UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] 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.)
1375 Lenoir-Rhyne Boulevard, P.O. Box 339
Hickory, North Carolina
(Address of principal executive offices)
28603
(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 X No
----- -----
As of July 31, 2001 there were 51,424,970 shares of Common Stock outstanding.
CommScope, Inc.
Form 10-Q
June 30, 2001
Table of Contents
Page No.
--------
Part I - Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statements of Stockholders'
Equity and Comprehensive Income 6
Notes to Condensed Consolidated Financial Statements 7 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 18
Part II - Other Information:
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
CommScope, Inc.
Condensed Consolidated Statements of Income
(Unaudited--in thousands, except net income per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales $ 199,899 $ 241,244 $ 417,259 $ 445,183
Operating costs and expenses:
Cost of sales 151,589 176,863 316,155 328,449
Selling, general and administrative 20,579 20,080 42,545 38,477
Research and development 2,145 4,955 3,625 8,593
Amortization of goodwill 1,341 1,342 2,683 2,685
Impairment charges for fixed assets
and investments (Note 7) 12,615 -- 12,615 --
--------- --------- --------- ---------
Total operating costs and expenses 188,269 203,240 377,623 378,204
--------- --------- --------- ---------
Operating income 11,630 38,004 39,636 66,979
Other income (expense), net (306) 495 (131) 480
Interest expense (2,052) (2,588) (4,074) (4,976)
Interest income 217 53 375 445
--------- --------- --------- ---------
Income before income taxes 9,489 35,964 35,806 62,928
Provision for income taxes (3,511) (13,671) (13,249) (23,908)
--------- --------- --------- ---------
Net income $ 5,978 $ 22,293 $ 22,557 $ 39,020
========= ========= ========= =========
Net income per share (Note 4):
Basic $ 0.12 $ 0.44 $ 0.44 $ 0.76
Assuming dilution $ 0.11 $ 0.42 $ 0.43 $ 0.74
Weighted average shares outstanding (Note 4):
Basic 51,385 51,151 51,350 51,046
Assuming dilution 52,231 56,249 52,133 56,167
See notes to condensed consolidated financial statements.
3
CommScope, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
June 30, December 31,
2001 2000
--------- ---------
Assets
Cash and cash equivalents $ 17,908 $ 7,704
Accounts receivable, less allowance for doubtful accounts of
$12,472 and $9,187, respectively 158,984 197,536
Inventories (Note 2) 53,531 63,763
Prepaid expenses and other current assets (Note 7) 3,687 3,364
Deferred income taxes 18,329 17,296
--------- ---------
Total current assets 252,439 289,663
Property, plant and equipment, net (Note 7) 267,590 251,356
Goodwill, net of accumulated amortization of
$56,615 and $54,140, respectively 153,981 156,685
Other intangibles, net of accumulated amortization of
$36,108 and $34,796, respectively 12,657 13,969
Other assets (Notes 6 and 7) 6,109 9,509
--------- ---------
Total Assets $ 692,776 $ 721,182
========= =========
Liabilities and Stockholders' Equity
Accounts payable $ 23,358 $ 39,958
Other accrued liabilities 38,217 38,481
Current portion of long-term debt (Note 3) 2,551 2,120
--------- ---------
Total current liabilities 64,126 80,559
Long-term debt, less current portion (Note 3) 192,866 225,316
Deferred income taxes 21,291 24,006
Other noncurrent liabilities 18,721 16,781
--------- ---------
Total Liabilities 297,004 346,662
Commitments and contingencies (Note 8)
Stockholders' Equity:
Preferred stock, $.01 par value; Authorized shares: 20,000,000;
Issued and outstanding shares: None at June 30, 2001 and
December 31, 2000 -- --
Common stock, $.01 par value; Authorized shares: 300,000,000;
Issued and outstanding shares: 51,412,820 at June 30, 2001;
51,263,703 at December 31, 2000 514 513
Additional paid-in capital 178,138 175,803
Retained earnings 223,359 200,802
Accumulated other comprehensive loss (Notes 5 and 6) (6,239) (2,598)
--------- ---------
Total Stockholders' Equity 395,772 374,520
--------- ---------
Total Liabilities and Stockholders' Equity $ 692,776 $ 721,182
========= =========
See notes to condensed consolidated financial statements.
