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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
COMMISSION FILE NO. 001-12561
----------------
BELDEN CDT INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 36-3601505
(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)
(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 requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 9, 2005
----- --------------------------
Common Stock, $0.01 Par Value 47,110,526
================================================================================
Exhibit Index on Pages 45 Page 1 of 45
-1-
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BELDEN CDT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
2005 2004
----------- ------------
(in thousands) (UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 190,259 $ 188,798
Receivables 205,706 174,554
Inventories 234,385 227,034
Income taxes receivable 1,733 194
Deferred income taxes 16,129 15,911
Other current assets 8,042 8,689
Current assets of discontinued operations 22,676 34,138
----------- -----------
Total current assets 678,930 649,318
Property, plant and equipment, less accumulated depreciation 327,739 338,247
Goodwill, less accumulated amortization 284,461 286,163
Other intangibles, less accumulated amortization 76,011 78,266
Other long-lived assets 5,109 6,460
Long-lived assets of discontinued operations 34,338 36,984
----------- -----------
$ 1,406,588 $ 1,395,438
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 198,353 $ 185,035
Current maturities of long-term debt 15,666 15,702
Current liabilities of discontinued operations 14,744 17,534
----------- -----------
Total current liabilities 228,763 218,271
Long-term debt 232,563 232,823
Postretirement benefits other than pensions 30,457 30,089
Deferred income taxes 74,641 68,158
Other long-term liabilities 21,027 25,340
Long-term liabilities of discontinued operations 1,475 1,516
Minority interest 8,536 9,241
Stockholders' equity
Common stock 503 502
Additional paid-in capital 534,429 531,984
Retained earnings 263,107 252,114
Accumulated other comprehensive income 13,326 27,862
Unearned deferred compensation (1,923) (2,462)
Treasury stock (316) -
----------- -----------
Total stockholders' equity 809,126 810,000
----------- -----------
$ 1,406,588 $ 1,395,438
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements
-2-
BELDEN CDT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
(in thousands, except per share data) 2005 2004
- ------------------------------------- -------- --------
Revenues $309,111 $170,103
Cost of sales 243,980 135,968
-------- --------
Gross profit 65,131 34,135
Selling, general and administrative expenses 48,930 25,213
-------- --------
Operating earnings 16,201 8,922
Minority interest 167 -
Interest expense 2,920 3,166
-------- --------
Income from continuing operations before taxes 13,114 5,756
Income tax expense 4,590 1,960
-------- --------
Income from continuing operations 8,524 3,796
Loss from discontinued operations, net of tax benefit of $957 and $841,
respectively (1,881) (1,496)
Gain on disposal of discontinued operations, net of tax expense of $3,600 6,400 -
-------- --------
Net income $ 13,043 $ 2,300
======== ========
Weighted average number of common shares and equivalents:
Basic 47,007 25,462
Diluted 53,684 25,811
======== ========
Basic income/(loss) per share:
Continuing operations $ .18 $ .15
Discontinued operations (.04) (.06)
Disposal of discontinued operations .14 -
Net income per share .28 .09
======== ========
Diluted income/(loss) per share:
Continuing operations $ .17 $ .15
Discontinued operations (.03) (.06)
Disposal of discontinued operations .12 -
Net income per share .26 .09
======== ========
Dividends declared per share $ .05 $ .05
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements
-3-
BELDEN CDT INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
(UNAUDITED)
Three Months Ended March 31,
(in thousands) 2005 2004
- --------------------------------------------------------------------------------- --------- ---------
Cash flows from operating activities
Net income $ 13,043 $ 2,300
Adjustments to reconcile net income to net cash used for operating activities
Depreciation and amortization 9,730 6,466
Deferred income tax benefit 6,265 (34)
Retirement savings plan contributions - 1,089
Employee stock purchase plan settlement - 56
Share-based compensation 223 1,752
Gain on disposal of tangible assets (6,400) -
Changes in operating assets and liabilities (1)
Receivables (25,961) (17,380)
Inventories (8,880) (10,266)
Accounts payable and accrued liabilities 880 11,664
Current and deferred income taxes, net (6,016) 2,097
Other assets and liabilities, net 13,554 (6,377)
-------- --------
Net cash used for operating activities (3,562) (8,633)
Cash flows from investing activities
Capital expenditures (5,935) (1,899)
Proceeds from disposal of tangible assets 12,833 252
-------- --------
Net cash provided by investing activities 6,898 (1,647)
Cash flows from financing activities
Payments on borrowing arrangements (169) -
Proceeds from exercise of stock options 2,060 43
Cash dividends paid (2,364) (1,288)
-------- --------
Net cash used for financing activities (473) (1,245)
Effect of exchange rate changes on cash and cash equivalents (1,402) (85)
-------- --------
Increase/(decrease) in cash and cash equivalents 1,461 (11,610)
Cash and cash equivalents, beginning of period 188,798 94,955
-------- --------
Cash and cash equivalents, end of period $190,259 $ 83,345
======== ========
Supplemental cash flow information
Income tax refunds received $ 2,079 $ 21
Income taxes paid (1,749) (378)
Interest paid, net of amount capitalized (7,336) (7,466)
======== ========
(1) Net of the effects of exchange rate changes and acquired businesses.
The accompanying notes are an integral part of these Consolidated Financial
Statements
-4-
BELDEN CDT INC. AND SUBSIDIARIES
CONSOLIDATED STOCKHOLDERS' EQUITY STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
Accumulated
Unearned Other
Common Paid-In Retained Treasury Deferred Comprehensive
Stock Capital Earnings Stock Compensation Loss Total
------ -------- -------- -------- ------------ ------------- ---------
(in thousands)
Balance at December 31, 2003 $ 262 $ 39,022 $244,217 $ (7,722) $(1,700) $ 7,461 $ 281,540
Net income 2,300 2,300
Foreign currency translation (471) (471)
Minimum pension liability 18 18
------ -------- -------- -------- ------- ------- ---------
Comprehensive income 1,847
Issuance of stock
Stock options 3 40 43
Stock compensation 348 1,025 (1,650) (277)
Retirement savings plan 276 813 1,089
Employee stock purchase plans 2 54 56
Amortization of unearned deferred
compensation 379 379
Cash dividends ($.05 per share) (1,288) (1,288)
------ -------- -------- -------- ------- ------- ---------
Balance at March 31, 2004 $ 262 $ 39,651 $245,229 $ (5,790) $(2,971) $ 7,008 $ 283,389
====== ======== ======== ======== ======= ======= =========
Balance at December 31, 2004 $ 502 $531,984 $252,114 $ - $(2,462) $27,862 $ 810,000
Net income 13,043 13,043
Foreign currency translation (14,643) (14,643)
Minimum pension liability 107 107
------ -------- -------- -------- ------- ------- ---------
Comprehensive loss (1,493)
Issuance/(forfeiture) of stock
Exercise of stock options 1 2,059 2,060
Stock compensation (316) (316)
Amortization of unearned deferred
compensation 539 539
Cash dividends ($.05 per share) (2,364) (2,364)
Merger between Belden and CDT 386 314 700
------ -------- -------- -------- ------- ------- ---------
Balance at March 31, 2005 $ 503 $534,429 $263,107 $ (316) $(1,923) $13,326 $ 809,126
====== ======== ======== ======== ======= ======= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements
-5-
BELDEN CDT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: FINANCIAL STATEMENT PRESENTATION
Basis of Presentation
The accompanying Consolidated Financial Statements include Belden CDT Inc. and
all of its subsidiaries (the COMPANY). The Company, formerly called Cable Design
Technologies Corporation (CDT), merged with Belden Inc. (BELDEN) and changed its
name to Belden CDT Inc. on July 15, 2004. In accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, the merger was treated as a reverse acquisition under the purchase
method of accounting. Belden was considered the acquiring enterprise for
financial reporting purposes. The results of operations of CDT are included in
the Company's Consolidated Statements of Operations from July 16, 2004. All
significant intercompany accounts and transactions are eliminated in
consolidation. The financial information presented as of any date other than
December 31, 2004 and December 31, 2003 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, 2004.
Foreign Currency Translation
For international operations with functional currencies other than the United
States dollar, asset and liability accounts are translated at current exchange
rates, and income and expenses are translated using average exchange rates.
Resulting translation adjustments, as well as gains and losses from certain
affiliate transactions, are reported in accumulated other comprehensive
income/(loss), a separate component of stockholders' equity. Exchange gains and
losses on transactions are included in operating earnings/(loss).
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 2004 Consolidated Financial
Statements in order to conform to the 2005 presentation.
