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 March 31, 2002
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.)
1100 COMMSCOPE PLACE, SE
P.O. BOX 339
HICKORY, NORTH CAROLINA
(Address of principal executive offices)
28602
(Zip Code)
(828) 324-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of April 30, 2002 there were 61,759,824 shares of Common Stock outstanding.
COMMSCOPE, INC.
FORM 10-Q
MARCH 31, 2002
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 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 17
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
-2-
COMMSCOPE, INC.
Condensed Consolidated Statements of Income
(Unaudited--in thousands, except net income per share amounts)
Three Months Ended
March 31,
----------------------------------
2002 2001
---------------- ----------------
Net sales $ 159,751 $ 217,360
---------------- ----------------
Operating costs and expenses:
Cost of sales 124,326 164,566
Selling, general and administrative 21,233 21,966
Research and development 1,995 1,480
Amortization of goodwill - 1,342
---------------- ----------------
Total operating costs and expenses 147,554 189,354
---------------- ----------------
Operating income 12,197 28,006
Other income (expense), net (387) 175
Interest expense (2,182) (2,022)
Interest income 440 158
---------------- ----------------
Income before income taxes and equity in losses
of OFS BrightWave, LLC 10,068 26,317
Provision for income taxes (3,725) (9,738)
---------------- ----------------
Income before equity in losses of OFS BrightWave, LLC 6,343 16,579
Equity in losses of OFS BrightWave, LLC (7,991) -
---------------- ----------------
Net income (loss) $ (1,648) $ 16,579
================ ================
Net income (loss) per share:
Basic $ (0.03) $ 0.32
Assuming dilution $ (0.03) $ 0.32
Weighted average shares outstanding:
Basic 61,714 51,315
Assuming dilution 61,714 52,028
See notes to condensed consolidated financial statements.
-3-
COMMSCOPE, INC.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
(Unaudited)
March 31, December 31,
2002 2001
--------------- -----------------
ASSETS
Cash and cash equivalents $ 86,940 $ 61,929
Accounts receivable, less allowance for doubtful accounts of
$14,259 and $12,599, respectively 116,068 105,402
Inventories 54,099 47,670
Prepaid expenses and other current assets 10,798 12,724
Deferred income taxes 18,214 18,143
--------------- ---------------
Total current assets 286,119 245,868
Property, plant and equipment, net 268,381 277,169
Goodwill, net of accumulated amortization of $59,493 151,304 151,307
Other intangibles, net of accumulated amortization of
$38,048 and $37,421, respectively 10,717 11,344
Investment in and advances to OFS BrightWave, LLC 171,318 196,860
Other assets 10,082 6,457
--------------- ---------------
Total Assets $ 897,921 $ 889,005
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 23,040 $ 16,339
Other accrued liabilities 33,039 27,753
Current portion of long-term debt 2,615 2,651
--------------- ---------------
Total current liabilities 58,694 46,743
Long-term debt, less current portion 191,144 191,918
Deferred income taxes 20,672 22,899
Other noncurrent liabilities 22,073 20,931
--------------- ---------------
Total Liabilities 292,583 282,491
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; Authorized shares: 20,000,000;
Issued and outstanding shares: None at March 31, 2002 and
December 31, 2001 -- --
Common stock, $.01 par value; Authorized shares: 300,000,000;
Issued and outstanding shares: 61,717,159 at March 31, 2002;
61,688,256 at December 31, 2001 617 617
Additional paid-in capital 382,328 381,823
Retained earnings 227,019 228,667
Accumulated other comprehensive loss (4,626) (4,593)
--------------- ---------------
Total Stockholders' Equity 605,338 606,514
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 897,921 $ 889,005
=============== ===============
See notes to condensed consolidated financial statements.
