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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission File Number 1-12280
BELDEN INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 76-0412617
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7701 FORSYTH BOULEVARD, SUITE 800
ST. LOUIS, MISSOURI 63105
(Address of Principal Executive Offices and Zip Code)
(314) 854-8000
(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
requirement 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 [ ]
Number of shares outstanding of the issuer's Common Stock, par
value $.01 per share, as of November 12, 2003: 25,448,538
shares
================================================================================
Exhibit Index on Page 35 Page 1 of 36
-1-
PART I FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
2003 2002
- ----------------------------------------------------------------------------------------------------------------
(in thousands) (UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 62,130 $ 19,409
Receivables 112,287 109,180
Inventories 130,169 159,817
Income taxes receivable 8,117 2,428
Deferred income taxes 19,258 15,097
Other current assets 5,694 7,818
- ---------------------------------------------------------------------------------------------------------------
Total current assets 337,655 313,749
Property, plant and equipment, less accumulated depreciation 327,176 337,196
Goodwill and other intangibles, less accumulated amortization 80,639 79,588
Other long-lived assets 6,262 13,006
- ---------------------------------------------------------------------------------------------------------------
$ 751,732 $ 743,539
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 110,705 $ 124,968
Current maturities of long-term debt 66,921 -
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 177,626 124,968
Long-term debt 136,000 203,242
Postretirement benefits other than pensions 10,292 10,732
Deferred income taxes 77,958 71,470
Other long-term liabilities 32,970 25,932
Stockholders' equity
Preferred stock - -
Common stock 262 262
Additional paid-in capital 39,488 40,917
Retained earnings 296,881 302,900
Accumulated other comprehensive loss (6,359) (17,859)
Unearned deferred compensation (2,097) (2,014)
Treasury stock (11,289) (17,011)
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 316,886 307,195
- ---------------------------------------------------------------------------------------------------------------
$ 751,732 $ 743,539
===============================================================================================================
See accompanying notes.
-2-
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues $ 207,568 $ 199,514 $ 617,929 $ 614,278
Cost of sales 177,539 165,545 531,151 511,291
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 30,029 33,969 86,778 102,987
Selling, general and administrative expenses 27,736 26,712 81,760 79,766
Other operating expense - - 352 -
- ----------------------------------------------------------------------------------------------------------------------
Operating earnings 2,293 7,257 4,666 23,221
Interest expense 3,046 3,324 9,434 10,534
- ----------------------------------------------------------------------------------------------------------------------
Income/(loss) before taxes (753) 3,933 (4,768) 12,687
Income tax expense/(benefit) (1,586) 1,171 (2,550) 4,060
- ----------------------------------------------------------------------------------------------------------------------
Net income/(loss) $ 833 $ 2,762 $ (2,218) $ 8,627
======================================================================================================================
Basic average shares outstanding 25,334 24,764 25,135 24,742
Basic earnings/(loss) per share $ .03 $ .11 $ (.09) $ .35
======================================================================================================================
Diluted average shares outstanding 25,611 24,837 25,135 24,942
Diluted earnings/(loss) per share $ .03 $ .11 $ (.09) $ .35
======================================================================================================================
Dividends declared per share $ .05 $ .05 $ .15 $ .15
======================================================================================================================
See accompanying notes.
-3-
CONSOLIDATED CASH FLOW STATEMENTS
(UNAUDITED)
Nine Months Ended September 30, 2003 2002
- -----------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities
Net income/(loss) $ (2,218) $ 8,627
Adjustments to reconcile net income/(loss) to net cash provided by
operating activities
Depreciation and amortization 26,865 29,356
Asset impairment charges 352 -
Retirement savings plan contributions 2,811 -
Stock compensation 1,253 767
Changes in operating assets and liabilities (1)
Receivables 3,564 (3,175)
Inventories 36,242 7,599
Accounts payable and accrued liabilities (23,104) 6,144
Current and deferred income taxes, net (3,485) 17,797
Other assets and liabilities, net 16,654 (661)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 58,934 66,454
Cash flows from investing activities
Capital expenditures (13,994) (26,493)
Proceeds from disposal of long-lived assets 159 167
- -----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (13,835) (26,326)
Cash flows from financing activities
Net payments under long-term credit facility and credit agreements - (30,717)
Proceeds from employee stock purchase plan settlement 61 -
Proceeds from exercise of stock options 85 1,198
Cash dividends paid (3,801) (3,742)
- -----------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (3,655) (33,261)
Effect of exchange rate changes on cash and cash equivalents 1,277 (52)
- -----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 42,721 6,815
Cash and cash equivalents, beginning of period 19,409 2,799
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 62,130 $ 9,614
=================================================================================================================
Supplemental cash flow information
Income tax refunds received $ 10,574 $ 16,437
Income taxes paid (11,926) (2,750)
Interest paid, net of amount capitalized (14,645) (14,696)
=================================================================================================================
See accompanying notes.
(1) Net of the effects of exchange rate changes and acquired businesses.
-4-
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Accumulated
Unearned Other
Common Paid-In Retained Treasury Deferred Comprehensive
Stock Capital Earnings Stock Compensation Loss Total
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance at December 31, 2001 $262 $43,773 $323,671 $(25,603) $(1,233) $(26,625) $314,245
Net income 8,627 8,627
Foreign currency translation adjustments 12,449 12,449
Unrealized loss on derivative instruments 245 245
--------
Comprehensive income 21,321
Issuance of treasury stock
Exercise of stock options (593) 1,791 1,198
Stock compensation (426) 2,464 (1,885) 153
Employee stock purchase plan (51) (81) (132)
Amortization of unearned deferred compensation 767 767
Cash dividends ($.05 per share) (3,742) (3,742)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $262 $42,703 $328,556 $(21,429) $(2,351) $(13,931) $333,810
================================================================================================================================
Balance at December 31, 2002 $262 $40,917 $302,900 $(17,011) $(2,014) $(17,859) $307,195
Net loss (2,218) (2,218)
Foreign currency translation adjustments 11,564 11,564
Minimum pension liability adjustments (64) (64)
--------
Comprehensive income 9,282
Issuance of treasury stock
Exercise of stock options (1) 86 85
Stock compensation (560) 1,896 (1,234) 102
Employee stock purchase plan (17) 78 61
Retirement savings plan contributions (851) 3,662 2,811
Amortization of unearned deferred compensation 1,151 1,151
Cash dividends ($.05 per share) (3,801) (3,801)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 $262 $39,488 $296,881 $(11,289) $(2,097) $ (6,359) $316,886
================================================================================================================================
See accompanying notes.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Consolidated Financial Statements include Belden and all of its
subsidiaries (the Company). All significant intercompany accounts and
transactions are eliminated in consolidation. The financial information
presented as of any date other than December 31, 2002 and December 31, 2001 has
been prepared from the books and records without audit. The accompanying
Consolidated Financial Statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information or the Notes
to Consolidated Financial Statements required by accounting principles generally
accepted in the United States for complete statements. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such financial statements have been
included. These Consolidated Financial Statements should be read in conjunction
with the Consolidated Financial Statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 2002 Consolidated Financial
Statements in order to conform to the 2003 presentation.
Acquisitions
On October 31, 2002, the Company purchased certain assets and assumed certain
liabilities of the NORCOM wire and cable business in Kingston, Ontario, Canada
(NORCOM) from Cable Design Technologies Corporation for cash of $11.3 million.
The purchase price is subject to adjustments for asset values as of the closing
date, with additional contingency payments for up to three years which could
total as much as $6.7 million depending mainly on the Company's achievement of
future business levels. No goodwill was recorded with respect to this
transaction. During 2003, the Company closed the Kingston facility and relocated
production to other Company facilities. The Company recorded accrued severance
and other plant closing costs incident to the purchase in 2002. The Company
anticipates making substantially all payments against these accruals within one
year of the acquisition date. NORCOM manufactured and marketed metallic cable
products primarily for the Canadian and United States communications markets.
Operating results for NORCOM have been included in the operating results for the
Communications segment since the acquisition date and may affect comparability
of the operating results between years.
Stock-Based Compensation
The Company has four stock compensation plans--the Belden Inc. 2003 Long-term
Incentive Plan and the Belden Inc. 1994 Incentive Plan (together, the "Incentive
Plans") as well as the Belden Inc. 2003 Employee Stock Purchase Plan and the
Belden Inc. 1994 Employee Stock Purchase Plan (together, the "Stock Purchase
Plans").
-6-
Under the Incentive Plans, certain employees of the Company are eligible to
receive awards in the form of stock options, stock appreciation rights,
restricted stock grants and performance shares. The Company accounts for stock
options using the intrinsic value method provided in Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Accordingly, no
compensation cost has been recognized for options granted under the Incentive
Plans. The Company accounts for restricted stock grants under APB No. 25 as
fixed-plan awards since both the aggregate number of awards issued and the
aggregate amount to be paid by the participants for the common stock is known.
Compensation related to the grants is measured as the difference between the
market price of the Company's common stock at the grant date and the amount to
be paid by the participants for the common stock.
Under the Stock Purchase Plans, all full-time employees and part-time employees
who work 20 or more hours per week in Canada, Germany, the Netherlands and the
United States receive the right to purchase a specified amount of common stock
at the lesser of 85% of the fair market value on the offering date or 85% of the
fair market value on the exercise date. The Company accounts for these purchase
rights using the intrinsic value method provided by APB No. 25. Accordingly, no
compensation cost has been recognized for purchase rights granted under the
Stock Purchase Plans.
The Company adopted the disclosure rules under Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based Compensation--Transition
and Disclosure, effective December 2002. The effect on operating results of
calculating the Company's stock-based employee compensation costs as if the fair
value method had been applied to all stock awards is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
- -------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
AS REPORTED
Stock-based employee compensation cost, net of tax $ 248 $ 205 $ 712 $ 522
Net income/(loss) 833 2,762 (2,218) 8,627
Basic earnings/(loss) per share .03 .11 (.09) .35
Diluted earnings/(loss) per share .03 .11 (.09) .35
PRO FORMA
Stock-based employee compensation cost, net of tax $ 489 $ 660 $ 1,644 $2,030
Net income/(loss) 592 2,307 (3,150) 7,119
Basic earning/(loss) per share .02 .09 (.13) .29
Diluted earnings/(loss) per share .02 .09 (.13) .29
=============================================================================================================
The fair value of common stock options outstanding under the Incentive Plans and
the fair value of stock purchase rights outstanding under the Stock Purchase
Plans were estimated at the date of grant using the Black-Scholes option-pricing
model.
-7-
There were no stock options or stock purchase rights granted during the
three-month periods ended September 30, 2003 and 2002.
