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, 2003
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
As of April 30, 2003 there were 59,219,567 shares of Common Stock outstanding.
COMMSCOPE, INC.
FORM 10-Q
MARCH 31, 2003
TABLE OF CONTENTS
Page No.
---------
Part I - Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statements of Stockholders'
Equity and Comprehensive Loss 6
Notes to Condensed Consolidated Financial Statements 7 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 18
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 18
Item 4. Controls and Procedures 18
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Certifications 21 - 22
2
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED -- IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
----------------------
2003 2002
--------- ---------
Net sales $ 129,368 $ 159,751
--------- ---------
Operating costs and expenses:
Cost of sales 105,251 124,326
Selling, general and administrative 20,070 21,233
Research and development 1,589 1,995
--------- ---------
Total operating costs and expenses 126,910 147,554
--------- ---------
Operating income 2,458 12,197
Other income (expense), net 209 (387)
Interest expense (2,158) (2,182)
Interest income 617 440
--------- ---------
Income before income taxes and equity
in losses of OFS BrightWave, LLC 1,126 10,068
Provision for income tax expense (417) (3,725)
--------- ---------
Income before equity in losses of
OFS BrightWave, LLC 709 6,343
Equity in losses of OFS BrightWave, LLC (3,782) (7,991)
--------- ---------
Net loss $ (3,073) $ (1,648)
========= =========
Net loss per share:
Basic $ (0.05) $ (0.03)
Assuming dilution $ (0.05) $ (0.03)
Weighted average shares outstanding:
Basic 59,220 61,714
Assuming dilution 59,220 61,714
See notes to condensed consolidated financial statements.
3
COMMSCOPE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
March 31, December 31,
2003 2002
--------- ---------
ASSETS
Cash and cash equivalents $ 121,698 $ 120,102
Accounts receivable, less allowance for doubtful
accounts of $13,185 and $11,811, respectively 78,852 64,787
Inventories 38,817 36,254
Prepaid expenses and other current assets 20,816 20,737
Deferred income taxes 15,354 16,579
--------- ---------
Total current assets 275,537 258,459
Property, plant and equipment, net 224,546 229,515
Goodwill, net of accumulated amortization of
$59,544 and $59,520, respectively 151,338 151,334
Other intangibles, net of accumulated amortization
of $40,556 and $39,930, respectively 8,209 8,835
Deferred income taxes 6,713 3,572
Investment in and advances to OFS BrightWave, LLC 105,467 111,528
Other assets 10,237 9,425
--------- ---------
Total Assets $ 782,047 $ 772,668
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 20,760 $ 18,483
Other accrued liabilities 32,364 26,005
--------- ---------
Total current liabilities 53,124 44,488
Long-term debt 183,300 183,300
Other noncurrent liabilities 29,845 27,345
--------- ---------
Total Liabilities 266,269 255,133
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; Authorized shares:
20,000,000; Issued and outstanding shares: None at
March 31, 2003 and December 31, 2002 -- --
Common stock, $.01 par value; Authorized shares:
300,000,000; Issued shares, including treasury stock:
61,762,667 at March 31, 2003 and December 31, 2002;
Issued and outstanding shares: 59,219,567 at
March 31, 2003 and December 31, 2002 618 618
Additional paid-in capital 383,541 383,541
Retained earnings 158,442 161,515
Accumulated other comprehensive loss (13,599) (14,915)
Treasury stock, at cost: 2,543,100 shares at
March 31, 2003 and December 31, 2002 (13,224) (13,224)
--------- ---------
Total Stockholders' Equity 515,778 517,535
--------- ---------
Total Liabilities and Stockholders' Equity $ 782,047 $ 772,668
========= =========
See notes to condensed consolidated financial statements.