-4-
COMMSCOPE, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - in thousands)
Three Months Ended
March 31,
---------------------------------
2002 2001
------------- --------------
OPERATING ACTIVITIES:
Net income (loss) $ (1,648) $ 16,579
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 9,071 9,940
Equity in losses of OFS BrightWave, LLC 12,734 --
Deferred income taxes (2,336) (372)
Tax benefit from stock option exercises 71 287
Changes in assets and liabilities:
Accounts receivable (10,735) 14,851
Inventories (6,492) 1,282
Prepaid expenses and other current assets 1,929 791
Accounts payable and other accrued liabilities 12,069 5,682
Other noncurrent liabilities 1,151 983
Other 640 473
------------- --------------
Net cash provided by operating activities 16,454 50,496
INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,077) (22,226)
Proceeds from repayment of advance to OFS BrightWave, LLC 13,000 --
Proceeds from disposal of fixed assets 48 --
------------- --------------
Net cash provided by (used in) investing activities 8,971 (22,226)
FINANCING ACTIVITIES:
Repayments under revolving credit facility -- (30,000)
Principal payments on long-term debt (656) --
Proceeds from exercise of stock options 418 1,360
------------- --------------
Net cash used in financing activities (238) (28,640)
Effect of exchange rate changes on cash (176) (289)
------------- --------------
Change in cash and cash equivalents 25,011 (659)
Cash and cash equivalents, beginning of period 61,929 7,704
------------- --------------
Cash and cash equivalents, end of period $ 86,940 $ 7,045
============= ==============
See notes to condensed consolidated financial statements.
-5-
COMMSCOPE, INC.
Condensed Consolidated Statements of Stockholders' Equity
and Comprehensive Income
(Unaudited - in thousands, except share amounts)
Three Months Ended
March 31,
-----------------------------
2002 2001
------------- -----------
Number of common shares outstanding:
Balance at beginning of period 61,688,256 51,263,703
Issuance of shares to nonemployee director 1,000 --
Issuance of shares for stock option exercises 27,903 106,492
-------------- -------------
Balance at end of period 61,717,159 51,370,195
-------------- -------------
Common stock:
Balance at beginning of period $ 617 $ 513
Issuance of shares for stock option exercises -- 1
-------------- -------------
Balance at end of period $ 617 $ 514
-------------- -------------
Additional paid-in capital:
Balance at beginning of period $ 381,823 $ 175,803
Issuance of shares to nonemployee director 16 --
Issuance of shares for stock option exercises 418 1,359
Tax benefit from stock option exercises 71 287
-------------- -------------
Balance at end of period $ 382,328 $ 177,449
-------------- -------------
Retained earnings:
Balance at beginning of period $ 228,667 $ 200,802
Net income (loss) (1,648) 16,579
-------------- -------------
Balance at end of period $ 227,019 $ 217,381
-------------- -------------
Accumulated other comprehensive loss:
Balance at beginning of period $ (4,593) $ (2,598)
Other comprehensive loss (33) (2,281)
-------------- -------------
Balance at end of period $ (4,626) $ (4,879)
-------------- -------------
Total stockholders' equity $ 605,338 $ 390,465
============== =============
Comprehensive income (loss):
Net income (loss) $ (1,648) $ 16,579
Other comprehensive loss, net of tax:
Foreign currency translation gain (loss) -
foreign subsidiaries 62 (579)
Foreign currency transaction loss on long-term
intercompany loans - foreign subsidiaries (251) (2,465)
Hedging gain on nonderivative instrument 96 631
Effect of adopting SFAS No. 133 -- 229
Gain (loss) on derivative financial instrument
designated as a cash flow hedge 60 (97)
-------------- -------------
Total other comprehensive loss, net of tax (33) (2,281)
-------------- -------------
Total comprehensive income (loss) $ (1,681) $ 14,298
============== =============
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 and equity method investee, operates in the cable
manufacturing business, with manufacturing facilities located in the United
States, Europe and Latin America. 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) broadband
networks. 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 March 31, 2002, and the
condensed consolidated statements of income, cash flows, stockholders'
equity and comprehensive income for the three months ended March 31, 2002
and 2001 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, 2001 audited consolidated financial statements and
notes thereto included in the Company's 2001 Annual Report on Form 10-K.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." 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 uses 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.