For the nine-month period ended September 30, 2003 and 2002, weighted average
assumptions used to determine the fair values of the stock options and stock
purchase rights granted during each period included the following:
Nine Months Ended
September 30,
- --------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------
Dividend yield 10.71% 6.61%
Expected volatility 41.86% 39.14%
Expected life (in years) 7.00 7.00
Risk free interest rate 3.40% 4.60%
===========================================================================
For the nine-month periods ended September 30, 2003 and 2002, the weighted
average per share fair value of options granted under the Incentive Plans and
purchase rights granted under the Stock Purchase Plans during each period were
as follows:
Nine Months Ended
September 30,
- ------------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------------
Incentive Plan $5.92 $4.46
Stock Purchase Plan - -
========================================================================
The Black-Scholes option-pricing model was developed to estimate the fair value
of market-traded options. Incentive stock options and stock purchase rights have
certain characteristics, including vesting periods and non-transferability,
which market-traded options do not possess. Due to the significant effect that
changes in assumptions and differences in option and purchase right
characteristics might have on the fair values of stock options and stock
purchase rights, the models may not accurately reflect the fair values of the
stock options and stock purchase rights.
Shipping and Handling Costs
In accordance with EITF 00-10, Accounting for Shipping and Handling Fees and
Costs, the Company includes fees earned on the shipment of product to customers
in revenues and includes costs incurred on the shipment of product to customers
as cost of sales. Certain handling costs totaling $1.6 million and $2.0 million
were included in selling, general and administrative expenses for the
three-month periods ended September 30, 2003 and 2002, respectively. Certain
handling costs totaling $4.8 million and $5.3 million were included in selling,
general and administrative expenses for the nine-month periods ended September
30, 2003 and 2002, respectively.
-8-
NOTE 2: SHARE INFORMATION
Common Stock Treasury Stock
- ------------------------------------------------------------------------------------------------
(number of shares in thousands)
Balance at December 31, 2001 26,204 (1,443)
Issuance/(return) of treasury stock
Exercise of stock options - 69
Stock compensation - 91
Employee stock purchase plan settlement - 1
- --------------------------------------------------------------------------------------------
Balance at September 30, 2002 26,204 (1,282)
============================================================================================
BALANCE AT DECEMBER 31, 2002 26,204 (1,091)
ISSUANCE OF TREASURY STOCK
EXERCISE OF STOCK OPTIONS - 5
STOCK COMPENSATION - 103
EMPLOYEE STOCK PURCHASE PLAN SETTLEMENT - 4
RETIREMENT SAVINGS PLAN CONTRIBUTIONS - 200
- --------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 26,204 (779)
============================================================================================
NOTE 3: EARNINGS/(LOSS) PER SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
- ---------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
Numerator
Net income/(loss) $ 833 $ 2,762 $ (2,218) $ 8,627
===============================================================================================================
Denominator
Denominator for basic earnings/(loss) per share -
adjusted weighted average shares 25,334 24,764 25,135 24,742
Effect of dilutive common stock equivalents 277 73 - 200
- ---------------------------------------------------------------------------------------------------------------
Denominator for dilutive earnings/(loss) per share -
adjusted weighted average shares 25,611 24,837 25,135 24,942
===============================================================================================================
Basic earnings/(loss) per share $ .03 $ .11 $ (.09) $ .35
===============================================================================================================
Diluted earnings/(loss) per share $ .03 $ .11 $ (.09) $ .35
===============================================================================================================
For the three-month periods ended September 30, 2003 and 2002, the Company did
not include 1.3 million and 1.6 million outstanding common stock equivalents,
respectively, because they were antidilutive.
Due to the Company's net loss for the nine months ended September 30, 2003, it
did not include any outstanding common stock equivalents in the fully diluted
computation because they were antidilutive. For the nine months ended September
30, 2002, the Company did not include 0.9 million average outstanding common
stock equivalents in the fully diluted computation because they were
antidilutive.
-9-
NOTE 4: ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign Unrealized Accumulated
Currency Gain/(Loss) on Minimum Other
Translation Derivative Pension Comprehensive
Adjustments Instruments Liability Loss
- ------------------------------------------------------------------------------------------------------
(in thousands)
Balance at December 31, 2001 $ (24,474) $ (245) $ (1,906) $ (26,625)
Current Period Change 12,449 245 - 12,694
- ----------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $ (12,025) $ - $ (1,906) $ (13,931)
- ----------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 $ (3,117) $ - $ (14,742) $ (17,859)
CURRENT PERIOD CHANGE 11,564 - (64) 11,500
- ----------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2003 $ 8,447 $ - $ (14,806) $ (6,359)
====================================================================================================
Minimum pension liability at September 30, 2003 and 2002 is presented net of
deferred taxes in the amount of $9.5 million and $1.2 million, respectively.
NOTE 5: INVENTORIES
SEPTEMBER 30, December 31,
2003 2002
- ----------------------------------------------------------------------------------------------------
(in thousands)
Raw materials $ 21,106 $ 22,988
Work-in-process 17,657 21,673
Finished goods 107,180 134,375
Perishable tooling and supplies 4,254 4,887
- --------------------------------------------------------------------------------------------------
Gross inventories 150,197 183,923
Excess of current standard costs over LIFO costs (6,320) (5,596)
Obsolescence and other reserves (13,708) (18,510)
- --------------------------------------------------------------------------------------------------
Net inventories $ 130,169 $ 159,817
==================================================================================================
Inventories are stated at the lower of cost (last-in, first-out and first-in,
first-out methods) or market. Costs include direct material, direct labor and
applicable production overhead costs.
NOTE 6: ACCRUED SEVERANCE AND OTHER RELATED BENEFITS
Acquisition-Related Severance and Other Related Benefits
On December 31, 2002, the Company accrued severance and other related benefits
costs of $11.3 million associated with the announced manufacturing facility
closing in Canada in connection with the NORCOM acquisition. These costs were
recognized as a liability assumed in the purchase and included in the allocation
of the cost to acquire NORCOM in accordance with Emerging Issues Task Force
Abstract (EITF) No. 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination. 197 employees were eligible for severance
payments. The Company anticipates making substantially all severance payments
against this accrual within one year of the accrual date.
-10-
Facility Consolidation Severance and Other Related Benefits
On December 31, 2002, the Company recorded severance and other related benefits
costs in the amount of $8.3 million related to the announced manufacturing
facility closings in Germany and Australia as operating expense ($5.9 million in
cost of sales and $2.4 million in selling, general and administrative expenses)
in accordance with EITF No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). During the second quarter of 2003, the
Company recorded additional severance and other related benefits costs in the
amount of $2.5 million related to the manufacturing facility closings in Germany
and Australia as operating expense ($1.9 million in cost of sales and $0.6
million in selling, general and administrative expenses). 259 employees were
eligible for severance payments, subject to finalization of negotiations under
collective bargaining agreements. The Company anticipates making substantially
all severance payments against these accruals within one year of each accrual
date.
Other Severance and Other Related Benefits
In the third quarter of 2003, the Company recorded severance and other related
benefits costs in the amount of $1.9 million related to involuntary personnel
reductions within the Electronics segment in the United States, Canada and the
Netherlands as operating expense ($0.9 million in cost of sales and $1.0 million
in selling, general and administrative expenses) in accordance with SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities. 108
employees were notified, prior to September 30, 2003, of their pending
termination as well as the amount of severance and other related benefits they
should expect to receive.
In the third quarter of 2003, the Company recorded severance and other related
benefits costs in the amount of $0.5 million related to voluntary personnel
reductions within the Electronics segment in the United States as operating
expense ($0.1 million in cost of sales and $0.4 million in selling, general and
administrative expenses) in accordance with SFAS No. 88, Employers' Accounting
for Settlements & Curtailments of Defined Benefit Pension Plans and for
Termination Benefits. Eight employees were offered and accepted voluntary
termination packages prior to September 30, 2003.
The Company anticipates making substantially all severance payments against
these accruals within one year of each accrual date.
The following table sets forth termination activity that occurred during the
three months ended September 30, 2003:
Acquisition- Total Number
Related Facility Other Total of Employees
Severance Consolidation Severance Severance Eligible for
and Other Severance and and Other and Other Severance and
Related Other Related Related Related Other Related
Benefits Benefits Benefits Benefits Benefits
- -----------------------------------------------------------------------------------------------------------------------
(in thousands, except number of employees)
Balance at June 30, 2003 $ 3,673 $ 8,136 $ - $ 11,809 229
Cash payments/terminations (2,256) (3,680) (135) (6,071) (94)
Foreign currency translation (51) (26) 12 (65) -
Charges/other adjustments - (60) 2,445 2,385 104
- -----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 $ 1,366 $ 4,370 $ 2,322 $ 8,058 239
- -----------------------------------------------------------------------------------------------------------------------
-11-
The following table sets forth termination activity that occurred during the
nine months ended September 30, 2003:
Acquisition- Total Number
Related Facility Other Total of Employees
Severance Consolidation Severance Severance Eligible for
and Other Severance and and Other and Other Severance and
Related Other Related Related Related Other Related
Benefits Benefits Benefits Benefits Benefits
- -----------------------------------------------------------------------------------------------------------------------
(in thousands, except number of employees)
Balance at December 31, 2002 $ 11,317 $ 8,344 $ - $ 19,661 430
Cash payments/terminations (8,242) (6,902) (135) (15,279) (340)
Foreign currency translation 1,143 536 12 1,691 -
Charges/other adjustments (2,852) 2,392 2,445 1,985 149
- -----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 $ 1,366 $ 4,370 $ 2,322 $ 8,058 239
- -----------------------------------------------------------------------------------------------------------------------
Charges/other adjustments for acquisition-related severance and other related
benefits reflects the reduction of charges originally accrued as of the
acquisition date due to unanticipated early retirements of identified employees.
In accordance with SFAS No. 141, Business Combinations, the original purchase
price allocation for the NORCOM acquisition was revised, resulting in a like
reduction in property, plant and equipment. Charges/other adjustments for
facility consolidation severance and other related benefits reflects additional
charges recognized during the second quarter of 2003 related to the completed
and planned manufacturing facility closures in Australia and Germany,
respectively. Charges/other adjustments for other severance and other related
benefits reflects charges recognized during the third quarter of 2003 related to
Electronics segment personnel reductions in the United States, Canada and the
Netherlands.
NOTE 7: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Credit Agreement
The Company entered into a credit agreement with a group of 6 banks on October
9, 2003 ("Credit Agreement"). The Credit Agreement provides for a secured,
variable-rate and revolving credit facility not to exceed $75 million expiring
in June 2006. In general, the Company's assets in the United States, other than
real property, secure any borrowing under the Credit Agreement. The amount of
any such borrowing is subject to a borrowing base comprised of the Company's
receivables and inventories located in the United States. A fixed charge
coverage ratio covenant becomes applicable if the Company's excess borrowing
availability falls below $25.0 million. The Company's borrowing capacity under
the Credit Agreement as of October 9, 2003 was $62.8 million.
The Company does not anticipate a need during the year ending December 31, 2003
for funds available under the Credit Agreement to meet its capital expenditure,
dividend and working capital requirements.
