UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended March 31, 2006

 

 

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the transition period from                to                

 

Commission file number  001-12929

 

CommScope, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

36-4135495

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1100 CommScope Place, SE
P.O. Box 339
Hickory, North Carolina

(Address of principal executive offices)

 

28602

(Zip Code)

 

(828) 324-2200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Exchange Act Rule 12b-2). Large accelerated filer ý        Accelerated filer o        Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No ý

 

As of April 24, 2006 there were 58,015,996 shares of Common Stock outstanding.

 

 



 

CommScope, Inc.
Form 10-Q
March 31, 2006
Table of Contents

 

Part I - Financial Information (Unaudited):

 

 

 

 

 

Item 1. Condensed Consolidated Financial Statements:

 

 

 

Condensed Consolidated Statements of Operations

 

 

 

Condensed Consolidated Balance Sheets

 

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

Item 4. Controls and Procedures

 

 

 

 

Part II - Other Information:

 

 

 

 

 

Item 6. Exhibits

 

 

 

 

 

Signatures

 

 

2



 

CommScope, Inc.

Condensed Consolidated Statements of Operations

(Unaudited – In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Net sales

 

$

352,254

 

$

309,054

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

Cost of sales

 

267,515

 

236,892

 

Selling, general and administrative

 

54,177

 

53,882

 

Research and development

 

7,465

 

7,770

 

Restructuring costs

 

3,749

 

2,029

 

Total operating costs and expenses

 

332,906

 

300,573

 

 

 

 

 

 

 

Operating income

 

19,348

 

8,481

 

Other income (expense), net

 

638

 

(57

)

Interest expense

 

(1,985

)

(2,078

)

Interest income

 

2,053

 

999

 

 

 

 

 

 

 

Income before income taxes

 

20,054

 

7,345

 

Income tax expense

 

(7,327

)

(1,811

)

 

 

 

 

 

 

Net income

 

$

12,727

 

$

5,534

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

$

0.22

 

$

0.10

 

Assuming dilution

 

$

0.19

 

$

0.09

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

56,724

 

54,512

 

Assuming dilution

 

70,667

 

66,784

 

 

See notes to condensed consolidated financial statements.

 

3



 

CommScope, Inc.

Condensed Consolidated Balance Sheets

(Unaudited – In thousands, except share amounts)

 

 

 

March 31,

 

December 31,

 

 

 

2006

 

2005

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

133,226

 

$

146,549

 

Short-term investments

 

108,746

 

102,101

 

Total cash, cash equivalents and short-term investments

 

241,972

 

248,650

 

 

 

 

 

 

 

Accounts receivable, less allowance for doubtful accounts of $12,944 and $13,644, respectively

 

191,561

 

165,608

 

Inventories

 

137,303

 

123,603

 

Prepaid expenses and other current assets

 

17,694

 

26,156

 

Deferred income taxes

 

25,761

 

25,245

 

Total current assets

 

614,291

 

589,262

 

 

 

 

 

 

 

Property, plant and equipment, net

 

261,986

 

252,877

 

Goodwill

 

151,360

 

151,356

 

Other intangibles, net

 

73,250

 

69,297

 

Deferred income taxes

 

22,595

 

24,623

 

Other assets

 

14,636

 

14,766

 

 

 

 

 

 

 

Total Assets

 

$

1,138,118

 

$

1,102,181

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

77,644

 

$

63,444

 

Other accrued liabilities

 

75,525

 

100,498

 

Current portion of long-term debt

 

13,000

 

13,000

 

Total current liabilities

 

166,169

 

176,942

 

 

 

 

 

 

 

Long-term debt

 

281,050

 

284,300

 

Pension and postretirement benefit liabilities

 

99,502

 

101,989

 

Other noncurrent liabilities

 

17,395

 

16,925

 

Total Liabilities

 

564,116

 

580,156

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $.01 par value; Authorized shares: 20,000,000; Issued and outstanding shares: None at March 31, 2006 and December 31, 2005

 

 

 

Common stock, $.01 par value; Authorized shares: 300,000,000; Issued shares, including treasury stock: 68,042,350 at March 31, 2006 and 66,073,347 at December 31, 2005; Issued and outstanding shares: 57,842,350 at March 31, 2006 and 55,873,347 at December 31, 2005

 

681

 

661

 

Additional paid-in capital

 

490,175

 

462,842

 

Deferred equity compensation

 

 

(8,980

)

Retained earnings

 

229,415

 

216,688

 

Accumulated other comprehensive loss

 

(734

)

(3,651

)

Treasury stock, at cost: 10,200,000 shares at March 31, 2006 and December 31, 2005

 

(145,535

)

(145,535

)

Total Stockholders’ Equity

 

574,002

 

522,025

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

1,138,118

 

$

1,102,181

 

 

See notes to condensed consolidated financial statements.

 

4



 

CommScope, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited – In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

Net income

 

$

12,727

 

$

5,534

 

Adjustments to reconcile net income to net cash used in  operating activities:

 

 

 

 

 

Depreciation and amortization

 

14,216

 

15,743

 

Equity based compensation

 

1,020

 

 

Deferred income taxes

 

1,614

 

1,370

 

Restructuring costs related to fixed asset impairment

 

 

1,678

 

Tax benefit from stock option exercises

 

 

87

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(25,465

)

(39,916

)

Inventories

 

(8,295

)

(1,930

)

Prepaid expenses and other current assets

 

(958

)

(693

)

Accounts payable and other accrued liabilities

 

(10,729

)

7,418

 

Other noncurrent liabilities

 

(2,286

)

797

 

Other

 

(237

)

1,236

 

Net cash used in operating activities

 

(18,393

)

(8,676

)

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(6,762

)

(8,226

)

Acquisition of MC2 product line

 

(13,810

)

 

Acquisition of Connectivity Solutions

 

 

653

 

Net (purchases of) proceeds from short-term investments

 

(6,645

)

9,158

 

Proceeds from disposal of fixed assets

 

297

 

426

 

Net cash provided by (used in) investing activities

 

(26,920

)

2,011

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Principal payments on long-term debt

 

(3,250

)

(3,250

)

Proceeds from exercise of stock options

 

27,670

 

320

 

Tax benefit from stock option exercises

 

7,143

 

 

Net cash provided by (used in) financing activities

 

31,563

 

(2,930

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

427

 

(517

)

 

 

 

 

 

 

Change in cash and cash equivalents

 

(13,323

)

(10,112

)

Cash and cash equivalents, beginning of period

 

146,549

 

99,631

 

Cash and cash equivalents, end of period

 

$

133,226

 

$

89,519

 

 

See notes to condensed consolidated financial statements.

