ADC Telecommunications, Inc.

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ADC Telecommunications, Inc.

4900 West 78th Street
Minneapolis, Minnesota 55435
U.S.A.
(612) 938-8080
Fax: (612) 946-3292

Public Company
Incorporated: 1953
Employees: 2,300
Sales: $366.1 million
Stock Exchanges: NASDAQ
SICs: 3661 Telephone & Telegraph Apparatus; 3669 Communications Equipment Nee; 3679 Electronic Components Nee

ADC Telecommunications, Inc. is a Minneapolis-based supplier of networking products and systems for telecommunications, cable television, broadcast, cellular, and enterprise networks. The company is a diversified niche marketer with a unique amalgam of products that enable it to work closely with industry giants as a collaborator, rather than competitor. A major aspect of the company’s operations is sales, with direct sales offices located in the United States, Canada, Europe, the Pacific Basin, Australia, and Central and South America. The company was formed as a result of the merging of Audio Development Company (ADC Incorporated) and Magnetic Controls Company.

Audio Development Company was founded by two Bell Laboratory engineers in 1935 as a telecommunications company, creating custom transformers and amplifiers for the radio broadcast industry. ADC also manufactured audiometers (machines that test children’s hearing). In 1941, ADC participated in a pivotal project—the development of a sophisticated audio system for Coffman Union at the University of Minnesota. As part of this enterprise, the company produced jacks, plugs, patch cords, and jackfields, foreshadowing its future involvement in the telephone industry.

As a result of the technological development during the postwar era, Magnetic Controls Company was founded and incorporated in Minnesota in 1953. The company produced high quality custom power supplies and magnetic amplifiers and was involved in military and space exploration programs. Magnetic Controls Company merged with ADC Incorporated in 1961, bringing magnetics and telecommunications together. While the firm used the umbrella name Magnetic Controls Company, ADC’s trade name was retained in telecommunications. In 1961, the company advanced its most significant product innovation, the Bantam jack, an amalgam of miniaturized components which became standard for telephone circuit access and patching. The company launched an ongoing involvement with major space missions in 1962, eventually designing and manufacturing sensors for the Columbia space shuttle.

The 1960s and 1970s ushered in technological advancement in all areas of telecommunications and data processing. Public and private computer use increased as products became more affordable, and telecommunications evolved into the computer age, with telephonic digital transmission and the expansion of data communications. As an innovator in these fields, the Magnetic Controls Company grew dramatically. In 1970, Charles Denny was encouraged by shareholders to quit his marketing executive job at Honeywell and take over leadership of the company. Under Denny’s leadership, the company’s earnings, which stood at $6 million in 1970, compounded at 20 percent a year for the next 20 years.

Magnetic Controls Company pioneered yet another industry standard during the 1970s—the digital signal cross-connect (DSX) product line. DSX products access and cross connect digital telephony circuits. The company also developed specialized test boards for long distance telephone companies, and designed and manufactured power conversion equipment for major data processing manufacturers. In addition to the proliferation of new products that addressed the digitalization of the industry, the company continued to introduce telecommunications hardware, including prewired connectorized jackfields and wired assemblies.

By 1981, Magnetic Controls Company had sales of $61.5 million, and by 1983 sales rose to $76.3 million. Nonetheless, the company was struggling. Although its telecommunications products were profitable, the magnetics division, which manufactured transformers and power supplies for mainframe peripherals, lost $1.2 million in fiscal year 1983. The company cut its losses in 1984, selling its magnetics assets and moving forward as solely a telecommunications company. Writing off the magnetics division as a $3.95 million one-time loss, the company incurred a $2.7 million corporate-wide loss for the final quarter of fiscal year 1984.

Having rid itself of its failing magnetics division and having purchased shares of its own stock, the company repositioned itself in the growth industry of telecommunications by investing in acquisitions and trimming expenses. In 1984, Magnetic Controls Company acquired TMS Systems, Inc., a private Massachusetts company that manufactured telephone call management equipment and software. With TMS functioning as a separate subsidiary, Magnetic Controls now sold the TMS product line, in addition to manufacturing telecommunications components and local and remote-access test systems. Also in 1984, the company began subcontracting assembly work in Mexico, where production costs could be lessened. In addition, a computer-based manufacturing resource planning system was implemented to streamline domestic manufacturing operations, and manufacturing personnel grew by approximately 20 percent.