Intangible assets with finite useful lives will continue to be amortized
over their useful lives.
Under SFAS No. 142, goodwill shall be tested for impairment as of the
beginning of the year in which the statement is adopted in its entirety.
SFAS No. 142 allows six months from the date the statement is initially
applied to complete the first step of the transitional goodwill impairment
test. CommScope is in the process of performing the first step of the
transitional goodwill impairment test. If the fair value of any reporting
unit is determined to be less than its carrying value, SFAS No. 142
requires completion of the second step of the goodwill impairment test as
soon as possible, but no later than the end of the year of initial
application. Any impairment loss resulting from the transitional goodwill
impairment test will be recorded retroactively to January 1, 2002 as a
-7-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
cumulative effect of a change in accounting principle. Subsequent to the
transitional goodwill impairment assessment, goodwill must be tested
annually at the same time each year, and on an interim basis when events or
circumstances change. Subsequent impairment losses, if any, will be
reflected in operating income in the statement of income.
The carrying value of intangible assets as of March 31, 2002 in the
amount of $10.7 million, net of accumulated amortization of $38.0 million,
represents patented technology, with a carrying value of $0.2 million, and
customer relationship assets, with a carrying value of $10.5 million. These
intangible assets have been determined by management to meet the criterion
for recognition apart from goodwill and to have finite lives. CommScope did
not have any indefinite-lived intangible assets as of the January 1, 2002
transition date or the March 31, 2002 balance sheet date. Based on
management's analysis of all pertinent factors, no adjustments were
necessary to the remaining useful lives of these assets, which will
continue to be amortized on a straight-line basis through 2006.
Amortization expense associated with these intangible assets was $627 for
the three months ended March 31, 2002 and $656 for the three months ended
March 31, 2001. Annual amortization expense for these intangible assets is
expected to be $2.5 million in 2002, $2.5 million in 2003, $2.4 million in
2004, $2.4 million in 2005 and $1.5 million in 2006.
The adoption of SFAS No. 142 effective January 1, 2002 resulted in the
elimination of pretax goodwill amortization expense in the amount of $1.3
million for the three months ended March 31, 2002. The following table
provides a reconciliation of net income and net income per share,
reflecting the impact of the adoption of SFAS No. 142 on a pro forma basis
for the three months ended March 31, 2001:
Three Months Ended
March 31,
--------------------------
2002 2001
------------ ------------
Net income (loss) $(1,648 ) $16,579
Elimination of goodwill amortization expense -- 1,342
------------ ------------
Net income (loss) - pro forma for 2001 $(1,648 ) $17,921
============ ============
Net income (loss) per share, basic - pro forma for 2001 $(0.03 ) $0.35
Net income (loss) per share, assuming dilution - pro forma
for 2001 $(0.03 ) $0.34
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
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. SFAS No. 144
was effective for the Company on January 1, 2002. The initial adoption of
this statement did not have a material impact on the Company's financial
statements. However, the Company did reclassify the $4.3 million carrying
value of its idle Kings Mountain facility from property, plant and
equipment to other assets in the March 31, 2002 balance sheet. Although
this facility does not meet the requirements under SFAS No. 144 for
classification as held for sale, it has been reclassified to other assets
-8-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
since it is not currently being, and has never been, used in the Company's
operations and is currently being actively marketed for sale.
2. INVENTORIES
March 31, December 31,
2002 2001
------------------ -----------------
Raw materials $ 23,017 $ 23,037
Work in process 12,239 9,688
Finished goods 18,843 14,945
------------------ -----------------
$ 54,099 $ 47,670
================== =================
3. LONG-TERM DEBT
March 31, December 31,
2002 2001
---------------- -----------------
Credit Agreement $ -- $ --
Convertible Notes 172,500 172,500
Eurodollar Credit Agreement 10,459 11,269
IDA Notes 10,800 10,800
---------------- -----------------
193,759 194,569
Less current portion ( 2,615 ) ( 2,651 )
---------------- -----------------
$ 191,144 $ 191,918
================ =================
4. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during
the applicable periods. Diluted net income (loss) per share is based on net
income (loss) 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.