Short-Term Borrowings
At September 30, 2003, the Company had unsecured, uncommitted arrangements with
4 banks under which it could borrow up to $28.5 million at prevailing interest
rates. There were no outstanding borrowings under these arrangements at
September 30, 2003.
-12-
Interest Rate Management
The Company manages its debt portfolio by using interest rate swap agreements to
achieve an overall desired position of fixed and floating rates. At September
30, 2003, the Company was party to interest rate swap agreements relating to
7.60% medium-term notes that mature in 2004. The swaps convert a notional amount
of $64.0 million from fixed rates to floating rates and mature in 2004. These
arrangements have been designated and qualify as fair value hedges of the
associated medium-term notes in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities.
Based on current interest rates for similar transactions, the fair value of the
Company's interest rate swap agreements at September 30, 2003 was $2.9 million.
Credit and market risk exposures on these agreements are limited to the net
interest differentials. Net interest differentials earned from the interest rate
swaps of $0.5 million pretax, or $0.01 per diluted share, and $1.4 million
pretax, or $0.03 per diluted share, were recorded as reductions to interest
expense for the three- and nine-month periods ended September 30, 2003. Net
interest differentials earned from the interest rate swaps reduced the Company's
average interest rate on long-term debt by 0.72 and 0.80 percentage points for
the three- and nine-month periods ended September 30, 2003. The Company is
exposed to credit loss in the event of nonperformance by counterparties on the
agreements, but does not anticipate nonperformance by any of the counterparties.
NOTE 8: INCOME TAXES
The net tax benefit of $2.6 million for the nine months ended September 30, 2003
resulted from a net loss before taxes of $4.8 million. Earnings from foreign
subsidiaries are considered to be indefinitely reinvested and, accordingly, no
provision for United States federal and state income taxes has been made for
these earnings. Upon distribution of foreign subsidiary earnings, the Company
may be subject to United States income taxes (subject to an adjustment for
foreign tax credits) and withholding taxes payable to the various foreign
countries.
The difference between the effective rate reflected in the provision for income
taxes on income before taxes and the amounts determined by applying the
applicable statutory United States tax rate for the nine months ended September
30, 2003 are analyzed below:
Nine Months Ended September 30, 2003 Amount Rate
- ----------------------------------------------------------------------------------------
(in thousands, except rate data)
Benefit at statutory rate $ (1,669) 35.0%
State income taxes (346) 7.3%
Higher foreign tax rates and other, net (535) 11.2%
- ----------------------------------------------------------------------------------------
Total tax benefit $ (2,550) 53.5%
- ----------------------------------------------------------------------------------------
The Company's effective nine-month tax rate increased to 53.5% through the
quarter ended September 30, 2003 from an effective annual tax rate of 32.0%
through the quarter ended September 30, 2002. The net tax rate increase was due
to a mix shift in pretax income toward taxing jurisdictions with comparatively
higher tax rates and the relative benefit of permanent deductions to the
nine-month pretax loss for 2003 as compared to the nine-month pretax income for
2002 partially offset by a valuation allowance of $1.2 million against foreign
net operating loss carryforwards in 2003.
NOTE 9: CONTINGENT LIABILITIES
General
Various claims are asserted against the Company in the ordinary course of
business including those pertaining to income tax examinations and product
liability, customer, vendor and patent matters. Based on facts currently
available, management believes that the disposition of the claims that are
pending or asserted will not have a materially adverse effect on the financial
position of the Company.
-13-
Severance and Other Related Benefits
The Company is currently negotiating the sale of part of its business in Germany
to a management-led buyout group. If the buyout does not occur, the Company
would recognize and pay severance and other related benefits costs of
approximately $2.8 million for an additional group of German employees. Even if
the buyout does occur, the Company will retain liability for severance and other
related benefits in the event the buyout group terminates transferred employees
within three years of the buyout date. The severance and other related benefits
amounts are reduced based upon the duration of employment with the buyout group.
Intercompany Guarantees
An intercompany guarantee is a contingent commitment issued by either Belden
Inc. or one of its subsidiaries to guarantee the performance of either Belden
Inc. or one of its subsidiaries to a third party in a borrowing arrangement or
similar transaction. The terms of these intercompany guarantees are equal to the
terms of the related borrowing arrangements or similar transactions and range
from 1 year to 12 years. The only intercompany guarantees outstanding at
September 30, 2003 are the guarantees executed by Belden Wire & Cable Company
and Belden Communications Company related to the $200.0 million indebtedness of
Belden Inc. under various medium-term note purchase agreements and the guaranty
executed by Belden Inc. related to $6.9 million of potential indebtedness under
an overdraft line of credit between Belden Wire & Cable B.V. and its local cash
management bank. The maximum potential amount of future payments Belden Inc. or
its subsidiaries could be required to make under these intercompany guarantees
at September 30, 2003 is $206.9 million. In accordance with the scope exceptions
provided by FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, the Company has not measured and recorded the carrying values of these
guarantees in its Consolidated Financial Statements. The Company also does not
hold collateral to support these guarantees.
NOTE 10: BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company conducts its operations through two business segments -- the
Electronics segment and the Communications segment. The Electronics segment
designs, manufactures and markets metallic and fiber optic wire and cable
products with industrial, networking, entertainment/OEM and communications
applications. These products are sold primarily through distributors. The
Communications segment designs, manufactures and markets metallic cable products
primarily with communications and networking applications. These products are
sold through distribution or to local exchange carriers (LECs) either directly
or through value-added resellers designated by the LECs.
The Company evaluates segment performance and allocates resources based on
operating earnings before interest and income taxes. Operating earnings of the
two principal segments include all the ongoing costs of operations. Allocations
to or from these business segments are not significant. With the exception of
certain unallocated tax assets, substantially all the business assets are
utilized by the business segments.
Amounts reflected in the column entitled "Other" in the tables below represent
corporate headquarters operating, treasury and income tax expenses and the
elimination of intersegment revenues and cost of sales.
BUSINESS SEGMENT INFORMATION
THREE MONTHS ENDED SEPTEMBER 30, 2003 ELECTRONICS COMMUNICATIONS OTHER CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
EXTERNAL CUSTOMER REVENUES $ 137,527 $ 70,041 $ - $ 207,568
AFFILIATE REVENUES 135 802 (937) -
OPERATING EARNINGS/(LOSS) 7,835 (3,094) (2,448) 2,293
TOTAL ASSETS 383,588 307,239 60,905 751,732
- ---------------------------------------------------------------------------------------------------------------
-14-
Three Months Ended September 30, 2002 Electronics Communications Other Consolidated
- ---------------------------------------------------------------------------------------------------------------
(in thousands)
External customer revenues $ 142,085 $ 57,429 $ - $ 199,514
Affiliate revenues 2,159 397 (2,556) -
Operating earnings/(loss) 10,549 (606) (2,686) 7,257
Total assets 432,966 283,562 12,374 728,902
- ---------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2003 ELECTRONICS COMMUNICATIONS OTHER CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
EXTERNAL CUSTOMER REVENUES $ 412,287 $ 205,642 $ - $ 617,929
AFFILIATE REVENUES 6,995 1,783 (8,778) -
OPERATING EARNINGS/(LOSS) 21,932 (8,943) (8,323) 4,666
- ---------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2002 Electronics Communications Other Consolidated
- ---------------------------------------------------------------------------------------------------------------
(in thousands)
External customer revenues $ 424,509 $ 189,769 $ - $ 614,278
Affiliate revenues 7,848 1,347 (9,195) -
Operating earnings/(loss) 32,285 (708) (8,356) 23,221
- ---------------------------------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
Three Months Ended September 30, 2003 2002
- ---------------------------------------------------------------------------------------------------------
PERCENT OF Percent of
REVENUES REVENUES Revenues Revenues
- ---------------------------------------------------------------------------------------------------------
(in thousands, except % data)
United States $125,690 60.5% $129,673 65.0%
Canada 19,142 9.2% 13,480 6.8%
United Kingdom 20,627 9.9% 19,665 9.9%
Continental Europe 23,979 11.6% 20,115 10.1%
Rest of World 18,130 8.8% 16,581 8.2%
- ---------------------------------------------------------------------------------------------------------
Total $207,568 100.0% $199,514 100.0%
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2003 2002
- ---------------------------------------------------------------------------------------------------------
PERCENT OF Percent of
REVENUES REVENUES Revenues Revenues
- ---------------------------------------------------------------------------------------------------------
(in thousands, except % data)
United States $363,792 58.9% $395,361 64.4%
Canada 62,259 10.1% 37,210 6.1%
United Kingdom 59,474 9.6% 62,683 10.2%
Continental Europe 77,420 12.5% 66,487 10.8%
Rest of World 54,984 8.9% 52,537 8.5%
- ---------------------------------------------------------------------------------------------------------
Total $617,929 100.0% $614,278 100.0%
- ---------------------------------------------------------------------------------------------------------
-15-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis, as well as the accompanying Consolidated
Financial Statements and related footnotes, will aid in the understanding of the
Company's results of operations as well as its financial position, cash flows,
indebtedness and other key financial information. Certain reclassifications have
been made to the 2002 financial information in order to conform to the 2003
presentation. The following discussion may contain forward-looking statements.
In connection therewith, please see the cautionary statements contained herein
under the caption "Forward-Looking Statements", which identify important factors
that could cause actual results to differ materially from those in
forward-looking statements.
CONSOLIDATED OPERATING RESULTS
The following table sets forth information comparing consolidated operating
results for the three- and nine-month periods ended September 30, 2003 with the
three- and nine-month periods ended September 30, 2002.
Three Months Ended Nine Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------
(In thousands)
Revenues $ 207,568 $ 199,514 $ 617,929 $ 614,278
Gross profit 30,029 33,969 86,778 102,987
Operating earnings 2,293 7,257 4,666 23,221
Interest expense 3,046 3,324 9,434 10,534
Income/(loss) before taxes (753) 3,933 (4,768) 12,687
Net income/(loss) 833 2,762 (2,218) 8,627
- --------------------------------------------------------------------------------------------
BUSINESS SEGMENTS
The Company conducts its operations through two business segments -- the
Electronics segment and the Communications segment. The Electronics segment
designs, manufactures and markets metallic and fiber optic wire and cable
products with industrial, networking, entertainment/OEM and communications
applications. These products are sold chiefly through distribution. The
Communications segment designs, manufactures, and markets metallic cable
products primarily with communications and networking applications. These
products are sold through distribution or to local exchange carriers (LECs)
either directly or through value-added resellers (VARs) designated by the LECs.
The following table sets forth information comparing the Electronics segment
operating results for the three- and nine-month periods ended September 30, 2003
with the three- and nine-month periods ended September 30, 2002.