-6-
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Share-Based Payments
During the three months ended March 31, 2005 and 2004, the Company sponsored two
stock compensation plans -- the Belden 2003 Long-Term Incentive Plan and the
CDT 2001 Long-Term Performance Incentive Plan (together, the ACTIVE INCENTIVE
PLANS). During the three months ended March 31, 2004, the Company also
sponsored the Belden 2003 Employee Stock Purchase Plan and four additional
stock compensation plans -- the Belden 1994 Incentive Plan, the CDT 1999
Long-Term Performance Incentive Plan, the CDT Supplemental Long-Term
Performance Incentive Plan and the CDT Long-Term Performance Incentive Plan
(all together, the INACTIVE INCENTIVE PLANS) along with the Active Incentive
Plans.
The Belden 1994 Incentive Plan expired by its own terms in October 2003 and no
future awards are available under this plan. There are no future awards
available under the CDT 1999 Long-Term Performance Incentive Plan, the
CDT Supplemental Long-Term Performance Incentive Plan or the CDT Long-Term
Performance Incentive Plan. Pursuant to the merger agreement between Belden and
CDT, the Belden Inc. 2003 Employee Stock Purchase Plan was terminated on July
15, 2004. Options and stock purchase rights granted under these plans affected
pro forma operating results for the three months ended March 31, 2004.
Under both the Active Incentive Plans and the Inactive 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 Active Incentive Plans or the Inactive 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. Compensation costs associated
with each restricted stock grant are amortized to expense over the grant's
vesting period.
Under the Belden 2003 Employee Stock Purchase Plan, eligible employees received
the right to purchase 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 accounted for these purchase rights using the intrinsic value method
provided by APB No. 25. Accordingly, no compensation cost was recognized for
purchase rights granted under the Belden 2003 Employee Stock Purchase Plan.
-7-
The Company adopted the disclosure rules under 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 March 31,
(in thousands, except per share amounts) 2005 2004
- ---------------------------------------- ------- --------
AS REPORTED
Stock-based employee compensation cost, net of tax $ 332 $ 233
Net income 13,043 2,303
Basic net income per share .28 .09
Diluted net income per share .26 .09
PRO FORMA
Stock-based employee compensation cost, net of tax $ 334 $ 535
Net income 13,041 2,001
Basic net income per share .28 .08
Diluted net income per share .26 .08
The fair value of common stock options outstanding under the Active Incentive
Plans and the Inactive Incentive Plans as well as the fair value of stock
purchase rights outstanding under the Belden 2003 Stock Purchase Plan were
estimated at the date of grant using the Black-Scholes option-pricing model.
No stock purchase rights were granted under the Belden 2003 Stock Purchase Plan
during the three months ended March 31, 2005 or 2004. For the three months ended
March 31, 2005 the weighted average per share fair value of options granted
under the Active Incentive Plans and the weighted average assumptions used to
determine the fair values of the options granted during that period are
presented in the following table. For the three months ended March 31, 2004, the
weighted average per share fair value of options granted under both the Active
Incentive Plans and the Inactive Incentive Plans as well as the weighted average
assumptions used to determine the fair value of the options granted during that
period are also presented in the following table.
Three months ended March 31, 2005 2004
- ---------------------------- ------- -------
Fair value of options granted $ 5.00 $ 3.53
------- -------
Dividend yield 6.18% 7.34%
Expected volatility 38.39% 39.70%
Expected life (in years) 7.00 7.00
Risk free interest rate 4.40% 3.55%
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. Because of 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.
-8-
On March 30, 2005, the Company granted 550,000 stock options to a number of its
employees. Grant recipients may purchase shares of the Company's common stock at
a share price of $22.665. If the recipient remains an employee of the Company,
the recipient may exercise one-third of the granted options on the first, second
and third anniversaries of the grant date. Additional provisions would apply in
the event of retirement, disability, death, or termination of employment.
Shipping and Handling Costs
In accordance with Emerging Issues Task Force Abstract (EITF) No. 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 primarily incurred at the Company's distribution centers totaling
$1.4 million and $1.8 million were included in selling, general and
administrative expenses for the three months ended March 31, 2005 and 2004,
respectively.
Interest Expense
The Company presents interest expense net of capitalized interest costs and
interest income earned on cash equivalents.
Three months ended March 31,
(in thousands) 2005 2004
- ------------------------------------------- ------- -------
Gross interest expense $ 3,773 $ 3,379
Capitalized interest costs (20) (6)
Interest income earned on cash equivalents (833) (207)
------- -------
Net interest expense $ 2,920 $ 3,166
======= =======
NOTE 3: BUSINESS COMBINATION
Belden and CDT entered into an Agreement and Plan of Merger, dated February 4,
2004 (the MERGER AGREEMENT), pursuant to which Belden merged with and became a
wholly owned subsidiary of CDT (the MERGER). On July 15, 2004, after both
parties received the appropriate stockholder approvals, after CDT effected a
one-for-two reverse split of its common stock, and pursuant to the Merger
Agreement, Belden and CDT completed the Merger. Pursuant to the Merger
Agreement, 25.6 million shares of Belden common stock, par value $.01 per share,
were exchanged for 25.6 million shares of CDT common stock, par value $.01 per
share, and CDT changed its name to Belden CDT Inc.
After the Merger consummation on July 15, 2004, the Company had approximately
46.6 million shares of common stock outstanding. On that date, the former CDT
stockholders and former Belden stockholders respectively owned approximately 45%
and 55% of the Company. The Company anticipates that annual dividends in the
aggregate of $.20 per common share will be paid to all common stockholders.
Quarterly dividends of $.05 per common share were paid on October 4, 2004,
January 4, 2005 and April 4, 2005 to all shareholders of record as of September
17, 2004, December 16, 2004 and March 10, 2005, respectively.
In accordance with the provisions of SFAS No. 141, the Merger was treated as a
reverse acquisition under the purchase method of accounting. Belden was
considered the acquiring enterprise for financial reporting purposes because
Belden's owners as a group retained or received the larger portion of the voting
rights in the Company and Belden's senior management represented a majority of
the senior management of the Company. For financial reporting purposes, the
results of operations of CDT are included in the Company's Consolidated
Statements of Operations from July 16, 2004.
-9-
The preliminary cost to acquire CDT was $490.4 million and consisted of the
exchange of common stock discussed above, change of control costs for legacy CDT
operations and costs incurred by Belden related directly to the acquisition. The
purchase price was established primarily through the negotiation of the share
exchange ratio. The share exchange ratio was intended to value both Belden and
CDT so that neither company paid a premium over equity market value for the
other. The Company established a new accounting basis for the assets and
liabilities of CDT based upon the fair values thereof as of the Merger date. A
preliminary allocation of the cost to acquire CDT to each major asset and
liability caption of CDT as of the July 15, 2004 effective date of the Merger is
included in Note 3, Business Combinations, to the Consolidated Financial
Statements reflected in the Company's 2004 Annual Report on Form 10-K. This
allocation remains preliminary because of the pending receipt of transaction
cost invoices from service providers. The Company recognized preliminary
goodwill of $203.3 million. Goodwill was recorded during the third quarter of
2004 and adjusted during the fourth quarter of 2004 and the first quarter of
2005.
Belden CDT's consolidated results of operations for the three months ended March
31, 2005 include the results of operations of the CDT entities. The following
table presents pro forma consolidated results of operations for Belden CDT for
the three months ended March 31, 2004 as though the Merger had been completed as
of the beginning of that period. This pro forma information is intended to
provide information regarding how Belden CDT might have looked if the Merger had
occurred as of the date indicated. The amounts for the CDT entities included in
this pro forma information are based on the historical results of the CDT
entities and, therefore, may not be indicative of the actual results of the CDT
entities when operated as part of Belden CDT. Moreover, the pro forma
information does not reflect all of the changes that may result from the Merger,
including, but not limited to, challenges of transition, integration and
restructuring associated with the transaction; achievement of further synergies;
ability to retain qualified employees and existing business alliances; and
customer demand for CDT products. The pro forma adjustments represent
management's best estimates and may differ from the adjustments that may
actually be required. Accordingly, the pro forma financial information should
not be relied upon as being indicative of the historical results that would have
been realized had the Merger occurred as of the dates indicated or that may be
achieved in the future.
Three months ended March 31, 2004
(in thousands, except per share date) Pro forma
- ------------------------------------ ---------
Revenues $295,280
Income from continuing operations 2,682
Net income 1,246
Diluted income per share:
Continuing operations .06
Net income .03
These pro forma results reflect adjustments for interest expense, depreciation,
amortization and related income taxes.
-10-
Income/(loss) from continuing operations, net income/(loss) and diluted net
income/(loss) per share for the three months ended March 31, 2005 include
certain material charges and Merger-related items incurred during the periods,
as listed below on an after-tax basis. There were no material charges or
Merger-related items incurred during the three months ended March 31, 2004.