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 (loss) per share, assuming dilution, for the three months ended
March 31, 2002 and 2001 because it would have been antidilutive in both
periods.
-9-
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 (loss) per share to weighted average
common and potential common shares outstanding for diluted net income
(loss) per share.
Three Months Ended
March 31,
-----------------------
2002 2001
----------- ----------
NUMERATOR:
Net income (loss) for basic and diluted net income (loss) per
share $ (1,648 ) $16,579
=========== ==========
DENOMINATOR:
Weighted average number of common shares outstanding
for basic net income (loss) per share 61,714 51,315
Effect of dilutive employee stock options (A) -- 713
----------- ----------
Weighted average number of common and potential common
shares outstanding for diluted net income (loss) per share 61,714 52,028
=========== ==========
(A) Options to purchase approximately 1.4 million common shares were
excluded from the computation of net loss per share, assuming
dilution, for the three months ended March 31, 2002 because they would
have been antidilutive. Options to purchase approximately 751 thousand
common shares, at prices ranging from $19.75 to $47.06 per share, were
excluded from the computation of net income per share, assuming
dilution, for the three months ended March 31, 2001 because the
exercise prices of such options were greater than the average market
price of the common shares during the period.
5. EQUITY IN LOSSES OF OFS BRIGHTWAVE, LLC
Effective November 16, 2001, CommScope acquired an approximate 18.4%
ownership interest in OFS BrightWave, LLC ("OFS BrightWave"), an optical
fiber and fiber cable venture between CommScope and The Furukawa Electric
Co., Ltd. of Japan. CommScope's portion of the losses of OFS BrightWave for
the three months ended March 31, 2002 has been included in the condensed
consolidated financial statements of CommScope, Inc. for the quarter ended
March 31, 2002. These results are net of elimination of intercompany profit
in the amount of $32, net of tax, related to interest payments received
from OFS BrightWave under a $30 million revolving note. OFS BrightWave has
elected to be taxed as a partnership, therefore the Company's income tax
benefit from flow through losses has been recorded based on the Company's
tax rates.
The following table provides summary financial information for OFS
BrightWave as of and for the three months ended March 31, 2002:
Income Statement Data:
Net revenues $ 26,797
Gross profit (48,433)
Loss from continuing operations (69,083)
Net loss (69,083)
Balance Sheet Data:
Current assets $232,314
Noncurrent assets 907,300
Current liabilities 150,045
Other noncurrent liabilities 131,558
Minority interests 49,120
-10-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
The reconciliation of CommScope's investment in and advances to OFS
BrightWave compared to CommScope's equity in the net assets of OFS
BrightWave as of March 31, 2002 was as follows:
Net assets of OFS BrightWave, LLC $ 808,891
CommScope ownership percentage 18.43225 %
------------
CommScope equity in net assets of
OFS BrightWave, LLC 149,097
Plus:
Advances, net of repayments 17,000
Direct costs of acquisition 4,763
Pushdown and other adjustments by majority
member in OFS BrightWave, LLC 458
------------
Investment in and advances to OFS
BrightWave, LLC $ 171,318
============
6. INCOME TAXES RELATED TO OTHER COMPREHENSIVE LOSS
Three Months Ended
March 31,
--------------------
2002 2001
--------- ---------
Income tax benefit (expense) for components of
other comprehensive loss:
Hedging gain on nonderivative instrument $ (57) $(335)
Effect of adopting SFAS No. 133 -- (135)
(Gain) loss on derivative instrument designated
as a cash flow hedge (35) 57
--------- ---------
Total income tax expense for components
of other comprehensive loss $ (92) $(413)
========= =========
7. DERIVATIVES AND HEDGING ACTIVITIES
The only derivative instrument outstanding for the three months ended
March 31, 2002 and 2001 was an interest rate swap, which effectively
converts the variable-rate Eurodollar Credit Agreement to a fixed-rate
basis. This interest rate swap is designated and documented as a cash flow
hedge of the 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 balance sheet date,
and is expected to continue to be effective for the duration of the swap
contract, resulting in no anticipated hedge ineffectiveness. There were no
material reclassifications from other comprehensive income to earnings
during the three months ending March 31, 2002 and 2001 and the Company does
not anticipate any material reclassifications from accumulated other
comprehensive income during the next twelve months.
