AFC Reports Third Quarter 2004 Financial Results

Share Name	Share Symbol	Market	Type
Advanced Fibre Communications (MM)	NASDAQ:AFCI	NASDAQ	Common Stock

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AFC Reports Third Quarter 2004 Financial Results PETALUMA, Calif., Oct. 25 /PRNewswire-FirstCall/ -- AFC(R) (NASDAQ:AFCI), The Acronym for Access(SM), today reported financial results for the third quarter ended September 30, 2004. Revenues for the third quarter of 2004 were $119.6 million on a generally accepted accounting principles (GAAP) basis, as compared with $85.2 million for the same period last year, an increase of 40%. GAAP net income for the third quarter of 2004 was $17.3 million, or $0.19 per share, compared with $9.3 million, or $0.11 per share, for the same period last year. Revenues for the first nine months of 2004 were $331 million compared with $248.7 million for the same period last year, an increase of 33%. Net income for the first nine months of 2004 was $15.6 million, or $0.17 per share, compared with $21.0 million, or $0.24 per share, for the same period last year. Core business net income, which excludes certain items, was $5.9 million, or $0.07 per share, for the third quarter of 2004, compared with $9.6 million, or $0.11 per share, for the same period last year. Core business net income for the first nine months of 2004 was $19.7 million, or $0.22 per share, compared with $25.4 million, or $0.29 per share, for the same period last year. Reconciliations between GAAP and core business results are provided immediately following the condensed consolidated statements of cash flows. These core business measures are not in accordance with, or alternatives to GAAP, and may be different from measures used by other companies. We believe core business results help investors better understand the financial performance of our core business. We also believe core business results provide a more consistent and useful basis for comparison between periods and for making projections. AFC management primarily uses core business results for budgeting purposes, reviewing business performance and making investment decisions. Cash provided by operations was $5.1 million in the third quarter of 2004, compared to cash used in operations of $45.9 million in the third quarter of 2003. "Although our revenue was slightly below our previous guidance, we exceeded our operating profit goals in a challenging spending environment," said John Schofield, chairman, president and chief executive officer at AFC. "The third quarter was characterized by record DSL shipments, growth in FTTP sales to both large and small carriers, and the launch of several new initiatives designed to strengthen our efforts in the IOC market. "For the past year, our strategy has been to extend AFC's reach in the RBOC market, and in the third quarter, we saw for the first time, more than half of our revenues derived from these large carriers. We are encouraged by this progress with the RBOCs, especially as it is coupled with AFC's expanded focus on the IOC market. We are seeing a high level of interest from small carriers for our FiberDirect(SM) solution and our newly introduced ADSL2+ card. In the future, we are confident that as carriers of all sizes upgrade their access networks, they will continue to look to AFC solutions to meet their most advanced fiber access needs." Today's Earnings Conference Call and Webcast AFC will discuss its third quarter 2004 results on a conference call and audio webcast scheduled today, October 25, at approximately 1:30 p.m. Pacific time. U.S. callers can access the conference call at 800-818-6592 and international callers may dial 312-461-0745. The audio webcast will be simultaneously available online at: http://www.afc.com/investors/investors.asp . The conference call replay will be available for approximately 72 hours following the call. U.S. callers can access the replay by dialing 800-839-6713 and entering pass code 6679359. International callers may dial 402-220-2306 and enter pass code 6679359. An audio webcast replay will also be available at http://www.afc.com/investors/investors.asp for approximately 12 months following the original call. About AFC Headquartered in Petaluma, Calif., AFC is a leading provider of broadband access solutions for the global telecommunications