 

5



 

CommScope, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

and Comprehensive Income

(Unaudited – In thousands, except share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Number of common shares outstanding:

 

 

 

 

 

Balance at beginning of period

 

55,873,347

 

54,487,745

 

Issuance of shares for stock option exercises

 

1,969,003

 

39,476

 

Balance at end of period

 

57,842,350

 

54,527,221

 

 

 

 

 

 

 

Common stock:

 

 

 

 

 

Balance at beginning of period

 

$

661

 

$

647

 

Issuance of shares for stock option exercises

 

20

 

 

Balance at end of period

 

$

681

 

$

647

 

 

 

 

 

 

 

Additional paid-in capital:

 

 

 

 

 

Balance at beginning of period

 

$

462,842

 

$

432,839

 

Issuance of shares for stock option exercises

 

27,650

 

320

 

Tax benefit from stock option exercises

 

7,143

 

87

 

Expiration of registration rights

 

500

 

 

Impact of adoption of SFAS No. 123(R)

 

(8,980

)

 

Equity compensation expense recognized

 

1,020

 

 

Balance at end of period

 

$

490,175

 

$

433,246

 

 

 

 

 

 

 

Deferred equity compensation:

 

 

 

 

 

Balance at beginning of period

 

$

(8,980

)

$

 

Impact of adoption of SFAS No. 123(R)

 

8,980

 

 

Balance at end of period

 

$

 

$

 

 

 

 

 

 

 

Retained earnings:

 

 

 

 

 

Balance at beginning of period

 

$

216,688

 

$

166,710

 

Net income

 

12,727

 

5,534

 

Balance at end of period

 

$

229,415

 

$

172,244

 

 

 

 

 

 

 

Accumulated other comprehensive loss:

 

 

 

 

 

Balance at beginning of period

 

$

(3,651

)

$

(5,198

)

Other comprehensive income (loss), net of tax

 

2,917

 

(773

)

Balance at end of period

 

$

(734

)

$

(5,971

)

 

 

 

 

 

 

Treasury stock, at cost:

 

 

 

 

 

Balance at beginning and end of period

 

$

(145,535

)

$

(145,535

)

 

 

 

 

 

 

Total stockholders’ equity

 

$

574,002

 

$

454,631

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

Net income

 

$

12,727

 

$

5,534

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation gain (loss) - foreign subsidiaries

 

(1,361

)

(752

)

Foreign currency transaction gain (loss) on long-term intercompany loans - foreign subsidiaries

 

4,449

 

(379

)

Gain (loss) on derivative financial instrument designated as a net investment hedge

 

(171

)

358

 

Total other comprehensive income (loss), net of tax

 

2,917

 

(773

)

 

 

 

 

 

 

Total comprehensive income

 

$

15,644

 

$

4,761

 

 

See notes to condensed consolidated financial statements.

 

6



 

CommScope, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited - In Thousands, Unless Otherwise Noted)

 

1.                                      BACKGROUND AND BASIS OF PRESENTATION

 

Background

 

CommScope, Inc., through its wholly-owned subsidiaries (CommScope or the Company), is a world leader in the design and manufacture of cable and connectivity solutions for communications networks. The Company focuses on the ‘last mile’ in communications networks, which is the distribution access, or final link to the customer. The Company is a global leader in structured cabling for business enterprise applications and broadband coaxial cables for the cable television industry. The Company also designs, manufactures and markets a broad line of high-performance electronic, coaxial and fiber optic cable products for data networking, Internet access, wireless communication, telephony and other broadband applications. In addition, the Company is a leading provider of environmentally secure enclosures and structured cabling solutions supporting central offices for telecommunication service providers in the United States.

 

Basis of Presentation

 

The condensed consolidated balance sheet as of March 31, 2006 and the condensed consolidated statements of operations, cash flows, stockholders’ equity and comprehensive income for the three months ended March 31, 2006 and 2005 are unaudited and reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year.

 

The unaudited interim condensed consolidated financial statements of CommScope have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The significant accounting policies followed by the Company are set forth in Note 2 to the consolidated financial statements within the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (the 2005 Form 10-K). There were no changes in the Company’s significant accounting policies during the three months ended March 31, 2006 other than the adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payments” (SFAS No. 123(R)), which is discussed below. In addition, the Company reaffirms the use of estimates in the preparation of the financial statements as set forth in the 2005 Form 10-K. These interim condensed consolidated financial statements should be read in conjunction with the Company’s December 31, 2005 audited consolidated financial statements and notes thereto included in the 2005 Form 10-K.

 

Concentrations of Risk
 

Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 28% and 32% of the Company’s total net sales during the three months ended March 31, 2006 and 2005, respectively. Sales to Anixter primarily originate within the Enterprise segment. No other customer accounted for 10% or more of the Company’s total net sales for the three months ended March 31, 2006 and 2005.

 

Accounts receivable from Anixter represented approximately 33% of net accounts receivable as of March 31, 2006. No other customer accounted for 10% or more of the Company’s net accounts receivable as of March 31, 2006.

 

Product Warranties

 

The Company recognizes a liability for the estimated claims that may be paid under its customer warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products. These product warranties extend over periods ranging from one to twenty-five years from the date of sale, depending upon the product subject to the warranty. The Company records a provision for estimated future warranty claims as cost of sales based upon the historical relationship of warranty claims to sales and specifically-identified warranty issues. The Company bases its estimates on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary.

 

7



 

Activity in the product warranty accrual, included in other accrued liabilities, for the three months ended March 31, 2006 and 2005 consisted of the following:

 

 

 

2006

 

2005

 

Product warranty accrual, beginning of period

 

$

2,035

 

$

1,531

 

Provision for warranty claims

 

447

 

14

 

Less: Warrany claims paid

 

(136

)

(112

)

Product warranty accrual, end of period

 

$

2,346

 

$

1,433

 

 

Commitments and Contingencies

 

CommScope is either a plaintiff or a defendant in pending legal matters in the normal course of business; however, management believes none of these legal matters will have a materially adverse effect on the Company’s financial statements upon final disposition. In addition, CommScope is subject to various federal, state, local and foreign laws and regulations governing the use, discharge, disposal and remediation of hazardous materials. Compliance with current laws and regulations has not had, and is not expected to have, a materially adverse effect on the Company’s financial condition or results of operations.

 

Net Income Per Share

 

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the applicable period. Diluted net income per share is based on net income adjusted for after-tax interest and amortization of debt issuance costs related to convertible debt, if dilutive, divided by the weighted average number of common shares outstanding adjusted for the dilutive effect of stock options, phantom stock, performance units and convertible securities (see Note 8).

 

Below is a reconciliation of net income and weighted average common shares and potential common shares outstanding for calculating diluted net income per share:

 

 

 

Three Months
Ended
March 31,

 

 

 

2006

 

2005

 

Numerator:

 

 

 

 

 

Net income for basic net income per share

 

$

12,727

 

$

5,534

 

Effect of assumed conversion of 1% convertible senior subordinated debentures due 2024

 

629

 

629

 

Income available to common shareholders for diluted net income per share

 

$

13,356

 

$

6,163

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average number of common shares outstanding for basic net income per share

 

56,724

 

54,512

 

Effect of dilutive securities:

 

 

 

 

 

Employee stock options (a)

 

2,373

 

778

 

Phantom stock and performance units

 

76

 

 

1% convertible senior subordinated debentures due 2024

 

11,494

 

11,494

 

Weighted average number of common and potential common shares outstanding for diluted net income per share

 

70,667

 

66,784

 

 


(a)          Options to purchase approximately 0.6 million and 5.6 million common shares were excluded from the computation of net income per share, assuming dilution, for the three months ended March 31, 2006 and 2005, respectively, because they would have been antidilutive.

 

Equity-Based Compensation

 

On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R) using the modified prospective transition method to account for its equity-based compensation arrangements. The Company previously applied Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations and provided the required pro forma disclosures of SFAS No. 123, “Accounting for Stock-Based Compensation.”  See Note 8 for the pro forma disclosures required for the three months ended March 31, 2005.  The adoption of SFAS No. 123(R) did not materially affect the

 

8



 

accounting for the equity-based compensation associated with the Company’s previously awarded phantom stock or performance units, which was already based on the market price of the stock at date of grant. Under the modified prospective transition method, new and previously granted but unvested equity awards are recognized as compensation expense in the income statement on a straight-line basis over the requisite service period based on the estimated fair value of the award (net of estimated forfeitures) at the grant date, and prior period results are not restated. The Company estimates the fair value of stock options using the Black-Scholes valuation model. The balance previously reflected as deferred equity compensation (a contra-equity account) was eliminated against Additional Paid-In Capital (APIC) upon adoption of SFAS No. 123(R).