Also, the Eurodollar Credit Agreement is designated and documented as
a partial hedge of the Company's net investment in its Belgian subsidiary.
This hedging instrument was effective 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 accumulated
other comprehensive income to earnings.
-11-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
Activity in the accumulated net gain on derivative instrument included
in accumulated other comprehensive loss for the three months ended March
31, 2002 and 2001 consisted of the following:
Three Months Ended
March 31,
------------------------
2002 2001
----------- -----------
Accumulated net gain on derivative instrument, beginning of
period $ 27 $ --
Net effect of adopting SFAS No. 133 -- 229
Net gain (loss) on derivative financial instrument designated
as a cash flow hedge 60 (97)
----------- -----------
Accumulated net gain on derivative instrument, end of period $ 87 $ 132
=========== ===========
8. COMMITMENTS AND CONTINGENCIES
As of March 31, 2002, the Company had committed funds of approximately
$2.5 million under purchase orders and contracts related to vertical
integration projects and equipment and capacity upgrades to meet current
and anticipated future business demands.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended
March 31,
---------------------------
2002 2001
---------------------------
Cash paid during the period for:
Income taxes $179 $ 102
Interest (net of capitalized amounts) 296 616
-12-
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, 2001
included in our 2001 Annual Report on Form 10-K.
HIGHLIGHTS
For the quarter ended March 31, 2002, we incurred a net loss of $1.6
million, or $0.03 per diluted share, compared to net income of $16.6
million, or $0.32 per diluted share for the quarter ended March 31, 2001.
An ongoing global slowdown in the telecommunications industry contributed
to the decline in earnings. In addition, during the three months ended
March 31, 2002, we recognized $8 million, or $0.13 per diluted share, of
after tax equity method losses related to our 18.4% equity interest in OFS
BrightWave, LLC ("OFS BrightWave"), an optical fiber and fiber cable
venture between us and The Furukawa Electric Co., Ltd. of Japan
("Furukawa").
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2002 WITH THE THREE MONTHS ENDED MARCH 31, 2001
Net sales
Net sales for the quarter ended March 31, 2002 decreased $57.6
million, or 26.5%, to $159.8 million, compared to the quarter ended March
31, 2001. The decrease in net sales was mainly due to the difficult global
environment, which resulted in lower demand and competitive pricing
pressures for some product lines both domestically and internationally.
While first quarter net sales decreased year over year, first quarter net
sales increased approximately 11% sequentially from the fourth quarter of
2001.
Domestic sales for the quarter ended March 31, 2002 decreased 13% to
$134.8 million, compared to the quarter ended March 31, 2001. For the
quarter ended March 31, 2002, international sales decreased 59% to $25.0
million compared to the quarter ended March 31, 2001. International sales
were down year over year in all regions.
Net sales of broadband and other video distribution products
("Broadband/Video Products") for the first quarter of 2002 decreased $37.0
million, or 22%, to $133.1 million, compared to the same period in 2001.