4
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED -- IN THOUSANDS)
Three Months Ended
March 31,
--------------------------
2003 2002
--------- ---------
Operating Activities:
Net loss $ (3,073) $ (1,648)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 8,636 9,071
Equity in losses of OFS BrightWave, LLC, pretax 6,046 12,734
Deferred income taxes (1,410) (2,336)
Tax benefit from stock option exercises -- 71
Changes in assets and liabilities:
Accounts receivable (13,809) (10,735)
Inventories (2,360) (6,492)
Prepaid expenses and other current assets 62 1,929
Accounts payable and other accrued liabilities 8,684 12,069
Other noncurrent liabilities 1,244 1,151
Other 172 640
--------- ---------
Net cash provided by operating activities 4,192 16,454
Investing Activities:
Additions to property, plant and equipment (1,849) (4,077)
Proceeds from repayment of advance to OFS BrightWave, LLC -- 13,000
Proceeds from disposal of fixed assets 56 48
--------- ---------
Net cash (used in) provided by investing activities (1,793) 8,971
Financing Activities:
Principal payments on long-term debt -- (656)
Long-term financing costs (1,166) --
Proceeds from exercise of stock options -- 418
--------- ---------
Net cash used in financing activities (1,166) (238)
Effect of exchange rate changes on cash 363 (176)
--------- ---------
Change in cash and cash equivalents 1,596 25,011
Cash and cash equivalents, beginning of period 120,102 61,929
--------- ---------
Cash and cash equivalents, end of period $ 121,698 $ 86,940
========= =========
See notes to condensed consolidated financial statements.
5
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE LOSS
(UNAUDITED -- IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Three Months Ended
March 31,
----------------------------
2003 2002
----------- -----------
Number of common shares outstanding:
Balance at beginning of period 59,219,567 61,688,256
Issuance of shares to nonemployee director -- 1,000
Issuance of shares for stock option exercises -- 27,903
----------- -----------
Balance at end of period 59,219,567 61,717,159
Common stock:
Balance at beginning of period $ 618 $ 617
Issuance of shares for stock option exercises -- --
----------- -----------
Balance at end of period $ 618 $ 617
Additional paid-in capital:
Balance at beginning of period $ 383,541 $ 381,823
Issuance of shares to nonemployee director -- 16
Issuance of shares for stock option exercises -- 418
Tax benefit from stock option exercises -- 71
----------- -----------
Balance at end of period $ 383,541 $ 382,328
Retained earnings:
Balance at beginning of period $ 161,515 $ 228,667
Net loss (3,073) (1,648)
----------- -----------
Balance at end of period $ 158,442 $ 227,019
Accumulated other comprehensive loss:
Balance at beginning of period $ (14,915) $ (4,593)
Other comprehensive income (loss) 1,316 (33)
----------- -----------
Balance at end of period $ (13,599) $ (4,626)
Treasury stock, at cost:
Balance at beginning of period $ (13,224) $ --
Treasury shares repurchased -- --
----------- -----------
Balance at end of period $ (13,224) $ --
----------- -----------
Total stockholders' equity $ 515,778 $ 605,338
=========== ===========
Three Months Ended
March 31,
----------------------------
2003 2002
----------- -----------
Comprehensive loss:
Net loss $ (3,073) $ (1,648)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) -
foreign subsidiaries (69) 62
Foreign currency transaction gain (loss) on long-term
intercompany loans - foreign subsidiaries 2,196 (251)
Hedging gain on nonderivative instrument -- 96
Gain on derivative financial instrument designated
as a cash flow hedge -- 60
Loss on derivative financial instrument
designated as a net investment hedge (811) --
----------- -----------
Total other comprehensive income (loss), net of tax 1,316 (33)
----------- -----------
Total comprehensive loss $ (1,757) $ (1,681)
=========== ===========
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, Inc. was incorporated in Delaware in January 1997.
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,
wireless communications and other broadband services. Management believes
CommScope is the world's largest manufacturer of coaxial cable for hybrid fiber
coaxial (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. In late 2001,
CommScope acquired an equity interest in an optical fiber and fiber optic cable
manufacturing business (see Note 5).
Basis of Presentation
The condensed consolidated balance sheet as of March 31, 2003, and the
condensed consolidated statements of operations, cash flows, stockholders'
equity and comprehensive loss for the three month periods ended March 31, 2003
and 2002 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, 2002 audited consolidated financial statements and notes thereto included in
the Company's 2002 Annual Report on Form 10-K.