 

With the adoption of SFAS No. 123(R), the Company changed its method of expense attribution for equity-based compensation for future awards from recognition over the nominal vesting period to recognition over the requisite service period. Compensation expense for equity-based awards granted prior to January 1, 2006 will continue to be recognized over the nominal vesting period. For the three months ended March 31, 2006, additional pre-tax compensation expense of $0.2 million was recognized due to the continued use of the nominal vesting period for awards that were granted prior to January 1, 2006 to retirement-eligible employees.

 

The Company records deferred tax assets related to compensation expense for awards that will result in future tax deductions for the Company, based on the amount of compensation cost recognized and the Company’s statutory tax rate in the jurisdiction in which it will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deductions reported on the Company’s income tax return are recorded in APIC (if the tax deduction exceeds the deferred tax asset) or in the Condensed Consolidated Statement of Operations as additional income tax expense (if the deferred tax asset exceeds the tax deduction and no excess APIC exists from previous awards). In determining the amount of excess APIC at the adoption of SFAS No. 123(R), the Company utilized the simplified alternative provided in FASB Staff Position FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (FSP FAS 123(R)-3).

 

Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits resulting from the exercise of stock options as operating cash inflows in the Condensed Consolidated Statements of Cash Flows. SFAS No. 123(R) requires the benefit of tax deductions in excess of the compensation costs recognized for those options to be classified as financing cash inflows rather than operating cash inflows, on a prospective basis. As a result of utilizing the simplified alternative provided under FSP FAS 123(R)-3, all tax benefits resulting from the exercise of stock options that were vested as of the adoption of SFAS No. 123(R) will be classified as financing cash inflows.

 

Impact of Newly Issued Accounting Standards

 

In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.”  This statement is the result of efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires that items such as idle facility expense, excessive spoilage and rehandling costs be recognized as expenses in the current period. It also requires that allocation of fixed production overhead to the costs of conversion be based on normal capacity of the production facilities. The Company adopted this standard January 1, 2006 and its adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows.

 

2.                                      ACQUISITIONS

 

On March 6, 2006, CommScope acquired the assets supporting the trunk and distribution cable television products business of Trilogy Communications, Inc., along with certain other assets. The purchase price of $13.8 million was paid in cash. The products acquired were integrated into the Broadband segment.

 

9



 

The preliminary allocation of the purchase price, based on estimated fair values of the assets acquired, is as follows:

 

 

 

Amortization
Period

 

Estimated Fair
Value

 

 

 

(in years)

 

(in millions)

 

Inventory

 

 

 

$

4.9

 

 

 

 

 

 

 

Machinery and equipment

 

 

 

1.6

 

 

 

 

 

 

 

Intangible assets

 

 

 

 

 

Customer relationships

 

16

 

3.8

 

Non-compete agreement

 

7

 

1.7

 

Other identifiable intangible assets

 

10

 

1.8

 

Total purchase price

 

 

 

$

13.8

 

 

The weighted average useful life of the intangible assets acquired is 12.4 years.

 

In conjunction with the Company’s acquisition of substantially all of the assets and assumption of certain liabilities of the Connectivity Solutions business of Avaya Inc. in January 2004, the Company issued approximately 1.8 million shares of CommScope common stock. These unregistered shares included registration rights and the Company established a liability at the time the shares were issued for such registration costs. During the three months ended March 31, 2006, the registration rights expired and the Company reversed the liability that had been established, resulting in an increase to additional paid-in capital of $500.

 

3.                                      BALANCE SHEET DATA

 

Short-term Investments

 

At March 31, 2006 and December 31, 2005, the Company’s short-term investments were composed of the following:

 

 

 

March 31,

 

December 31,

 

 

 

2006

 

2005

 

Available for sale

 

$

57,343

 

$

67,643

 

Held-to-maturity

 

51,403

 

34,458

 

 

 

$

108,746

 

$

102,101

 

 

At March 31, 2006, the held-to-maturity short-term investments were composed of the following:

 

 

 

Amortized Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Corporate debt obligations

 

$

34,946

 

$

1

 

$

(71

)

$

34,876

 

State and municipal obligations

 

 

13,459

 

 

 

 

(6

)

13,453

 

Federal agency notes

 

2,998

 

 

(4

)

2,994

 

 

 

$

51,403

 

$

1

 

$

(81

)

$

51,323

 

 

At December 31, 2005, the held-to-maturity short-term investments were composed of the following:

 

 

 

Amortized Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

Corporate debt obligations

 

$

25,000

 

$

 

$

(88

)

$

24,912

 

State and municipal obligations

 

 

6,467

 

 

 

 

(5

)

6,462

 

Federal agency notes

 

2,991

 

 

(13

)

2,978

 

 

 

$

34,458

 

$

 

$

(106

)

$

34,352

 

 

10



 

Inventories

 

 

 

March 31,

 

December 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Raw materials

 

$

51,658

 

$

49,936

 

Work in process

 

24,491

 

26,002

 

Finished goods

 

61,154

 

47,665

 

 

 

$

137,303

 

$

123,603

 

 

4.                                      LONG-TERM DEBT

 

 

 

March 31,

 

December 31,

 

 

 

2006

 

2005

 

Senior secured term loan

 

$

33,250

 

$

36,500

 

1% convertible senior subordinated debentures

 

250,000

 

250,000

 

IDA notes

 

10,800

 

10,800

 

 

 

294,050

 

297,300

 

Less: Current portion

 

(13,000

)

(13,000

)

 

 

$

281,050

 

$

284,300

 

 

See Note 10 in the Notes to the Consolidated Financial Statements in the 2005 Form 10-K for information on the terms and conditions of the senior secured credit facility. As of March 31, 2006, the Company had availability of approximately $65 million and no outstanding borrowings under the senior secured revolving credit facility. The interest rate on the senior secured term loan was 6.33% and 6.17% at March 31, 2006 and December 31, 2005, respectively. Management believes the Company was in compliance with all of its covenants under this facility as of March 31, 2006.

 

See Note 10 in the Notes to the Consolidated Financial Statements in the 2005 Form 10-K for information on the terms and conditions of the 1% convertible senior subordinated debentures. The estimated fair value of the Company’s convertible debentures as of March 31, 2006 and December 31, 2005 was $341.6 million and $258.2 million, respectively.

 

5.                                      RESTRUCTURING CHARGES

 

2005 Restructuring Initiatives

 

In August 2005, the Board of Directors of CommScope adopted global manufacturing initiatives to reduce costs by improving manufacturing efficiency and to enhance the Company’s long-term competitive position. Implementation of these initiatives includes shifting significant Enterprise and Broadband segment cable production capacity among CommScope’s global facilities and the expected closing of a Broadband segment manufacturing facility in Scottsboro, Alabama in late 2006. As a result of these initiatives, the Company recognized pretax charges of $34.5 million during 2005 and $3.7 million during the three months ended March 31, 2006.