4
CommScope, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited - in thousands)
Six Months Ended
June 30,
--------------------
2001 2000
-------- --------
Operating Activities:
Net income $ 22,557 $ 39,020
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 19,856 16,894
Impairment charges for fixed assets and investments 12,615 --
Deferred income taxes (4,235) (1,331)
Tax benefit from stock option exercises 423 3,936
Changes in assets and liabilities:
Accounts receivable 37,259 (71,435)
Inventories 9,489 (25,037)
Prepaid expenses and other current assets 1,158 (326)
Accounts payable and other accrued liabilities (16,139) 27,617
Other noncurrent liabilities 1,939 1,447
Other 988 35
-------- --------
Net cash provided by (used in) operating activities 85,910 (9,180)
Investing Activities:
Additions to property, plant and equipment (45,996) (51,619)
Other (328) 353
-------- --------
Net cash used in investing activities (46,324) (51,266)
Financing Activities:
Net borrowings (repayments) under revolving credit facility (30,640) 30,000
Proceeds from exercise of stock options 1,913 4,065
-------- --------
Net cash provided by (used in) financing activities (28,727) 34,065
Effect of exchange rate changes on cash (655) (126)
-------- --------
Change in cash and cash equivalents 10,204 (26,507)
Cash and cash equivalents, beginning of period 7,704 30,223
-------- --------
Cash and cash equivalents, end of period $ 17,908 $ 3,716
======== ========
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)
Six Months Ended
June 30,
-------------------------
2001 2000
---------- ----------
Number of common shares outstanding:
Balance at beginning of period 51,263,703 50,889,208
Issuance of shares for stock option exercises 149,117 323,726
---------- ----------
Balance at end of period 51,412,820 51,212,934
Common stock:
Balance at beginning of period $ 513 $ 509
Issuance of shares for stock option exercises 1 3
---------- ----------
Balance at end of period $ 514 $ 512
Additional paid-in capital:
Balance at beginning of period $ 175,803 $ 166,875
Issuance of shares for stock option exercises 1,912 4,062
Tax benefit from stock option exercises 423 3,936
---------- ----------
Balance at end of period $ 178,138 $ 174,873
Retained earnings:
Balance at beginning of period $ 200,802 $ 115,915
Net income 22,557 39,020
---------- ----------
Balance at end of period $ 223,359 $ 154,935
Accumulated other comprehensive loss:
Balance at beginning of period $ (2,598) $ (1,955)
Other comprehensive loss (3,641) (345)
---------- ----------
Balance at end of period $ (6,239) $ (2,300)
---------- ----------
Total stockholders' equity $ 395,772 $ 328,020
========== ==========
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Comprehensive income:
Net income $ 5,978 $ 22,293 $ 22,557 $ 39,020
Other comprehensive income (loss), net of tax (Note 5):
Foreign currency translation loss - foreign subsidiaries (266) (6) (845) (469)
Foreign currency transaction gain (loss) on long-term
intercompany loans - foreign subsidiaries (1,421) 202 (3,886) (356)
Hedging gain on nonderivative instruments (Note 6) 325 12 956 480
Effect of adopting SFAS No. 133 (Note 6) -- -- 229 --
Gain (loss) on derivative financial instruments
designated as cash flow hedges (Note 6) 2 -- (95) --
-------- -------- -------- --------
Total other comprehensive income (loss), net of tax (1,360) 208 (3,641) (345)
-------- -------- -------- --------
Total comprehensive income $ 4,618 $ 22,501 $ 18,916 $ 38,675
======== ======== ======== ========
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. ("CommScope" or the "Company"), through its wholly owned
subsidiaries, operates in the cable manufacturing business. CommScope is a
leading worldwide designer, manufacturer and marketer of a wide array of
broadband coaxial cables and other high-performance electronic and fiber optic
cable products for cable television, telephony, Internet access and wireless
communications. Management believes CommScope is the world's largest
manufacturer of coaxial cable for hybrid fiber coax (HFC) cable television
systems. CommScope is also a leading supplier of coaxial, twisted pair, and
fiber optic cables for premise wiring (local area networks), wireless and other
communication applications.
Basis of Presentation
The condensed consolidated balance sheet as of June 30, 2001, the condensed
consolidated statements of income and comprehensive income for the three and six
months ended June 30, 2001 and 2000 and the condensed consolidated statements of
cash flows and stockholders' equity for the six months ended June 30, 2001 and
2000 are unaudited and reflect all adjustments of a normal recurring nature
which 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. 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. These interim condensed consolidated
financial statements should be read in conjunction with the Company's December
31, 2000 audited consolidated financial statements and notes thereto included in
the Company's 2000 Annual Report on Form 10-K.