Three Months Ended Nine Months Ended
September 30, September 30,
- ---------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
(In thousands, except % data)
External customer revenues $ 137,527 $ 142,085 $ 412,287 $ 424,509
Affiliate revenues 135 2,159 6,995 7,848
Operating earnings 7,835 10,549 21,932 32,285
As a percent of external customer revenues 5.7% 7.4% 5.3% 7.6%
- ---------------------------------------------------------------------------------------------------
-16-
The following table sets forth information comparing the Communications segment
operating results for the three- and nine-month periods ended September 30, 2003
with the three- and nine-month periods ended September 30, 2002.
Three Months Ended Nine Months Ended
September 30, September 30,
- ---------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
(In thousands, except % data)
External customer revenues $ 70,041 $ 57,429 $ 205,642 $ 189,769
Affiliate revenues 802 397 1,783 1,347
Operating loss (3,094) (606) (8,943) (708)
As a percent of external customer revenues (4.4)% (1.1)% (4.3)% (0.4)%
- ---------------------------------------------------------------------------------------------------
ACQUISITIONS
On October 31, 2002, the Company purchased certain assets and assumed certain
liabilities of the NORCOM wire and cable business in Kingston, Ontario, Canada
(NORCOM) from Cable Design Technologies Corporation for cash of $11.3 million.
The purchase price is subject to adjustments for asset values as of the closing
date, with additional contingency payments for up to three years which could
total as much as $6.7 million depending mainly on the Company's achievement of
future business levels. No goodwill was recorded with respect to this
transaction. During 2003, the Company closed the Kingston facility and relocated
production to other Company facilities. The Company recorded accrued severance
and other plant closing costs incident to the purchase in 2002. The Company
anticipates making substantially all payments against these accruals within one
year of the acquisition date. NORCOM manufactured and marketed metallic cable
products primarily for the Canadian and United States communications markets.
Operating results for NORCOM have been included in the operating results for the
Communications segment since the acquisition date and may affect comparability
of the operating results between years.
RESULTS OF OPERATIONS --
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2002
REVENUES
Revenues increased 4.0% to $207.6 million in the three months ended September
30, 2003 from $199.5 million in the three months ended September 30, 2002 due to
favorable currency translation on international revenues and the inclusion of
revenues generated by NORCOM, acquired in the fourth quarter of 2002, partially
offset by reduced sales volume and decreased selling prices.
Favorable foreign currency translation on international revenues contributed 3.1
percentage points of revenue increase. The euro, British pound, Canadian dollar
and Australian dollar appreciated in relation to the United States dollar from
average exchange values of $0.98, $1.55, $0.64 and $0.55, respectively, in the
third quarter of 2002 to $1.13, $1.61, $0.73 and $0.66, respectively, in the
third quarter of 2003.
Revenues generated by NORCOM during the third quarter of 2003 in the amount of
$7.9 million contributed 3.9 percentage points of revenue increase. The Company
acquired NORCOM in the fourth quarter of 2002.
Decreased unit sales partially offset the positive impact that currency
translation and NORCOM had on revenues by 2.8 percentage points. The Company
experienced volume decreases in its sales of products with networking,
industrial and entertainment/OEM applications due primarily to unfavorable
economic conditions in the United States, Europe and parts of Asia. These
decreases were partially offset by a volume increase in sales of products with
communications applications.
Decreased product pricing partially offset the positive impact that currency
translation and NORCOM had on revenues by 0.2 percentage points. This decrease
resulted primarily from sales price reductions implemented on certain products
with communications and networking applications partially offset by sales price
increases implemented on certain products with industrial and entertainment/OEM
applications.
-17-
Revenues in the United States, representing 60.5% of the Company's total
revenues generated during the three months ended September 30, 2003, declined by
3.1% compared with revenues generated during the same period in 2002. This
decline was attributed to a shortfall in sales of Electronics segment products
that was partially offset by improvement in Communications segment product
sales. United States revenues generated from the sale of Electronics segment
products during the third quarter of 2003 declined by 7.1% compared with
revenues generated during the third quarter of 2002. Revenues generated in the
United States from the sale of Communications segment products during the three
months ended September 30, 2003 increased by 5.2% compared with the same period
in 2002.
Revenues in Canada represented 9.2% of the Company's total revenues for the
quarter ended September 30, 2003. Canadian revenues for the third quarter of
2003 increased by 42.0% compared with revenues for the third quarter of 2002 due
primarily to revenues generated by NORCOM and the impact of favorable currency
translation partially offset by lower local currency revenues generated on the
sale of products with industrial applications. Local currency revenues generated
by NORCOM contributed 58.2 percentage points of revenue increase. The impact of
favorable currency translation contributed 9.3 percentage points of revenue
increase. Lower local currency revenues generated on the sale of products with
industrial applications partially offset the positive impact that currency
translation and NORCOM had on total Canadian revenues by 25.5 percentage points.
Revenues in the United Kingdom, representing 9.9% of the Company's total
revenues generated during the third quarter of 2003, increased by 4.9% compared
with revenues generated during the same period in 2002. Absent the impact of
favorable currency translation, revenues generated for the third quarter of 2003
increased by 1.4% compared with revenues generated for the same period in 2002.
This increase occurred due to improved demand for Communications segment
products partially offset by a shortfall in demand for Electronics segment
products.
Revenues in Continental Europe represented 11.6% of the Company's total revenues
for the quarter ended September 30, 2003. Continental European revenues
generated during the third quarter of 2003 increased by 19.2% compared with
revenues generated during the same period in 2002. Absent the impact that
favorable currency translation had on the revenue comparison, Continental
European revenues generated during the third quarter of 2003 increased by 0.9%
compared with revenues generated during the same period of 2002.
Revenues from the rest of the world, representing 8.8% of the Company's total
revenues generated during the three months ended September 30, 2003, increased
by 9.3% from the same period in 2002. The increase represented favorable
currency translation and stronger demand in the Asia/Pacific and Africa/Middle
East markets partially offset by lower demand in Latin America.
-18-
COSTS, EXPENSES AND EARNINGS
The following table sets forth information comparing the components of
earnings/(loss) for the three months ended September 30, 2003 with the three
months ended September 30, 2002.
Percent
Decrease
2003 Compared
Three Months Ended September 30, 2003 2002 With 2002
- -------------------------------------------------------------------------------------------------
(in thousands, except % data)
Gross profit $30,029 $33,969 (11.6)%
As a percent of revenues 14.5% 17.0%
Operating earnings $ 2,293 $ 7,257 (68.4)%
As a percent of revenues 1.1% 3.6%
Income/(loss) before taxes $ (753) $ 3,933 (119.1)%
As a percent of revenues (0.4)% 2.0%
Net income $ 833 $ 2,762 (69.8)%
As a percent of revenues 0.4% 1.4%
- -------------------------------------------------------------------------------------------------
Gross profit decreased 11.6% to $30.0 million in the three months ended
September 30, 2003 from $34.0 million in the three months ended September 30,
2002 due primarily to lower sales volume, higher product costs resulting from
rising copper and petroleum-based commodities prices, the impact of sales price
reductions taken on certain products with communications applications, severance
and other benefits costs of $1.0 million recognized in the current quarter
related to personnel reductions within the Electronics segment and a $0.5
million favorable settlement from class action litigation regarding the pricing
of copper futures recognized in the third quarter of 2002. Also contributing to
the unfavorable gross profit comparison was the impact of the Company's
inventory reduction initiative. By limiting production to reduce inventory
levels, the Company absorbed less of its fixed costs; thus, unabsorbed costs, or
unfavorable production variances, had a negative impact on gross profit. These
negative factors were partially offset by the current-quarter impact of
material, labor and overhead cost reduction initiatives and severance and other
benefits costs of $0.6 million recognized in the third quarter of 2002 related
to personnel reductions within the Electronics segment. Gross profit as a
percent of revenues declined by 2.5 percentage points from the prior year due to
the previously mentioned items and the Company's unfavorable leveraging of fixed
costs over a lower revenue base.
Operating earnings decreased 68.4% to $2.3 million for the three months ended
September 30, 2003 from $7.3 million for the three months ended September 30,
2002 due primarily to lower gross profit. Also contributing to the negative
operating earnings comparison was an increase in selling, general and
administrative expenses to $27.7 million in the third quarter of 2003 from $26.7
million for the third quarter of 2002 due primarily to the NORCOM acquisition in
the fourth quarter of 2002, the unfavorable impact of currency translation,
severance and other benefits costs of $1.4 million recognized in the current
quarter related to personnel reductions within the Electronics segment and bad
debt expense of $0.6 million recognized in the current quarter related to the
failure of a distribution customer in Asia. These negative factors were
partially offset by bad debt expense of $1.3 million and severance and other
benefits costs of $0.1 million recognized in the third quarter of 2002. Selling,
general and administrative expenses as a percentage of revenues were unchanged
at 13.4% in both the third quarter of 2003 and the third quarter of 2002.
Operating earnings as a percent of revenues declined by 2.5 percentage points
from the prior year due to the previously mentioned items and the Company's
unfavorable leveraging of fixed costs over a lower revenue base.
-19-
Income/(loss) before taxes decreased 119.1% to a loss before taxes of $0.8
million in the three months ended September 30, 2003 from income before taxes of
$3.9 million in the three months ended September 30, 2002 due mainly to lower
operating earnings. The lower operating earnings were partially offset by
decreased interest expense. Interest expense decreased 8.4% to $3.0 million in
the third quarter of 2003 from $3.3 million in the third quarter of 2002 due to
lower average borrowings and marginally lower interest rates. Average debt
outstanding during the third quarters of 2003 and 2002 was $200.0 million and
$205.0 million, respectively. The Company's average interest rate was 6.56% in
the third quarter of 2003 and 6.64% in the third quarter of 2002.
The Company's effective nine-month tax rate increased to 53.5% through the
quarter ended September 30, 2003 from an effective annual tax rate of 32.0%
through the quarter ended September 30, 2002. The net tax rate increase was due
to a mix shift in pretax income toward taxing jurisdictions with comparatively
higher tax rates and the relative benefit of permanent deductions to the
nine-month pretax loss for 2003 as compared to the nine-month pretax income for
2002 partially offset by a valuation allowance of $1.2 million against foreign
net operating loss carryforwards in 2003.
Net income decreased 69.8% to $0.8 million in the three months ended September
30, 2003 from $2.8 million in the three months ended September 30, 2002 due
mainly to lower income/(loss) before taxes partially offset by the tax benefit
recognized during the current quarter.
Electronics Segment
Revenues generated from sales to external customers decreased 3.2% to $137.5
million for the quarter ended September 30, 2003 from $142.1 million for the
quarter ended September 30, 2002. The segment experienced lower sales volume on
products with networking, industrial, entertainment/OEM and communications
applications due to the unfavorable manufacturing economies in the United
States, Europe and parts of Asia. The impact of price increases taken on certain
products with industrial and entertainment/OEM applications partially offset the
negative impact that volume had on the revenue comparison. The impact of these
price increases was partially offset by price reductions taken on certain
products with communications and networking applications. Favorable currency
translation on international revenues also partially offset the negative impact
that volume had on the revenue comparison.