Concentrations of Risk
Net sales to Comcast Corporation ("Comcast"), which merged with AT&T
Broadband in November 2002, accounted for 23% and net sales to another customer
accounted for 11% of the Company's total net sales during the three months ended
March 31, 2003. During the three months ended March 31, 2002, net sales to
Comcast, as if combined with AT&T Broadband during the period, accounted for 16%
and net sales to another customer accounted for 11% of the Company's total net
sales.
Accounts receivable from Comcast comprised approximately 30% of the Company's
net accounts receivable as of March 31, 2003, compared to 23% as of December 31,
2002. Accounts receivable from another customer represented approximately 12% of
net accounts receivable as of March 31, 2003, compared to 14% as of December 31,
2002.
7
Goodwill and Other Intangibles
The carrying value of other intangible assets as of March 31, 2003 in the
amount of $8.2 million, net of accumulated amortization of $40.6 million,
represents patented technology, with a carrying value of $0.1 million, and
customer relationship assets, with a carrying value of $8.1 million.
Amortization expense associated with these intangible assets was $626 for the
three months ended March 31, 2003 and $627 for the three months ended March 31,
2002. Annual amortization expense for these other intangible assets is expected
to be $2.5 million in 2003, $2.4 million in 2004, $2.4 million in 2005 and $1.5
million in 2006.
The change in goodwill from December 31, 2002 to March 31, 2003 was
due to the impact of translating the euro-denominated goodwill on the balance
sheet of the Company's Belgian subsidiary into CommScope's US dollar reporting
currency.
Stock Options
As of March 31, 2003, the Company had one stock-based employee compensation
plan, the Amended and Restated CommScope, Inc. 1997 Long-Term Incentive Plan.
The Company accounts for this plan under the intrinsic value method recognition
and measurement principles of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" and related Interpretations. No
stock-based employee compensation cost is reflected in net loss, as all options
granted under this plan had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net loss and net loss per share if the Company had applied the
fair value recognition provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation using the Black-Scholes option pricing model:
Three Months
Ended March 31,
-----------------------
2003 2002
------- -------
Net loss, as reported $(3,073) $(1,648)
Add: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects 1,721 1,715
------- -------
Pro forma net loss $(4,794) $(3,363)
======= =======
Net loss per share:
Basic--as reported $ (0.05) $ (0.03)
Basic--pro forma $ (0.08) $ (0.05)
Diluted--as reported $ (0.05) $ (0.03)
Diluted--pro forma $ (0.08) $ (0.05)
Reclassifications
Certain prior period amounts have been reclassified to conform to the 2003
presentation.
Impact of Newly Issued Accounting Standards
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS
8
No. 123, "Accounting for Stock-Based Compensation," to provide three alternative
methods of transition for an entity that voluntarily adopts the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, SFAS No.
148 amends APB Opinion No. 28, "Interim Financial Reporting," to require
disclosure about those effects in interim financial information. The provisions
related to the alternative transition methods and the new disclosure
requirements were effective for the Company as of December 31, 2002. There was
no impact on the Company's financial condition or results of operations as a
result of the adoption of SFAS No. 148, but the Company's disclosures related to
stock-based compensation have been modified in accordance with the new
requirements. The interim reporting provisions of SFAS No. 148 were effective
for the Company as of March 31, 2003, and management has modified the Company's
quarterly disclosures in accordance with the new requirements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which is an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN
46 addresses how to identify a variable interest entity and provides guidance
on when such an entity should be consolidated by an enterprise. The Company does
not currently hold an interest in a variable interest entity, thus the initial
application of this Interpretation did not affect the Company's results of
operations, financial condition or disclosures.
2. INVENTORIES
March 31, December 31,
2003 2002
-------- --------
Raw materials $ 12,357 $ 12,402
Work in process 10,086 11,160
Finished goods 16,374 12,692
-------- --------
$ 38,817 $ 36,254
======== ========
3. LONG-TERM DEBT
March 31, December 31,
2003 2002
-------- --------
Convertible Notes $172,500 $172,500
IDA Notes 10,800 10,800
-------- --------
$183,300 $183,300
======== ========
The Company entered into a new $100 million senior secured revolving credit
facility, which closed January 10, 2003. The facility, which was established for
future liquidity, working capital needs and other general corporate purposes,
was not drawn at closing and has not been drawn in any amount from that date
through March 31, 2003. The facility is secured by substantially all of the
Company's assets and can have a maximum availability of up to $100 million over
its three and a half year expected term, subject to certain covenants and
conditions contained in the agreement. As of March 31, 2003, the Company had
availability of approximately $76 million and no outstanding borrowings under
this senior secured revolving credit facility.