Goodwill
When events or changes in circumstances, such as significant forecasted
operating losses or a significant adverse change in legal factors or business
climate, indicate that the carrying amount of goodwill may not be recoverable,
the asset is reviewed by management for impairment. An impairment loss is
recognized if the carrying value exceeds the forecasted, undiscounted operating
cash flows of the operating assets related to the goodwill being evaluated. The
impairment loss to be recognized is measured as the amount by which the carrying
value exceeds fair value, estimated based on forecasted operating cash flows,
discounted using a discount rate commensurate with the risks involved. After the
impairment loss is recognized, the reduced carrying amount is accounted for as
the new cost and amortized over the remaining useful life, which is also
revised, if appropriate. There were no events or changes in circumstances during
the three and six months ended June 30, 2001 that would indicate that the
7
Notes to Condensed Consolidated Financial Statements
(Unaudited - In Thousands, Unless Otherwise Noted)
carrying amount of goodwill may not be recoverable (see Note 10 for Impact of
Newly Issued Accounting Standards).
Shipping and Handling Costs
Amounts billed to a customer in a sale transaction related to shipping
costs are included in net sales. All shipping costs incurred to transport
products to the customer are recorded in cost of sales. Internal handling costs,
which relate to activities to prepare goods for shipment, are recorded in
selling, general and administrative expense and were not material for the three
and six months ended June 30, 2001 or 2000.
2. INVENTORIES
December
June 30, 31,
2001 2000
---------- ----------
Raw materials $ 25,139 $ 28,382
Work in process 13,914 11,124
Finished goods 14,478 24,257
---------- ----------
$ 53,531 $ 63,763
========== ==========
3. LONG-TERM DEBT
December
June 30, 31,
2001 2000
---------- ----------
Credit Agreement $ -- $ 30,000
Convertible Notes 172,500 172,500
Eurodollar Credit Agreement 12,117 14,136
IDA Notes 10,800 10,800
---------- ----------
195,417 227,436
Less current portion (2,551) (2,120)
---------- ----------
$ 192,866 $ 225,316
========== ==========
4. 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
periods. 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 and
convertible securities. The diluted net income per share calculation assumes the
exercise of stock options using the treasury stock method.
8
Notes to Condensed Consolidated Financial Statements
(Unaudited - In Thousands, Unless Otherwise Noted)
Below is a reconciliation of weighted average common shares outstanding for
basic net income per share to weighted average common and potential common
shares outstanding for diluted net income per share.
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Net income for basic net income per share $ 5,978 $ 22,293 $ 22,557 $ 39,020
Convertible debt interest and amortization,
net of tax -- 1,179 -- 2,361
-------- -------- -------- --------
Net income available to common stock-
holders for diluted net income per share $ 5,978 $ 23,472 $ 22,557 $ 41,381
======== ======== ======== ========
Denominator:
Weighted average number of common shares
outstanding for basic net income per
share 51,385 51,151 51,350 51,046
Effect of dilutive securities:
Convertible debt (A) -- 3,580 -- 3,580
Employee stock options (B) 846 1,518 783 1,541
-------- -------- -------- --------
Weighted average number of common and
potential common shares outstanding for
diluted net income per share 52,231 56,249 52,133 56,167
======== ======== ======== ========
(A) On December 15, 1999, the Company issued $172.5 million in convertible
notes, which are convertible into shares of common stock at a conversion
rate of 20.7512 shares per $1,000 principal amount. The effect of the
assumed conversion of these notes was excluded from the calculation of net
income per share, assuming dilution, for the three and six months ended
June 30, 2001 because it would have been antidilutive in both periods.
(B) Options to purchase approximately 738 thousand common shares, at prices
ranging from $19.94 to $47.06 per share, were excluded from the computation
of net income per share, assuming dilution, for the three and six months
ended June 30, 2001 because the options' exercise prices were greater than
the average market price of the common shares. These options, which expire
on various dates during 2009 and 2010, were still outstanding as of June
30, 2001. Common shares excluded from the computation of net income per
share, assuming dilution, for the three and six months ended June 30, 2000
were not material.
9
Notes to Condensed Consolidated Financial Statements
(Unaudited - In Thousands, Unless Otherwise Noted)
5. INCOME TAXES RELATED TO OTHER COMPREHENSIVE INCOME
Three Six
Months Months
Ended Ended
June 30, June 30,
------------- -------------
2001 2000 2001 2000
------ ------ ------ ------
Income tax (expense) benefit for components of
other comprehensive income:
Hedging gain on nonderivative instruments $(226) $ (7) $(561) $(300)
Effect of adopting SFAS No. 133 -- -- (135) --
Gain (loss) on derivative instruments designated
as cash flow hedges (1) -- 56 --
------ ------ ------ ------
Total income tax expense for components of
other comprehensive income $(227) $ (7) $(640) $(300)
====== ====== ====== ======
6. DERIVATIVES AND HEDGING ACTIVITIES UNDER SFAS NO. 133
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date for FASB
Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other host
contracts (collectively referred to as embedded derivatives) and for hedging
activities. The new standards require an entity to recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value.