Operating earnings decreased 25.7% to $7.8 million for the quarter ended
September 30, 2003 from $10.5 million for the quarter ended September 30, 2002
due mainly to lower sales volumes, the impact of sales price reductions taken on
certain products with communications and networking applications, increased
unabsorbed production costs resulting from actions taken by the segment to
reduce inventory levels, severance and other benefits costs of $2.4 million
recognized in the current quarter related to personnel reductions within the
segment, bad debt expense of $0.6 million recognized in the current quarter
related to the failure of a distribution customer in Asia and a $0.3 million
favorable settlement from class action litigation regarding the pricing of
copper futures recognized in the third quarter of 2002. The negative effect
these factors had on operating earnings was partially offset by the
current-quarter impact of cost reduction initiatives related to certain
material, labor, manufacturing overhead and selling, general and administrative
expenditures, the impact of sales price increases taken on certain products with
industrial and entertainment/OEM applications, severance and other benefits
costs of $0.7 million recognized during the third quarter of 2002, bad debt
expense of $1.0 million recognized during the third quarter of 2002 and $1.6
million in unabsorbed production costs recognized during the third quarter of
2002 of the Company's Ft. Mill, South Carolina manufacturing facility which was
transferred from this segment to the Communications segment effective July 1,
2003. As a percent of revenues from external customers, operating earnings
decreased to 5.7% in the third quarter of 2003 from 7.4% in the third quarter of
2002 due to the previously mentioned items.
-20-
Communications Segment
The Communications segment recorded revenues generated on sales to external
customers of $70.0 million for the quarter ended September 30, 2003, a 22.0%
increase from revenues of $57.4 million for the quarter ended September 30,
2002. The revenue increase was due principally to improved distribution sales,
favorable currency translation on international revenues and the inclusion of
revenues in the amount of $7.9 million generated by NORCOM during the third
quarter of 2003. The Company acquired NORCOM in the fourth quarter of 2002. The
positive impact that improved distribution sales, currency translation and
NORCOM had on the revenue comparison was partially offset by capital spending
reductions by the major communications companies and the impact of price
reductions taken on certain products with communications applications.
Operating loss increased to $3.1 million for the quarter ended September 30,
2003 from $0.6 million for the quarter ended September 30, 2002 due primarily to
the impact of price reductions take on certain products with communications
applications, increased unabsorbed production costs resulting from actions taken
by the segment to reduce inventory levels, higher product costs resulting from
rising copper and petroleum-based commodities prices, a $0.2 million favorable
settlement from class action litigation regarding the pricing of copper futures
recognized in the third quarter of 2002 and increased production, selling,
general and administrative costs and expenses due to the acquisition of NORCOM
in the fourth quarter of 2002 and the transfer of the Company's Ft. Mill, South
Carolina manufacturing facility from the Electronics segment to this segment
effective July 1, 2003. The negative impact these factors had on the operating
loss comparison was partially offset by increased revenues, the current-quarter
impact of cost reduction initiatives related to certain material, labor,
manufacturing overhead and selling, general and administrative expenditures and
bad debt expense of $0.1 million recognized in the third quarter of 2002.
Operating loss as a percent of revenues from external customers increased to
(4.4)% in the quarter ended September 30, 2003 from (1.1)% in the same period of
2002 due to the previously mentioned items as well as a shift in demand toward
less profitable, lower pair-count cable and a greater percentage of distribution
business which is currently less profitable. The Communications segment also
incurred manufacturing inefficiencies due to the large swing in customer demand.
RESULTS OF OPERATIONS --
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2002
REVENUES
Revenues increased 0.6% to $617.9 million in the nine months ended September 30,
2003 from $614.3 million in the nine months ended September 30, 2002 due to
favorable currency translation on international revenues and the inclusion of
revenues generated by NORCOM, acquired in the fourth quarter of 2002, partially
offset by reduced sales volume and decreased selling prices.
Favorable foreign currency translation on international revenues contributed 4.1
percentage points of revenue increase. The euro, British pound, Canadian dollar
and Australian dollar appreciated in relation to the United States dollar from
average exchange values of $0.93, $1.48, $0.64 and $0.54, respectively, in the
first nine months of 2002 to $1.11, $1.61, $0.70 and $0.63, respectively, in the
first nine months of 2003.
The inclusion of revenues in the amount of $24.7 million generated by NORCOM
also contributed 4.1 percentage points of revenue increase.
Decreased unit sales partially offset the positive impact that currency
translation and NORCOM had on revenues by 7.0 percentage points. The Company
experienced volume decreases in its sales of products with communications,
networking, industrial and entertainment/OEM applications due primarily to
unfavorable economic conditions in the United States, Europe and parts of Asia
as well as capital spending reductions by the major communications companies.
Decreased product pricing partially offset the positive impact that currency
translation and NORCOM had on revenues by 0.6 percentage points. This decrease
resulted primarily from sales price reductions implemented on certain products
with communications and networking applications partially offset by sales price
increases implemented on certain products with industrial and entertainment/OEM
applications.
-21-
Revenues in the United States, representing 58.9% of the Company's total
revenues generated during the nine months ended September 30, 2003, declined by
8.0% compared with revenues generated during the same period in 2002. This
decline was attributed to a shortfall in sales of both Electronics segment and
Communications segment products. United States revenues generated from the sale
of Electronics segment products during the first nine months of 2003 declined by
9.1% compared with revenues generated during the first nine months of 2002.
Revenues generated in the United States from the sale of Communications segment
products during the nine months ended September 30, 2003 declined by 6.7%
compared with the same period in 2002.
Revenues in Canada represented 10.1% of the Company's total revenues for the
nine-month period ended September 30, 2003. Canadian revenues for the first nine
months of 2003 increased by 67.3% compared with revenues for the first nine
months of 2002 due primarily to revenues generated by NORCOM and the impact of
favorable currency translation partially offset by decreased demand for products
with industrial applications. Local currency revenues generated by NORCOM
contributed 64.7 percentage points to the revenue increase. The impact of
favorable currency translation contributed 8.3 percentage points of the revenue
increase. Decreased local currency revenues generated on sales of products with
industrial applications partially offset the favorable impact that NORCOM and
currency translation had on the revenue comparison by 5.7 percentage points.
Revenues in the United Kingdom, representing 9.6% of the Company's total
revenues generated during the first nine months of 2003, decreased by 5.1%
compared with revenues generated during the same period in 2002. Absent the
impact of favorable currency translation, revenues generated for the first nine
months of 2003 declined by 11.5% compared with revenues generated for the same
period in 2002. This decline occurred due to a shortfall in revenues generated
on the sale of Electronics segment products partially offset by increased
revenues generated on the sale of Communications segment products.
Revenues in Continental Europe represented 12.5% of the Company's total revenues
for the nine-month period ended September 30, 2003. Continental European
revenues generated during the first nine months of 2003 increased by 16.4%
compared with revenues generated during the same period in 2002. Absent the
impact that favorable currency translation had on the revenue comparison,
Continental European revenues generated during the first nine months of 2003
decreased by 6.8% compared with revenues generated during the same period of
2002. This decline occurred primarily due to a shortfall in demand for
Electronics segment products.
Revenues from the rest of the world, representing 8.9% of the Company's total
revenues generated during the nine months ended September 30, 2003, increased by
4.7% from the same period in 2002. The increase represented favorable currency
translation and stronger demand in the Africa/Middle East markets partially
offset by lower demand in both Latin America and the Asia/Pacific markets.
-22-
COSTS, EXPENSES AND EARNINGS
The following table sets forth information comparing the components of
earnings/(loss) for the nine months ended September 30, 2003 with the nine
months ended September 30, 2002.
Percent
Decrease
2003 Compared
Nine Months Ended September 30, 2003 2002 With 2002
- -------------------------------------------------------------------------------------------------
(in thousands, except % data)
Gross profit $86,778 $102,987 (15.7)%
As a percent of revenues 14.0% 16.8%
Operating earnings $ 4,666 $ 23,221 (79.9)%
As a percent of revenues 0.8% 3.8%
Income/(loss) before taxes $(4,768) $ 12,687 (137.6)%
As a percent of revenues (0.8)% 2.1%
Net income/(loss) $(2,218) $ 8,627 (125.7)%
As a percent of revenues (0.4)% 1.4%
- -------------------------------------------------------------------------------------------------
Gross profit decreased 15.7% to $86.8 million in the nine months ended September
30, 2003 from $103.0 million in the nine months ended September 30, 2002 due
primarily to lower sales volume, higher product costs resulting from rising
copper and petroleum-based commodities prices, the impact of sales price
reductions taken on certain products with communications and networking
applications, severance and related benefits costs of $2.2 million recognized in
the second quarter of 2003 related to the manufacturing facility closings in
Australia and Germany, severance and related benefits costs of $1.0 million
recognized in the third quarter of 2003 resulting from personnel reductions
within the Electronics segment and an aggregate nonrecurring $2.0 million
favorable settlement from class action litigation regarding the pricing of
copper futures recognized in the first and third quarters of 2002. Also
contributing to the unfavorable gross profit comparison was the impact of the
Company's inventory reduction initiative. By limiting production to reduce
inventory levels, the Company absorbed less of its fixed costs; thus, unabsorbed
costs, or unfavorable production variances, had a negative impact on gross
profit. These negative factors were partially offset by the current-year impact
of material, labor and overhead cost reduction initiatives as well as severance
costs totaling $2.7 million related to personnel reductions within the
Electronics segment recognized in the first and third quarters of 2002. Gross
profit as a percent of revenues declined by 2.8 percentage points from the prior
year due to the previously mentioned items.
-23-
Operating earnings decreased 79.9% to $4.7 million for the nine months ended
September 30, 2003 from $23.2 million for the nine months ended September 30,
2002 due primarily to lower gross profit and additional asset impairment costs
of $0.4 million recognized in the second quarter of 2003 related to the planned
manufacturing facility closing in Germany. Also contributing to the negative
operating earnings comparison was an increase in selling, general and
administrative expenses to $81.8 million for the first nine months of 2003 from
$79.8 million for the first nine months of 2002 due primarily to the NORCOM
acquisition in the fourth quarter of 2002, the unfavorable impact of currency
translation, severance and other related benefits costs of $0.3 million
recognized in the second quarter of 2003 related to the manufacturing facility
closings in Australia and Germany, severance and other related benefits costs of
$1.4 million recognized in the third quarter of 2003 related to personnel
reductions within the Electronics segment and bad debt expense of $0.6 million
recognized in the third quarter of 2003 related to the failure of a distribution
customer in Asia. This unfavorable performance was somewhat mitigated by
severance costs totaling $1.3 million recognized in the first and third quarters
of 2002 related to personnel reductions within the Electronics segment and bad
debt expense totaling $1.9 recognized in the second and third quarters of 2002.