Income from Diluted
Three Months Ended March 31, 2005 Continuing Net Income
(in thousands, except per share data) Operations Net Income per Share
- ------------------------------------- ----------- ---------- ----------
Impact of short-lived intangibles purchase adjustments $218 $218 $ -
Merger-related retention awards and other compensation 295 295 .01
Merger-related plant closings and other restructuring actions 378 378 .01
Business restructuring expense and severance charges 405 476 .01
NOTE 4: DISCONTINUED OPERATIONS
The Company currently reports four operations -- the Belden Communications
Company (BCC) Phoenix, Arizona operation; the Raydex/CDT Ltd. (RAYDEX)
Skelmersdale, United Kingdom operation; Montrose; and Admiral -- as discontinued
operations. Each of these operations is reported as a discontinued operation in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Raydex, Montrose and Admiral operations were acquired
through the Merger. As of the effective date of the Merger, management had
formulated a plan to dispose of these operations. In regard to all discontinued
operations, the remaining assets of these operations were properly held for sale
in accordance with SFAS No. 144 during the three months ended March 31, 2005.
BCC-Phoenix Operation
In March 2004, the Board of Directors of Belden decided to sell the assets of
the BCC manufacturing facility in Phoenix, Arizona. BCC's Phoenix facility
manufactured communications cables for the telecommunications industry. In June
2004, Belden sold certain assets to Superior Essex Communications LLC
(SUPERIOR). Superior purchased certain inventory and equipment, and assumed
Belden's supply agreements with major telecommunications customers, for an
amount not to exceed $92.1 million. At the time the transaction closed, Belden
received $82.1 million in cash ($47.1 million for inventory and $35.0 million
for equipment). During the third quarter of 2004, the Company and Superior
agreed to the closing-date inventory adjustment that resulted in the Company
paying $3.9 million to Superior and retaining certain inventory. The Company
recognized a gain of $0.4 million pretax ($0.3 million after tax) on the
disposal of the inventory. The equipment was sold at cost.
The remaining payment of $10.0 million was contingent upon Superior's retention
of the assumed customer agreements. The Company received this $10.0 million
payment from Superior in March 2005 and recorded an additional $6.4 million
after-tax gain on the disposal of this discontinued operation during the first
quarter of 2005.
In April 2005, the Company sold the land and facilities of BCC's discontinued
Phoenix operation to Phoenix Van Buren Partners, LLC for $20.7 million cash. The
Company will recognize a gain on disposal of discontinued operations in the
amount of $13.7 million pretax ($8.8 million after tax) during the second
quarter of 2005.
-11-
Raydex-Skelmersdale Operation
In September 2004, the Company announced that it was in discussions with
employee representatives regarding its intention to close the Raydex
manufacturing facility in Skelmersdale, United Kingdom. The Skelmersdale
facility manufactures twisted-pair and coaxial cables for data networking,
telecommunications, and broadcast applications. During the first quarter of
2005, some of the equipment was transferred to other European locations of
Belden CDT. Management does not believe the migration of revenues and cash flows
from Raydex to the Company's continuing operations is material. The Company
expects to close this operation in the summer of 2005. At March 31, 2005, none
of the assets of the Skelmersdale facility had been sold.
Montrose
In September 2004, the Company announced the pending closure and sale of its
Montrose cable operation in Auburn, Massachusetts. Montrose, an unincorporated
operating division of the Company, manufactures and markets coaxial and
twisted-pair cable products principally for the telecommunications industry.
Montrose has faced declining demand in recent years. Select equipment was
transferred to other Belden CDT manufacturing locations beginning in December
and the Company expects the operation to be closed by the summer of 2005.
Management does not believe the migration of revenues and cash flows from
Montrose to the Company's continuing operations is material. At March 31, 2005,
none of the assets of the Montrose operation had been sold.
Admiral
In December 2004, a management buyout group purchased certain assets and assumed
certain liabilities of the Company's Admiral operation in Wadsworth, Ohio for
$0.3 million cash. In March 2005, the Company sold a former Admiral
manufacturing facility in Barberton, Ohio for $1.5 million cash. The carrying
value of this facility exceeded the proceeds received from the sale by less than
$0.1 million. The Company reduced the portion of Merger consideration it
previously allocated to the tangible assets of Admiral and increased the portion
of Merger consideration it previously allocated to goodwill recorded in F&A by
this excess amount. Admiral, which was an unincorporated operating division of
the Company, manufactured precision tire castings and was not considered a core
business to the Company.
Disclosure regarding severance and other benefits related to these discontinued
operations is included in Note 12, Accounts Payable and Accrued Liabilities, to
the Consolidated Financial Statements.
Results from discontinued operations for the three months ended March 31, 2005
and 2004 include the following revenues and income/(loss) before income tax
expense/(benefit) (IBT):
2005 2004
Three Months Ended March 31, ------------------------- -------------------------
(in thousands) REVENUES IBT Revenues IBT
- ---------------------------- -------- ------- -------- -------
BCC -- Phoenix Operation $ - $ 8,984 $45,233 $(2,337)
Raydex -- Skelmersdale Operation 137 (1,374) - -
------- ------- ------- -------
Networking Segment 137 7,610 45,233 (2,337)
Montrose 1,851 (441) - -
Admiral - (7) - -
------- ------- ------- -------
Electronics Segment 1,851 (448) - -
------- ------- ------- -------
Total $ 1,988 $ 7,162 $45,233 $(2,337)
======= ======= ======= =======
-12-
Listed below are the major classes of assets and liabilities belonging to the
discontinued operations of the Company at March 31, 2005 that remain as part of
the disposal group:
Networking Segment Electronics Segment
------------------------ --------------------
BCC Raydex
(in thousands) Phoenix Skelmersdale Montrose Admiral Total
- -------------- ------- ------------ -------- ------- -----
Assets:
Receivables $ 502 $ 3,052 $ 589 $ - $ 4,143
Inventories - 1,593 - - 1,593
Property, plant and equipment, net 7,214 8,315 5,731 - 21,260
Deferred income taxes 19,509 1,661 3,085 5 24,260
Other assets 2,662 2,613 432 51 5,758
------- -------- ------- ------- --------
Total assets $29,887 $ 17,234 $ 9,837 $ 56 $ 57,014
Liabilities:
Accounts payable and accrued liabilities $ 2,525 $ 6,751 $ 2,233 $ - $ 11,509
Other liabilities 4,547 - - 163 4,710
------- -------- ------- ------- --------
Total liabilities $ 7,072 $ 6,751 $ 2,233 $ 163 $ 16,219
======= ======== ======= ======= ========
NOTE 5: SHARE INFORMATION
Common Treasury
Stock Stock
(number of shares in thousands) ------- --------
Balance at December 31, 2003 26,204 (547)
Issuance of stock:
Exercise of stock options - 3
Stock compensation - 86
Employee stock purchase plan settlement - 4
Retirement savings plan contributions - 54
Receipt of stock:
Forfeiture of stock by Incentive Plans participants in lieu of
cash payment of individual tax liabilities related to share-based
compensation - (13)
------ ------
Balance at March 31, 2004 26,204 (413)
====== ======
Balance at December 31, 2004 50,211 (3,009)
ISSUANCE OF STOCK:
EXERCISE OF STOCK OPTIONS 99 17
RECEIPT OF STOCK:
FORFEITURE OF STOCK BY INCENTIVE PLANS PARTICIPANTS IN LIEU OF
CASH PAYMENT OF INDIVIDUAL TAX LIABILITIES RELATED TO SHARE-BASED
COMPENSATION - (11)
------ ------
BALANCE AT MARCH 31, 2005 50,310 (3,003)
====== ======
-13-
NOTE 6: INCOME/(LOSS) PER SHARE
Basic income/(loss) per share is computed by dividing income/(loss) available to
common shareholders by the weighted average number of common shares outstanding.
Diluted income/(loss) per share is computed by dividing income/(loss) available
to common shareholders by the weighted average number of common shares
outstanding plus additional potential dilutive shares assumed to be outstanding.
Except for additional potential shares associated with convertible subordinated
debentures, additional potential shares are calculated for each measurement
period based on the treasury stock method, under which repurchases are assumed
to be made at the average fair market value price per share of the Company's
common stock during the period. Additional potential shares associated with
convertible subordinated debentures are calculated by dividing the principal
amount of the debentures by their conversion price. The Company's additional
potential dilutive shares currently consist of stock options, nonvested stock
and convertible subordinated debentures. Nonvested stock carries dividend and
voting rights but is not included in the weighted average number of common
shares outstanding used to compute basic income/(loss) per share.