9
4. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the applicable periods.
Diluted net loss per share is based on net 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 loss per share, assuming
dilution, for the three month periods ended March 31, 2003 and 2002 because it
would have been antidilutive in both periods.
Additionally, options to purchase approximately 6.1 million common shares
were excluded from the computation of net loss per share, assuming dilution, for
the three months ended March 31, 2003 because they would have been antidilutive.
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.
5. EQUITY IN LOSSES OF OFS BRIGHTWAVE, LLC
Effective November 16, 2001, CommScope acquired an 18.4% ownership interest
in OFS BrightWave, LLC ("OFS BrightWave"), an optical fiber and fiber optic
cable venture between CommScope and The Furukawa Electric Co., Ltd. of Japan.
CommScope's portion of the losses of OFS BrightWave for the three month periods
ended March 31, 2003 and 2002 has been included in the condensed consolidated
financial statements of CommScope for the quarters ended March 31, 2003 and
2002. These results are net of elimination of intercompany income in the amount
of $27 and $32, net of tax, for the three month periods ended March 31, 2003
and 2002, respectively, 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. Income tax
expense or benefit provided by OFS BrightWave for income or losses generated by
its c-corporation subsidiary does not flow through to CommScope, and therefore
does not impact CommScope's income tax benefit from flow-through losses of OFS
BrightWave. However, the income tax expense or benefit provided for the income
or loss generated by OFS BrightWave's c-corporation subsidiary does impact
CommScope's equity interest in the net assets of OFS BrightWave, as shown in the
reconciliation below.
10
The following table provides summary financial information for OFS BrightWave
for the three month periods ended March 31, 2003 and 2002 and as of March 31,
2003 and December 31, 2002:
Three Months Ended
March 31,
-------------------------
2003 2002
-------- --------
Income Statement Data:
Net revenues $ 28,266 $ 26,797
Gross profit (20,553) (48,433)
Loss from continuing operations (32,803) (69,083)
Net loss (32,803) (69,083)
As of
--------------------------
March 31, December 31,
2003 2002
-------- --------
Balance Sheet Data:
Current assets $ 91,049 $ 83,876
Noncurrent assets 640,043 655,265
Current liabilities 65,662 57,353
Other noncurrent liabilities 200,409 182,297
Minority interests 43,747 45,338
The reconciliation of CommScope's investment in and advances to OFS
BrightWave compared to CommScope's equity interest in the net assets of OFS
BrightWave as of March 31, 2003 and December 31, 2002 was as follows:
As of
-------------------------
March 31, December 31,
2003 2002
--------- ---------
Net assets of OFS BrightWave, LLC $ 421,274 $ 454,153
CommScope ownership percentage 18.43225% 18.43225%
--------- ---------
CommScope equity interest in net assets
of OFS BrightWave, LLC 77,650 83,711
Plus:
Notes receivable from OFS BrightWave, LLC 30,000 30,000
Direct costs of acquisition 4,763 4,763
Nonproportionate equity adjustments by
majority member in OFS BrightWave, LLC (1,036) (1,036)
Less:
Income tax benefit related to CommScope's
share of losses generated by OFS
BrightWave, LLC's domestic c-corporation
subsidiary (5,910) (5,910)
--------- ---------
Investment in and advances to OFS BrightWave,
LLC $ 105,467 $ 111,528
========= =========
11
6. INCOME TAXES RELATED TO OTHER COMPREHENSIVE INCOME/LOSS
Three Months Ended
March 31,
-------------------
2003 2002
----- -----
Income tax benefit (expense) for components
of other comprehensive income/loss:
Hedging gain on nonderivative instrument $ -- $ (57)
Gain on derivative instrument designated
as a cash flow hedge -- (35)
Loss on derivative instrument designated
as a net investment hedge 477 --
----- -----
Total income tax benefit (expense) for
components of other comprehensive
income/loss $ 477 $ (92)
===== =====
7. DERIVATIVES AND HEDGING ACTIVITIES
As of March 31, 2003, the only derivative financial instrument outstanding
was a cross currency swap, which was designated and documented at inception as a
net investment hedge of a portion of the Company's net investment in its Belgian
subsidiary. The notional amount of this derivative financial instrument, which
is a cross currency swap of US dollars for euros, was $20 million at inception
of the hedging relationship and as of March 31, 2003. This hedging instrument
was effective at inception of the hedging relationship and at March 31, 2003 and
is expected to continue to be effective for the duration of the agreement,
resulting in no anticipated hedge ineffectiveness. The fair value of this
derivative instrument, reflected in other noncurrent liabilities, was
approximately $2.6 million as of March 31, 2003, compared to $1.3 million as of
December 31, 2002.