 

The activity within the liability (included in other accrued liabilities) for these restructuring initiatives was as follows:

 

 

 

Employee-
Related
Costs

 

Equipment
Relocation
Costs

 

Asset
Impairment
Charges

 

Total

 

Balance as of December 31, 2005

 

$

8,087

 

$

 

$

 

$

8,087

 

Activity during first quarter 2006

 

 

 

 

 

 

 

 

 

Additional charge recorded

 

1,940

 

1,809

 

 

3,749

 

Cash paid

 

(7,850

)

(1,809

)

 

(9,659

)

Non-cash

 

 

 

 

 

Balance as of March 31, 2006

 

$

2,177

 

$

 

$

 

$

2,177

 

 

Employee-related costs include the expected severance costs and related fringe benefits, accrued over the remaining period employees are required to work in order to receive severance benefits. Additional pretax employee-related costs of $1.5 million to $2.5 million are expected to be recognized during the balance of 2006.

 

11



 

Equipment relocation costs relate directly to shifting manufacturing capacity among our global manufacturing facilities and include costs to uninstall, pack, ship and re-install equipment as well as the costs to prepare the receiving facility to accommodate the equipment. These costs are recognized as the expenses are incurred and additional costs of $2.5 million to $3.5 million are expected to be recognized, substantially during the balance of 2006.

 

Asset impairment charges relate to production equipment that has been identified as excess, pending consolidation of certain production operations in other facilities. It is anticipated that this equipment will be available for sale once the facility consolidation is complete. The equipment has been recorded at its estimated net realizable value upon sale plus an estimate of its remaining utility while still in service. Additional impairment charges may be incurred upon the disposition of these assets or if additional excess equipment is identified.

 

2004 Restructuring Initiatives

 

In October 2004, the Board of Directors of Connectivity Solutions Manufacturing, Inc. (CSMI), a wholly-owned subsidiary of the Company, adopted organizational and cost reduction initiatives at its Omaha, Nebraska facility in order to improve its competitive position.

 

The activity within the liability for these restructuring initiatives during the three months ended March 31, 2006 was as follows:

 

 

 

Employee-
Related
Costs

 

Process
Improvement
Costs

 

Impairment
Charges

 

Total

 

Balance as of December 31, 2005

 

$

173

 

$

 

$

 

$

173

 

Activity during first quarter 2006:

 

 

 

 

 

 

 

 

 

Cash paid

 

(84

)

 

 

(84

)

Balance as of March 31, 2006

 

$

89

 

$

 

$

 

$

89

 

 

No future charges are anticipated in connection with these initiatives and the remainder of the liability is expected to be substantially paid during the balance of 2006.

 

6.                                      DERIVATIVES AND HEDGING ACTIVITIES

 

As of March 31, 2006 and 2005, the only derivative financial instrument outstanding was a cross currency swap of U.S. dollars for euros with a notional amount of $14 million. During the three months ended March 31, 2005, the swap was designated and documented as a hedge of the Company’s net investment in its Belgian subsidiary to reduce the volatility in stockholders’ equity caused by changes in euro exchange rates. Effective October 1, 2005, a portion of the hedging instrument was designated as a hedge against fluctuations in the fair value of certain of the Company’s euro-denominated assets. Losses of $48 (pre-tax) on the portion designated as a fair value hedge are reflected in in the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2006. The designations of the hedging instrument were effective as of March 31, 2006 and 2005, and are expected to continue to be effective for the duration of the agreement, resulting in no anticipated hedge ineffectiveness.

 

The fair value of the derivative instrument, reflected in other noncurrent liabilities, was approximately $6.1 million and $5.8 million as of March 31, 2006 and December 31, 2005, respectively.

 

There were no material reclassifications from other comprehensive income (loss) to earnings during the three months ended March 31, 2006 and 2005.

 

12



 

Activity in the accumulated net loss on derivative instruments included in accumulated other comprehensive loss consisted of the following:

 

 

 

Three Months
Ended
March 31,

 

 

 

2006

 

2005

 

Accumulated net loss on derivative instruments, beginning of period

 

$

(4,274

)

$

(5,716

)

Net gain (loss) on derivative financial instrument designated as a net investment hedge

 

(171

)

358

 

Accumulated net loss on derivative instruments, end of period

 

$

(4,445

)

$

(5,358

)

 

During the three months ended March 31, 2006 and 2005, the income tax expense (benefit) related to the gain (loss) on the derivative financial instrument designated as a net investment hedge and reported within other comprehensive income was $(101) and $210, respectively.

 

7.                    EMPLOYEE BENEFIT PLANS

 

 

 

Pension Benefits

 

Other Postretirement
Benefits

 

 

 

Three Months Ended
March 31,

 

 

 

2006

 

2005

 

2006

 

2005

 

Service cost

 

$

814

 

$

991

 

$

1,128

 

$

1,053

 

Interest cost

 

1,725

 

1,570

 

1,229

 

1,152

 

Recognized actuarial loss

 

13

 

 

140

 

89

 

Amortization of prior service cost

 

(97

)

 

(132

)

 

Amortization of transition obligation

 

10

 

11

 

 

 

Return on plan assets

 

(1,967

)

(1,584

)

(139

)

(131

)

Net periodic benefit cost

 

$

498

 

$

988

 

$

2,226

 

$

2,163

 

 

The Company contributed approximately $5.2 million to its pension plans during the three months ended March 31, 2006 and anticipates making additional contributions of approximately $9.8 million to these plans during 2006. The Company contributed approximately $1.0 million to the other postretirement benefit plans during the three months ended March 31, 2006 and anticipates making additional contributions of approximately $3.0 million to these plans during 2006.

 

8. EQUITY-BASED COMPENSATION PLANS

 

Equity-based compensation awards are provided to employees and non-employee directors under the Amended and Restated CommScope, Inc. 1997 Long-Term Incentive Plan (the CommScope Incentive Plan). Awards under the CommScope Incentive Plan may include stock options, restricted stock, performance units, performance shares and phantom shares for employees of the Company and stock, restricted stock and stock options for non-employee directors of the Company. As of March 31, 2006, 13.2 million shares have been authorized for issuance under the CommScope Incentive Plan and 0.4 million remain available to be issued.

 

Performance Units (PUs) are stock awards where the number of shares ultimately received by the employee depends on Company performance against specified targets and vest over a three-year period. The fair value of each PU is determined on the date of grant, based on the Company’s stock price and assumes that performance targets will be achieved. Over the performance period, the number of shares of stock that will be issued is adjusted upward or downward based upon the probable achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized will be based on a comparison of the final performance metrics to the specified targets.

 

Phantom Stock Awards (PSAs) entitle the holder to shares of common stock after the three-year vesting period. The fair value of the awards is determined on the grant date based on the Company’s stock price.

 

13



 

Stock options are awards that allow the employee to purchase shares of the Company’s common stock at a fixed price. Stock options are granted at an exercise price equal to or greater than the Company’s stock price at the date of grant. These awards generally vest one-third per year over the three years following the grant date and have a contractual term of ten years.

 

The following table sets forth the total equity-based compensation expense resulting from PUs, PSAs and stock options included in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 (in thousands):

 

Cost of sales

 

$

298

 

Selling, general and administrative expense

 

611

 

Research and development expense

 

111

 

Total equity-based compensation expense

 

$

1,020

 

 

As of March 31, 2006, $10.3 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of 2.3 years. There were no significant capitalized equity-based compensation costs at March 31, 2006.