Three Months Ended March 31,
(in thousands, except per share amounts) 2005 2004
- ---------------------------------------- -------- -------
Numerator for basic income/(loss) per share:
Income from continuing operations $ 8,524 $ 3,796
Loss from discontinued operations (1,881) (1,496)
Gain on disposal of discontinued operations 6,400 -
-------- -------
Net income/(loss) $ 13,043 $ 2,300
======== =======
Numerator for diluted income/(loss) per share:
Income from continuing operations $ 8,524 $ 3,796
Tax-effected interest expense on convertible subordinated debentures 678 -
-------- -------
Adjusted income from continuing operations 9,202 3,796
Loss from discontinued operations (1,881) (1,496)
Gain on disposal of discontinued operations 6,400 -
-------- -------
Adjusted net income/(loss) $ 13,721 $ 2,300
======== =======
Denominator:
Denominator for basic income/(loss) per share -- weighted average shares 47,007 25,462
Effect of dilutive common stock equivalents 6,677 349
-------- -------
Denominator for diluted income/(loss) per share -- adjusted
weighted average shares 53,684 25,811
======== =======
Basic income/(loss) per share:
Continuing operations $ .18 $ .15
Discontinued operations (.04) (.06)
Disposal of discontinued operations .14 -
Earnings/(loss) per share .28 .09
======== =======
Diluted income/(loss) per share:
Continuing operations $ .17 $ .15
Discontinued operations (.03) (.06)
Disposal of discontinued operations .12 -
Earnings/(loss) per share .26 .09
======== =======
For the three months ended March 31, 2005 and 2004, the Company did not include
2.2 million and 2.0 million outstanding stock options, respectively, in its
development of the denominators used in the diluted income/(loss) per share
computations. The exercise prices of these options were greater than the
respective average market price of the Company's common stock during those
measurement periods.
-14-
NOTE 7: COMPREHENSIVE INCOME/(LOSS)
Comprehensive income/(loss) consists of two components -- net income/(loss) and
other comprehensive income/(loss). Other comprehensive income/(loss) refers to
revenues, expenses, gains and losses that under accounting principles generally
accepted in the United States are recorded as an element of stockholders' equity
but are excluded from net income. The Company's other comprehensive
income/(loss) is comprised of (a) adjustments that result from translation of
the Company's foreign entity financial statements from their functional
currencies to United States dollars, (b) adjustments that result from
translation of intercompany foreign currency transactions that are of a
long-term investment nature (that is, settlement is not planned or anticipated
in the foreseeable future) between entities that are consolidated in the
Company's financial statements, and (c) minimum pension liability adjustments.
The components of comprehensive income/(loss) for the three-months ended March
31, 2005 and 2004 were as follows:
Three Months Ended March 31,
(in thousands) 2005 2004
- ---------------------------- --------- --------
Net income $ 13,043 $ 2,300
Adjustments to foreign currency translation component of equity (14,643) (471)
Adjustments to minimum pension liability 107 18
--------- --------
Comprehensive income/(loss) $ (1,493) $ 1,847
========= ========
The components of accumulated other comprehensive income at March 31, 2005 and
December 31, 2004 were as follows:
MARCH 31, December 31,
2005 2004
(in thousands) ---------- ------------
Translation component of equity $ 31,124 $ 45,766
Minimum pension liability adjustments, net of deferred tax benefit of
$10,392 at March 31, 2004 and $10,421 at December 31, 2004 (17,798) (17,904)
-------- --------
Accumulated other comprehensive income $ 13,326 $ 27,862
======== ========
NOTE 8: INVENTORIES
The major classes of inventories at March 31, 2005 and December 31, 2004 were as
follows:
MARCH 31, December 31,
2005 2004
(in thousands) ---------- ------------
Raw materials $ 54,638 $ 55,229
Work-in-process 41,262 38,921
Finished goods 153,426 151,753
Perishable tooling and supplies 3,755 3,822
--------- ---------
Gross inventories 253,081 249,725
Obsolescence and other reserves (18,696) (22,691)
--------- ---------
Net inventories $ 234,385 $ 227,034
========= =========
Inventories are stated at the lower of cost or market. The Company determines
the cost of all raw materials, work-in-process and finished goods inventories by
the first in, first out method. Cost components include direct labor, applicable
production overhead and amounts paid to suppliers of materials and products as
well as freight costs and, when applicable, duty costs to import the materials
and products.
-15-
NOTE 9: PROPERTY, PLANT AND EQUIPMENT
Carrying Values
The carrying values of property, plant and equipment at March 31, 2005 and
December 31, 2004 were as follows:
MARCH 31, December 31,
2005 2004
(in thousands) --------- ------------
Land and land improvements $ 31,528 $ 33,089
Buildings and leasehold improvements 136,650 139,990
Machinery and equipment 432,053 442,078
Construction in process 14,859 10,071
--------- ---------
Gross property, plant and equipment 615,090 625,228
Accumulated depreciation (287,351) (286,981)
--------- ---------
Net property, plant and equipment $ 327,739 $ 338,247
========= =========
Disposals
In February 2005, the Company sold a former AWI manufacturing facility in Fort
Lauderdale, Florida for $1.4 million. The proceeds received from the sale
exceeded the carrying value of this facility by less than $0.1 million. The
Company increased the portion of Merger consideration it previously allocated to
the tangible assets of AWI and reduced the portion of Merger consideration it
previously allocated to goodwill recorded in F&A by this excess amount.
Impairment
During the first quarter of 2005, the Company determined that certain assets
within the United States operations of its Networking segment were impaired. The
applicable assets of the segment's AWI operation were impaired because of the
Company's exit from product lines manufactured by AWI. In accordance with SFAS
No. 144, the Company estimated the fair value of these assets based upon
anticipated net proceeds from their sale. The carrying value of these assets
exceeded their fair value by less than $0.1 million. The Company reduced the
portion of Merger consideration it previously allocated to the tangible assets
of AWI and increased the portion of Merger consideration it previously allocated
to goodwill recorded in F&A by this excess amount.
NOTE 10: INTANGIBLE ASSETS
Carrying Values
The carrying values of intangible assets at March 31, 2005 and December 31, 2004
were as follows:
MARCH 31, December 31,
2005 2004
(in thousands) --------- ------------
Developed technologies $ 6,395 $ 6,558
Customer relations 55,273 55,702
Favorable contracts 1,094 1,094
Backlog 2,063 2,357
-------- --------
Gross amortizable intangible assets 64,825 65,711
Accumulated amortization (4,178) (3,093)
-------- --------
Net amortizable intangible assets 60,647 62,618
Trademarks 15,364 15,648
Goodwill, net of accumulated amortization of $12,513 at March 31, 2005 and
$12,640 at December 31, 2004 284,461 286,163
-------- --------
Net intangible assets $360,472 $364,429
======== ========
-16-
Segment Allocation
The Electronics segment and the Networking segment reported goodwill, net of
accumulated amortization, at March 31, 2005 in the amounts of $127.2 million and
$7.4 million, respectively. Goodwill allocated to the Electronics segment and
Networking segment decreased by $1.7 million and $0.4 million, respectively,
from December 31, 2004 due primarily to the impact of translation on goodwill
denominated in currencies other than the United States dollar. Goodwill of
$149.9 million has not been assigned to any specific segment. Management
believes it benefits the entire Company because it represents acquirer-specific
synergies unique to the Merger and is therefore recognized in the F&A financial
records. Goodwill recognized in the F&A financial records increased by $0.4
million from December 31, 2004 because of adjustments in the allocation of
merger consideration to the assets of the legacy CDT operations.
NOTE 11: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Carrying Values
The carrying values of accounts payable and accrued liabilities at March 31,
2005 and December 31, 2004 were as follows:
MARCH 31, December 31,
2005 2004
(in thousands) --------- ------------
Trade accounts $ 95,749 $ 77,591
Wages, severance and related taxes 29,620 39,876
Employee benefits 42,394 37,351
Interest 2,143 5,804
Other (individual items less than 5% of total current liabilities) 28,447 24,413
-------- ---------
Total accounts payable and accrued liabilities $198,353 $ 185,035
======== =========
Accrued Severance and Other Related Benefits Under 2003 Restructuring Plans
In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, the Company recorded severance and other related benefits
costs in the amount of $2.7 million in the third and fourth quarters of 2003
related to personnel reductions within the Electronics segment in the United
States, Canada and the Netherlands and within the Networking segment in the
United Kingdom as operating expense ($1.4 million in cost of sales and $1.3
million in selling, general and administrative (SG&A) expenses). The Company
notified 132 employees, prior to December 31, 2003, of the pending terminations
as well as the amount of severance and other related benefits they each should
expect to receive. During the first quarter of 2004, the Company recorded
additional severance and other related benefits costs in the amount of $0.2
million related to personnel reductions within the Electronics segment in the
Netherlands as SG&A expenses. One employee was notified, prior to March 31,
2004, of the pending termination as well as the amount of severance and other
related benefits he should expect to receive.