CommScope is exposed to various risks resulting from adverse fluctuations
in commodity prices, interest rates, and foreign currency exchange rates.
CommScope's risk management strategy includes the use of derivative and
nonderivative financial instruments primarily as hedges of these risks in
accordance with the requirements of SFAS No. 133, whenever management determines
their use to be reasonable and practical. This strategy does not permit the use
of derivative financial instruments for trading purposes, nor does it allow for
speculation. A hedging instrument may be designated as a fair value hedge to
manage exposure to risks related to a firm commitment for the purchase of raw
materials or a foreign-currency-denominated firm commitment for the purchase of
equipment, or it may be designated as a cash flow hedge to manage exposure to
risks related to a forecasted purchase of raw materials, variable interest rate
payments, or a forecasted foreign-currency-denominated sale of product. In
addition, the use of nonderivative financial instruments is limited to hedging
fair value risk related to a foreign-currency-denominated firm commitment or a
net investment in a foreign subsidiary.
The Company's risk management strategy permits the reasonable and practical
use of derivative hedging instruments such as forward contracts, options, cross
currency swaps, certain interest rate swaps, caps and floors, and nonderivative
hedging instruments such as foreign-currency-denominated loans. All hedging
instruments are designated and documented, in accordance with SFAS No. 133, as
either a fair value hedge, a cash flow hedge or a foreign currency hedge at
inception. The effectiveness of designated hedging relationships is tested and
10
Notes to Condensed Consolidated Financial Statements
(Unaudited - In Thousands, Unless Otherwise Noted)
documented on at least a quarterly basis. Any ineffectiveness of cash flow or
foreign currency hedges is recognized currently in earnings.
The only derivative instrument identified in the implementation of SFAS No.
133 and outstanding for the three and six months ended June 30, 2001 was an
interest rate swap, which effectively converts the variable-rate Eurodollar
Credit Agreement to a fixed-rate basis. As of January 1, 2001, this interest
rate swap was designated and documented as a cash flow hedge of the risk of
changes in the cash flows attributable to fluctuations in the variable benchmark
interest rate associated with the underlying debt being hedged. This hedging
instrument was effective at the transition date to SFAS No. 133, and at the
balance sheet date, and is expected to continue to be effective for the duration
of the swap contract, resulting in no anticipated hedge ineffectiveness and no
material reclassifications from other comprehensive income to earnings during
the next twelve months. In addition, there were no material reclassification
adjustments during the three and six months ended June 30, 2001. The transition
adjustment as of January 1, 2001 was recorded as a change in accounting
principle to accumulated other comprehensive loss and other assets on the
balance sheet and did not have a material impact on the Company's consolidated
results of operations, financial position, and cash flows.
Also, as of January 1, 2001, the Eurodollar Credit Agreement was designated
and documented as a hedge of the Company's net investment in its Belgian
subsidiary. There was no adjustment required under SFAS No. 133 as of January 1,
2001 related to this net investment hedge. This hedging instrument was effective
at the SFAS No. 133 transition date, and at the balance sheet date, and is
expected to continue to be effective for the duration of the loan agreement,
resulting in no anticipated reclassifications from other comprehensive income to
earnings. In addition, the Company does not currently intend to repatriate the
earnings of this subsidiary in the foreseeable future.
Activity in the accumulated net gain on derivative instruments included in
accumulated other comprehensive loss for the three and six months ended June 30,
2001 consists of the following:
Three Six
Months Ended Months Ended
June 30, 2001 June 30, 2001
------------- -------------
Accumulated net gain on derivative instruments,
beginning of period $ 132 $ --
Net effect of adopting SFAS No. 133 -- 229
Net gain (loss) on derivative financial instruments
designated as cash flow hedges 2 (95)
----- -----
Accumulated net gain on derivative instruments,
end of period $ 134 $ 134
===== =====
7. IMPAIRMENT CHARGES FOR FIXED ASSETS AND INVESTMENTS
The Company has taken a number of steps to closely manage costs and has
been evaluating all aspects of its business in response to challenging industry
conditions. As a result of its review, the Company recorded pretax impairment
charges totaling $12.6 million for the three months ended June 30, 2001.