 

The following table summarizes the stock option activity for the three months ended March 31, 2006 (in thousands, except per share data):

 

 

 

Shares

 

Weighted
Average
Option
Exercise
Price Per
Share

 

Weighted
Average
Grant Date
Fair
Value Per
Share

 

Aggregate
Intrinsic
Value

 

Outstanding, December 31, 2005

 

8,440

 

$

 16.31

 

 

 

$

 42,705

 

Granted

 

7

 

$

 19.91

 

$

 9.01

 

 

Exercised

 

(1,969

)

$

 14.05

 

 

 

$

 21,190

 

Expired

 

(4

)

$

 38.38

 

 

 

 

Outstanding, March 31, 2006

 

6,474

 

$

 16.99

 

 

 

$

 80,119

 

 

As of March 31, 2006, the aggregate intrinsic value of exercisable stock options was $77,130, with a weighted average remaining contractual life of 5.7 years.

 

The following table summarizes the PU and PSA activity for the three months ended March 31, 2006 (in thousands, except per share data):

 

 

 

Units

 

Weighted
Average Grant
Date Fair
Value Per
Share

 

Outstanding, December 31, 2005

 

484

 

$

19.91

 

Granted

 

12

 

$

23.98

 

Forfeited

 

(7

)

$

19.91

 

Outstanding, March 31, 2006

 

489

 

$

20.01

 

 

The following table summarizes the non-vested stock option, PU and PSA activity for the three months ended March 31, 2006 (in thousands):

 

 

 

Stock
Options

 

PUs and PSAs

 

Non-vested awards, December 31, 2005

 

293

 

484

 

Granted

 

7

 

12

 

Vested

 

(13

)

(1

)

Forfeited

 

(4

)

(7

)

Non-vested awards, March 31, 2006

 

283

 

488

 

 

 

14



 

The shares under option at March 31, 2006 were in the following exercise price ranges:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise Prices

 

Shares
(in thousands)

 

Weighted
Average
Remaining
Contractual Life
(in Years)

 

Weighted
Average
Exercise Price
Per Share

 

Shares
(in thousands)

 

Weighted
Average
Exercise Price
Per Share

 

$7.43 to $10.00

 

1,075

 

6.6

 

$

7.92

 

1,075

 

$

7.92

 

10.01 to 15.50

 

1,063

 

2.9

 

$

13.53

 

977

 

$

13.52

 

15.51 to 16.50

 

1,579

 

6.5

 

$

15.93

 

1,579

 

$

15.93

 

16.51 to 18.00

 

927

 

5.1

 

$

17.16

 

927

 

$

17.16

 

18.01 to 24.00

 

1,226

 

8.6

 

$

19.13

 

1,029

 

$

18.97

 

24.01 to 47.06

 

604

 

3.7

 

$

37.38

 

604

 

$

37.38

 

$7.43 to $47.06

 

6,474

 

5.9

 

$

16.99

 

6,191

 

$

16.94

 

 

The Company’s pro forma disclosures of net earnings for periods prior to the adoption of SFAS No. 123(R) were determined under a fair value method as prescribed by SFAS No. 123. Key input assumptions used to estimate the fair value of stock options include the grant price of the award, the expected option term, volatility of the Company’s stock, the risk-free rate and the Company’s projected dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in estimating the fair values of CommScope stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company under SFAS No. 123 or SFAS No. 123(R).

 

Had the Company accounted for equity-based compensation plans using the fair value based accounting method described by SFAS No. 123 for the periods prior to 2006, the Company’s basic and diluted net income per share for the three months ended March 31, 2005, would have been as follows (in thousands, except per share data):

 

Net income

 

$

5,534

 

Less: Total equity-based employee compensation expense determined under fair value based method for all awards, net of tax

 

(1,998

)

Pro forma net income for basic net income per share

 

$

3,536

 

Add: Effect of assumed conversion of 1% convertible senior subordinated debentures due 2024

 

629

 

Pro forma net income for diluted net income per share

 

$

4,165

 

 

 

 

 

Net income per share:

 

 

 

Basic-as reported

 

$

0.10

 

Basic-pro forma

 

$

0.06

 

 

 

 

 

Diluted-as reported

 

$

0.09

 

Diluted-pro forma

 

$

0.06

 

 

On August 10, 2005, the Compensation Committee of the Company’s Board of Directors amended certain stock option agreements with employees to accelerate the vesting of certain outstanding unvested stock options. Unvested options to purchase 2.1 million shares with an average exercise price of $17.54 per share became exercisable as a result of the vesting acceleration. The intrinsic value of the stock options on the acceleration date was $2.6 million. As a result of the accelerated vesting, the Company recognized no compensation expense associated with these options during the three months ended March 31, 2006. Had these options not been accelerated, the Company would have recognized additional pre-tax compensation expense for the three months ended March 31, 2006 of $1.7 million.

 

15



 

9.                                      SEGMENTS

 

The Company’s reportable segments are defined by major product category as follows: Enterprise, Broadband and Carrier.

 

The Enterprise segment consists mainly of structured cabling systems for business enterprise applications and connectivity solutions for wired and wireless networks within organizations. The segment also includes coaxial cable for various video and data applications.

 

The Broadband segment primarily consists of coaxial cable, fiber optic cable and conduit for cable television system operators. These products support multi-channel video, voice and high-speed data services for residential and commercial customers using Hybrid Fiber Coaxial architecture.

 

The Carrier segment consists of secure environmental enclosures for electronic devices and equipment, cables and components used by wireless providers to connect antennae to transmisters and structured cabling solutions for telephone central offices. These products are primarily used by telecommunications service providers or “carriers.”

 

The following tables provide summary financial information by segment as of March 31, 2006 and December 31, 2005 and for the three months ended March 31, 2006 and 2005 (in millions):

 

 

 

As of
March 31,
2006

 

As of
December 31,
2005

 

Identifiable segment-related assets:

 

 

 

 

 

Enterprise

 

$

371.1

 

$

352.4

 

Broadband

 

366.1

 

343.2

 

Carrier

 

110.5

 

108.0

 

Total identifiable segment-related assets

 

847.7

 

803.6

 

 

 

 

 

 

 

Reconciliation to total assets:

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

242.0

 

248.7

 

Deferred income taxes

 

48.4

 

49.9

 

Total assets

 

$

1,138.1

 

$

1,102.2

 

 

 

 

Three Months Ended
March 31,

 

 

 

2006

 

2005

 

Net sales:

 

 

 

 

 

Enterprise

 

$

172.1

 

$

157.7

 

Broadband

 

125.9

 

108.1

 

Carrier

 

54.7

 

44.1

 

Inter-segment eliminations

 

(0.4

)

(0.8

)

Consolidated net sales

 

$

352.3

 

$

309.1

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

Enterprise

 

$

11.3

 

$

8.9

 

Broadband

 

8.0

 

6.5

 

Carrier

 

 

(6.9

)

Consolidated operating income

 

$

19.3

 

$

8.5

 

 

16



 

10.                               SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

Three Months Ended
March 31,

 

 

 

2006

 

2005

 

Cash paid during the period for:

 

 

 

 

 

Income taxes

 

$

1,681

 

$

4,726

 

Interest

 

2,190

 

2,223

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

Asset previously classifed as held for sale transferred from prepaid and other current assets to property, plant and equipment at estimated fair value

 

$

10,190

 

$

 

Fair value less costs to sell of held for sale assets transferred from property, plant and equipment to prepaid and other current assets

 

 

11,190

 

 

17



 

ITEM 2.                             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2006 and 2005 is provided to increase the understanding of, and should be read in conjunction with, the unaudited condensed consolidated financial statements and accompanying notes included in this document as well as the audited consolidated financial statements, related notes thereto and management’s discussion and analysis of financial condition and results of operations, including management’s discussion and analysis about the application of critical accounting policies included in our 2005 Annual Report on Form 10-K.