In the second quarter of 2004, the Company was notified by Inland Revenue that
it owed an additional $0.4 million in other benefits related to severance paid
in the fourth quarter of 2003 to terminated employees within the Company's
Networking segment operation in the United Kingdom. In accordance with SFAS No.
146, the Company recorded these other benefits costs as cost of sales during the
second and fourth quarters of 2004.
-17-
Accrued Severance and Other Related Benefits Under 2004 Restructuring Plans
In accordance with SFAS No. 146, the Company recorded severance and other
related benefits costs in the amount of $0.3 million in the first quarter of
2004 related to personnel reductions within the Electronics segment in Canada as
SG&A expense. Two employees were notified, prior to March 31, 2004, of the
pending terminations as well as the amount of severance and other related
benefits they each should expect to receive. The company recorded severance and
other related benefits costs in the amount of $10.7 million in the second, third
and fourth quarters of 2004 related to (1) personnel reductions within the
Electronics segment in the United States, Canada, the Netherlands and Germany
and (2) personnel reductions in the Networking segment in the United States as
operating expense ($9.9 million in cost of sales and $0.8 million in SG&A
expenses). The Company also recorded severance and other related benefits costs
in the amount of $1.1 million in the third and fourth quarters of 2004 and $0.5
million in the first quarter of 2005 related to the pending closure of its
Electronics segment manufacturing facility in Essex Junction, Vermont in cost of
sales. The Company notified 232 employees, prior to December 31, 2004, of the
pending terminations as well as the amount of severance and other related
benefits they each should expect to receive.
On June 1, 2004, the Company announced its decision to close its BCC
manufacturing facility in Phoenix, Arizona. In accordance with SFAS No. 146, the
Company recognized severance and other related benefits costs of $4.8 million,
$0.8 million, and $0.1 million associated with the Phoenix facility in loss from
discontinued operations during the second and third quarters of 2004 and the
first quarter of 2005, respectively. The Company notified 889 employees, prior
to June 30, 2004, of the pending terminations as well as the amount of severance
and other related benefits they each should expect to receive.
On September 10, 2004, the Company announced its decision to close legacy CDT
operations in Skelmersdale, United Kingdom and Auburn, Massachusetts and to
reduce personnel at several other legacy CDT locations. As of the acquisition
date, the Company accrued severance and other related benefits costs of $16.7
million associated with the closures and the personnel reductions. These costs
were recognized as a liability assumed in the purchase and included in the
allocation of the cost to acquire CDT in accordance with EITF No. 95-3,
Recognition of Liabilities in Connection with a Purchase Business Combination.
The number of employees eligible for severance payments because of these actions
was 504.
In accordance with SFAS No. 146, the Company recorded severance and other
related benefits costs in the amount of $0.3 million in the fourth quarter of
2004 related to personnel reductions within the Networking segment in Australia
as SG&A expense. Five employees were notified, prior to December 31, 2004, of
the pending terminations as well as the amount of severance and other related
benefits they each should expect to receive.
The Company anticipates making substantially all severance payments against
these accruals within one year of each accrual date.
-18-
The following table sets forth termination activity that occurred during the
three months ended March 31, 2005:
Total Number
of Employees
Total Eligible for
Severance and Severance and
Other Related Other Related
2003 Plans 2004 Plans Benefits Benefits
(in thousands, except number of employees) ---------- ---------- -------------- -------------
Balance at December 31, 2004 $ 542 $ 19,941 $ 20,483 728
Merger-related activities:
Cash payments/terminations - (3,269) (3,269) (192)
New charges - - - -
Foreign current translation - (89) (89) -
Other adjustments - (105) (105) 1
Other activities:
Cash payments/terminations (137) (2,656) (2,793) (97)
New charges (1) 1 587 588 -
Foreign currency translation (17) (437) (454) -
Other adjustments - (72) (72) (3)
------ -------- -------- ----
Balance at March 31, 2005 (2) $ 389 $ 13,900 $ 14,289 437
====== ======== ======== ====
(1) Includes charges totaling $0.1 million related to discontinued operations
(2) Includes severance and other related benefits totaling $2.8 million and
174 applicable employees related to discontinued operations
The Company continues to review its business strategies and evaluate further
restructuring actions. This could result in additional severance and other
related benefits charges in future periods.
NOTE 12: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Credit Agreement
There were no outstanding borrowings at March 31, 2005 under the Company's
credit agreement dated October 9, 2003. The Company had $32.8 million in
borrowing capacity available at March 31, 2005.
Short-Term Borrowings
At March 31, 2005, the Company had unsecured, uncommitted arrangements with ten
banks under which it could borrow up to $12.5 million at prevailing interest
rates. There were no outstanding borrowings under these arrangements at March
31, 2005.
Convertible Subordinated Debentures
At March 31, 2005, the Company had outstanding $110.0 million of unsecured
subordinated debentures. The debentures are convertible into approximately 6.1
million shares of common stock, at a conversion price of $18.069 per share, upon
the occurrence of certain events. Holders may surrender their debentures for
conversion into shares of common stock upon satisfaction of any of the
conditions listed in Note 13, Long-Term Debt and Other Borrowing Arrangements,
to the Consolidated Financial Statements in the Company's Annual Report on Form
10-K for the year ended December 31, 2004. At March 31, 2005, one of these
conditions -- the closing sale price of the Company's common stock must be at
least 110% of the conversion price for a minimum of 20 days in the 30
trading-day period prior to surrender -- had been satisfied. To date, no holders
of the debentures have surrendered their debentures for conversion into shares
of the Company's common stock.
-19-
The 6.1 million shares of common stock that would be issued if the debentures
were converted are included in the Company's calculation of diluted income/loss
per share for the three months ended March 31, 2005.
NOTE 13: INCOME TAXES
Net tax expense of $4.6 million for the three months ended March 31, 2005
resulted from income from continuing operations before taxes of $13.1 million.
The Company considers earnings from foreign subsidiaries 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 from continuing operations before taxes and the amounts
determined by applying the applicable statutory United States tax rate for the
three months ended March 31, 2005 are analyzed below:
Three Months Ended March 31, 2005
(in thousands, except rate data) Amount Rate
- ---------------------------------- ------- -----
Provision at statutory rate $ 4,590 35.0%
State income taxes 621 4.7%
Change in valuation allowance 382 2.9%
Lower foreign tax rates and other, net (1,003) (7.6)%
------- ----
Total tax expense $ 4,590 35.0%
======= ====
In October 2004, the American Jobs Creation Act (the AJCA) was signed into law.
The AJCA includes a deduction of 85% of certain foreign earnings that are
repatriated, as defined in the AJCA. Taxpayers may elect to apply this provision
to qualifying earnings repatriations in either 2004 or 2005. In December 2004,
the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP)
No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004. FSP No.
109-2 allows companies additional time to evaluate the effect of the law on
whether unrepatriated foreign earnings continue to qualify for an exception to
recognizing deferred tax liabilities in accordance with SFAS No. 109, Accounting
for Income Taxes, and would require explanatory disclosures from those who need
additional time to complete such an evaluation. The Company is in the process of
evaluating the repatriation provisions, but does not expect to complete its
analysis before the United States Congress or the United States Treasury
Department provides additional clarifying language on key elements in the
provision. An estimate of the impact of this provision (if any) cannot be
determined at this point.
NOTE 14: PENSION AND OTHER POSTRETIREMENT OBLIGATIONS
The Company sponsors defined benefit pension plans for certain employees in the
United States, the United Kingdom, the Netherlands, Canada and Germany. Annual
contributions to these pension plans equal or exceed the minimum funding
requirements of applicable local regulations. The assets of the pension plans
are maintained in various trusts and invested primarily in equity and fixed
income securities and money market funds.
The Company also sponsors unfunded postretirement (medical and life insurance)
benefit plans in the United States and Canada. The medical benefit portion of
the United States plan is only for employees who retired prior to 1989 as well
as certain other employees who were near retirement and elected to receive
certain benefits.