The only derivative instrument outstanding for the three months ended March
31, 2002 was an interest rate swap, which effectively converted the
variable-rate Eurodollar Credit Agreement to a fixed-rate basis. This interest
rate swap was 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. The Eurodollar Credit
Agreement was designated and effective as a partial hedge of the Company's net
investment in its Belgian subsidiary. As of December 2, 2002, the Company
terminated both the Eurodollar Credit Agreement and the related interest rate
swap agreement, which were both scheduled to expire on March 1, 2006. As a
result, both hedging relationships were terminated as well.
There were no material reclassifications from other comprehensive income
(loss) to earnings during the three month periods ending March 31, 2003 and
2002.
12
Activity in the accumulated net gain (loss) on derivative instrument included
in accumulated other comprehensive loss for the three month periods ended March
31, 2003 and 2002 consisted of the following:
Three Months Ended
March 31,
-------------------
2003 2002
------- ------
Accumulated net gain (loss) on derivative instrument,
beginning of period $ (802) $ 27
Net gain on derivative financial instrument designated
as a cash flow hedge -- 60
Net loss on derivative financial instrument designated
as a net investment hedge (811) --
------- ------
Accumulated net gain (loss) on derivative instrument,
end of period $(1,613) $ 87
======= ======
8. SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended
March 31,
-------------------
2003 2002
------- ------
Cash paid during the period for:
Taxes $ 558 $ 179
Interest (net of capitalized amounts) 854 296
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, 2002 included in our
2002 Annual Report on Form 10-K.
HIGHLIGHTS
For the quarter ended March 31, 2003, we incurred a net loss of $3.1 million,
or $0.05 per share, compared to a net loss of $1.6 million, or $0.03 per share,
for the quarter ended March 31, 2002. Included in these net losses were after
tax equity method losses in OFS BrightWave, LLC ("OFS BrightWave") of $3.8
million, or $0.06 per share, during the three months ended March 31, 2003,
compared to $8.0 million, or $0.13 per share, during the three months ended
March 31, 2002. Although OFS BrightWave's performance improved year over year in
the first quarter, the challenging global business environment continues to
adversely affect its sales and gross profit.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003
WITH THE THREE MONTHS ENDED MARCH 31, 2002
Net sales
Net sales for the quarter ended March 31, 2003 decreased $30.4 million, or
19.0%, to $129.4 million, compared to the quarter ended March 31, 2002. The
decrease in net sales was mainly due to lower sales of broadband and other video
distribution products ("Broadband/Video Products").
Domestic sales for the quarter ended March 31, 2003 decreased 22.7% to $104.2
million, compared to the quarter ended March 31, 2002, mainly due to lower
Broadband/Video Product sales. For the quarter ended March 31, 2003,
international sales were essentially stable compared to the quarter ended March
31, 2002.
Net sales of Broadband/Video Products for the first quarter of 2003 decreased
$31.8 million, or 23.9%, to $101.3 million, compared to the same period in 2002.
