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 September 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 October 31, 2001 there were 51,467,154 shares of Common Stock
outstanding.
COMMSCOPE, INC.
FORM 10-Q
SEPTEMBER 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 - 19
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED--IN THOUSANDS, EXCEPT NET INCOME PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net sales $ 177,702 $ 256,873 $ 594,961 $ 702,056
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of sales 133,755 190,608 449,910 519,057
Selling, general and administrative 19,019 20,105 61,564 58,582
Research and development 1,834 5,158 5,459 13,751
Amortization of goodwill 1,340 1,341 4,023 4,026
Terminated acquisition costs (Note 10) 9,294 - 9,294 -
Impairment charges for fixed assets
and investments (Note 7) - - 12,615 -
------------- ------------- ------------- -------------
Total operating costs and expenses 165,242 217,212 542,865 595,416
------------- ------------- ------------- -------------
Operating income 12,460 39,661 52,096 106,640
Other income (expense), net (472) 12 (603) 492
Interest expense (2,211) (2,635) (6,285) (7,611)
Interest income 294 39 669 484
------------- ------------- ------------- -------------
Income before income taxes 10,071 37,077 45,877 100,005
Provision for income taxes (3,726) (14,089) (16,975) (37,997)
------------- ------------- ------------- -------------
Net income $ 6,345 $ 22,988 $ 28,902 $ 62,008
============= ============= ============= =============
Net income per share (Note 4):
Basic $ 0.12 $ 0.45 $ 0.56 $ 1.21
Assuming dilution $ 0.12 $ 0.43 $ 0.55 $ 1.17
Weighted average shares outstanding (Note 4):
Basic 51,440 51,229 51,384 51,106
Assuming dilution 52,350 55,972 52,208 56,108
See notes to condensed consolidated financial statements.
3
COMMSCOPE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
September 30, December 31,
2001 2000
----------------- -----------------
ASSETS
Cash and cash equivalents $ 40,928 $ 7,704
Accounts receivable, less allowance for doubtful accounts of
$13,206 and $9,187, respectively 144,511 197,536
Inventories (Note 2) 47,821 63,763
Prepaid expenses and other current assets (Note 7) 4,734 3,364
Deferred income taxes 20,146 17,296
----------------- -----------------
Total current assets 258,140 289,663
Property, plant and equipment, net (Note 7) 270,447 251,356
Goodwill, net of accumulated amortization of
$58,158 and $54,140, respectively 152,652 156,685
Other intangibles, net of accumulated amortization of
$36,765 and $34,796, respectively 12,000 13,969
Other assets (Notes 6 and 7) 7,188 9,509
----------------- -----------------
Total Assets $ 700,427 $ 721,182
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 20,730 $ 39,958
Other accrued liabilities 41,855 38,481
Current portion of long-term debt (Note 3) 2,735 2,120
----------------- -----------------
Total current liabilities 65,320 80,559
Long-term debt, less current portion (Note 3) 192,870 225,316
Deferred income taxes 21,361 24,006
Other noncurrent liabilities 20,297 16,781
----------------- -----------------
Total Liabilities 299,848 346,662
Commitments and contingencies (Note 8)
Stockholders' Equity:
Preferred stock, $.01 par value; Authorized shares: 20,000,000;
Issued and outstanding shares: None at September 30, 2001
and December 31, 2000 - -
Common stock, $.01 par value; Authorized shares: 300,000,000;
Issued and outstanding shares: 51,466,154 at September 30,
2001; 51,263,703 at December 31, 2000 515 513
Additional paid-in capital 179,030 175,803
Retained earnings 229,704 200,802
Accumulated other comprehensive loss (Note 5) (8,670) (2,598)
----------------- -----------------
Total Stockholders' Equity 400,579 374,520
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 700,427 $ 721,182
================= =================
See notes to condensed consolidated financial statements.