Included in these impairment charges was approximately $3.6 million related to
an investment in an unconsolidated affiliate, $4.4 million related to fixed
assets identified as held for disposal and $4.6 million related to fixed assets
to be held and used.
11
Notes to Condensed Consolidated Financial Statements
(Unaudited - In Thousands, Unless Otherwise Noted)
Management determined that the fair value of the Company's investment in an
unconsolidated affiliate was less than its carrying value, which has been
accounted for under the cost method. This determination was based on reduced
cash flow projections. The fair value of this investment was determined using
present value techniques based on anticipated cash flows.
The assets held for disposal consist of machinery and equipment used or
purchased for use in production. Management identified specific assets that were
determined to have no future use to the Company and developed a plan of disposal
for each of the assets which will be completed as soon as practicable. The
assets held for disposal have a carrying value of $1.6 million, after impairment
charges including costs of disposal, and are included in current assets.
The assets to be held and used consist of the Kings Mountain facility,
which was under construction, and other machinery and equipment whose
anticipated future cash flows have been affected by challenging industry
conditions. Although we have not classified this facility as held for disposal,
we are uncertain as to its future use. Equipment that was intended for the Kings
Mountain facility is expected to be redeployed overseas. The fair values of the
assets to be held and used were determined using appraisals or present value
techniques.
8. COMMITMENTS AND CONTINGENCIES
As of June 30, 2001, the Company had committed funds of approximately $10.5
million under purchase orders and contracts related to capacity expansion
projects.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Six Months
Ended
June 30,
------------------
2001 2000
-------- --------
Cash paid during the period for:
Income Taxes $ 15,694 $ 21,850
Interest 4,435 4,577
10. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142 , "Goodwill and Other Intangible Assets." Both statements are
effective for the Company on January 1, 2002, except that business combinations,
including related goodwill and intangible assets, occurring after June 30, 2001
are immediately subject to the provisions of the two Statements. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and broadens the criteria for
recording intangible assets separate from goodwill. SFAS No. 142 requires the
use of a nonamortization approach to account for purchased goodwill and certain
intangible assets with indefinite useful lives and also requires at least an
annual assessment for impairment by applying a fair-value-based test. Goodwill
and certain intangible assets with indefinite lives acquired after June 30, 2001
are immediately subject to the nonamortization provisions of SFAS No. 142.
Intangible assets with definite useful lives will continue to be amortized over
12
Notes to Condensed Consolidated Financial Statements
(Unaudited - In Thousands, Unless Otherwise Noted)
their useful lives. The adoption of these statements will have a material impact
on the Company's results of operations and financial position after January 1,
2002 when goodwill will no longer be amortized. The impact on the Company's
results of operations and financial position of adopting a nonamortization
approach to accounting for goodwill under SFAS No. 142 is expected to be
approximately $5.3 million per year. The Company is currently assessing the
impact of the other provisions of these two Statements, which will be adopted on
January 1, 2002.
11. SUBSEQUENT EVENTS
The Company announced on July 24, 2001 that it had agreed with Furukawa
Electric Co., Ltd. of Japan to form two joint ventures to acquire certain fiber
cable and transmission fiber assets of the Optical Fiber Solutions Group of
Lucent Technologies, Inc. The transaction is expected to enhance CommScope's
technology platform with key intellectual property and research and development,
expand its channel access by adding complementary capabilities and provide it
with a strategic position in fiber optic manufacturing.
Under the terms of the transaction, CommScope and Furukawa will enter into
two joint ventures, one owning certain fiber cable assets of Lucent's Optical
Fiber Solutions Group and one owning certain transmission fiber assets of such
business. CommScope expects to own 51% of the fiber cable joint venture and to
consolidate its financial results. CommScope expects to own 49% of the
transmission fiber joint venture and to account for its results using the equity
method. CommScope will invest approximately $650 million for its ownership
interests in the two joint ventures, which are expected to be funded through a
combination of debt and equity. In conjunction with the debt and equity
financing, the Company anticipates refinancing its existing revolving credit
agreement and prepaying its eurodollar credit agreement and related interest
rate swap. Consummation of the transaction, which is subject to regulatory
approval and the satisfaction of other conditions, is expected to occur in
September 2001.
The Company will apply the provisions of SFAS Nos. 141 and 142 to this
transaction, since both statements are effective immediately for business
combinations consummated after June 30, 2001 (see Note 10).
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis 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 for the year ended December 31, 2000 included in our
Annual Report on Form 10-K.