This decrease primarily resulted from a decline in domestic sales mainly due to
the lower year-over-year volume of sales to Adelphia Communications Corp. and
Charter Communications, Inc. This decrease was somewhat offset by a higher
year-over-year volume of sales to Comcast Corporation ("Comcast"), which
completed its merger with AT&T Broadband in November 2002. However, sales to
Comcast declined from the fourth quarter of 2002, partly due to the impact of
higher fourth quarter 2002 inventory levels, which we believe were built in
anticipation of the merger. First quarter 2003 net sales to Comcast represented
23% of total net sales. Pricing for coaxial cable remained relatively stable
during the first quarter of 2003, compared to the same period last year. In
contrast, prices for fiber optic cable, which represented more than 10% of total
net sales during the three months ended March 31, 2003, continued to experience
significant pressure. Yet, despite this pricing pressure, we achieved
substantial growth in fiber optic cable sales volume resulting in a
year-over-year increase in fiber optic cable sales of more than 20% in the first
quarter of 2003. Although fiber optic cable margins remain under pressure in the
current environment, we believe that enhancing our overall market position
through our relationship with OFS will provide important long-term benefits.
Net sales of local area network and other data applications products ("LAN
Products") for the first quarter of 2003 increased by $3.0 million, or 15.0%, to
$23.0 million, compared to the same period in 2002. In addition, we achieved
14
significant sequential growth in LAN Product sales, which increased $8.9
million, or 63%, from the fourth quarter of 2002. Sales of LAN Products
benefited from strengthening project business and increasing fiber optic and
apparatus sales volumes, which more than offset pricing declines in certain LAN
Products.
Net sales of wireless and other telecommunications products ("Wireless and
Other Telecom Products") for the first quarter of 2003 declined to $5.1 million
compared to $6.7 million in the same period last year, primarily due to the
combination of lower volume and pricing pressure. We expect ongoing softness and
significant competitive pressures for our Wireless and Other Telecom Products.
The general slowdown in telecommunications capital spending and the inability of
certain customers to get financing for their projects has had a significant
impact on sales of our Wireless Products. Although we continue to experience
aggressive competition in the wireless market, we achieved sequential sales
growth in the first quarter of 2003, which was the second straight quarter of
sequential improvement.
Gross profit (net sales less cost of sales)
Gross profit for the first quarter ended March 31, 2003 decreased to $24.1
million, compared to first quarter 2002 gross profit of $35.4 million, and first
quarter gross profit margin declined to 18.6% from 22.2%, year over year. The
decreases in gross profit and gross profit margin were primarily due to lower
sales volume and competitive pricing pressure for certain products, including
fiber optic cable and LAN Products. The impact of lower sales volumes, which
resulted in lower overhead absorption for many products, more than offset
the year-over-year gross profit improvement resulting from workforce reductions
and asset impairments. Additionally, we are experiencing rising costs of certain
raw materials, primarily polyethylene and other plastics, and expect these cost
increases to negatively impact our gross profit margin in the near term.
Selling, general and administrative
Selling, general and administrative ("SG&A") expense for the first quarter
ended March 31, 2003 was $20.1 million, or 15.5% of net sales, compared to $21.2
million, or 13.3% of net sales, for the same period in 2002. 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 the
decline in sales and marketing expense, as well as our 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 also plan to continue investing in our information
technology infrastructure in order to further differentiate our service model
through technology. Additionally, 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.
Research and development
Research and development ("R&D") expense decreased to $1.6 million, or 1% of
net sales, for the first quarter ended March 31, 2003 from $2.0 million, or 1%
of net sales, for the same period in 2002. 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, 2003 was $1.5 million,
compared to $1.7 million for the same period in 2002. The decrease in net
interest expense was primarily due to an increase in interest income earned on a
higher level of cash and cash equivalents.
15
Income taxes
Our effective income tax rate was 37% for the three month periods ended March
31, 2003 and 2002.
Equity in losses of OFS BrightWave, LLC
For the three months ended March 31, 2003 and 2002, our 18.4% equity
interest in the losses of OFS BrightWave was approximately $6.0 million and
$12.7 million, pretax, respectively. Since OFS BrightWave has elected to be
taxed as a partnership, we recorded a tax benefit related to our 18.4% equity
interest in the flow-through losses of approximately $2.2 million and $4.7
million for the three months ended March 31, 2003 and 2002, respectively.