 

Overview

 

CommScope, Inc., through our wholly-owned subsidiaries, is a world leader in the design and manufacture of cable and connectivity solutions for communications networks. We focus on the ‘last mile’ in communications networks, which is the distribution access, or final link to the customer. Through our acquisition of the Connectivity Solutions business of Avaya Inc. on January 31, 2004, we became a global leader in structured cabling for business enterprise applications. We are also a global leader in broadband coaxial cables for the cable television industry. We also design, manufacture and market a broad line of high-performance electronic, coaxial and fiber optic cable products for data networking, Internet access, wireless communication, telephony and other broadband applications. In addition, we are a leading provider of environmentally secure enclosures and structured cabling solutions supporting central offices for telecommunication service providers in the United States.

 

CRITICAL ACCOUNTING POLICIES

 

There have been no changes in our critical accounting policies or significant accounting estimates as disclosed in our 2005 Annual Report on Form 10-K other than the implementation of SFAS No. 123(R) as of January 1, 2006 on the modified prospective basis (see Notes 1 and 8 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-Q) .

 

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 WITH THE THREE MONTHS ENDED MARCH 31, 2005

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2006

 

2005

 

 

 

 

 

 

 

$
(millions)

 

% of
Net
Sales

 

$
(millions)

 

% of
Net
Sales

 

Dollar
Change

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

352.3

 

100.0

%

$

309.1

 

100.0

%

$

43.2

 

14.0

%

Gross profit

 

84.7

 

24.1

 

72.2

 

23.4

 

12.5

 

17.4

 

SG&A expense

 

54.2

 

15.4

 

53.9

 

17.4

 

0.3

 

0.6

 

R&D expense

 

7.5

 

2.1

 

7.8

 

2.5

 

(0.3

)

(3.8

)

Restructuring costs

 

3.7

 

1.1

 

2.0

 

0.6

 

1.7

 

84.8

 

Net income

 

12.7

 

3.6

 

5.5

 

1.8

 

7.2

 

130.0

 

Net income per diluted share

 

0.19

 

 

 

0.09

 

 

 

 

 

 

 

 

Net sales

 

Overall, the year-over-year increase in net sales is attributable to growth in domestic and international sales in the Broadband segment and domestic sales for the Enterprise and Carrier segments. The improvement in net sales can be attributed to the positive impact of price increases implemented for certain products in response to significant increases in the costs of raw materials, improved project business and improved economic conditions for the telecommunications industry. International sales decreased as a percentage of total net sales from 33.4% for the three months ended March 31, 2005 to 30.4% for the three months ended March 31, 2006, largely as a result of weakness in the European region. For further details by segment, see section titled “Segment Results” below.

 

18



 

Gross profit (net sales less cost of sales)

 

The year-over-year increase in gross profit of $12.5 million and gross profit margin to 24.1% from 23.4% was primarily due to the impact of price increases implemented in response to increases in costs of raw materials, higher sales levels, an improvement in the mix of products sold and the impact of expense reduction efforts.

 

We expect additional increases in the costs of certain raw materials, particularly copper and aluminum, and continued volatility in the costs of other raw materials such as plastics and other polymers, which are derived from oil and natural gas, to result in increased cost of sales. If we are unable to achieve customer acceptance of price increases, higher sales volume and continued cost efficiencies to offset the increasing costs of raw materials, we could realize lower gross profit and gross profit margin.

 

Selling, general and administrative expense

 

The year-over-year increase in selling, general and administrative expense (SG&A) of $0.3 million was primarily due to higher marketing costs associated with the higher level of sales; these increased costs were substantially offset by a $1.0 million reduction in bad debt expense that resulted from lower balances of foreign and problem account balances. The decrease in SG&A expense as a percentage of sales can be primarily attributed to increased sales, largely resulting from price increases, lower bad debt expense and expense control initiatives.

 

Research and development

 

Research and development (R&D) expense decreased by $0.3 million year over year primarily due to cost reduction efforts. R&D expense as a percentage of net sales decreased modestly to 2.1% for the three months ended March 31, 2006 compared to 2.5% for the three months ended March 31, 2005. This year-over-year decrease in R&D expense as a percentage of net sales is mainly due to increased sales, largely resulting from price increases, and expense control initiatives. The ongoing R&D activities generally relate to bringing new products to market and to modifying existing products to better serve our customers.

 

Restructuring Costs

 

We recognized pretax restructuring costs of $3.7 million in the first quarter of 2006. These costs resulted from the continued implementation of the global manufacturing initiatives which began during the third quarter of 2005. Included in the costs incurred during the first quarter of 2006 were employee-related costs of $1.9 million, which consisted of expected severance costs and related fringe benefits, accrued over the remaining period employees are required to work in order to receive benefits, and equipment relocation costs of $1.8 million, which consisted of costs directly related to shifting manufacturing capacity among our global manufacturing facilities including costs to uninstall, pack, ship and re-install equipment as well as costs to prepare the receiving facility to accommodate the equipment. During the first quarter of 2005, we recognized $2.0 million of pretax restructuring costs related to the continued implementation of the organizational and cost reduction initiatives at the Omaha facility of Connectivity Solutions Manufacturing, Inc., our wholly-owned manufacturing subsidiary, which began during the fourth quarter of 2004.

 

We anticipate that we will recognize additional pretax restructuring charges of up to $6 million to complete the implementation of the global manufacturing initiatives. The majority of these costs are expected to be incurred during the balance of 2006.

 

There continues to be excess real estate at the Omaha facility which we are attempting to sell or lease. Additional charges, which are not expected to be material, could result from actions that may be taken.

 

Net interest income/expense

 

We recognized net interest income of $67 for the three months ended March 31, 2006 compared to net interest expense of $1,079 for the three months ended March 31, 2005. The change was due to the impact of significantly higher balances of invested funds (cash, cash equivalents and short-term investments) as well as improved rates of return on invested balances as a result of increases in LIBOR and other short-term interest rates. Interest expense declined slightly as a result of lower levels of outstanding debt due to scheduled principal repayments and a reduction in the interest rate spreads on our senior secured credit facility due to improvements in our fixed charge coverage ratio, offset by the impact of increases in LIBOR and other short-term interest rates. Our weighted average effective interest rate on outstanding borrowings, including amortization of associated long-term financing costs, was essentially unchanged at 2.73% as of March 31, 2006 compared to 2.74% as of December 31, 2005.

 

19



 

Income taxes

 

Our effective income tax rate was 36.5% for the three months ended March 31, 2006 compared to 24.7% for the three months ended March 31, 2005. The tax provision for the three months ended March 31, 2006 included $0.4 million related to adjustments of reserves established as a result of matters raised by various taxing authorities during audits of prior tax returns and other adjustments that resulted from the completion or amendment of prior year tax returns. The effective rate excluding these items that relate to prior years was 34.3%. Our effective tax rate reflects the benefits derived from significant operations outside the U.S., which are generally taxed at rates lower than the U.S. statutory rate of 35%, offset to some extent by state income taxes. The benefits from international activities in lower tax rate jurisdictions were greater during the three months ended March 31, 2005 than during the three months ended March 31, 2006 due to changes in the mix of earnings among foreign and domestic entities.