-20-
The following table provides the components of net periodic benefit costs for
the plans for the three months ended March 31, 2005 and 2004:
Other Postretirement
Pension Obligations Obligations
Three Months Ended March 31, -------------------------- -----------------------
(in thousands) 2005 2004 2005 2004
- ---------------------------- ------- ------- ----- -----
Service cost $ 2,732 $ 1,947 $ 112 $ 7
Interest cost 3,440 2,795 596 242
Expected return on plan assets (3,903) (3,232) - -
Amortization of prior service cost (10) (10) (27) (26)
Net (gain)/loss recognition 899 486 155 118
------- ------- ----- -----
Net periodic benefit cost $ 3,158 $ 1,986 $ 836 $ 341
======= ======= ===== =====
The Company contributed $4.9 million and $0.5 million to its pension plans and
other postretirement plan, respectively, during the three months ended March 31,
2005. The Company anticipates contributing $25.5 million and $2.5 million to its
pension plans and other postretirement plan, respectively, during 2005.
In May 2004, the FASB issued FSP No. 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the ACT). FSP No. 106-2 provides guidance on the
accounting for and disclosure of the subsidy available under the Act for
employers that sponsor postretirement health care plans providing prescription
drug benefits. The Company elected to apply this guidance for the quarter
beginning April 1, 2004, retroactive to the date of enactment of the Act.
Pursuant to the requirement of SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements, and FAS No. 106-2, the results of operations for
the three months ended March 31, 2004 were increased by $52,668 pretax as
follows:
Three months ended March 31, 2004 As Originally Effect of
(in thousands) Reported Subsidy As Restated
- --------------------------------- ------------- --------- -----------
Cost of sales $136,005 $ 37 $135,968
Selling, general and administrative expenses 25,229 16 25,213
Income tax expense 1,940 20 1,960
Income from continuing operations 3,763 33 3,796
Net income 2,267 33 2,300
NOTE 15: 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.
Letters of Credit, Guarantees and Bonds
At March 31, 2005, the Company was party to unused standby letters of credit and
unused bank guarantees totaling $9.6 million and $5.1 million, respectively. The
Company also maintains surety bonds totaling $4.6 million in connection with
workers compensation self-insurance programs in several states, taxation in
Canada, retirement benefits in Germany and the importation of product into the
United States and Canada.
-21-
Severance and Other Related Benefits
The Company completed the sale of part of its business in Germany to a
management-led buyout group in October 2003. The Company will retain liability
for severance and other related benefits estimated at $1.6 million on March 31,
2005 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 transferred employees' duration of employment with the
buyout group. The Company will be relieved of any remaining contingent liability
related to the transferred employees on the third anniversary of the buyout
date.
Intercompany Guarantees
An intercompany guarantee is a contingent commitment issued by either Belden CDT
Inc. or one of its subsidiaries to guarantee the performance of either Belden
CDT 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 contractual terms of 1 year to 12 years (unexpired terms of 1 year to
5 years). The only intercompany guarantees outstanding at March 31, 2005 are the
guarantees executed by Belden Wire & Cable Company and Belden Communications
Company related to the $136.0 million indebtedness of Belden Inc. under various
medium-term note purchase agreements and the guaranty executed by Belden Inc.
related to $3.9 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 March 31, 2005
is $139.9 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 16: BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company conducts its operations through two business segments -- the
Electronics segment and the Networking segment. The Electronics segment designs,
manufactures and markets metallic and fiber optic cable products primarily with
industrial, video/sound/security and transportation/defense applications. These
products are sold principally through distributors or directly to systems
integrators and original equipment manufacturers (OEMs). The Networking segment
designs, manufactures and markets metallic cable, fiber optic cable,
connectivity and certain other non-cable products primarily with
networking/communications applications. These products are sold principally
through distributors or directly to systems integrators, OEMs and large
telecommunications companies.
The Company evaluates business segment performance and allocates resources based
on operating earnings before interest and income taxes. Operating earnings of
the two principal business segments include all the ongoing costs of operations.
Allocations to or from these business segments are not significant. Transactions
between the business segments are conducted on an arms-length basis. With the
exception of certain unallocated tax assets, substantially all the business
assets are utilized by the business segments.
-22-
Effective January 1, 2005, the Company began accounting for all internal
sourcing of product between its business segments as affiliate sales and
directed any business segment that sold product it had sourced from an affiliate
to recognize profit margin applicable to both the manufacturing and selling
efforts. In prior years, a business segment that sold product it had sourced
from an affiliate only recognized profit margin applicable to the selling
effort. The Company made this change as a result of increased transactions
between its business segments largely resulting from the Merger. The Company
believes this change provides more useful information to the chief executive
officer and chief financial officer for purposes of making decisions about
allocating resources to the business segments and assessing their performance.
The Company has reclassified the business segment information presented for the
three months ended March 31, 2004 to reflect business segment performance as if
the Company had implemented this new accounting procedure effective January 1,
2004.
Business Segment Information
Amounts reflected in the column entitled F&A in the tables below represent
corporate headquarters operating, treasury and income tax expenses. Amounts
reflected in the column entitled Eliminations in the tables below represent the
eliminations of affiliate revenues and cost of sales.
THREE MONTHS ENDED MARCH 31, 2005
(IN THOUSANDS) ELECTRONICS NETWORKING F&A ELIMINATIONS TOTAL
- --------------------------------- ----------- ---------- ------- ------------ ----------
EXTERNAL CUSTOMER REVENUES $184,860 $124,251 $ - $ - $ 309,111
AFFILIATE REVENUES 27,084 1,682 - (28,766) -
SEGMENT OPERATING EARNINGS/(LOSS) 22,189 8,164 (5,970) (8,182) 16,201
SEGMENT IDENTIFIABLE ASSETS (1) 669,333 351,909 499,690 (163,927) 1,357,005
(1) EXCLUDES ASSETS OF DISCONTINUED OPERATIONS
Three Months Ended March 31, 2004
(in thousands) Electronics Networking F&A Eliminations Total
- --------------------------------- ----------- ---------- -------- ------------ ----------
External customer revenues $112,950 $ 57,153 $ - $ - $ 170,103
Affiliate revenues 24,974 438 - (25,412) -
Segment operating earnings/(loss) 12,511 4,182 (4,208) (3,563) 8,922
Segment identifiable assets (1) 353,421 111,498 183,452 (89,172) 559,199
(1) Excludes assets of discontinued operations
Total segment operating earnings differ from net income/(loss) reported in the
Consolidated Statements of Operations as follows:
Three Months Ended March 31,
(in thousands) 2005 2004
- ---------------------------- -------- -------
Total segment operating earnings $ 16,201 $ 8,922
Minority interest 167 -
Interest expense 2,920 3,166
Income tax expense 4,590 1,960
-------- -------
Income from continuing operations 8,524 3,796
Loss from discontinued operations (1) (1,881) (1,496)
Gain on disposal of discontinued operations (2) 6,400 -
-------- -------
Net income/(loss) $ 13,043 $ 2,300
======== =======
(1) Net of tax benefit of $957 and $841, respectively
(2) Net of tax expense of $3,600
-23-
Geographic Information
The following table identifies revenues by geographic region based on the
location of the customer.
2005 2004
Three Months Ended March 31, PERCENT OF Percent of
(in thousands, except % data) REVENUES REVENUES Revenues Revenues
- ----------------------------- --------- --------- -------- ----------
United States $ 155,441 50.3% $ 91,493 53.8%
Canada 30,999 10.0% 12,565 7.4%
United Kingdom 36,269 11.7% 24,784 14.6%
Continental Europe 61,843 20.0% 24,533 14.4%
Rest of World 24,559 8.0% 16,728 9.8%
--------- ----- -------- -----
Total $ 309,111 100.0% $170,103 100.0%
========= ===== ======== =====
NOTE 17: MINIMUM REQUIREMENTS CONTRACT
The Company has a contractual ("sales incentive") agreement with a Networking
segment customer that requires the customer to purchase quantities of product
from the Company generating at a minimum $3.0 million in gross profit per annum
or pay the Company compensation according to contractual terms through 2005.
During 2004, the customer did not make the minimum required purchases and the
Company was entitled to receive compensation according to the terms of the
agreement. As a result, the Company recorded $3.0 million in other operating
earnings as "sales incentive" compensation during the quarter ended December 31,
2004. As of the filing date of this Quarterly Report on Form 10-Q, the customer
has not paid this $3.0 million receivable and is disputing the amount. The
Company has filed for binding arbitration on this matter and believes it should
prevail. Accordingly, the Company has not recognized an allowance for bad debts
related to this receivable. Should the Company not prevail in binding
arbitration, the write-off of this receivable would have a negative effect on
operating results.
-24-
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 notes, will aid in the understanding of the
operating results as well as the financial position, cash flows, indebtedness
and other key financial information of the Company. Certain reclassifications
have been made to prior year amounts to make them comparable to current year
presentation. Preparation of this Quarterly Report on Form 10-Q requires the
Company to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of its financial statements and the reported amounts of revenue and
expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily derived from other sources. There can be no assurance that actual
amounts will not differ from those estimates. The following discussion will also
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 the forward-looking statements.