industry. With a customer base of more than 800 service providers worldwide, AFC continues to build and support the world's evolving broadband access network architecture. Advanced Fibre Communications, Inc., AFC, and the AFC logo are registered trademarks of Advanced Fibre Communications, Inc. The Acronym for Access and FiberDirect are service marks of Advanced Fibre Communications, Inc. Copyright 2004. All rights reserved. Any other trademarks are the property of their respective owners. For more information, visit AFC online at http://www.afc.com/ or call 1-800-690-AFCI. Forward-Looking Statements Except for historical information contained in this press release, the foregoing contains forward-looking statements, including statements concerning our ability to remain a leading supplier of access equipment to large carriers and the expectation that demand for AFC's broadband access solutions will grow. These statements involve risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements based on a variety of risks and uncertainties, including the risks and uncertainties relating to growth in demand for broadband services; AFC's ability to maintain or grow demand for its broadband access solutions; the potential for business disruption and other risks associated with AFC's pending merger with Tellabs, Inc.; and AFC's expanded product offering and the potential for increased competition related thereto. Information about potential factors that could affect AFC's financial results is included in AFC's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which have been filed with the Securities and Exchange Commission. We undertake no obligation to revise or update these forward-looking statements to reflect events or circumstances after today or to reflect the occurrence of unanticipated events. ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 Revenues $119,612 $85,214 $330,987 $248,704 Cost of revenues 74,430 44,600 190,331 127,367 Gross profit 45,182 40,614 140,656 121,337 Operating expenses: Research and development 21,176 14,831 61,573 50,167 Sales and marketing 10,694 9,355 35,151 30,196 General and administrative 8,615 6,498 29,880 21,313 Amortization of acquired intangibles 3,955 349 10,261 1,793 Integration costs 1,081 -- 3,632 -- Securities litigation settlement costs (563) -- (6,350) -- In-process research and development -- -- 14,000 -- Total operating expenses 44,958 31,033 148,147 103,469 Operating income (loss) 224 9,581 (7,491) 17,868 Other income: Interest income, net 2,171 2,850 6,921 8,712 Unrealized gains on Cisco investment -- -- -- 1,386 Other (10) -- 63 4 Total other income, net 2,161 2,850 6,984 10,102 Income (loss) before income taxes 2,385 12,431 (507) 27,970 Income taxes (benefit) (14,955) 3,108 (16,083) 6,993 Net income $17,340 $9,323 $15,576 $20,977 Basic net income per share $0.20 $0.11 $0.18 $0.25 Shares used in basic per share computations 88,599 86,246 88,111 85,478 Diluted net income per share $0.19 $0.11 $0.17 $0.24 Shares used in diluted per share computations 89,275 87,906 89,528 86,832 ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) September 30, December 31, 2004 2003 Assets Current assets: Cash and cash equivalents $238,150 $246,552 Cisco marketable securities 194,293 250,786 Other marketable securities 380,665 594,230 Accounts receivable, net 59,428 54,464 Income taxes receivable 218,559 -- Inventories, net 50,672 18,959 Other current assets 5,938 27,026 Total current assets 1,147,705 1,192,017 Property and equipment, net 57,212 43,762 Goodwill 189,798 55,883 Other acquired intangible assets, net 73,604 1,639 Other assets 29,582 24,415 Total assets $1,497,901 $1,317,716 Liabilities & stockholders' equity Current liabilities: Accounts payable $18,112 $11,112 Accrued liabilities 50,417 39,605 Cisco securities loans payable 194,293 250,786 Current taxes payable 20,271 26,989 Deferred tax liabilities 182,553 -- Total current liabilities 465,646 328,492 Long-term liabilities 4,748 4,068 Commitments and contingencies Stockholders' equity: Preferred stock -- -- Common stock 888 871 Additional paid-in capital 403,641 376,394 Deferred compensation (4) (29) Accumulated other comprehensive income 1,046 1,560 Retained earnings 622,776 607,200 Treasury stock (840) (840) Total stockholders' equity 1,027,507 985,156 Total liabilities and