Although OFS BrightWave made progress in both revenue expansion and cost
reduction during the quarter ended March 31, 2003, OFS BrightWave operates in
some of the same markets we do and its financial results were also adversely
affected by the difficult market environment in telecommunications and the
challenging global economic conditions. We expect ongoing pricing pressure and
weak demand industry wide for fiber optic cable products at least through 2003.
We therefore believe OFS BrightWave will incur losses through 2003, and as a
result we will continue to recognize noncash equity method losses from our
investment in OFS BrightWave. Our investment in OFS BrightWave provides us with
an interest in one of the world's largest producers of optical fiber and cable.
Despite these recent and anticipated losses, we believe this investment and our
relationship with The Furukawa Electric Co., Ltd. have enhanced our competitive
position with the domestic broadband and LAN service providers by providing,
among other things, access to a broad array of technologically advanced optical
fibers.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity both on a short-term and long-term basis
are cash and cash equivalents, cash flows provided by operations and
availability under our senior secured revolving credit facility ("secured credit
facility"). Reduced sales and profitability could reduce cash provided by
operations and limit availability under the secured credit facility. In
addition, increases in working capital, due to seasonal fluctuations in sales
and collections, among other things, could reduce our operating cash flows in
the short term.
Cash provided by operating activities was $4.2 million for the three months
ended March 31, 2003, compared to $16.5 million for the same period in 2002.
This year-over-year decrease in operating cash flow primarily resulted from
lower sales and profitability.
Working capital was $222.4 million at March 31, 2003, compared to $214.0
million at December 31, 2002. This increase in working capital during the three
months ended March 31, 2003 primarily related to an increase in accounts
receivable of $14.1 million over the same period to $78.9 million as of March
31, 2003. This increase in accounts receivable was primarily driven by seasonal
fluctuations in sales and collections and partly by an increase in average days
sales outstanding. First quarter sales are typically concentrated near the end
of the quarter as we emerge from the historically slower winter months, while
fourth quarter sales are typically concentrated near the beginning of the
quarter or spread more evenly throughout the quarter as we approach the winter
months. This timing difference in sales affects the collections of accounts
receivable within each quarter and the balance of accounts receivable at the end
of each quarter. If sales are concentrated near the end of the quarter, as they
typically are in the first quarter, most of the related receivables will
generally be collected in the following quarter, normally resulting in an
increase in accounts receivable from the fourth quarter to the first quarter,
regardless of the sequential increase or decrease in sales.
During the three months ended March 31, 2003, we invested $1.9 million in
property, plant and equipment compared to $4.1 million during the same period in
2002. While we may place additional production capability in certain
international markets, we expect capital expenditures to remain at a level below
16
depreciation and amortization expense for the next several years. We currently
expect capital expenditures to be in the range of $12 to $15 million in 2003,
primarily for cost reduction efforts and information technology initiatives,
depending upon business conditions.
Our long-term debt totaled $183.3 million, or 26% of our book capital
structure, defined as long-term debt and total stockholders' equity, as of March
31, 2003 and December 31, 2002.
We entered into a new $100 million senior secured revolving credit facility,
which closed January 10, 2003. The facility, which was established for future
liquidity, working capital needs and other general corporate purposes, was not
drawn at closing and has not been drawn in any amount from that date through
March 31, 2003. The facility is secured by substantially all of our assets and
can have a maximum availability of up to $100 million over its three and a half
year expected term, subject to certain covenants and conditions contained in the
agreement. As of March 31, 2003, we had availability of approximately $76
million and no outstanding borrowings under this secured credit facility.
In April 2003, Standard & Poor's Rating Services ("S&P") announced that it
lowered its corporate credit rating on CommScope to "BB" from "BB+" and its
subordinated debt rating to "B+" from "BB-." Although S&P indicated that the
outlook for CommScope is stable, the downgrade was based on reduced sales and
profitability forecasts. The lower ratings do not affect interest rates or
covenant compliance under our existing debt agreements. As a result,
we believe the lower ratings do not have a material impact on our financial
position, cash flows or results of operations.