OVERVIEW
The Company designs, manufactures and markets high-speed electronic cables and
connectivity products for the specialty electronics and data networking markets.
The Company focuses on segments of the worldwide cable and connectivity market
that require highly differentiated, high-performance products and adds value
through design, engineering, manufacturing excellence, product quality, and
customer service. The Company has manufacturing facilities in North America and
Europe.
The Company believes that revenue growth, operating margins and working capital
management are its key performance indicators.
BUSINESS COMBINATION
Belden Inc. (BELDEN) and Cable Design Technologies Corporation (CDT) entered
into an Agreement and Plan of Merger, dated February 4, 2004 (the MERGER
AGREEMENT) pursuant to which Belden merged with and became a wholly owned
subsidiary of CDT (the MERGER). On July 15, 2004, after both parties received
the appropriate stockholder approvals, after CDT effected a one-for-two reverse
split of its common stock, and pursuant to the Merger Agreement, Belden and CDT
completed the Merger. Pursuant to the Merger Agreement, 25.6 million shares of
Belden common stock, par value $.01 per share, were exchanged for 25.6 million
shares of CDT common stock, par value $.01 per share, and CDT changed its name
to Belden CDT Inc.
In accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations, the Merger was treated as a reverse
acquisition under the purchase method of accounting. Belden was considered the
acquiring enterprise for financial reporting purposes because Belden's owners as
a group retained or received the larger portion of the voting rights in the
Company and Belden's senior management represented a majority of the senior
management of the Company. For financial reporting purposes, the results of
operations of CDT are included in the Company's Consolidated Statements of
Operations from July 16, 2004.
-25-
The following information is included in Note 3, Business Combinations, to the
Consolidated Financial Statements in this Quarterly Report on Form 10-Q:
- The number of shares of the Company's common stock outstanding after
consummation of the Merger,
- The relative ownership percentages of former CDT stockholders and
former Belden stockholders in the Company,
- Actual and anticipated dividend payments,
- The preliminary cost of the Merger,
- The preliminary amount of goodwill recorded by the Company related
to the Merger, and
- Unaudited pro forma summary results presenting selected operating
information for the Company as if the Merger and the one-for-two
reverse stock split had been completed as of the beginning of the
three months ended March 31, 2004.
DISCONTINUED OPERATIONS
The Company currently reports four operations -- the Belden Communications
Company (BCC) Phoenix, Arizona operation; the Raydex/CDT Ltd. Skelmersdale,
United Kingdom operation; Montrose; and Admiral -- as discontinued operations.
Each of these operations is reported as a discontinued operation in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. The Raydex, Montrose and Admiral operations were acquired through the
Merger. As of the effective date of the Merger, management had formulated a plan
to dispose of these operations. In regard to all discontinued operations, the
remaining assets of these operations were properly held for sale in accordance
with SFAS No. 144 during the three months ended March 31, 2005.
Discussion regarding each operation, including (1) a listing of revenues and
income/(loss) before income taxes generated by each operation during the three
months ended March 31, 2005 and 2004 and (2) a listing of the major classes of
assets and liabilities belonging to each operation at March 31, 2005 that remain
as part of the disposal group, is included in Note 4, Discontinued Operations,
to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
CONSOLIDATED OPERATING RESULTS
The following table sets forth information comparing consolidated operating
results for the three months ended March 31, 2005 and 2004.
Three Months Ended March 31,
(In thousands) 2005 2004
- ---------------------------- -------- --------
Revenues $309,111 $170,103
Gross profit 65,131 34,135
Operating earnings 16,201 8,922
Interest expense 2,920 3,166
Income from continuing operations before taxes 13,114 5,756
Income from continuing operations 8,524 3,796
Loss from discontinued operations (1) (1,881) (1,496)
Gain on disposal of discontinued operations (2) 6,400 -
Net income 13,043 2,300
(1) Net of tax benefit of $957 and $841, respectively
(2) Net of tax expense of $3,600
-26-
BUSINESS SEGMENTS
The Company conducts its operations through two business segments -- the
Electronics segment and the Networking segment. The Electronics segment designs,
manufactures and markets metallic and fiber optic cable products primarily with
industrial, video/sound/security and transportation/defense applications. These
products are sold principally through distributors or directly to systems
integrators and original equipment manufacturers (OEMs). The Networking segment
designs, manufactures and markets metallic cable, fiber optic cable,
connectivity and certain other non-cable products primarily with
networking/communications applications. These products are sold principally
through distributors or directly to systems integrators, OEMs and large
telecommunications companies.
Effective January 1, 2005, the Company began accounting for all internal
sourcing of product between its business segments as affiliate sales and
directed any business segment that sold product it had sourced from an affiliate
to recognize profit margin applicable to both the manufacturing and selling
efforts. In prior years, a business segment that sold product it had sourced
from an affiliate only recognized profit margin applicable to the selling
effort. The Company made this change as a result of increased transactions
between its business segments largely resulting from the Merger. The Company
believes this change provides more useful information to the chief executive
officer and chief financial officer for purposes of making decisions about
allocating resources to the business segments and assessing their performance.
The Company has reclassified the business segment information presented for the
three months ended March 31, 2004 to reflect business segment performance as if
the Company had implemented this new accounting procedure effective January 1,
2004.
The following table sets forth information comparing the Electronics segment
operating results for the three months ended March 31, 2005 and 2004.
Three Months Ended March 31,
(In thousands, except % data) 2005 2004
- ---------------------------- --------- --------
External customer revenues $ 184,860 $112,950
Affiliate revenues 27,084 24,974
--------- --------
Total revenues 211,944 137,924
Operating earnings 22,189 12,511
As a percent of total revenues 10.5% 9.1%
The following table sets forth information comparing the Networking segment
operating results for the three months ended March 31, 2005 and 2004.
Three Months Ended March 31,
(In thousands, except % data) 2005 2004
- ---------------------------- --------- --------
External customer revenues $ 124,251 $ 57,153
Affiliate revenues 1,682 438
--------- --------
Total revenues 125,933 57,591
Operating earnings 8,164 4,182
As a percent of total revenues 6.5% 7.3%
-27-
RESULTS OF OPERATIONS --
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2004 CONTINUING OPERATIONS CONSOLIDATED REVENUES
Revenues generated in the three months ended March 31, 2005 increased 81.7% to
$309.1 million from revenues generated in the three months ended March 31, 2004
of $170.1 million because of the impact of the Merger, increased selling prices,
and favorable currency translation on international revenues partially offset by
decreased sales volume (excluding the impact of the Merger).
Revenues generated through the addition of the CDT operations during the first
quarter of 2005 totaled $136.8 million and contributed 80.4 percentage points of
revenue increase.
The impact of increased product pricing contributed 6.6 percentage points of
revenue increase during the first quarter of 2005. This price improvement
resulted primarily from the impact of sales price increases implemented by the
Company during 2004 and the first quarter of 2005 across all product lines in
response to increases in the costs of copper, Teflon(R) FEP, and commodities
derived from petroleum and natural gas.
Favorable foreign currency translation on international revenues contributed 1.7
percentage points of revenue increase.
Decreased unit sales generated during the three months ended March 31, 2005
offset the positive impact that the Merger, price increases and foreign currency
translation had on the revenue comparison by 7.0 percentage points. Lower unit
sales of products with networking/communications, video/sound/security and
industrial applications resulted in 4.7, 1.3 and 1.3 percentage points of
revenue decline, respectively. These volume decreases were partially offset by
0.2 percentage points because of a volume increase in sales of products with
transportation/defense applications. Factors contributing to the net reduction
in sales volume are listed below:
- Decreased unit purchasing of products with communications
applications by a large telecommunications customer in the United
Kingdom during the final quarter of its annual capital spending
cycle;
- Customer pre-buying of products with industrial applications and, to
a lesser extent, networking/communications and video/sound/security
applications during the first quarter of 2004 ahead of the Company's
announced March 2004 sales price increases;
- Reduced stocking orders from distribution customers in Asia for
products with networking/communications applications resulting from
a decline in market share because of increased competition from
local manufacturers; and
- A shift from the Company's traditional Belden-branded products with
networking applications to the Company's Mohawk-branded products
(sales of which would be included in the Merger causal above).
Factors partially mitigating the net decreased sales volume are listed below:
- Improvement in general economic conditions within North America,
Europe and Asia;
- Increased demand for multi-mode fiber optic cable products and
structured wiring components in North America; and
- Increased project activity in North America requiring products with
transportation/defense applications.