stockholders' equity $1,497,901 $1,317,716 ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 2004 2003 Cash flows from operating activities: Net income $15,576 $20,977 Adjustments to reconcile net income to net cash provided by operating activities: Current income taxes (225,277) 46,939 Deferred income taxes 204,709 (243,288) Depreciation and amortization 25,270 14,238 In-process research and development 14,000 -- Increase in reserve for returns, rebates and credits 12,012 1,358 Tax benefit from option exercises 4,411 6,730 Increase in reserve for write- down of inventories 3,433 2,432 Interest receivable 2,362 (3,727) Reduction in reserve for purchase commitments (600) (2,196) Other non-cash adjustments to operating income 491 2,955 Allowance for doubtful accounts (159) 507 Cash proceeds from settlement of Cisco hedge contracts -- 690,226 Unrealized gains on Cisco investment -- (1,386) Changes in operating assets and liabilities: Accounts receivable 255 (20,992) Inventories (22,047) 6,400 Other current assets (179) 20,361 Other assets 34 194 Accounts payable (9,440) 6,201 Accrued and other liabilities (3,750) (9,663) Net cash provided by operating activities 21,101 538,266 Cash flows from investing activities: Purchases of other marketable securities (2,335,577) (4,459,794) Sales of other marketable securities 2,139,050 3,872,418 Maturities of other marketable securities 406,776 241,930 Payment for purchase of business (245,932) -- Purchases of property and equipment (11,623) (8,793) Restricted investment (3,050) -- Investment in privately-held company (2,000) -- Net cash used in investing activities (52,356) (354,239) Cash flows from financing activities: Proceeds from common stock issuances 22,853 27,497 Purchase of treasury stock -- (701) Net cash provided by financing activities 22,853 26,796 Increase (decrease) in cash and cash equivalents (8,402) 210,823 Cash and cash equivalents, beginning of period 246,552 94,754 Cash and cash equivalents, end of period $238,150 $305,577 Noncash investing activities Acquisition of business $225 $-- ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS (In thousands, except per share data) (Unaudited) For the Three Months Ended September 30, 2004 Adjustments from GAAP Core GAAP to Core Business Results Results Results Revenues $119,612 $119,612 Cost of revenues 74,430 74,430 Gross profit 45,182 45,182 Operating expenses: Research and development 21,176 21,176 Sales and marketing 10,694 (57) (1) 10,637 General and administrative 8,615 (470) (1,2) 8,145 Amortization of acquired intangibles 3,955 (3,955) (3) -- Integration costs 1,081 1,081 Securities litigation settlement costs (563) 563 (4) -- Total operating expenses 44,958 (3,919) 41,039 Operating income 224 3,919 4,143 Other income: Interest income, net 2,171 2,171 Other (10) (10) Total other income, net 2,161 2,161 Income before income taxes 2,385 3,919 6,304 Income taxes (benefit) (14,955) 15,395 (5) 440 Net income $17,340 (11,476) $5,864 Basic net income per share $0.20 $0.07 Shares used in basic per share computations 88,599 88,599 Diluted net income per share $0.19 $0.07 Shares used in diluted per share computations 89,275 89,275 (1) Adjustment arose from a leased facility write-off and revision stemming from a workforce reduction initiated in 2003. (2) Adjustment of $502 for Tellabs merger-related costs. (3) Adjustment arose from the amortization of intangible assets acquired in the NAA and AccessLan acquisitions. (4) Adjustment for an additional portion of an arbitration award for compensatory damages and interest from a former insurer. (5) Adjustment included a $15.9 million tax benefit relating to a tax reserve adjustment and the difference between the GAAP 40% effective tax rate and core business 7% effective tax rate. ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS (In thousands, except per share data) (Unaudited) For the Three Months Ended September 30, 2003 Adjustments from GAAP Core GAAP to Core Business Results Results Results Revenues $85,214 $85,214 Cost of revenues 44,600 44,600 Gross profit 40,614 40,614 Operating expenses: Research and development 14,831 14,831 Sales and marketing 9,355 9,355 General and administrative 6,498 6,498 Amortization of acquired intangibles 349 (349) (1) -- Total operating expenses 31,033 (349) 30,684 Operating income 9,581 349 9,930 Other income: Interest income, net 2,850 2,850 Total other income 2,850 2,850 Income before income taxes 12,431 349 12,780 Income taxes 3,108 87 3,195 Net income $9,323 262 $9,585 Basic net income per share $0.11 $0.11 Shares used in basic per share computations 86,246 86,246 Diluted net income per share $0.11 $0.11 Shares used in diluted per share computations 87,906 87,906 Note: (1) Adjustment arose from the amortization of intangible assets acquired in the acquisition of AccessLan in 2002. ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS (In thousands, except per share data) (Unaudited) For the Nine Months Ended September 30, 2004 Adjustments from GAAP Core GAAP to Core Business Results Results Results Revenues $330,987 $330,987 Cost of revenues 190,331 190,331 Gross profit 140,656 140,656 Operating expenses: Research and development 61,573 (293) (1) 61,280 Sales and marketing 35,151 (99) (2) 35,052 General and administrative 29,880 (5,387) (2,3) 24,493 Amortization of acquired intangibles 10,261 (10,261) (4) -- Integration costs 3,632 3,632 In-process research and development 14,000 (14,000) (5) -- Securities litigation settlement costs (6,350) 6,350 (6) -- Total operating expenses 148,147 (23,690) 124,457 Operating income (loss) (7,491) 23,690 16,199 Other income: Interest income, net 6,921 6,921 Other 63 63 Total other income, net 6,984 6,984 Income (loss) before income taxes (507) 23,690 23,183 Income taxes (benefit) (16,083) 19,561 (7) 3,478 Net income $15,576 4,129 $19,705 Basic net income per share $0.18 $0.22 Shares used in basic per share computations 88,111 88,111 Diluted net income per share $0.17 $0.22 Shares used in diluted per share computations 89,528 89,528 Notes: (1) Adjustment arose from a non workforce reduction-related leased facility write-off. (2) Adjustments arose from additional leased facility write-offs stemming from a workforce reduction initiated in 2003. (3) Adjustment of $4,012 for Tellabs merger-related costs. (4) Adjustment arose from the amortization of intangible assets acquired in the NAA and AccessLan acquisitions. (5) Adjustment arose from the write-off of in-process research and development costs upon acquisition of NAA in February 2004. (6) Adjustment for an arbitration award for compensatory damages and interest from a former insurer. (7) Adjustment included a $15.9 million tax benefit relating to a tax reserve adjustment and the difference between the GAAP 36% tax benefit and core business 15% effective tax rate. ADVANCED FIBRE COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS RECONCILIATION OF GAAP RESULTS TO CORE BUSINESS RESULTS (In thousands, except per share data) (Unaudited) For the Nine Months Ended September 30, 2004 Adjustments from GAAP Core GAAP to Core Business Results Results Results Revenues $248,704 $248,704 Cost of revenues 127,367 (778) (1) 126,589 Gross profit 121,337 778 122,115 Operating expenses: Research and development 50,167 (1,887) (1,2) 48,280 Sales and marketing 30,196 (471) (1) 29,725 General and administrative 21,313 (2,338) (1) 18,975 Amortization of acquired intangibles 1,793 (1,793) (3) -- Total operating expenses 103,469 (6,489) 96,980 Operating income 17,868 7,267 25,135 Other income: Interest income, net 8,712 8,712 Unrealized gains on Cisco investment 1,386 (1,386) (4) -- Other 4 4 Total other income 10,102 (1,386) 8,716 Income before income taxes 27,970 5,881 33,851 Income taxes 6,993 1,470 8,463 Net income $20,977 $4,411 $25,388 Basic net income per share $0.25 $0.30 Shares used in basic per share computations 85,478 85,478 Diluted net income per share $0.24 $0.29 Shares used in diluted per share computations 86,832 86,832 Notes: (1) Adjustments related to severance and leased facility write-offs resulting from a workforce reduction initiated in 2003. (2) Adjustment for $292 arose from a non workforce reduction-related leased facility write-off. (3) Adjustment arose from the amortization of intangible assets acquired in the acquisition of AccessLan in 2002. (4) Adjustment arose from income generated by the Cisco securities holdings and related hedge contracts. DATASOURCE: AFC CONTACT: Debbie McGowan of AFC, +1-707-794-7720, or 1-888-875-7555, or http://www.afc.com/ Web site: http://www.afc.com/

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AFCI Advanced Fibre Communications (MM)