The year-over-year decrease in net sales of Broadband/Video Products was
primarily due to lower volume and was significantly affected by the
downturn in international demand. The ongoing slowdown in
telecommunications as well as the uncertain global economic conditions
continues to affect sales of Broadband/Video Products, primarily in
international markets. While we believe that near term international sales
will be depressed until the global economy improves, we remain optimistic
about the long-term global opportunities for broadband cable. First quarter
domestic Broadband/Video sales remained flat, year over year, due primarily
to stronger than expected sales to Adelphia Communications Corporation
("Adelphia") and AT&T Broadband, which represented approximately 11% and
10% of net sales in the first quarter of 2002, respectively, and less than
10% of sales in the first quarter of 2001. This favorable impact was offset
by declining sales of fiber optic cable resulting from challenging market
conditions and competitive pricing pressures. While we expect the market
for fiber optic cable to remain difficult during 2002, we believe that our
ability to offer both coaxial and fiber optic cable as well as other types
of communications cable, continues to be an important competitive
advantage. We also believe that second quarter 2002 sales will benefit from
the anticipated increase in infrastructure spending announced by AT&T
Broadband, which may be somewhat offset by an expected decline in sales to
Adelphia.
-13-
Net sales of local area network and other data applications products
("LAN Products") for the first quarter of 2002 decreased by $4.1 million,
or 17%, to $20.0 million, compared to the same period in 2001. The year-
over-year decrease in sales of LAN Products was primarily driven by lower
volume and was also impacted by pricing pressures on certain products.
Net sales of wireless and other telecommunications products ("Wireless
and Other Telecom Products") for the first quarter of 2002 were $6.7
million compared to $23.2 million in the same period last year, primarily
due to lower sales of Other Telecom Products related to telephone central
office applications. The decrease in sales of Other Telecom Products was
primarily driven by lower volume. We expect ongoing softness and
significant competitive pressures for these Other Telecom Products. Sales
of Wireless Products were also down significantly year over year, primarily
due to the general slowdown in telecommunications capital spending and the
inability of certain customers to get financing for their projects. As a
result, the decrease in sales of Wireless Products was primarily driven by
lower volume. We also continue to experience aggressive competition in the
wireless market.
Gross profit (net sales less cost of sales)
Gross profit for the first quarter ended March 31, 2002 was $35.4
million, compared to first quarter 2001 gross profit of $52.8 million, and
first quarter gross profit margin declined to 22.2% from 24.3%, year over
year. The year-over-year decrease in gross profit and gross profit margin
was primarily due to lower sales volume and increasing pricing pressure,
particularly in fiber and LAN Products. The lower sales volume resulted in
lower overhead absorption rates for many products.
Selling, general and administrative
Selling, general and administrative ("SG&A") expense for the first
quarter ended March 31, 2002 was $21.2 million, or 13% of net sales,
compared to $22.0 million, or 10% of net sales, for the same period in
2001. The year-over-year decrease in SG&A expense was primarily due to
lower variable costs attributable to lower sales volume. The year-over-year
increase in SG&A expense as a percentage of net sales was primarily due to
sales declining faster than sales and marketing expense, as well as the
level of charges for doubtful accounts and ongoing investment in our
information technology infrastructure. We intend to continue to fund
domestic and international sales and marketing efforts in order to enhance
our competitive position around the world in anticipation of improving
global economic conditions. We believe we have taken appropriate charges
for doubtful accounts as a result of the difficult market environment based
on our analysis of customer financial difficulties, age of receivable
balances and other relevant factors. We also plan to continue investing in
our information technology infrastructure in order to further differentiate
our service model through technology.
Research and development
Research and development ("R&D") expense increased to $2.0 million, or
1% of net sales, for the first quarter ended March 31, 2002 from $1.5
million, or 1% of net sales, for the same period in 2001. We expect R&D
expense to remain at approximately 1% of net sales in the near term.
Net interest expense
Net interest expense for the quarter ended March 31, 2002 was $1.7
million, compared to $1.9 million for the same period in 2001. The decrease
in net interest expense was primarily due to interest income, net of
elimination of intercompany profit, received from OFS BrightWave under a
$30 million revolving note established in the fourth quarter of 2001.