In 1985, the company purchased Aetna Life & Casualty Company’s Fiber Optic Component division in Westborough, Massachusetts. The company’s focus was now decidedly on telecommunications, and the corporate name was no longer appropriate. Recalling its heritage, in March 1985, Magnetic Controls Company changed its name to ADC Telecommunications and renamed its new subsidiary ADC Advanced Fiber Optics Corp. Four Magnetic Controls employees who were already working on fiber optics development were relocated to join the new Massachusetts staff.

After the disastrous dip in its sales in 1984, the newly named company emerged victorious in 1985. The company focused its efforts on manufacturing, selling, and servicing two groups of telecommunications products: communications connectors and electronics. Rather than trying to compete with the industry giants in its fields, ADC’s product strategy was to manufacture and sell products in diversified industries, finding and occupying niches that were not already filled by larger companies. New orders, backlogs, revenues, and operating income soared to new highs in the first quarter. The increased demand for ADC’s products was attributed to an energized telecommunications industry, resulting from technological change and the deregulation in long distance telephone service. GTE, Sprint, MCI, and Allnet entered the $40 billion long distance market as major players and potential new customers for ADC Telecommunications.

ADC’s customer base in the early 1980s was a diverse pool of public and private networks, with no single customer representing more than 10 percent of 1984 net sales. Foreign buyers accounted for 8 percent of sales that year. ADC’s clientele consisted of public telecommunications networks, telephone operating companies and other common carriers, and private telecommunications networks used by large businesses and government agencies. ADC’s customer list included IBM, AT&T, the Bell Operating Companies, MCI, GTE, ITT, Allnet, and Northern Telecom.

In 1988, slightly over half of ADC’s business was in public networks. ADC products were divided into five categories: network management and control products, termination products, test products, transmission products, and access products. Access products were the most significant category, accounting for approximately 61 percent of sales. Responding to a demonstrated growth area in new technology, ADC took steps to become more involved in the fiberization process of local loops and local area networks (LANs). The company began working on fiber distribution, fiber termination, and broadwidth limiter technology, as well as a fiber loop converter. New products introduced by ADC in 1988 included EDSX (an electronic digital signal cross-connect product) and Series 3000 tester software. The company’s international sales had grown from 8 percent in 1980 to 15 percent in 1988, and ADC sought further foreign growth, with marketing efforts in Europe, the Pacific Rim, Canada, Latin America, and the Middle East.

ADC narrowly avoided a buyout when the Lodestar Group, a New York investment fund specializing in mergers and acquisitions, acquired a 6.4 percent stake in the company in 1989. Shares of ADC were $16.75, making the market value of the company $221 million. Lodestar told ADC President Charles Denny that it intended to implement a takeover unless ADC borrowed $200 million and declared a one-time dividend. Denny was furious, feeling that a debt of that magnitude would preclude any investment in future growth for the company. He refused to comply.

Meanwhile, Denny had been pursuing negotiations regarding a potential acquisition, a much better use of ADC resources, in Denny’s opinion. In 1989, ADC acquired Kentrox Industries (a maker of products for high-speed private telecommunications networks) for $31 million and restructured its operations into three areas: telecom, diversified markets, and operations. Lodestar did not make good on its threat, but instead sold its shares at a small profit. Over the next four years, those shares would triple in value.

Beginning the 1990s with a new president—Denny’s chosen successor and former AT&T executive Bill Cadogan—, ADC entered the video services delivery market, acquiring American Lightwave Systems, Inc., a leading supplier of fiber-optic video transmission equipment for cable operators. ADC purchased the company for $10.7 million, with an agreement to make payments totaling at least $4 million over the next three and a half years. ADC also acquired Telinq Inc. in 1990 and utilized its newly acquired fiber-optics expertise to develop a local loop system with the goal of providing economical fiber directly to private homes. Fiber products contributed approximately $18 million to ADC’s total sales in 1990, having doubled every year since 1987. Cadogan directed the company to expand its fiber division toward a goal of $250 million in sales in 1995. Simultaneously, Cadogan mandated that costs be kept low, and that ADC act as an early follower—rather than a leader—in the developing industry.

In 1991, ADC acquired Fibermux, a maker of high-speed, fiberoptic equipment for local area networks (LANs). The company was purchased for $50 million, with a $40 million loan. Fibermux proved so successful an investment for ADC that the loan was paid off by 1993.

