ADC Telecommunications Inc. (ADCT) lifted its earnings guidance for the fiscal third quarter. The company now expects GAAP EPS within a positive range of 5 cents to 10 cents.
Earlier guidance was within the range of a loss of 4 cents to a gain of 4 cents. In the revised forecast, adjusted EPS (excluding non-cash charges and special items) has been approximated within the range of a gain of 11 cents to 16 cents. This is well above the Zacks Consensus Estimate of a gain of 9 cents per share. Revised revenue guidance of around $280 million was however within the company’s prior view of $265 million to $290 million.
According to our assessment, the main reason for this improved earnings forecast is the cost synergies that ADCT generated through restructuring activities. ADCT implemented LEAN and Six Sigma methodologies to improve its cost structure. In the second quarter, the company realized approximately $13 million of cost savings due to restructuring activities taken by management.
Excluding special charges, operating costs decreased by $20 million in the same quarter, compared to the prior-year period, enabling ADCT to generate positive free cash flow (cash flow from operations less capital expenditures) of $13.7 million. The company is continuing its EMEA operation restructuring initiative to streamline international resources.
Generation of operating cash flow is very critical for ADCT’s competitiveness. The network solutions and connectivity solutions market is highly competitive. The company competes directly with 3M (MMM), Commscope Inc. (CTV) and ADTRAN Inc. (ADTN). The company also competes with industry giants like Ericsson (ERIC) and Alcatel-Lucent (ALU) for Professional Services offering.
Nevertheless, we also believe that industry dynamics in synergy with the robust demand for higher bandwidth to support high-speed network traffic will create new opportunities for the company’s products when economic conditions improve.
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