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Income taxes
Our effective income tax rate was 37% for the quarters ended March 31,
2002 and 2001.
Equity in losses of OFS Brightwave, LLC
For the three months ended March 31, 2002, our 18.4% equity interest
in the losses of OFS BrightWave was approximately $13 million, pretax.
Since OFS BrightWave has elected to be taxed as a partnership, we have
recorded a tax benefit of approximately $5 million related to our 18.4%
equity interest in the flow-through losses. OFS BrightWave operates in many
of the same markets we do and its financial results were also adversely
affected by the ongoing slowdown in the global economy and the
telecommunications industry. In addition, OFS BrightWave is party to
manufacturing and supply agreements with OFS Fitel, LLC, which is wholly
owned by Furukawa. As a result of Furukawa's controlling interest in both
ventures, it has significant influence over the structure and pricing of
these agreements. Future changes in these terms, over which we have limited
influence, could have a material impact on the profitability of OFS
BrightWave and ultimately on our results of operations and financial
condition. Due primarily to the difficult market environment for certain
telecommunications products and challenging global economic conditions, we
expect ongoing pricing pressure and weak demand industry wide for fiber
optic cable products during 2002. Based on these expectations, we expect
that OFS BrightWave will incur losses for 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity both on a short-term and long-term
basis are cash flows provided by operations and borrowing capacity under
credit facilities. Reduced sales and profitability could reduce cash
provided by operations. In addition, increases in working capital,
excluding cash and cash equivalents, related to increasing sales could
reduce our operating cash flows in the short term until cash collections of
accounts receivable catch up to the higher level of billings.
Cash provided by operating activities was $16.4 million for the three
months ended March 31, 2002, compared to $50.5 million for the same period
in 2001. This year-over-year decrease in operating cash flow primarily
resulted from lower sales volume and an increase in accounts receivable
during the three months ended March 31, 2002.
Working capital was $227.4 million at March 31, 2002, compared to
$199.1 million at December 31, 2001. This increase in working capital
during the three months ended March 31, 2002 primarily relates to an
increase in our cash balance of $25 million over the same period to $87
million as of March 31, 2002. The increase in cash during the quarter ended
March 31, 2002 was driven by net income before the noncash impact of our
pretax equity in losses in OFS BrightWave and depreciation and
amortization. In addition, we received repayment of $13 million from OFS
BrightWave under a $30 million revolving note receivable during the quarter
ended March 31, 2002. As of March 31, 2002, OFS BrightWave owed $17 million
under this $30 million revolving note, and we are committed to advance the
remaining $13 million balance under the note when requested by OFS
BrightWave. We are not required to make any additional cash investments in
the form of loans or capital contributions to OFS BrightWave, other than
this revolving credit commitment.
During the three months ended March 31, 2002, we invested $4.1 million
in property, plant and equipment compared to $22.2 million during the same
period in 2001. As of March 31, 2002, we had committed funds of nearly $2.5
million under purchase orders and contracts related to vertical integration
projects and equipment and capacity upgrades to meet current and
anticipated future business demands. While we may place additional
production capability in important international markets, we expect capital
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expenditures to remain at a level below depreciation and amortization
expense for the next several years. We currently expect capital
expenditures to be in the range of $25 to $30 million in 2002, primarily
for global capacity expansion and information technology initiatives,
depending upon business conditions.
Our revolving credit agreement, which expires in December 2002,
provides a total of $350 million in revolving credit commitments in the
form of loans and letters of credit. Our available borrowing capacity under
the revolving credit agreement, determined on a quarterly basis, is based
on certain financial ratios which are affected by the level of long-term
debt outstanding and our profitability. As of March 31, 2002, we had no
outstanding indebtedness under this revolving credit agreement and our
borrowing capacity was approximately $145 million. We expect this available
borrowing capacity to decrease to approximately $47 million during the
second quarter of 2002. We owed total long-term debt of $193.8 million,
including current portion, or 24% of our book capital structure, defined as
long-term debt, including current portion, and total stockholders' equity,
as of March 31, 2002, compared to $194.6 million, or 24% of our book
capital structure as of December 31, 2001. The decrease in long-term debt
was due to the quarterly repayment of principal on our eurodollar credit
agreement and associated foreign currency transaction gains, which were
recorded to accumulated other comprehensive loss.