In an effort to increase productivity, ADC joined a number of employers implementing plans using company stock to match employee contributions, whereby a portion of the match was tied to company performance. ADC’s Retirement Savings Plus Plan, combining a 401(k) and a non-leveraged ESOP, was implemented in 1991 in an effort to provide an employee incentive to improve company performance, while raising long-term stock value and controlling benefits costs. In June of 1990, 84 percent of ADC’s 1,395 employees had elected to participate in the voluntary plan.

In 1992, ADC formed a collaborative development venture with Fulcrum Communications in Birmingham, England, devising a system to carry voice and video signals over fiber-optic cable to businesses and residences in North America in a more cost-effective way than that of existing systems. ADC also created Networx, a new transmission platform that integrates cable management and private networking products, using synchronous optical network and the asynchronous transfer mode (ATM). The cornerstone of Networx was Sonoplex, a multirate, multimedia system that brings fiber to the customer’s work or residence site, while making use of existing copper plant. In 1991, ADC had formed a similar partnership with South Central Bell, Mississippi Educational Television, Northern Telecom, IBM Corp., and Apple Computer to create Fibernet, a network linking students at four high schools in Clarksville, Corinth, West Point, and Philadelphia, Mississippi, with teachers at Mississippi State University, Mississippi University for Women, and Mississippi School for Mathematics and Science to create “electronic classrooms.”

ADC’s—and its competitors’—marketing strategies were dramatically impacted in 1992 by work force reductions and early retirement programs implemented by large local exchange carriers. Seeking to build a stronger relationship with its customers to secure longevity, ADC adopted strategies including simplifying product lines; providing more detailed support materials; and improving ordering, customer service, quality of products, and maintenance support. Sales in 1992 reached $316 million, with shares priced at $56.75.

ADC had become a leader in a growth field in 1993. With the advent of ATM technology and the scrambling of television, computer, and telephone industries to board the information superhighway, telecommunications was booming and wireless telecommunications had a growth rate of 25 percent. The company’s products included fiber-optic video, data, and voice transmission systems, and its clients included phone companies, TV broadcasters, and all major cable TV operators. Its new cellular radio switch was undergoing testing by seven large cellular phone operators. ADC continued to market new products, including an Ethernet converter, a coaxial cable delivery option for its Homeworx broadband access system, and a Sonoplex flexible access platform. ADC’s Homeworx system was selected by Rochester Telephone Corp. in May of 1993 for a six-month video-on-demand trial.

ADC became an ’ ’early follower’’ into the asynchronous transfer mode (ATM) market, announcing a multiyear agreement with Loral Data Systems for an ATM switch. The ATM switch would create the capability of handling the massive flows of simultaneous high-speed digital information that the industry projected would be generated during the latter half of the 1990s and the twenty-first century, arising from the blending of the communications, computing, and entertainment industries. The company also landed a coup in March of 1994, when Ameritech chose ADC to supply equipment for its $75-$ 100 million video system, to be developed over the next five years. This $4.4 billion project would bring 70 channels of analog television and 40 channels of digital video to customers, with unlimited program choices and interactive, customer-controllable programming.

In 1994, Charles Denny announced his retirement as chairman of the board, making way for a new generation of executives to lead the company into a rapidly changing telecommunications industry. Bill Cadogan replaced Denny. During Denny’s tenure, the company’s revenues had grown from $6 million in 1970 to $366 million in 1993, with a market value approaching a billion dollars. Records set in 1993 included ADC’s highest annual order, revenues, gross profits, operating income, net income, and earnings per share.

As ADC Telecommunications, Inc. moves into a new era of leadership, its strategies include a new focus on cable TV and cellular communications, increased international presence, and increased fiber optics and electronic product offerings in the multimedia market. As always, ADC will be an “early follower” in this emerging market, preparing itself to take advantage of expanded opportunities as the multimedia telecommunications market experiences a sweeping convergence of customers, technologies, and products.

Principal Subsidiaries:

ADC Telecom Canada Inc.; ADC Europe NV; ADC Telecommunications U.K. Limited; ADC Telecommunications Australia, Pty. Ltd.; ADC Telecomunicaciones Venezuela, S.A.; ADC de Mexico, S.A. de C.V.; ADC Telecommunications Singapore PTE Limited; American Lightwave Systems, Inc.; Fibermux Corporation; Kentrox Industries, Inc.