4
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - IN THOUSANDS)
Nine Months Ended
September 30,
----------------------------
2001 2000
------------- -------------
Operating Activities:
Net income $ 28,902 $ 62,008
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30,080 25,831
Impairment charges for fixed assets and investments 12,615 -
Deferred income taxes (5,826) (2,790)
Tax benefit from stock option exercises 617 4,138
Changes in assets and liabilities:
Accounts receivable 52,199 (75,607)
Inventories 15,525 (21,532)
Prepaid expenses and other current assets (3) (767)
Accounts payable and other accrued liabilities (15,182) 39,800
Other noncurrent liabilities 3,515 2,052
Other 72 (72)
------------- -------------
Net cash provided by operating activities 122,514 33,061
Investing Activities:
Additions to property, plant and equipment (59,465) (79,455)
Other (880) (3,280)
------------- -------------
Net cash used in investing activities (60,345) (82,735)
Financing Activities:
Net borrowings (repayments) under revolving credit facility (30,000) 21,000
Principal payments on long-term debt (1,326) -
Proceeds from exercise of stock options 2,612 4,446
------------- -------------
Net cash provided by (used in) financing activities (28,714) 25,446
Effect of exchange rate changes on cash (231) (297)
------------- -------------
Change in cash and cash equivalents 33,224 (24,525)
Cash and cash equivalents, beginning of period 7,704 30,223
------------- -------------
Cash and cash equivalents, end of period $ 40,928 $ 5,698
============= =============
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)
Nine Months Ended
September 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 202,451 351,806
------------- -------------
Balance at end of period 51,466,154 51,241,014
------------- -------------
Common stock:
Balance at beginning of period $ 513 $ 509
Issuance of shares for stock option exercises 2 3
------------- -------------
Balance at end of period $ 515 $ 512
------------- -------------
Additional paid-in capital:
Balance at beginning of period $ 175,803 $ 166,875
Issuance of shares for stock option exercises 2,610 4,443
Tax benefit from stock option exercises 617 4,138
------------- -------------
Balance at end of period $ 179,030 $ 175,456
------------- -------------
Retained earnings:
Balance at beginning of period $ 200,802 $ 115,915
------------- -------------
Net income 28,902 62,008
------------- -------------
Balance at end of period $ 229,704 $ 177,923
Accumulated other comprehensive loss:
Balance at beginning of period $ (2,598) $ (1,955)
Other comprehensive loss (6,072) (1,510)
------------- -------------
Balance at end of period $ (8,670) $ (3,465)
------------- -------------
Total stockholders' equity $ 400,579 $ 350,426
============= =============
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Comprehensive income:
Net income $ 6,345 $ 22,988 $ 28,902 $ 62,008
Other comprehensive loss, net of tax (Note 5):
Foreign currency translation gain (loss) -
foreign subsidiaries 788 (968) (57) (1,437)
Foreign currency transaction loss on long-term
intercompany loans - foreign subsidiaries (2,490) (876) (6,376) (1,232)
Hedging gain (loss) on nonderivative
instruments (Note 6) (617) 679 339 1,159
Effect of adopting SFAS No. 133 (Note 6) - - 229 -
Loss on derivative financial instruments
designated as cash flow hedges (Note 6) (112) - (207) -
------------ ------------- ------------- -------------
Total other comprehensive loss, net of tax (2,431) (1,165) (6,072) (1,510)
------------ ------------- ------------- -------------
Total comprehensive income $ 3,914 $ 21,823 $ 22,830 $ 60,498
============ ============= ============= =============
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 September 30, 2001, the
condensed consolidated statements of income and comprehensive income for
the three and nine months ended September 30, 2001 and 2000 and the
condensed consolidated statements of cash flows and stockholders' equity
for the nine months ended September 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 nine months ended September 30, 2001 that would
indicate that the carrying amount of goodwill may not be recoverable (see
Note 11 for Impact of Newly Issued Accounting Standards).
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
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 nine months ended September 30, 2001 or 2000.