 

Segment Results

 

 

 

Three months
ended

 

Three months
ended

 

 

 

 

 

 

 

March 31,

 

March 31,

 

 

 

 

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Net
Sales

 

% of
Net
Sales

 

Net
Sales

 

% of
Net
Sales

 

Dollar
Change

 

%
Change

 

Net sales by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Enterprise

 

$

172.1

 

48.9

%

$

157.7

 

51.0

%

$

14.4

 

9.1

%

Broadband

 

125.9

 

35.7

 

108.1

 

35.0

 

17.8

 

16.5

 

Carrier

 

54.7

 

15.5

 

44.1

 

14.3

 

10.6

 

24.0

 

Inter-segment eliminations

 

(0.4

)

(0.1

)

(0.8

)

(0.3

)

0.4

 

 

 

Consolidated net sales

 

$

352.3

 

100.0

%

$

309.1

 

100.0

%

$

43.2

 

14.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total domestic sales

 

$

245.1

 

69.6

%

$

205.8

 

66.6

%

$

39.3

 

19.1

%

Total international sales

 

107.2

 

30.4

 

103.3

 

33.4

 

3.9

 

3.8

 

Total worldwide sales

 

$

352.3

 

100.0

%

$

309.1

 

100.0

%

$

43.2

 

14.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss) by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Enterprise

 

$

11.3

 

 

 

$

8.9

 

 

 

$

2.4

 

27.0

%

Broadband

 

8.0

 

 

 

6.5

 

 

 

1.5

 

23.1

 

Carrier

 

 

 

 

(6.9

)

 

 

6.9

 

100.0

 

Consolidated operating income

 

$

19.3

 

 

 

$

8.5

 

 

 

$

10.8

 

127.1

%

 

Enterprise Segment

 

The Enterprise segment consists mainly of structured cabling systems for business enterprise applications and connectivity solutions for wired and wireless networks within organizations. The segment also includes coaxial cable for various video and data applications.

 

The increase in Enterprise segment net sales was primarily driven by price increases and the introduction of new products. Domestic sales were higher, reflecting increased sales volumes as well as the impact of price increases and new products. International sales were lower as a result of a decline in sales volume, particularly in the Europe/Middle East/Africa region. We implemented price increases for certain Enterprise products during 2005 and the first quarter of 2006 as a result of significant increases in the cost of certain raw materials.

 

We expect demand for Enterprise products to be driven by the ongoing need for bandwidth and high-performance structured cabling in the enterprise market and affected by global information technology spending, among other things.

 

The improvement in Enterprise segment operating income is primarily attributable to changes in product mix towards products that generate higher margins. The price increases that were realized were substantially offset by the impact of increased raw material costs. Operating income was favorably impacted by a modest reduction in R&D expenses and unfavorably impacted by restructuring costs of $3.0 million for the three months ended March 31, 2006 compared to $1.2 million for the three months ended March 31, 2005.

 

20



 

Broadband Segment

 

The Broadband segment primarily consists of coaxial cable, fiber optic cable and conduit for cable television system operators. These products support multi-channel video, voice and high-speed data services for residential and commercial customers using Hybrid Fiber Coaxial architecture.

 

The increase in net sales of Broadband products primarily resulted from strong domestic and international sales for most of our product lines.This increase reflects the impact of higher sales volumes and price increases announced during 2005 and the first quarter of 2006 for certain products to mitigate the significant increase in raw material costs. The domestic sales increase can be also attributed to continued infrastructure needs of our large cable television system operator customers. Net sales increased in most international regions as a result of new projects and maintenance projects. Net sales for the three months ended March 31, 2006 includes $0.7 million related to the MC2® product that was acquired from Trilogy Communications, Inc. on March 6, 2006.

 

The improvement in Broadband segment operating income reflects the impact of strong sales volumes and price increases, which were largely offset by the impact of raw material cost increases. Operating income for the three months ended March 31, 2006 included restructuring costs of $0.7 million. There were no such costs incurred during the comparable 2005 period.

 

Carrier Segment

 

The Carrier segment consists of secure environmental enclosures for electronic devices and equipment, cables and components used by wireless providers to connect antennae to transmitters and structured cabling solutions for telephone central offices. These products are primarily used by telecommunications service providers or “carriers.”

 

The Carrier segment net sales increased substantially on a year over year basis, primarily as a result of Integrated Cabinet Solutions (ICS) product group sales related to Digital Subscriber Line (DSL) deployments by telephone companies. The wireless product group net sales within this segment were essentially unchanged.  Net sales for the ExchangeMAX product group within this segment decreased slightly, reflecting lower sales of twisted pair central office cable products as a result of our decision to exit this business.

 

While we expect sales of Carrier products to be somewhat volatile since customer spending is mainly project-driven, we remain optimistic about our opportunities for the ICS and wireless product groups. We anticipate growth in sales primarily due to fiber to the node construction activity and DSL deployments, which provide opportunities for our ICS product group. We also expect continuing expansion in cellular telephone base stations, which affects growth for our wireless product group.

 

The improvement in Carrier segment operating income for the three months ended March 31, 2006 over the comparable 2005 period is primarily due to the impact of cost reduction initiatives and the higher sales volume of ICS products. Operating income for the three months ended March 31, 2005 included $0.8 million of restructuring costs.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flow Overview

 

Our principal sources of liquidity both on a short-term and long-term basis are cash and cash equivalents, short-term investments, cash flows provided by operations and availability under credit facilities. A reduction in sales and profitability could reduce cash provided by operations and limit availability under credit facilities. In addition, increases in working capital, excluding cash, cash equivalents and short-term investments, related to increasing sales could reduce our operating cash flows in the short term until cash collections of accounts receivable catch up to the higher level of billings.

 

21



 

 

 

As of

 

 

 

 

 

 

 

March  31,
2006

 

December 31,
2005

 

Dollar
Change

 

%
Change

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

242.0

 

$

248.7

 

$

(6.7

)

(2.7

)%

Working capital, excluding cash, cash equivalents and short-term investments and current portion of long-term debt

 

219.2

 

176.7

 

42.5

 

24.1

 

Long-term debt, including current portion

 

294.1

 

297.3

 

(3.2

)

(1.1

)

Book capital structure

 

868.1

 

819.3

 

48.8

 

6.0

 

Long-term debt as a percentage of book capital structure

 

33.9

%

36.3

%

 

 

 

 

 

The decrease in cash, cash equivalents and short-term investments during the quarter ended March 31, 2006 was primarily driven by the utilization of cash flow from operations. Also affecting the balance of cash, cash equivalents and short-term investments during the quarter ended March 31, 2006 was $34.8 million of proceeds and tax benefits realized from the exercise of stock options, a $13.8 million investment to acquire the MC2 75-ohm trunk and distribution cable television products business and certain other assets from Trilogy Communications, Inc., $6.8 million of capital expenditures and a $5.0 million voluntary contribution to one of our defined benefit pension plans.

