ADC Reports Q1

MINNEAPOLIS -- ADC (NASDAQ:ADCT) (www.adc.com) today announced results for its first fiscal quarter ended January 28, 2005 prepared in accordance with generally accepted accounting principles (GAAP) as summarized below for ADC and its operating segments, Broadband Infrastructure and Access, and Professional Services, on a continuing operations basis.

"We are pleased with our sales growth and operating expense reduction in the first quarter," said Robert E. Switz, president and CEO of ADC. "Our better than expected first quarter sales of $243 million benefited from the addition of the KRONE acquisition, and strong contributions from our OmniReach(TM) Fiber-to-the-X solutions and professional services. Excluding KRONE's sales, ADC's first quarter sales grew 10% year-over-year. With future sales growth and continued progress in lowering our cost of operations, we expect profitable growth in fiscal 2005."

ADC Reduces Operating Expenses and Focuses on Improving Gross Margins

"We executed our plans in the first quarter to lower the cost of operations in 2005," said Gokul Hemmady, ADC's chief financial officer. "We reduced first quarter operating expenses from the fourth quarter of 2004 to $76 million, before restructuring charges of $3 million. Going forward, we will focus on improving our gross margins through renegotiated purchasing agreements, moving production of certain products to lower-cost locations and achieving improved fix-cost efficiencies as production volumes increase. We expect these actions combined with growing sales should contribute to further earnings growth in 2005."

ADC's total cash and securities (short- and long-term) were $567 million on January 28, 2005. The increase from the previous quarter was primarily a result of proceeds received from the divestiture of the Metrica software business partially offset by cash used by operating activities. The decrease from January 31, 2004 was primarily a result of the KRONE acquisition in May 2004 partially offset by proceeds received from the divestiture of the Singl.eView and Metrica software businesses. ADC believes that the resulting cash and securities balance is sufficient for organic growth plans for ADC's core business as $200 million of convertible notes do not mature until June 15, 2008, and the other $200 million of convertible notes do not mature until June 15, 2013. All convertible notes have a conversion price of $4.013 per share. In addition, ADC's deferred tax assets, which are nearly fully reserved at this time, should reduce its income tax payable on taxable earnings in future years.

In the quarter ended January 28, 2005, total cash used by operating activities from continuing operations was partially driven by inventory builds for future shipments of OmniReach Fiber-to-the-X (FTTX) and wireless products and the pay down of current liabilities. These uses were partially offset by positive cash earnings and receivables collections. In the quarter ended January 31, 2004, total cash provided by operating activities from continuing operations was primarily from positive cash earnings partially offset by an increase in working capital.

Total employees were approximately 7,600 as of January 28, 2005 compared to approximately 7,500 as of October 31, 2004 and approximately 5,800 as of January 31, 2004. The increase in employees from October 31, 2004 was primarily a result of increased manufacturing capacity for OmniReach FTTX products, partially offset by the divestiture of the Metrica software business as well as workforce reductions related to the integration of the KRONE acquisition. The year-over-year increase of employees in the quarter was primarily a result of the KRONE acquisition and increased FTTX manufacturing capacity partially offset by divestitures in 2004 and workforce reductions related to the integration of the KRONE acquisition.

Review of Operating Segments

Sales from ADC's operating segments from continuing operations are summarized above. Commentary on the changes in the sales results follows.

Broadband Infrastructure and Access (BIA)

On a quarterly sequential basis from the fourth quarter of 2004, BIA sales in the first quarter of 2005 were lower than expected due to a historical slowdown in activity among ADC's customers during this period as previously announced. Fiber-to-the-X sales in the first quarter of 2005 increased 57% sequentially after reducing sales in the fourth quarter of 2004 for the recognition of $5 million of deferred sales. This strength was offset by lower sales in other products, primarily in the wireline and wireless systems businesses. Comparing first quarters on a year-over-year basis, BIA sales were $83 million higher as a result of the $79 million addition of KRONE product sales in the first quarter of 2005 due to the acquisition being finalized on May 18, 2004, as well as strong growth in ADC's fiber connectivity sales offset by lower sales in other products, primarily in the wireline systems business.

Professional Services

On a quarterly sequential basis from the fourth quarter of 2004, Professional Services sales in the first quarter of 2005 increased 9% as a result of growth in the United States and Europe primarily from work on wireless network deployments. Comparing first quarters on a year-over-year basis, 2004 sales for Professional Services increased by $24 million primarily as a result of the $14 million addition of KRONE service sales as described in the BIA commentary, as well as growth in the United States and Europe primarily from work on wireless network deployments.

Outlook

The following guidance is presented on a GAAP basis. When it reports results, ADC intends to show the impact of restructuring and impairment charges, acquired intangibles amortization and certain non-operating gains/losses included in its actual GAAP results. ADC currently estimates that GAAP sales in the second quarter of fiscal 2005 will be around $260-$270 million and GAAP earnings per share from continuing operations will be around $0.02, subject to any significant restructuring and impairment charges and certain non-operating gains/losses of which the amounts are uncertain at this time.

Starting in the third quarter of 2002, the tax benefits of ADC's pre-tax losses have been added to deferred tax assets with an offsetting valuation reserve. As of January 28, 2005, ADC had a total of $1,059 million in deferred tax assets (primarily for U.S. income taxes) that have been offset by a nearly full valuation reserve and as a result have been shown on the balance sheet at an insignificant amount. Approximately $226 million of these deferred tax assets relate to capital loss carryovers that can be utilized only against realized capital gains through October 31, 2009. As it generates pre-tax income in future periods, ADC currently expects to record minimal income tax expense until either its deferred tax assets are fully utilized to reduce future income tax liabilities or the value of its deferred tax assets are restored on the balance sheet. Excluding the deferred tax assets related to capital loss carryovers, most of the remaining deferred tax assets are not expected to expire until after 2021.

ADC Telecommunications Inc.