Prior to its 2010 merger with Tyco Electronics Ltd., the company provided broadband network infrastructure products such as fiber-optic, copper and coaxial based frames, cabinets, cables, connectors and cards, and wireless capacity and coverage solutions.
A company creates wealth for its long-term shareholders in 2 main ways - through dividend payments and through the accumulation of retained earnings. This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars).
In the words of Warren Buffett: "We're looking for... businesses earning good returns on equity while employing little or no debt."
Return on equity is a key metric of financial performance, indicating a company's ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth. The average ROE for large U.S. companies is 12%, and many investors use it as a threshold for attractive investments.
Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company's earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated.
Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential. However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings.
Free cash flow shows how much cash a company generates from operations, above and beyond what is required to maintain or expand its productive assets. This cash can be returned to investors, or spent by management on growing the company or paying back its debts.
Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Companies often use debt financing to increase their return on equity. However, as the amount of debt financing increases relative to the amount of equity financing, the company becomes more sensitive to down turns and other negative events. As a result, many investors use the ratio of debt to equity as a measure of a company's financial risk, and avoid companies that have this ratio above 1.
This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments. This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations.
The ratio of current assets to current liabilities is known as the current ratio. This metric is a quick measure of the company's ability to pay its short-term obligations. A current ratio below 1 is a warning sign that should be investigated, especially for companies that cannot count on adequate cash flow from operations.
This chart shows the cumulative dilution of investor ownership in a company over time. Dilution reduces an investor's participation in the future earnings. Dilution increases when a company issues new shares, and decreases when a company buys its shares back. Many investors avoid companies with large chronic dilution.
analysis provides insight into factors affecting the Return On Equity of a company.
The DuPont equation decomposes ROE as follows:
ROE = (Net margin) * (Asset turnover) * (Asset to equity ratio)
Net margin indicates operating efficiency, Asset turnover measures the total asset use efficiency, and the Asset to equity ratio is a measure of financial leverage.
The dividend payout ratio tells investors what percentage of earnings a company returns to shareholders, and what percentage it retains and reinvests. This ratio represents a major capital allocation decision by the company, and can be used to judge management rationality. Rational management should pay out all earnings that cannot be productively reinvested. Therefore, a low dividend payout ratio for a profitable company with a low growth potential may be a warning sign.
Many investors use the P/B ratio as a quick way of judging company valuation. Value investors - followers of Graham and Dodd - specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company's earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors - followers of Graham and Dodd - often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions.
On June 14, 1995, the Company completed a secondary public offering of 6,325,000 shares of its common stock at $30 per share.
On October 8, 1999, ADC issued 14,096,000 shares of its common stock for all of the outstanding stock of Saville Systems PLC ("Saville"). Saville is a developer and integrator of communications billing and customer care software.
On May 17, 2000, ADC acquired all of the outstanding equity interests in Altitun AB, a Swedish corporation based in Kista, Sweden ("Altitun"). Altitun is a leading developer and supplier of active optical components for next-generation optical networks. In the transaction, ADC issued approximately 27.6 million shares of its common stock to Altitun's shareholders. ADC also converted all outstanding Altitun stock options into options to acquire approximately 2.8 million shares of ADC common stock. The transaction was accounted for as a pooling of interests.
On June 28, 2000, ADC completed a merger with PairGain by exchanging 63.8 million shares of its common stock for all of the common stock of PairGain. Each share of PairGain was exchanged for 0.86 of a share of ADC common stock. In addition, outstanding PairGain stock options were converted at the same exchange ratio into options to purchase approximately 8.4 million shares of ADC stock. The merger has been accounted for as a pooling of interests and accordingly all prior period consolidated financial statements have been restated to include the combined results of operations, financial position and cash flows of PairGain.
We recorded an impairment charge of $401.5 million ($368.8 million net of tax). This charge consisted of goodwill write-downs associated with non-strategic businesses of $282.3 million ($278.0 million net of tax) and impairment of long-lived assets within our non-strategic businesses of $119.2 million ($90.8 million net of tax).
On May 18, 2004, we completed the acquisition of KRONE, a global supplier of copper-based and fiber-based connectivity solutions and cabling products used in public access and enterprise networks, from GenTek, Inc. This acquisition increases our network infrastructure business and expands our presence in the international marketplace. The results of KRONE subsequent to May 18, 2004, are included in our results of operations for the three and nine months ended July 31, 2004. In this transaction, we acquired the assets and operations of KRONE for $293.1 million in cash (net of cash acquired) and assumed certain liabilities of KRONE. We acquired $67.9 million of intangible assets (see Note 9 below 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 acquisition. Goodwill of $175.7 million was recorded in the transaction and assigned to our Broadband Infrastructure and Access segment.
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 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.
On August 12, 2008, our board of directors approved a share repurchase program for up to $150.0 million. As of October 31, 2008, we had repurchased approximately 6.4 million shares of common stock for approximately $56.5 million, or $8.80 average per share. In early December 2008, we completed this repurchase program at an average price of $7.04 per share, resulting in approximately 21.3 million shares purchased under the program.
As of our first quarter of fiscal 2009, we recorded an estimated impairment charge of $413.5 million to reduce the carrying value of goodwill and other long-lived intangibles. The estimated impairment includes $280.8 million of goodwill related to Connectivity and $85.4 million of goodwill and $47.3 million of intangibles related to Network Solutions.
Our first three quarters end on the Friday nearest to the end of December, March and June, respectively, and our fiscal year ends on September 30. Due to the change in our fiscal year end date from October 31st to September 30th, which was completed in fiscal 2009, the financial statements and financial comparisons included in this Form 10-Q relate to the three-month period ended January 1, 2010 and the three-month period ended December 26, 2008. The financial results for the three-month period ended December 26, 2008 have been recast to allow for comparison based on our new fiscal periods.
On July 12, 2010, we entered into an Agreement and Plan of Merger with Tyco Electronics Ltd., a Swiss company, and its indirect subsidiary, Tyco Electronics Minnesota, Inc., which was amended as of July 24, 2010. Pursuant to that merger agreement, on July 26, 2010, Tyco Electronics commenced a tender offer to purchase all of our outstanding shares of common stock at a purchase price of $12.75 per share in cash. The terms reflect a 44% premium over ADC's closing price on July 12, 2010 of $8.98. the total consideration is about about $1.25 billion.