2. INVENTORIES
September 30, December 31,
2001 2000
---------------- -----------------
Raw materials $ 21,932 $ 28,382
Work in process 12,874 11,124
Finished goods 13,015 24,257
---------------- -----------------
$ 47,821 $ 63,763
================ =================
3. LONG-TERM DEBT
September 30, December 31,
2001 2000
---------------- -----------------
Credit Agreement $ -- $ 30,000
Convertible Notes 172,500 172,500
Eurodollar Credit Agreement 12,305 14,136
IDA Notes 10,800 10,800
---------------- -----------------
195,605 227,436
Less current portion (2,735) (2,120)
---------------- -----------------
$ 192,870 $ 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 (CONTINUED)
(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 Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
NUMERATOR:
Net income for basic net income per share $ 6,345 $ 22,988 $ 28,902 $ 62,008
Convertible debt interest and amortization,
net of tax -- 1,177 -- 3,538
------------ ------------ ------------ ------------
Net income available to common stock-
holders for diluted net income per share $ 6,345 $ 24,165 $ 28,902 $ 65,546
============ ============ ============ ============
DENOMINATOR:
Weighted average number of common shares
outstanding for basic net income per share 51,440 51,229 51,384 51,106
Effect of dilutive securities:
Convertible debt (A) -- 3,580 -- 3,580
Employee stock options (B) 910 1,163 824 1,422
------------ ------------ ------------ ------------
Weighted average number of common and
potential common shares outstanding for
diluted net income per share 52,350 55,972 52,208 56,108
============ ============ ============ ============
(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 nine months ended September 30, 2001 because it would have been
antidilutive in both periods.
(B) Options to purchase approximately 944 thousand common shares, at
prices ranging from $22.00 to $47.06 per share, were excluded from the
computation of net income per share, assuming dilution, for the three
months ended September 30, 2001 because the exercise prices of such
options were greater than the average market price of the common
shares. Similarly, options to purchase approximately 793 thousand
common shares, at prices ranging from $20.55 to $47.06 per share, were
excluded for the nine months ended September 30, 2001. These options,
which expire on various dates during 2009 and 2010, were still
outstanding as of September 30, 2001. Common shares excluded from the
computation of net income per share, assuming dilution, for the three
and nine months ended September 30, 2000 were not material.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
5. INCOME TAXES RELATED TO OTHER COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Income tax benefit (expense) for components of
other comprehensive income:
Hedging loss (gain) on nonderivative instruments $ 397 $(416) $(164) $(716)
Effect of adopting SFAS No. 133 -- -- (135) --
Loss on derivative instruments designated
as cash flow hedges 66 -- 122 --
-------- -------- -------- --------
Total income tax benefit (expense) for components
of other comprehensive income $ 463 $(416) $(177) $(716)
======== ======== ======== ========
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 documented
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
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 nine months ended September
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 nine months ended September 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 nine months ended
September 30, 2001 consisted of the following:
Three Nine
Months Months
Ended Ended
Sept 30, Sept 30,
2001 2001
----------- -----------
Accumulated net gain on derivative instruments, beginning of
period $ 134 $ --
Net effect of adopting SFAS No. 133 -- 229
Net loss on derivative financial instruments designated as
cash flow hedges (112) (207)
----------- -----------
Accumulated net gain on derivative instruments, end of period $ 22 $ 22
=========== ===========
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 during the second quarter of
2001. Included in these impairment charges was approximately $3.6 million
related to an investment in an unconsolidated affiliate, $4.4 million
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
related to fixed assets identified as held for disposal and $4.6 million
related to fixed assets to be held and used.
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 consisted 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. The assets held for disposal had a
carrying value of $1.6 million as of June 30, 2001, after the second
quarter impairment charges including costs of disposal. Assets valued at
$840 thousand were sold during the third quarter of 2001, leaving a
remaining carrying value of $775 thousand, which was included in other
current assets as of September 30, 2001.
The assets to be held and used consisted 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 September 30, 2001, the Company had committed funds of
approximately $4.9 million under purchase orders and contracts for
completion of existing capacity related projects.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended
September 30,
---------------------------
2001 2000
---------------------------
Cash paid during the period for:
Income Taxes $ 17,927 $ 32,917
Interest 4,853 5,355
10. TERMINATED ACQUISITION COSTS
The Company announced on July 24, 2001 that it had agreed with the
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. Given the uncertain economic
environment and severe downturn in the telecommunications market as well as
associated difficulties in the financing markets following the September
11th tragedy, CommScope is in discussions with Furukawa to restructure the
joint venture arrangements. The Company expects to reduce its investment
and participation in the joint ventures due to the potential restructuring.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
As a result of the restructuring discussions, the Company recorded
pretax charges of approximately $9.3 million, or approximately $0.11 per
diluted share, net of tax, during the three months ended September 30,
2001, related to financing and formation costs of the original joint
venture arrangements.
11. IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
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 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 pretax 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.
In August 2001, the FASB issued SFAS No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets." SFAS No.
143 will require the accrual, at fair value, of the estimated retirement
obligation for tangible long-lived assets if the Company is legally
obligated to perform retirement activities at the end of the related
asset's life. The Company is currently assessing the impact of this
statement, which will be effective for the Company on January 1, 2003.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No.
121, "Accounting for the Impairment or Disposal of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," but retains many of its
fundamental provisions. Additionally, this statement expands the scope of
discontinued operations to include more disposal transactions. The Company
is currently assessing the impact of this statement, which will be
effective for the Company on January 1, 2002.
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 $0.12 per diluted share, for the quarter
ended September 30, 2001 compared to net income of $23 million, or $0.43
per diluted share for the quarter ended September 30, 2000. Net income for
the current quarter included charges of approximately $0.11 per diluted
share, net of tax, related to terminated acquisition costs (see further
discussion below).
Net income was $29 million, or $0.55 per diluted share, for the nine
months ended September 30, 2001 compared to net income of $62 million, or
$1.17 per diluted share, for the nine months ended September 30, 2000. Net
income for the nine months ended September 30, 2001 included charges of
approximately $0.26 per diluted share, net of tax, related to terminated
acquisition costs and impairment charges for fixed assets and investments.
An ongoing global slowdown in the telecommunications industry, as well as
second quarter impairment charges and third quarter terminated acquisition
costs contributed to the decline in earnings.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 2001 WITH THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net Sales
Net sales for the third quarter ended September 30, 2001 decreased $79
million, or 31%, to $178 million, compared to the third quarter ended
September 30, 2000. Net sales for the nine months ended September 30, 2001
decreased $107 million, or 15%, to $595 million, compared to the nine
months ended September 30, 2000. Revenues reflect an ongoing global
slowdown in telecommunications spending. We expect these challenging
business conditions to continue to affect our performance and, currently
expect sales in the fourth quarter of 2001 to be down 10-20% sequentially.
Domestic sales decreased 27% to $143 million in the third quarter and
14% to $455 million in the nine months ended September 30, 2001, compared
to the same periods in 2000. For the third quarter of 2001, international
sales decreased 42% to $34 million compared to the same period in 2000.
International sales and orders were down year over year in all regions.
International sales for the nine months ended September 30, 2001 decreased
18% to $140 million compared to the same period in 2000.
Net sales to broadband and other video distribution markets
("Broadband/Video Products") for the third quarter of 2001 decreased $55
million, or 28%, to $139 million, from the same period in 2000. For the
nine months ended September 30, 2001, net sales of Broadband/Video Products
decreased $52 million, or 10%, to $469 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 was primarily due to lower coaxial
cable volume, which was somewhat offset by higher sales of fiber optic
cable. Sales of fiber optic cable represented more than 15% of total
worldwide sales in the third quarter ended September 30, 2001, primarily
for Broadband/Video applications. Coaxial cable pricing remained generally
firm during the third quarter ended September 30, 2001. Third quarter
domestic Broadband/Video sales decreased 22%, year over year, despite an
increase in fiber optic cable sales which offset a significant decrease in
broadband cable sales to AT&T and alternate service providers. The ongoing
slowdown in telecommunications as well as the uncertain global economic
conditions continues to affect Broadband/Video sales. However, we believe
that our ability to offer both coaxial and fiber optic cable continues to
be an important competitive advantage over the longer term.
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Net sales for local area network and other data applications ("LAN
Products") for the third quarter of 2001 increased by $2 million, or 11%,
to $23 million, from the same period in 2000. For the nine months ended
September 30, 2001, sales of LAN Products increased by $3 million, or 4%,
compared to the same period in 2000. The year over year increases in sales
of LAN Products were primarily driven by higher volume. However, we expect
sales of LAN Products to encounter increasing price pressures in the fourth
quarter.
Net sales for wireless and other telecommunications products
("Wireless and Other Telecom Products") for the third quarter of 2001 were
$15 million compared to $42 million in the same period last year. For the
nine months ended September 30, 2001, sales of Wireless and Other Telecom
Products were $53 million compared to $110 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 due to lower capital spending for telephone central
office applications and significant competitive pressure.