HIGHLIGHTS
Net income was $6 million, or $0.11 per diluted share, for the quarter
ended June 30, 2001 compared to net income of $22 million, or $0.42 per diluted
share for the quarter ended June 30, 2000. Net income for the current quarter
included charges of approximately $0.15 per diluted share, net of tax, related
to the impairment of certain assets.
Net income was $23 million, or $0.43 per diluted share, for the six months
ended June 30, 2001 compared to net income of $39 million, or $0.74 per diluted
share, for the six months ended June 30, 2000. The impairment charges during the
second quarter of 2001 accounted for the majority of the year-over-year
decrease.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE- AND SIX-MONTH PERIODS ENDED
JUNE 30, 2001 WITH THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2000
Net Sales
Net sales for the second quarter ended June 30, 2001 decreased $41 million,
or 17%, to $200 million, compared to the second quarter ended June 30, 2000. Net
sales for the six months ended June 30, 2001 decreased $28 million, or 6%, to
$417 million, compared to the six months ended June 30, 2000. Revenues reflect
the slowdown in telecommunications spending. Domestic sales decreased 14% to
$156 million in the second quarter and 7% to $312 million in the six months
ended June 30, 2001, compared to the same periods in 2000.
For the second quarter of 2001, international sales decreased 28% to $44
million compared to the same period in 2000. International sales for the six
months ended June 30, 2001 decreased 5% to $105 million compared to the same
period in 2000. International sales were down year over year in all regions
except Latin America.
Net sales to broadband and other video distribution markets
("Broadband/Video Products") for the second quarter of 2001 decreased
approximately $20 million or 11% to $160 million, from the same period in 2000.
We have not changed the composition of this product group, but have changed the
name from CATV/Video to Broadband/Video in order to reflect the ongoing
convergence of video, voice and data. The year-over-year decrease in net sales
of Broadband/Video products for the second quarter was primarily due to lower
coaxial cable volume, which was somewhat offset by strong sales of fiber optic
cable. Sales of fiber optic cable grew to more than 15% of total worldwide sales
in the second quarter ended June 30, 2001. For the six months ended June 30,
2001, net sales of Broadband/Video Products increased slightly by $2 million, or
approximately 1%, to $329 million, compared to the same period in 2000. Second
quarter domestic Broadband/Video sales decreased approximately 4%, year over
year, despite strong fiber optic cable sales which offset a significant decrease
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in broadband cable sales to AT&T and alternate service providers. Primarily due
to the challenging economic environment, we currently expect sales of broadband
cable products to be lower in the second half of 2001 than in the first half of
2001. However, we believe that our ability to offer both coaxial and fiber optic
cable continues to be an important competitive advantage.
Net sales for local area network and other data applications ("LAN
Products") for the second quarter of 2001 increased slightly by $1 million or
approximately 4% to $26 million, from the same period in 2000. For the six
months ended June 30, 2001, sales of LAN Products were flat at $50 million,
compared to the same period in 2000.
Net sales for wireless and other telecommunications products ("Wireless and
Other Telecom Products") for the second quarter of 2001 were approximately $14
million compared to nearly $37 million in the same period last year. For the six
months ended June 30, 2001, sales of Wireless and Other Telecom Products were
$38 million compared to $68 million in the same period last year. The decrease
in sales of Wireless and Other Telecom Products was primarily driven by lower
volume. Sales of Other Telecom Products, which primarily represent coaxial
cables designed for switching and transmission applications for enhanced
telecommunications services, accounted for the majority of the decline primarily
due to lower capital spending for telephone central office applications and
increasing competitive pressures. Due to these issues, we currently expect sales
of Wireless and Other Telecom Products to be lower in the second half of 2001
than in the first half of 2001.
Gross Profit (Net Sales Less Cost of Sales)
Gross profit for the second quarter ended June 30, 2001 was approximately
$48 million, compared to second quarter 2000 gross profit of $64 million and
second quarter gross profit margin declined to 24.2% from 26.7%, year over year.
For the six months ended June 30, 2001, gross profit decreased to $101 million,
compared to $117 million for the same period in 2000 with gross profit margins
of 24.2% and 26.2%, respectively. The decline in gross profit margins was
primarily due to lower sales volumes, increased overhead costs associated with
capacity expansion and shifting product mix. We intend to continue evaluating
all aspects of our business and closely manage costs. However, despite these
efforts, we expect continued margin compression during the remainder of 2001,
primarily as a result of lower sales volumes, shifting product mix, and lower
prices for certain products.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense for the second quarter
ended June 30, 2001 increased to $21 million, compared to $20 million for the
same period in 2000. As a percentage of net sales, SG&A expense was 10% for the
second quarter ended June 30, 2001, up from 8% for the same period in 2000. For
the six months ended June 30, 2001, SG&A expense was approximately $43 million,
or 10% of sales, compared to approximately $38 million, or nearly 9% of sales,
for the same period in 2000. The year-over-year increases in SG&A expense were
mainly due to the decrease in sales and partly due to the increase in bad debt
expense resulting from a more difficult collection environment.