 

 

 

Three months ended

 

 

 

 

 

 

 

March 31,

 

Dollar

 

%

 

 

 

2006

 

2005

 

Change

 

Change

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$

(18.4

)

$

(8.7

)

$

(9.7

)

(111.5

)%

Depreciation and amortization

 

14.2

 

15.7

 

(1.5

)

(9.6

)

Increase in working capital, excluding cash, cash equivalents and short-term investments and current portion of long-term debt

 

42.5

 

47.1

 

(4.6

)

(9.8

)

Capital expenditures

 

6.8

 

8.2

 

(1.4

)

(17.1

)

 

Operating Activities

 

During the three months ended March 31, 2006, operating activities utilized $18.4 million in cash compared to using $8.7 million during the three months ended March 31, 2005. During the three months ended March 31, 2006, net income of $12.7 million and depreciation and amortization of $14.2 million were more than offset by a $25.5 million increase in accounts receivable, a $10.7 million decrease in accounts payable and accrued liabilities and an $8.3 million increase in inventories. The increase in accounts receivable can be primarily attributed to an increase in sales over the fourth quarter of 2005, particularly the portion of the increase that occurred during the latter part of the first quarter of 2006. The reduction in accounts payable and accrued liabilities is primarily due to payments during the three months ended March 31, 2006 of year-end incentive programs and severance payments resulting from the global manufacturing initiatives, somewhat offset by increases in accounts payable due to higher raw materials purchases.

 

We expect to generate net cash from operations during 2006, primarily due to increased margins from sales of certain product groups and the impact of cost reduction efforts.

 

Investing Activities

 

During the three months ended March 31, 2006, we acquired certain assets supporting the MC2  75-ohm trunk and distribution cable television products business and certain other assets from Trilogy Communications, Inc. for a cash payment of $13.8 million.

 

Investment in property, plant and equipment during the first quarter decreased by $1.4 million year-over-year to $6.8 million. The primary capital expenditures made during the first quarter of 2006 related to the expansion of our new manufacturing facility in Asia that will provide additional production capability and continuing investments to support cost reduction initiatives.

 

22



 

We currently expect total capital expenditures to be approximately $33 million in 2006 compared to $19.9 million in 2005. The expected increase in capital spending during 2006 is primarily for cost reduction efforts and additional production capability, primarily in Asia. We expect total capital expenditures to remain at a level below consolidated depreciation and amortization expense for the next several years.

 

Financing Activities

 

The exercise of 1.97 million stock options during the three months ended March 31, 2006 generated $27.7 million of proceeds and $7.1 million from the tax benefits generated by such stock option exercises.

 

During the three months ended March 31, 2006, we reduced the principal balance of our outstanding long-term debt by $3.25 million in accordance with the scheduled maturities outlined in our respective debt agreements.

 

Future Cash Needs

 

We expect that our primary future cash needs will be to fund working capital, capital expenditures, debt service, and employee benefit obligations. We elected to make a voluntary contributon of $9.2 million to a defined benefit pension plan during April 2006. We expect to make additional contributions of approximately $3.6 million to our pension and other postretirement benefit plans during 2006. We expect that our noncurrent employee benefit liabilities will be funded through cash flow from future operations. In conjunction with our restructuring initiatives, we have accrued a liability of approximately $2.3 million as of March 31, 2006, which is expected to be substantially paid during 2006 with final cash settlements during the first quarter of 2007.

 

We believe that our existing cash, cash equivalents and short-term investments and cash flows from operations, combined with availability under our senior secured revolving credit facility, will be sufficient to meet our presently anticipated future cash needs. We may, from time to time, borrow under our revolving credit facility or issue securities, if market conditions are favorable, to meet our future cash needs or to reduce our borrowing costs.

 

There were no material changes in our contractual obligations during the quarter ended March 31, 2006.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements in this Form 10-Q that are other than historical facts are intended to be “forward-looking statements” within the meaning of the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and other related laws and include but are not limited to those statements relating to our business position, plans, transition, outlook, revenues, earnings, margins, accretion, synergies and other financial items, restructuring plans, sales and earnings expectations, expected demand, cost and availability of key raw materials, internal production capacity and expansion, competitive pricing, relative market position and outlook. While we believe such statements are reasonable, the actual results and effects could differ materially from those currently anticipated. These forward-looking statements are identified, by the use of certain terms and phrases including but not limited to “intends,” “intend,” “intended,” “goal,” “estimate,” “estimates,” “expects,” “expect,” “expected,” “project,” “projects,” “projected,” “projections,” “plans,” “anticipates,” “anticipated,” “should,” “designed to,” “foreseeable future,” “believe,” “believes,” “think,” “thinks” and “scheduled” and similar expressions.

 

These statements are subject to various risks and uncertainties, many of which are outside our control, including, without limitation, changes in cost and availability of key raw materials and our ability to recover these costs from our customers through price increases; the challenges of executing our previously announced global manufacturing initiatives; the integration and expected synergies related to the acquisition of the MC2® product line from Trilogy Communications, Inc.; customer demand for our products and the ability to maintain existing business alliances with key Enterprise, Broadband and Carrier customers or distributors; competitive pricing and acceptance of our products; industry competition and the ability to retain customers through product innovation; possible production disruption due to supplier bankruptcy, reorganization or restructuring; successful ongoing operation of our vertical integration activities; the possibility of further restructuring actions; possible future impairment charges for fixed or intangible assets; increased obligations under employee benefit plans; ability to achieve expected sales, growth and earnings goals; ability to achieve expected benefits from future acquisitions; costs of protecting or defending our intellectual property; ability to obtain capital on commercially reasonable terms; adequacy and availability of insurance; costs and challenges of compliance with domestic and foreign environmental laws; variability in expected tax rate; product performance issues and associated warranty claims; regulatory changes affecting us or the industries we serve; any changes required by the Securities and Exchange Commission in connection with its review of our public filings; authoritative changes in generally accepted accounting principles by standard-setting bodies; environmental remediation issues; terrorist

 

23



 

activity or armed conflict; political instability; major health concerns; and any statements of belief and any statements of assumptions underlying any of the foregoing. These and other factors are discussed in greater detail in Item 1A. to our Annual Report on Form 10-K for the year ended  December 31, 2005. The information contained in this Form 10-Q represents our best judgment at the date of this report based on information currently available. However, we do not intend, and are not undertaking any duty or obligation, to update this information to reflect developments or information obtained after the date of this report.

 

ITEM 3.                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005, our major market risk exposure relates to adverse fluctuations in commodity prices, interest rates and foreign currency exchange rates. We have established a risk management strategy that includes the reasonable use of derivative and nonderivative financial instruments primarily to manage our exposure to these market risks. We believe our exposure associated with these market risks has not materially changed since December 31, 2005. We have not acquired any new derivative financial instruments since December 31, 2005 or terminated any derivative financial instruments that existed at that date.

 

ITEM 4.                 CONTROLS AND PROCEDURES

 

Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Our Chief Executive Officer and our Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and have concluded that the disclosure controls and procedures are effective.

 

There were no changes in our internal control over financial reporting during the three months ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER  INFORMATION

 

ITEM 6.

 

EXHIBITS

 

 

 

 

 

10.1

 

CommScope, Inc. Annual Incentive Plan 2006 Financial Targets (Incorporated by reference from the Company’s Current Report on Form 8-K dated March 23, 2006 (File No. 1-12929))

 

 

 

 

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

 

 

 

 

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a).

 

 

 

 

 

 

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32)(ii) of Regulation S-K).

 

24



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

COMMSCOPE, INC.

 

 

May 5, 2006

 

/s/ Jearld L. Leonhardt

 

Date

Jearld L. Leonhardt

 

Executive Vice President and Chief Financial Officer

 

signing both in his capacity as Executive Vice

 

President on behalf of the Registrant and as

 

Chief Financial Officer of the Registrant