Selling, general and administrative expenses increased to 13.2% of revenues in
the first nine months of 2003 from 13.0% of revenues in the first nine months of
2002. Operating earnings as a percent of revenues declined by 3.0 percentage
points from the prior year due to the previously mentioned items.
Income/(loss) before taxes decreased 137.6% to a loss before taxes of $4.8
million in the nine months ended September 30, 2003 from income before taxes of
$12.7 million in the nine months ended September 30, 2002 due mainly to lower
operating earnings. The lower operating earnings were partially offset by
decreased interest expense. Interest expense decreased 10.4% to $9.4 million in
the first nine months of 2003 from $10.5 million in the first nine months of
2002 due to lower average borrowings and marginally lower interest rates.
Average debt outstanding during the first nine months of 2003 and 2002 was
$200.1 million and $216.0 million, respectively. The Company's average interest
rate was 6.66% in the first nine months of 2003 and 6.75% in the first nine
months of 2002.
The Company's effective nine-month tax rate increased to 53.5% through the
quarter ended September 30, 2003 from an effective annual tax rate of 32.0%
through the quarter ended September 30, 2002. The net tax rate increase was due
to a mix shift in pretax income toward taxing jurisdictions with comparatively
higher tax rates and the relative benefit of permanent deductions to the
nine-month pretax loss for 2003 as compared to the nine-month pretax income for
2002 partially offset by a valuation allowance of $1.2 million against foreign
net operating loss carryforwards in 2003.
Net income/(loss) decreased 125.7% to a net loss of $2.2 million in the nine
months ended September 30, 2003 from net income of $8.6 million in the nine
months ended September 30, 2002 due mainly to lower income/(loss) before taxes
partially offset by the tax benefit recognized during the first nine months of
2003.
Electronics Segment
Revenues generated from sales to external customers decreased 2.9% to $412.3
million for the nine-month period ended September 30, 2003 from $424.5 million
for the nine-month period ended September 30, 2002. The segment experienced
lower sales volume on products with networking, industrial, entertainment/OEM
and communications applications due to the unfavorable manufacturing economies
in the United States, Europe and parts of Asia. The impact of price reductions
taken on certain products with networking and communications applications also
had a negative impact on the revenue comparison. The impact of these price
reductions was partially offset by price increases taken on certain products
with industrial and entertainment/OEM applications. Favorable currency
translation on international revenues partially offset the negative impact that
volume and pricing had on the revenue comparison.
-24-
Operating earnings decreased 32.1% to $21.9 million for the nine months ended
September 30, 2003 from $32.3 million for the same period in 2002 due mainly to
lower sales volumes, the impact of sales price reductions taken on certain
products, increased unabsorbed production costs resulting from actions taken by
the segment to reduce inventory levels, severance and other related benefit
costs of $2.5 million and additional asset impairment costs of $0.4 million
recognized in the second quarter of 2003 related to the manufacturing facility
closings in Australia and Germany, severance and other related benefit costs of
$2.4 million recognized in the third quarter of 2003 related to personnel
reductions within the segment, bad debt expense of $0.6 million recognized in
the third quarter of 2003 related to the failure of a distribution customer in
Asia and an aggregate nonrecurring $0.7 million favorable settlement from class
action litigation regarding the pricing of copper futures recognized during the
first and third quarters of 2002. These negative factors were partially offset
by the current-year impact of cost reduction initiatives related to certain
material, labor, manufacturing overhead and selling, general and administrative
expenditures, severance and other benefits costs totaling $4.0 million related
to personnel reductions recognized during the first and third quarters of 2002
and bad debt expense totaling $1.3 million recognized during the second and
third quarters of 2002 and $1.6 million in unabsorbed production costs
recognized during the nine months ended September 30, 2002 of the Company's Ft.
Mill, South Carolina manufacturing facility which was transferred from this
segment to the Communications segment effective July 1, 2003. As a percent of
revenues from external customers, operating earnings decreased to 5.3% in the
first nine months of 2003 from 7.6% in the first nine months of 2002 due to the
previously mentioned items and the segment's inability to leverage its fixed
costs over a lower revenue base.
Communications Segment
The Communications segment recorded revenues generated on sales to external
customers of $205.6 million for the nine months ended September 30, 2003, an
8.4% increase from revenues of $189.8 million generated for the nine months
ended September 30, 2002. The revenue increase was due principally to favorable
currency translation on international revenues, the inclusion of revenues in the
amount of $24.7 million generated by NORCOM during the first nine months of 2003
and increased sales of products with communications applications to distribution
customers. The positive impact of currency translation, NORCOM and increased
distribution sales had on the revenue comparison was partially offset by capital
spending reductions by the major communications companies.
Operating loss increased to $8.9 million for the nine months ended September 30,
2003 from $0.7 million for the nine-month period ended September 30, 2002 due
primarily to lower sales volume, higher product costs resulting from rising
copper and petroleum-based commodities prices, increased unabsorbed production
costs resulting from actions taken to reduce inventory levels, an aggregate
nonrecurring $1.3 million favorable settlement from class action litigation
regarding the pricing of copper futures recognized in the first and third
quarters of 2002 and increased production, selling, general and administrative
costs and expenses due to the acquisition of NORCOM in the fourth quarter of
2002 and the transfer of the Company's Ft. Mill, South Carolina manufacturing
facility from the Electronics segment to this segment effective July 1, 2003.
These negative factors were partially offset by the current-year impact of cost
reduction initiatives related to certain material, labor, manufacturing overhead
and selling, general and administrative expenditures and bad debt expense
totaling $0.5 million recognized in the second and third quarters of 2002.
Operating loss as a percent of revenues from external customers increased to
(4.3)% in the nine months ended September 30, 2003 from (0.4)% in the same
period of 2002 due to the previously mentioned items as well as a shift in
demand toward less profitable, lower pair-count cable and a greater percentage
of distribution business which is currently less profitable. The Communications
segment also incurred manufacturing inefficiencies due to the large swing in
customer demand.
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company's sources of cash liquidity include cash and cash equivalents, cash
from operations and amounts available under uncommitted borrowing arrangements.
The Company believes that these sources are sufficient to fund the current
requirements for working capital, capital expenditures, dividends, and other
financial commitments.
-25-
The following table summarizes the Company's cash flows from operating,
investing and financing activities as reflected in the Consolidated Cash Flow
Statements.
SUMMARIZED CASH FLOW STATEMENTS
Nine Months Ended September 30, 2003 2002
- ---------------------------------------------------------------------------------------------
(in thousands)
Net cash provided by (used in)
Operating activities $ 58,934 $ 66,454
Investing activities (13,835) (26,326)
Financing activities (3,655) (33,261)
Effect of exchange rate changes on cash and cash equivalents 1,277 (52)
- ---------------------------------------------------------------------------------------------
Increase in cash and cash equivalents $ 42,721 $ 6,815
- ---------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
Nine Months Ended September 30, 2003 2002
- ---------------------------------------------------------------------------------------------
(in thousands)
Net income/(loss) $ (2,218) $ 8,627
Depreciation and amortization 26,865 29,356
Asset impairment charges 352 -
Retirement savings plan contributions 2,811 -
Stock compensation 1,253 767
Decrease/(increase) in current and deferred income taxes, net (3,485) 17,797
Decrease in other operating assets and liabilities, net 33,356 9,907
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 58,934 $ 66,454
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities in the first nine months of 2003
totaled $58.9 million and included a $29.9 million net decrease in operating
assets and liabilities. This net decrease in operating assets and liabilities
resulted primarily from decreased inventories, receivables and other net
operating assets and liabilities partially offset by decreased accounts payable
and accrued liabilities and increased income taxes receivable.
In 2003, the Company elected to fund certain contributions to one of its savings
plans with common stock held in treasury rather than with cash.
Net cash provided by operating activities in the first nine months of 2002
totaled $66.5 million and included a $27.7 million net decrease in operating
assets and liabilities. This net decrease in operating assets and liabilities
resulted from increased accounts payable and accrued liabilities, decreased
inventories and receipt of income tax refunds partially offset by increased
receivables.
NET CASH USED IN INVESTING ACTIVITIES
Nine Months Ended September 30, 2003 2002
- ---------------------------------------------------------------------------------------------
(in thousands)
Capital expenditures $(13,994) $(26,493)
Proceeds from disposal of long-lived assets 159 167
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities $(13,835) $(26,326)
- ---------------------------------------------------------------------------------------------
-26-
CAPITAL EXPENDITURES
Nine Months Ended September 30, 2003 2002
- ---------------------------------------------------------------------------------------------
(in thousands)
Capacity modernization and enhancement $ 11,889 $ 20,057
Capacity expansion 332 2,064
Other 1,773 4,372
- ---------------------------------------------------------------------------------------------
$ 13,994 $ 26,493
- ---------------------------------------------------------------------------------------------
Capital expenditures during the nine months ended September 30, 2003 and 2002
represented 2.3% and 4.3%, respectively, of revenues for the same periods.
Investment during both the first nine months of 2003 and 2002 was utilized
principally for maintaining and enhancing existing production capabilities.
NET CASH USED IN FINANCING ACTIVITIES
Nine Months Ended September 30, 2003 2002
- ---------------------------------------------------------------------------------------------
(in thousands)
Net payments under long-term credit facility and credit agreements $ - $(30,717)
Proceeds from the exercise of stock options 85 1,198
Proceeds from employee stock purchase plan settlement 61 -
Cash dividends paid (3,801) (3,742)
- ---------------------------------------------------------------------------------------------
Net cash used in financing activities $ (3,655) $(33,261)
- ---------------------------------------------------------------------------------------------
During the nine months ended September 30, 2003, dividends of $0.15 per share
were paid to shareholders.
During the nine months ended September 30, 2002, the Company repaid $30.7
million of debt. The repayments were funded primarily by cash flow from
operations, which included $13.0 million from federal income tax refunds.
Dividends of $0.15 per share were paid to shareholders for the same period.
Working Capital
The following table summarizes the Company's working capital position at
September 30, 2003 and December 31, 2002.