Research and Development
Research and development ("R&D") expense, as a percentage of net sales,
decreased in line with our expectations to 1% for the second quarter ended June
30, 2001 from 2% for the same period in 2000. For the six months ended June 30,
2001, R&D expense decreased to nearly $4 million, or 1% of sales, compared to
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almost $9 million, or 2% of sales, for the same period in 2000. These decreases
were primarily due to the substantial completion of certain vertical integration
projects for bimetallic wire fabrication and fine wire drawing. We have ongoing
programs to develop new products and market opportunities for our products and
core capabilities and new manufacturing technologies to achieve cost reductions.
Impairment Charges for Fixed Assets and Investments
As previously stated, we have taken a number of steps to closely manage
costs and have been evaluating all aspects of our business in response to
challenging industry conditions. As a result of our review, we recorded pretax
charges of nearly $13 million, or approximately $0.15 per diluted share, net of
tax, related to the impairment of certain assets. Management identified specific
assets that were determined to have no future use in our operations and assets
whose anticipated future cash flows have fallen below their book values. These
adjustments include equipment charges and a write-down of the Kings Mountain
facility, which was under construction. Equipment that was intended for the
Kings Mountain facility is expected to be redeployed overseas. The write-off of
an investment in an unconsolidated affiliate, whose fair value was determined to
be less than its carrying value due to reduced cash flow projections, was also
included in the charges.
Net Interest Expense
Net interest expense for the second quarter ended June 30, 2001 decreased
to $1.8 million, compared to $2.5 million for the same period in 2000. For the
six months ended June 30, 2001, net interest expense decreased to $3.7 million,
compared to $4.5 million for the same period in 2000. The decrease in net
interest expense was primarily due to a lower long-term debt balance at June 30,
2001, compared to June 30, 2000.
Income Taxes
Our effective tax rate was 37% for the second quarter and six months ended
June 30, 2001, compared to 38% for the same periods in 2000. This decrease in
our effective tax rate was mainly due to specific tax savings strategies
implemented late in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was nearly $86 million for the six
months ended June 30, 2001, compared to cash used in operating activities of $9
million for the same period in 2000. This increase in operating cash flow was
mainly due to the decrease in working capital from December 31, 2000 levels.
Working capital was $188 million at June 30, 2001, compared to $209 million
at December 31, 2000. The decrease primarily relates to lower accounts
receivable due to declining sales. We believe that working capital levels are
appropriate to support current levels of orders and backlog. We had an order
backlog of approximately $78 million as of June 30, 2001, compared to $156
million as of December 31, 2000. Orders typically fluctuate from quarter to
quarter based on customer demand and general business conditions. In some cases,
unfilled orders may be cancelled prior to shipment of goods. Backlog includes
only orders for products scheduled to be shipped within six months.
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During the six months ended June 30, 2001, we invested $46 million in
property, plant and equipment compared to $52 million during the same period in
2000. As of June 30, 2001, we had committed funds of nearly $11 million under
purchase orders and contracts related to capacity expansion projects. In
response to current market conditions, we intend to continue evaluating all
aspects of our business, including the timing and location of capacity needs. We
currently expect capital expenditures for equipment and facilities in 2001 to be
approximately $80-$90 million, with the majority of funds expected to be
invested in global capacity expansion projects.
Our principal sources of liquidity both on a short-term and long-term basis
are cash flows provided by operations and funds available under long-term credit
facilities. We currently have $350 million of available borrowing capacity under
our revolving credit agreement, which expires in December 2002. We owed
long-term debt of $195 million, or 33% of our book capital structure, defined as
long-term debt and total stockholders' equity, as of June 30, 2001, compared to
$227 million, or 38% of our book capital structure as of December 31, 2000. The
decrease in long-term debt is due mainly to the repayment of $30 million under
our revolving credit agreement and partly to the first quarterly principal
payment and favorable impact of foreign exchange rate fluctuations on our 15
million eurodollar term loan.