Gross Profit (Net Sales Less Cost of Sales)
Gross profit for the third quarter ended September 30, 2001 was $44
million, compared to third quarter 2000 gross profit of $66 million, and
third quarter gross profit margin declined to 24.7% from 25.8%, year over
year. For the nine months ended September 30, 2001, gross profit decreased
to $145 million, compared to $183 million for the same period in 2000 with
gross profit margins of 24.4% and 26.1%, 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 margin compression
during the fourth quarter 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 third
quarter ended September 30, 2001 was $19 million, or 11% of net sales,
compared to $20 million, or 8% of net sales, for the same period in 2000.
The year-over-year decrease in SG&A expense in the third quarter was offset
by a more significant decrease in sales, resulting in an increase in SG&A
expense as a percentage of net sales. For the nine months ended September
30, 2001, SG&A expense was $62 million, or 10% of sales, compared to $59
million, or 8% of sales, for the same period in 2000. The year-over-year
increase in SG&A expense as a percentage of sales for the nine months ended
September 30, 2001 was mainly due to the decrease in sales and an increase
in bad debt expense resulting from a more difficult collection environment.
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Research and Development
Research and development ("R&D") expense decreased to $2 million, or
1% of net sales, for the third quarter ended September 30, 2001 from $5
million, or 2% of net sales, for the same period in 2000. For the nine
months ended September 30, 2001, R&D expense decreased to $5 million, or 1%
of sales, compared to $14 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.
Terminated Acquisition Costs
We announced on July 24, 2001 that we had agreed with the 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. Given the uncertain economic environment
and severe downturn in the telecommunications market as well as associated
difficulties in the financing markets following the September 11th tragedy,
management is in discussions with Furukawa to restructure the joint venture
arrangements. We expect to reduce our investment and participation in the
joint ventures due to the potential restructuring. As a result of the
restructuring discussions, we recorded pretax charges of approximately $9
million, or $0.11 per diluted share, net of tax, during the three months
ended September 30, 2001, related to financing and formation costs of the
original joint venture arrangements and we expect to incur additional
charges of $800 thousand, net of tax, during the fourth quarter of 2001.
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 approximately $13 million, or $0.15 per diluted
share, net of tax, during the nine months ended September 30, 2001 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 included 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 third quarter ended September 30, 2001
decreased to $1.9 million, compared to $2.6 million for the same period in
2000. For the nine months ended September 30, 2001, net interest expense
decreased to $5.6 million, compared to $7.1 million for the same period in
2000. The decrease in net interest expense was primarily due to a lower
long-term debt balance at September 30, 2001, compared to September 30,
2000.
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Income Taxes
Our effective tax rate was 37% for the third quarter and nine months
ended September 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 $123 million for the nine
months ended September 30, 2001, compared to $33 million for the same
period in 2000. This year-over-year increase in operating cash flow
primarily resulted from reduced working capital on lower sales volume.
Working capital was $193 million at September 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 $39 million as of September 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.
During the nine months ended September 30, 2001, we invested $59
million in property, plant and equipment compared to $79 million during the
same period in 2000. As of September 30, 2001, we had committed funds of
nearly $5 million under purchase orders and contracts for completion of
existing capacity related 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 expect capital
expenditures for equipment and facilities in 2001 to be approximately
$70-$80 million, with the majority of funds invested in global capacity
expansion projects. We currently expect capital expenditures to be in the
range of $30-$40 million in 2002, depending upon business conditions.
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 $196 million, or 33% of our book
capital structure, defined as long-term debt and total stockholders'
equity, as of September 30, 2001, compared to $227 million, or 38% of our
book capital structure as of December 31, 2000. The decrease in long-term
debt was due to the repayment of $30 million under our revolving credit
agreement and the first two quarterly principal payments and favorable
impact of foreign exchange rate fluctuations on our 15 million eurodollar
term loan.
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
currently anticipated 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.
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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 credit agreement
in the first quarter of 2001 and approximately $1 million of variable rate
debt on our Eurodollar Credit Agreement, 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
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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 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 September
30, 2001:
On July 24, 2001 we filed a current report on Form 8-K announcing
our second quarter 2001 results and an agreement with The 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.
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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.
November 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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