SEPTEMBER 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------
(in thousands, except current ratio)
Current assets
Cash and cash equivalents $ 62,130 $ 19,409
Receivables 112,287 109,180
Inventories 130,169 159,817
Income taxes receivable 8,117 2,428
Deferred income taxes 19,258 15,097
Other current assets 5,694 7,818
- ------------------------------------------------------------------------------------------------------
Total current assets $ 337,655 $ 313,749
- ------------------------------------------------------------------------------------------------------
Total current assets less cash and cash equivalents $ 275,525 $ 294,340
Current liabilities
Accounts payable and accrued liabilities $ 110,705 $ 124,968
Current maturities of long-term debt 66,921 -
- ------------------------------------------------------------------------------------------------------
Total current liabilities $ 177,626 $ 124,968
- ------------------------------------------------------------------------------------------------------
Working capital(1) $ 97,899 $ 169,372
Current ratio(2) 1.55 2.36
- ------------------------------------------------------------------------------------------------------
(1) Total current assets less cash and cash equivalents and total current
liabilities
(2) Total current assets less cash and cash equivalents divided by total
current liabilities
-27-
\
Current assets less cash and cash equivalents decreased $18.8 million, or 6.4%,
from $294.3 million at December 31, 2002 to $275.5 million at September 30,
2003. Receivables increased $3.1 million during the nine months ended September
30, 2003, despite the receipt of $12.5 million in minimum requirements contract
compensation in January 2003, due to the impact of currency translation on
receivables denominated in currencies other than the United States dollar and
the payment of annual sales incentive rebates to customers during the first
quarter of 2003 that were originally reported as an allowance against
receivables. Inventories decreased $29.6 million due to the impact of focused
inventory reduction initiatives in both segments partially offset by the impact
of currency translation. Income taxes receivable increased $5.7 million due to
the Company's loss before income taxes for the nine months ended September 30,
2003. Other current assets decreased $2.1 million due to the amortization of
prepaid insurance and other prepaid costs and the sale of employee houses
previously purchased by the Company as part of its employee relocation program
partially offset by the impact of currency translation and the transfer of the
fair value of interest rate swap contracts that mature within one year from
long-lived assets.
Current liabilities increased $52.7 million, or 42.1%, from $125.0 million at
December 31, 2002 to $177.6 million at September 30, 2003. Accounts payable and
accrued liabilities decreased due primarily to severance payments totaling $15.3
million during the first nine months of 2003 partially offset by the impact of
currency translation on accounts payable and accrued liabilities denominated in
currencies other than the United States dollar. In regard to the severance
payments, please refer to Note 6 of the Financial Statements. Current maturities
of long-term debt increased $66.9 million reflecting the payment due on
September 1, 2004 of the Senior Notes, Series 1999-A.
Long-lived Assets
The following table summarizes the Company long-lived assets at September 30,
2003 and December 31, 2002.
SEPTEMBER 30, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------
(in thousands)
Property, plant and equipment $ 327,176 $ 337,196
Goodwill and other intangibles 80,639 79,588
Other long-lived assets 6,262 13,006
- ------------------------------------------------------------------------------------------------------
$ 414,077 $ 429,790
- ------------------------------------------------------------------------------------------------------
Long-lived assets decreased $15.7 million, or 3.7%, from $429.8 million at
December 31, 2002 to $414.1 million at September 30, 2003.
Property, plant and equipment includes the acquisition cost less accumulated
depreciation of the Company's land and land improvements, buildings and
leasehold improvements and machinery and equipment. Property, plant and
equipment decreased $10.0 million during the first nine months of 2003 due
mainly to depreciation and the additional impairment related to the planned
manufacturing facility closing in Germany.
Goodwill and other intangibles includes goodwill, defined as the unamortized
difference between the aggregate purchase price of acquired businesses taken as
a whole and the fair market value of the identifiable net assets of those
acquired businesses, and the preliminary fair value of a major customer
relationship acquired in the NORCOM acquisition. Goodwill and other intangibles
increased $1.1 million during the first nine months of 2003 due primarily to the
positive effect that currency exchange rates had on goodwill denominated in
currencies other than the United States dollar. This positive effect more than
offset amortization of the customer relationship intangible.
Included in other long-lived assets are unamortized prepaid service fees
associated with the Company's borrowing arrangements, long-lived pension fund
prepayments and the carrying value of steel reels used to store and transport
communications cable. Other long-lived assets decreased $6.7 million during the
first nine months of 2003 due to the write-off of unamortized prepaid service
fees associated with the Company's terminated credit agreement and a reduction
in long-lived pension fund prepayments to recognize pension costs in accordance
with Statement of Financial Accounting Standards (SFAS) No. 87, Employers'
Accounting for Pensions and the transfer of the fair value of interest rate swap
contracts that mature within one year to current assets.
-28-
Capital Structure
SEPTEMBER 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------------
AMOUNT PERCENT Amount Percent
- --------------------------------------------------------------------------------------------------
(in thousands, except % data)
Current maturities of long-term debt $ 66,921 12.8% $ - -%
Long-term debt 136,000 26.2% 203,242 39.8%
- --------------------------------------------------------------------------------------------------
Total debt 202,921 39.0% 203,342 39.8%
Stockholders' equity 316,886 61.0% 307,195 60.2%
- --------------------------------------------------------------------------------------------------
$519,807 100.0% $510,437 100.0%
- --------------------------------------------------------------------------------------------------
The Company's capital structure consists primarily of current maturities of
long-term debt, long-term debt and stockholders' equity. The capital structure
increased $9.4 million due to an increase in stockholders' equity that was
partially offset by a marginal reduction in long-term debt.
The Company had privately-placed debt of $200.0 million outstanding at September
30, 2003. Details regarding maturities and interest rates are shown below.
Principal Effective
Balance Maturity Date Interest Rate
- ----------------------------------------------------------------------------
(in thousands, except % data)
Senior Notes, Series 1997-A(1) $ 75,000 08/11/2009 6.92%
Senior Notes, Series 1999-A(2) 64,000(2) 09/01/2004 7.60%
Senior Notes, Series 1999-B 44,000 09/01/2006 7.75%
Senior Notes, Series 1999-C 17,000 09/01/2009 8.06%
- ----------------------------------------------------------------------------
(1) The Senior Notes, Series 1997-A include an amortizing maturity feature.
The Company is required to repay $15 million in principal per annum
beginning August 11, 2005.
(2) The Senior Notes, Series 1999-A, mature within one year of the balance
sheet date. Accordingly, they have been reclassified as current
maturities of long-term debt in the financial records as of September
1, 2003. These notes also serve as the notional principal on certain
outstanding interest rate swap agreements. Therefore, they were
recorded in the financial records in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activity, at a fair
market value as of September 30, 2003 of $66.9 million.
The agreements for these private placements contain affirmative and negative
covenants including maintenance of minimum net worth and maintenance of a
maximum ratio of debt to total capitalization.
The Company entered into a credit agreement with a group of 6 banks on October
9, 2003 ("Credit Agreement"). The Credit Agreement provides for a secured,
variable-rate and revolving credit facility not to exceed $75 million expiring
in June 2006. In general, the Company's assets in the United States, other than
real property, secure any borrowing under the Credit Agreement. The amount of
any such borrowing is subject to a borrowing base comprised of the Company's
receivables and inventories located in the United States. A fixed charge
coverage ratio covenant becomes applicable if the Company's excess borrowing
availability falls below $25.0 million. The Company's borrowing capacity under
the Credit Agreement as of October 9, 2003 was $62.8 million. The Company does
not anticipate a need during the year ending December 31, 2003 for funds
available under the Credit Agreement to meet its capital expenditure, dividend
and working capital requirements.
At September 30, 2003, the Company had unsecured, uncommitted arrangements with
4 banks under which it could borrow up to $28.5 million at prevailing interest
rates. There were no outstanding borrowings under these arrangements at
September 30, 2003.
-29-
The Company manages its debt portfolio by using interest rate swap agreements to
achieve an overall desired position of fixed and floating rates. At September
30, 2003, the Company was party to interest rate swap agreements relating to
7.60% medium-term notes that mature in 2004. The swaps convert a notional amount
of $64.0 million from fixed rates to floating rates and mature in 2004. These
arrangements have been designated and qualify as fair value hedges of the
associated medium-term notes in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. Based on current interest rates
for similar transactions, the fair value of the Company's interest rate swap
agreements at September 30, 2003 was $2.9 million. Credit and market risk
exposures on these agreements are limited to the net interest differentials. Net
interest differentials earned from the interest rate swaps of $0.5 million
pretax, or $0.01 per diluted share, and $1.4 million pretax, or $0.03 per
diluted share, were recorded as reductions to interest expense for the three-
and nine-month periods ended September 30, 2003. Net interest differentials
earned from the interest rate swaps reduced the Company's average interest rate
on long-term debt by 0.72 and 0.80 percentage points for the three- and
nine-month periods ended September 30, 2003. The Company is exposed to credit
loss in the event of nonperformance by counterparties on the agreements, but
does not anticipate nonperformance by any of the counterparties.
Borrowings have the following scheduled maturities.
Payments Due by Period
- ------------------------------------------------------------------------------------------------------------------
Less than 1-2 3-4 After
September 30, 2003 Total 1 year years years 4 years
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
Long-term debt (1) $200,000 $ 64,000 $15,000 $74,000 $47,000
- ------------------------------------------------------------------------------------------------------------------
(1) The Senior Notes, Series 1999-A, mature within one year of the balance
sheet date. Accordingly, they have been reclassified as current
maturities of long-term debt in the financial records as of September
1, 2003. These notes also serve as the notional principal on certain
outstanding interest rate swap agreements. Therefore, they were
recorded in the financial records in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activity, at a fair
market value as of September 30, 2003 of $66.9 million.
Other Commercial Commitments
Amount of Commitment Expiration Per Period
- ------------------------------------------------------------------------------------------------------------------
Less than 1-3 4-5 After
September 30, 2003 Total 1 year years years 5 years
- ------------------------------------------------------------------------------------------------------------------
(in thousands)
Lines of credit(1) $ - $ - $ - $ - $ -
Standby letters of credit 4,020 4,020 - - -
Guarantees 495 495 - - -
Standby repurchase obligations - - - - -
Other commercial commitments - - - - -
- ------------------------------------------------------------------------------------------------------------------
Total commercial commitments $ 4,515 $ 4,515 $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------
(1) The Company entered into a credit agreement with a group of 6 banks on
October 9, 2003 ("Credit Agreement"). The Credit Agreement provides for
a secured, variable-rate and revolving credit facility not to exceed
$75 million expiring in June 2006. The amount of any borrowing under
the Credit Agreement is subject to a borrowing base comprised of the
Company's receivables and inventories located in the United States. The
Company's borrowing capacity under the Credit Agreement as of October
9, 2003 was $62.8 million.
Stockholders' equity increased by $9.7 million, or 3.2%, during the first nine
months of 2003 due primarily to a $5.7 million reduction of common stock held in
treasury as a result of stock compensation plans settlement activity and
employer contributions to the Company's retirement savings plan and an $11.5
million reduction of accumulated other comprehensive loss resulting from the
positive effect of currency exchange rates on financial statement translation
during the first nine months of 2003. These positive factors were partially
offset by the net loss for the nine months ended September 30, 2003 of $2.2
million, dividends of $3.8 million, a decrease of $1.4 million in additional
paid-in capital resulting from the use of common stock held in treasury for
stock compensation plans settlement activity and retirement savings plan
employer contributions and an increase of $0.1 million in unearned deferred
compensation due to restricted shares awarded in the first quarter of 2003.