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 Comcast and other major domestic Multiple System Operators, ability of our
customers to secure adequate financing to fund their infrastructure projects or
to pay us, product demand and industry excess capacity, changes or fluctuations
in global business conditions, financial performance of OFS BrightWave,
competitive pricing and acceptance of our products, changes in cost and
availability of key raw materials (including without limitation polyethylene
and other plastics, bimetallic center conductors, optical fibers, fine aluminum
wire and fluorinated-ethylene-propylene which are available only from limited
sources), ability to recover higher material and transportation costs from our
customers through price increases, possible future impairment charges for
goodwill and other long-lived assets, industry competition and ability to retain
customers, possible disruption due to customer or supplier bankruptcy,
reorganization or restructuring, ability to obtain financing and capital on
commercially reasonable terms, covenant restrictions and ability to comply with
covenants in debt agreements, successful operation of bimetal manufacturing and
other vertical integration activities, successful expansion and related
operation of our facilities, product performance issues, achievement of sales,
growth, and earnings goals, ability to achieve reductions in costs, margin
improvement, ability to retain and attract key personnel, developments in
technology, intellectual property protection, adequacy and availability of
17
insurance, litigation or regulatory developments, including future or pending
tax legislation, stock price fluctuations, foreign currency fluctuations,
technological obsolescence, acquisition activities and the ability to integrate
acquisitions, our participation in joint ventures, international economic and
political uncertainties, possible disruption due to terrorist activity or armed
conflict, outbreaks of sicknesses (such as SARS) and other factors discussed.
Actual results may also differ due to changes in telecommunications industry
capital spending, which is affected by a variety of factors, including, without
limitation, general business conditions, acquisitions of telecommunications
companies by others, consolidation within the telecommunications industry, the
financial condition of telecommunications companies and their access to
financing, competition among telecommunications companies, technological
developments, and new legislation and regulation of telecommunications
companies. These and other factors are discussed in greater detail in Exhibit
99.1 to our 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.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As disclosed in our Annual Report on Form 10-K for the year ended December
31, 2002, our major market risk exposure relates to adverse fluctuations in
commodity prices, interest rates and foreign currency exchange rates. We have
established a risk management strategy that includes the reasonable use of
derivative and nonderivative financial instruments primarily to manage our
exposure to these market risks. We believe our exposure associated with these
market risks has not materially changed since December 31, 2002. We have not
acquired any new derivative financial instruments since December 31, 2002 or
terminated any derivative financial instruments that existed at that date.
ITEM 4.CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission. Our Chief Executive Officer and our Chief Financial Officer
have reviewed the effectiveness of our disclosure controls and procedures within
the last ninety days and have concluded that the disclosure controls and
procedures are effective.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the last
day they were evaluated by our Chief Executive Officer and our Chief Financial
Officer.
18
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.2 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.3 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K filed during the three months ended March 31, 2003:
On January 13, 2003, we filed a current report on Form 8-K announcing
the establishment of a new credit facility.
On February 20, 2003, we filed a current report on Form 8-K announcing
our financial results for the fourth quarter of 2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMSCOPE, INC.
May 14, 2003 /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
20
CERTIFICATIONS
I, Frank M. Drendel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CommScope, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (and persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 14, 2003
---------------------
By: /s/ Frank M. Drendel
---------------------
Frank M. Drendel
Chairman and Chief Executive Officer
21
I, Jearld L. Leonhardt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CommScope, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (and persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 14, 2003
-----------------------
By: /s/ Jearld L. Leonhardt
-----------------------
Jearld L. Leonhardt
Executive Vice President and Chief Financial Officer
22
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CommScope, Inc. (the "Company") on
Form 10-Q for the period ended March 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Frank M. Drendel,
Chairman and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ Frank M. Drendel
--------------------
Frank M. Drendel
Chairman and Chief Executive Officer
Date: May 14, 2003
--------------------
Exhibit 99.3
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CommScope, Inc. (the "Company") on
Form 10-Q for the period ended March 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Jearld L. Leonhardt,
Executive Vice President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ Jearld L. Leonhardt
-----------------------
Jearld L. Leonhardt
Executive Vice President and Chief Financial Officer
Date: May 14, 2003
-----------------------