Our revolving credit agreement, eurodollar credit agreement, and an
operating lease for our corporate office building contain covenants
requiring us to maintain a total debt to EBITDA ratio, a net worth
maintenance ratio, and an interest expense ratio. Our performance under
these covenants could impact our cost of funds and limit the funds
available under the revolving credit agreement. In addition, our
noncompliance with these covenants could create a default under these
agreements, resulting in potential acceleration of repayment of our
obligations and inability to borrow under the revolving credit agreement.
We were in compliance with these covenants as of March 31, 2002.
However, we expect the market for fiber optic cable to remain
difficult during 2002 and management does not currently expect the
performance of OFS BrightWave to improve significantly in the near term. As
a result, we believe it is likely that the inclusion in our net income of
our equity in the losses of OFS BrightWave, including forecasted losses,
may result in noncompliance with the total debt to EBITDA covenant at the
end of the second quarter of 2002. Although our pretax equity in the losses
of OFS BrightWave does not have a cash flow impact, our covenants do not
currently allow us to exclude this noncash impact from the EBITDA
calculation. Management is engaged in discussions with the counterparties
under each of these agreements in order to obtain waivers or amendments to
the total debt to EBITDA covenants, and we anticipate being able to do so
on acceptable terms for all three agreements.
As of March 31, 2002, we had no outstanding borrowings under the
revolving credit agreement, approximately $11 million in borrowings
outstanding under the eurodollar credit agreement, and approximately $13
million in contractual cash obligations under an operating lease for our
corporate office building. If we do not comply with the total debt to
EBITDA covenant and are unable to obtain a waiver or amendment to these
agreements, the outstanding debt under our eurodollar credit agreement and
the contractual cash obligations under the operating lease may become
immediately due and payable. If acceleration of payment is required, we
intend to repay our obligations using current cash balances. We have no
outstanding borrowings under the revolving credit agreement and do not
anticipate future borrowings under this facility as we believe that cash
provided by our operations will be sufficient to meet our anticipated
working capital requirements during the remaining term of this facility,
which expires in December 2002.
MARKET RISK
As disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2001, our major market risk exposure relates to adverse
fluctuations in commodity prices, interest rates and foreign currency
exchange rates. We have established a risk management strategy that
includes the reasonable use of derivative and nonderivative financial
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instruments primarily to manage our exposure to these market risks. Our
exposure associated with these market risks has not materially changed
since December 31, 2001. However, we did repay 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, 2001 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, industry excess capacity, financial performance of OFS
BrightWave, pricing and acceptance of our products, ability of our
customers to secure adequate financing or to pay, global economic
conditions, expected demand from AT&T Broadband, Adelphia and others, 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 operation of bimetal manufacturing and other vertical
integration activities, successful expansion and related operation of our
facilities, margin improvement, developments in technology, industry
competition, achievement of sales, growth, and earnings goals, ability to
obtain financing and capital on commercially reasonable terms, ability to
comply with covenants in debt and lease agreements, regulatory changes
affecting our business, foreign currency fluctuations, technological
obsolescence, the ability to achieve reductions in costs, the ability to
integrate acquisitions, our participation in joint ventures, international
economic and political uncertainties, possible disruption due to terrorist
activity or armed conflict 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 99.1 to our 2001 Annual
Report on Form 10-K. The information contained in this Form 10-Q represents
our best judgment at the date of this report based on information currently
available. However, we do not intend, and are not undertaking any duty or
obligation, to update this information to reflect developments or
information obtained after the date of this report.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K filed during the three months ended March 31, 2002:
None.
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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.
May 14, 2002 /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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