-30-
OFF-BALANCE SHEET ARRANGEMENTS
The Company was not a party to any of the following types of off-balance sheet
arrangements at September 30, 2003:
- - Guarantee contracts or indemnification agreements that contingently
require the Company to make payments to the guaranteed or indemnified
party based on changes in an underlying asset, liability or equity
security of the guaranteed or indemnified party;
- - Guarantee contracts that contingently require the Company to make
payments to the guaranteed party based on another entity's failure to
perform under an obligating agreement;
- - Indirect guarantees under agreements that contingently require the
Company to transfer funds to the guaranteed party upon the occurrence
of specified events under conditions whereby the funds become legally
available to creditors of the guaranteed party and those creditors may
enforce the guaranteed party's claims against the Company under the
agreement;
- - Retained or contingent interests in assets transferred to an
unconsolidated entity or similar arrangements that serve as credit,
liquidity or market risk support to that entity for such assets;
- - Derivative instruments that are indexed to the Company's common or
preferred stock and classified as stockholders' equity under accounting
principles generally accepted in the United States; and
- - Material variable interests held by the Company in unconsolidated
entities that provide financing, liquidity, market risk or credit risk
support to the Company, or engage in leasing, hedging or research and
development services with the Company.
CRITICAL ACCOUNTING POLICIES
During the three- and nine-month periods ended September 30, 2003:
- - The Company did not change any of its existing critical accounting
policies and did not adopt any new critical accounting policies;
- - No existing accounting policies became critical accounting policies due
to an increase in the materiality of associated transactions or changes
in the circumstances to which associated judgments and estimates
relate; and
- - There were no significant changes in the manner in which critical
accounting policies were applied or in which related judgments and
estimates were developed.
OUTLOOK
The Company anticipates that market conditions for its Communications segment
will include excess production capacity, pricing pressure on products with
communications applications and continued utilization of thinly capitalized
value-added resellers for product distribution for the remaining months in 2003
and throughout 2004. In addition, the Communications segment operations in
Europe are largely dependent on one customer in the United Kingdom. The Company
successfully renewed its supply agreement with that major communications
customer in the United Kingdom during the third quarter of 2003. Management
anticipates that revenues generated by the Company's Communications segment in
the fourth quarter of 2003 will be sequentially lower than current quarter
revenues. However, management also believes, given the positive impact of three
months of revenues generated by NORCOM in the fourth quarter of 2003 as compared
to only two months of revenues generated by NORCOM in the fourth quarter of
2002, slightly improved orders from the segment's major communications customers
and additional distribution revenues, that revenues generated by the
Communications segment in the fourth quarter of 2003 should be higher than
revenues generated in the fourth quarter of 2002.
Market conditions for the Company's Electronics segment are expected to remain
constrained during the remaining months in 2003 and will also include excess
production capacity. Management anticipates that revenues generated by the
Electronics segment in the fourth quarter of 2003 will decrease slightly from
revenues generated in the fourth quarter of 2002. However, based on modestly
stronger order data early in the fourth quarter of 2003, management anticipates
a small sequential increase in revenues generated by the Electronics segment
from the current quarter.
-31-
Consolidated revenues generated by the Company in the fourth quarter of 2003 are
expected to increase slightly over consolidated revenues generated in the fourth
quarter of 2002. They are, however, expected to decrease slightly from
consolidated revenues generated during the third quarter of 2003. For both
segments, the cost-saving initiatives taken during 2002, coupled with continued
cost reduction efforts such as personnel reductions, product line curtailment
and manufacturing facility consolidation in 2003, reflect the Company's efforts
to adjust its cost structure to market demand.
The Company will no longer receive "take-or-pay" compensation from the major
private-label customer as the applicable minimum requirements contract
terminated in 2002. The Company will continue to receive "sales incentive"
compensation through 2005 from this same customer under the second minimum
requirements contract should the customer fail to meet purchasing targets.
However, purchase requirements after 2002 are approximately 20% of targets in
the first contract. Under the second contract, the customer is required to pay
up to $3.0 million per annum to the Company through 2005. This amount could be
reduced to the extent of gross margin generated from the customer's purchases of
certain products from the Company during each year through 2005. The Company
estimates it will recognize $2.7 million of "sales incentive" compensation under
the contract during the fourth quarter of 2003.
The Company recognized $19.7 million in severance and other benefits costs in
the fourth quarter of 2002 and $2.5 million in severance and other benefits
costs in the second quarter of 2003 related to product line curtailment and
planned manufacturing facility consolidation during 2003. The Company
anticipates paying these costs in 2003 ($15.1 million of which the Company had
paid as of September 30, 2003). Annual savings of at least $10.0 million are
anticipated as a result of the product line curtailment and planned
manufacturing facility consolidation. Most of the savings will be achieved after
completion of the manufacturing facility consolidations late in 2003.
The Company recognized $2.4 million of severance and other benefits costs in the
third quarter of 2003 related to personnel reductions within its Electronics
segment. These costs had a negative effect on operating results in 2003 and will
have a negative effect on cash flow in both 2003 and 2004. The Company will
recognize additional costs in the fourth quarter of 2003 associated with
on-going restructuring activities.
The Company is currently negotiating the sale of part of its business in Germany
to a management-led buyout group. If the buyout does not occur, the Company
would recognize severance and other related benefits costs of approximately $2.8
million for an additional group of German employees. Even if the buyout does
occur, the Company will retain liability for severance and other related
benefits in the event the buyout group terminates transferred employees within
three years of the buyout date. The severance and other related benefits amounts
are reduced based upon the duration of employment with the buyout group.
The Company sold certain fully-impaired equipment and technology used for the
production of deflection coils during the second quarter of 2003 and received a
cash payment of $1.3 million. The Company cannot recognize a gain on the sale of
the equipment until certain technical conditions of the sale are fulfilled. If
the technical conditions of the sale are fulfilled, the sale would have a
positive effect on operating results in the period the technical conditions are
fulfilled. If the technical conditions of the sale are not fulfilled, the
Company will return the cash to the buyer and, in turn, accept return delivery
of the equipment and technology.
The Company anticipates contributing cash of $7.6 million during 2003 ($4.7
million of which the Company had contributed as of September 30, 2003) and $15.0
million during 2004 to its defined benefit pension plans.
The Company's supply agreements with two major communications customers -- one
in the United States and one in Canada -- are up for renewal in 2003. The
Company anticipates maintaining its relationship with each customer; however,
there can be no assurance this will occur. Should the Company lose the supply
agreement with the Canadian customer, it would likely not be required to pay
certain contingent acquisition price liabilities currently recorded in the
financial statements.
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The Company anticipates economic softness will continue throughout 2003 for
some, perhaps most, geographic and market segments. Increases in revenues and
operating income will be largely dependent on the level of investment by the
technology and communications industries and on the timing of any general
economic recovery. Because the Company is now experiencing some savings from its
many restructuring actions, management expects the trend in the underlying, or
recurring, earnings will continue to improve.
FORWARD-LOOKING STATEMENTS
The statements set forth in this Quarterly Report on Form 10-Q other than
historical facts, including those noted in the "Outlook" section, are
forward-looking statements made in reliance upon the safe harbor of the Private
Securities Litigation Reform Act of 1995. As such, they are based on current
expectations, estimates, forecasts and projections about the industries in which
the Company operates, general economic conditions, and management's beliefs and
assumptions. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions, which are difficult to
predict. As a result, the Company's actual results may differ materially from
what is expected or forecasted in such forward-looking statements. The Company
undertakes no obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise, and disclaims any
obligation to do so.
The Company's actual results may differ materially from such forward-looking
statements for the following reasons: unfavorable economic conditions in the
United States, Europe and parts of Asia (and the impact such conditions may have
on the Company's sales); increasing price, product and service competition from
United States and international competitors (including new entrants); the credit
worthiness of the Company's customers (including the collectibility of
receivables resulting from sales by the Communications segment to VARs); the
Company's continued ability to introduce, manufacture and deploy competitive new
products and services on a timely, cost-effective basis; the ability to
successfully integrate the operations and businesses of acquired companies
(including NORCOM and, in particular, the Company's ability to retain NORCOM's
primary customers); the ability to transfer production to new or existing
facilities; developments in technology; the threat of displacement from
competing technologies (including wireless and fiber optic technologies); demand
and acceptance of the Company's products by customers and end users; changes in
raw material costs and availability; changes in foreign currency exchange rates;
the pricing of the Company's products; changes in regulation affecting the
business of communications companies and other customers; the success of
implementing cost-saving programs and initiatives; reliance on large customers
(particularly, the reliance of the Communications segment on sales to a limited
number of large LECs in the United States and sales to two major international
communications companies -- one in the United Kingdom, the other in Canada); the
Company's ability to successfully renew supply agreements with major
communications customers in the United States and Canada; the Company's ability
to complete current product curtailment and manufacturing facility consolidation
programs at anticipated costs; the Company's ability to successfully negotiate
collective bargaining agreement renewals with organized personnel; the threat of
war and terrorist activities; general industry and market conditions and growth
rates; and other factors noted in the Company's Annual Report on Form 10-K for
2002 and other Securities Exchange Act of 1934 filings.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risks relating to the Company's operations result primarily from interest
rates, foreign exchange rates, certain commodity prices and concentrations of
credit. The Company manages its exposure to these and other market risks through
regular operating and financing activities, and on a limited basis, through the
use of derivative financial instruments. The Company intends to use such
derivative financial instruments as risk management tools and not for
speculative investment purposes. Quantitative and Qualitative Disclosures About
Market Risks in the Company's Annual Report on Form 10-K for 2002 provides more
information as to the types of practices and instruments used to manage risk.
The following provides a discussion of material changes to the Company's
exposure to market risk since December 31, 2002.
Interest Rate Risk
There have been no material changes to the Company's exposure to interest rate
risk since December 31, 2002.
Foreign Exchange Rate Risk
There have been no material changes to the Company's exposure to foreign
exchange rate risk since December 31, 2002.
Commodity Price Risk
There have been no material changes to the Company's exposure to commodity price
risk since December 31, 2002.
Credit Risk
There have been no material changes to the Company's exposure to credit risk
since December 31, 2002.
ITEM 4: DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures were effective as of the end of
the period covered by this report. There was no change in the Company's internal
control over financial reporting during the Company's most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit 31.1 Certificate of the Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certificate of the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certificate of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certificate of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
On July 24, 2003, the Company furnished a Current Report on Form 8-K
relating to the announcement of the Company's financial results for the
three-month period ended June 30, 2003.
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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.
BELDEN INC.
Date: November 12, 2003 By: /s/ C. Baker Cunningham
-----------------------------------
C. Baker Cunningham
Chairman of the Board, President
and Chief Executive Officer
Date: November 12, 2003 By: /s/ Richard K. Reece
-----------------------------------
Richard K. Reece
Vice President, Finance
and Chief Financial Officer
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