In July 2001, we announced that we had agreed with Furukawa Electric Co.,
Ltd. of Japan to form two joint ventures to acquire certain fiber cable and
transmission fiber assets of the Optical Fiber Solutions Group of Lucent
Technologies, Inc. We will invest approximately $650 million for our ownership
interests in the joint ventures, which will be funded through a combination of
debt and equity. In conjunction with the debt and equity financing, we
anticipate refinancing our existing revolving credit agreement and prepaying our
eurodollar term loan and related interest rate swap. Consummation of the
transaction, which is subject to regulatory approval and the satisfaction of
other conditions, is expected to occur in September 2001.
Based upon our analysis of our consolidated financial position and the
expected results of our operations in the future, we believe that we will have
sufficient cash flows from future operations and the financial flexibility to
attract both short-term and long-term capital on acceptable terms as may be
needed to fund operations, capital expenditures and other growth objectives.
There can be no assurance, however, that future industry-specific developments,
general economic trends or other situations will not adversely affect our
operations or ability to meet cash requirements.
MARKET RISK
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Financial Instruments and
Hedging Activities," as amended by SFAS Nos. 137 and 138. The adoption of SFAS
No. 133, as amended, did not have a material impact on our consolidated results
of operations, financial position, and cash flows as of January 1, 2001. SFAS
No. 133 establishes accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other host
contracts and for hedging activities.
As disclosed in our Annual Report on Form 10-K for the year ended December
31, 2000, 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 use of derivative and
nonderivative financial instruments primarily to manage our exposure to these
market risks in accordance with the requirements of SFAS No. 133, whenever
management determines their use to be reasonable and practical. Our exposure
associated with these market risks has not materially changed since December 31,
2000. However, we did repay $30 million of variable rate debt on our revolving
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credit agreement in the first quarter of 2001 and approximately $1 million of
variable rate debt on our eurodollar term loan, somewhat reducing our exposure
to interest rate risk. In addition, we have not acquired any new derivative
financial instruments since December 31, 2000 or terminated any derivative
financial instruments that existed at that date.
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 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, including, without limitation, by their use of such terms and
phrases as "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, expected demand from our customers, cost and availability of key raw
materials (including without limitation bimetallic center conductors, optical
fibers, fine aluminum wire and fluorinated-ethylene-propylene which are
available only from limited sources), successful implementation of internal
bimetal production and other vertical integration activities, pricing and
acceptance of our products, successful expansion and related operation of our
facilities, conditions of excess capacity, the ability to implement cost
reductions in a timely manner and the success of those actions, margin
improvement, developments in technology, industry competition, achievement of
sales, growth, and earnings goals, ability of our customers to secure adequate
financing, regulatory changes affecting our business, worldwide economic
conditions, foreign currency fluctuations, technological obsolescence, the
ability to integrate acquisitions, international economic and political
uncertainties and other factors discussed. Actual results may also differ due to
changes in communications industry capital spending, which is affected by a
variety of factors, including, without limitation, general economic conditions,
acquisitions of communications companies by others, consolidation within the
communications industry, the financial condition of communications companies and
their access to financing, competition among communications companies,
technological developments, and new legislation and regulation of communications
companies. These and other factors are discussed in greater detail in Exhibit 99
to this Form 10-Q. 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 to update this information to reflect
developments or information obtained after the date of this report and are not
undertaking any duty or obligation to do so.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders (the "Meeting") on May
4, 2001. Proxies for such meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended. A total of
51,360,367 shares of Common Stock with one vote each were entitled to vote
at the Meeting and holders of 45,733,927 shares voted in person or by
proxy, constituting a quorum.
At the Meeting, two of the Company's directors were elected for three-year
terms ending at the 2004 Annual Meeting of Stockholders by the vote set
forth below:
Name of Director Votes For Votes Withheld
--------------------- ---------- --------------
Boyd L. George 42,962,667 2,771,260
George N. Hutton, Jr. 44,603,301 1,130,626
The Company's other four directors, whose terms of office continue after
the Meeting, are Edward D. Breen, Frank M. Drendel, Duncan M. Faircloth,
and James N. Whitson.
A proposal to ratify the appointment by the board of directors of the
Company of Deloitte & Touche LLP as independent auditors for the Company
for the 2001 fiscal year was approved by 42,627,728 votes cast in favor,
2,944,861 votes cast against and 161,338 votes abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO.
99. Forward-Looking Information
(b) Reports on Form 8-K filed during the three months ended June 30, 2001:
On April 2, 2001 we filed a current report on Form 8-K announcing work
force reductions.
On April 25, 2001 we filed a current report on Form 8-K announcing our
first quarter 2001 results.
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SIGNATURE
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.
August 14, 2001 /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
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