-28-
Revenues generated on sales of product to customers in the United States,
representing 50.3% of the Company's total revenues generated during the three
months ended March 31, 2005, increased by 70.0% compared with revenues generated
during the same period in 2004. Absent the impact of the Merger and favorable
currency translation on product sold by the Company's international operations
to customers in the United States, sales of product to customers in the United
States decreased by 3.1%. This decrease resulted primarily from customer
pre-buying of products in the first quarter of 2004 ahead of the Company's
announced sales price increases in March 2004 and a shift from the Company's
traditional Belden-branded networking products to the Company's Mohawk-branded
networking products. This decrease was partially offset by the impact of sales
price increases implemented during 2004 and during the first quarter of 2005,
increased project activity requiring products with transportation/defense
applications, and increased demand for multi-mode fiber optic cable products and
structured wiring components.
Revenues generated on sales of product to customers in Canada represented 10.0%
of the Company's total revenues for the quarter ended March 31, 2005. Canadian
revenues for the first quarter of 2005 increased by 146.7% compared with
revenues for the first quarter of 2005. Absent the impact of the Merger and
favorable currency translation on product sold by the Company's international
operations to customers in Canada, revenues generated for the first quarter of
2005 increased by 16.2% compared with revenues generated for the same period in
2004. This increase resulted primarily from the impact of sales price increases
implemented during 2004 and the first quarter of 2005 and increased project
activity requiring products with industrial applications.
Revenues generated on sales of product to customers in the United Kingdom,
representing 11.7% of the Company's total revenues generated during the first
quarter of 2005, increased by 46.1% compared with revenues generated during the
same period in 2005. Absent the impact of the Merger and favorable currency
translation on products sold by the Company's international operations to
customers in the United Kingdom, revenues generated for the first quarter of
2005 increased by 13.9% compared with revenues generated for the same period in
2004. This increase resulted primarily from the impact of sales price increases
implemented during 2004 and the first quarter of 2005 and the addition of
Belden-branded products to the portfolios of several United Kingdom distributors
who have historically carried only CDT-branded products. This increase was
partially offset by decreased unit purchasing of products with communications
applications by a large telecommunications customer in the United Kingdom during
the final quarter of its annual capital spending cycle.
Revenues generated on sales of product to customers in Continental Europe
represented 20.0% of the Company's total revenues for the quarter ended March
30, 2005. Continental European revenues generated during the first quarter of
2005 increased by 151.8% compared with revenues generated during the same period
in 2004. Absent the impact of the Merger and favorable currency translation on
products sold by the Company's international operations to customers in
Continental Europe, revenues generated during the first quarter of 2005
decreased by 30.4% compared with revenues generated during the same period of
2004. This decrease resulted primarily from (1) reduced demand for the Company's
broadband products because of extended poor winter weather in Northern Europe
and, to a lesser extent, in Spain and Italy and (2) the Company's decision to
cease production of cord products and assemblies in Continental Europe during
the first quarter of 2005.
-29-
Revenues generated on sales of product to customers in the rest of the world,
representing 7.9% of the Company's total revenues generated during the three
months ended March 31, 2005, increased by 46.8% from the same period in 2004.
Absent the impact of the Merger and favorable currency translation of products
sold by the Company's international operations to customers in the Latin
America, Asia/Pacific and Africa/Middle East markets, revenues generated during
the first quarter of 2005 increased by 19.3% compared with revenues generated
during the same period in 2004. This increase represented the impact of sales
price increases implemented during 2004 and the first quarter of 2005 and higher
demand in all three markets.
CONTINUING OPERATIONS CONSOLIDATED COSTS, EXPENSES AND EARNINGS
The following table sets forth information comparing the components of earnings
for the three months ended March 31, 2005 and 2004.
Percent
Increase
Three Months Ended March 31, 2005 Compared
(in thousands, except % data) 2005 2004 With 2004
- ---------------------------- ------- ------- -------------
Gross profit $65,131 $34,135 90.8%
As a percent of revenues 21.1% 20.1%
Operating earnings $16,201 $ 8,922 81.6%
As a percent of revenues 5.2% 5.2%
Income from continuing operations before taxes $13,114 $ 5,756 127.8%
As a percent of revenues 4.2% 3.4%
Income from continuing operations $ 8,524 $ 3,796 124.6%
As a percent of revenues 2.8% 2.2%
Gross profit increased 90.8% to $65.1 million in the three months ended March
31, 2005 from $34.1 million in the three months ended March 31, 2004 due
primarily to the addition of gross profit generated by CDT operations during the
quarter, the impact of sales price increases implemented during 2004 and the
first quarter of 2005, and the favorable impact of currency translation on the
gross profit generated by the Company's international operations. Also
contributing to the favorable gross profit comparison were the current-quarter
impact of material, labor and overhead cost reduction initiatives, the impact of
production outsourcing in Europe during the first quarter of 2004, and the
impact of a 2003 production capacity rationalization initiative in Europe that
resulted in lower output, higher scrap and increased maintenance costs during
the first quarter of 2004.
These positive factors were partially offset by lower sales volumes, higher
product costs resulting from increased purchase prices for copper, Teflon(R) FEP
and commodities derived from both petroleum and natural gas, and severance and
other related benefits costs totaling $0.5 million related to the pending
closure of a manufacturing facility in the United States.
Gross profit as a percent of revenues increased by 1.0 percentage point from the
prior year because of the previously mentioned items and the Company's favorable
leveraging of fixed costs over a higher revenue base.
-30-
Operating earnings increased 81.6% to $16.2 million for the three months ended
March 31, 2005 from $7.1 million for the three months ended March 31, 2004 due
primarily to higher gross profit largely attributable to the Merger. Partially
offsetting the positive operating earnings comparison was an increase in
selling, general and administrative (SG&A) expenses to $48.9 million in the
first quarter of 2005 from $25.2 million for the first quarter of 2004 due
primarily to the addition of SG&A expenses related to the CDT operations and the
unfavorable impact of currency translation on the SG&A expenses of the Company's
international operations. These negative factors were partially offset by
severance and other benefits costs of $0.6 million recognized in the first
quarter of 2004 related to personnel reductions within the Electronics segment.
SG&A expenses as a percentage of revenues increased to 15.8% in the first
quarter of 2005 from 14.8% in the first quarter of 2004. Operating earnings as a
percent of revenues was unchanged from the prior year.
Income from continuing operations before taxes increased 127.8% to $13.1 million
in the three months ended March 31, 2005 from $5.8 million in the three months
ended March 31, 2004 because of higher operating earnings largely attributable
to the Merger and lower net interest expense. Net interest expense decreased
7.8% to $2.9 million in the first quarter of 2005 from $3.2 million in the first
quarter of 2004 because of higher interest income earned on cash equivalents.
Interest income earned on cash equivalents was $0.8 million in the first quarter
of 2005 compared to $0.2 million in the first quarter of 2004. Average debt
outstanding was $246.1 million and $200.0 million during the first quarters of
2005 and 2004, respectively. The Company's average interest rate was 6.18% in
the first quarter of 2005 and 6.90% in the first quarter of 2004.
The Company's effective annual tax rate increased to 35.0% in the three months
ended March 31, 2005 from 32.0% in the three months ended March 31, 2004
primarily attributable to an increase in the valuation allowance.
Income from continuing operations increased 124.6% to $8.5 million in the three
months ended March 31, 2005 from $3.8 million in the three months ended March
31, 2004 due mainly to higher income from continuing operations before taxes
resulting largely from the Merger partially offset by higher income tax expense.
ELECTRONICS SEGMENT
Revenues generated from sales to external customers increased 63.7% to $184.9
million for the quarter ended March 31, 2005 from $112.9 million for the quarter
ended March 31, 2004 because of the impact of the Merger, increased selling
prices, and favorable currency translation on international revenues partially
offset by decreased sales volume (excluding the impact of the Merger).
Revenues generated through the addition of the CDT operations during the first
quarter of 2005 totaled $67.3 million and contributed 59.6 percentage points of
revenue increase.
The impact of increased product pricing contributed 7.0 percentage points of
revenue increase during the first quarter of 2005. This price improvement
resulted primarily from the impact of sales price increases implemented by the
segment during 2004 and the first quarter of 2005 across all product lines in
response to increases in the costs in copper, Teflon(R) FEP, and commodities
derived from petroleum and natural gas.
Favorable foreign currency translation on international revenues contributed 1.8
percentage points of revenue increase.
-31-
Decreased unit sales generated during the three months ended March 31, 2005
offset the positive impact that the Merger, increased sales prices and favorable
currency translation had on the revenue comparison by 4.6 percentage points.
Lower unit sales of products with video/sound/security, industrial and
networking/communications applications offset the overall revenue increase by
2.1, 1.7 and 1.2 percentage points, respectively. The negative impact that these
volume decreases had on the revenue comparison was partially offset by an
increase in unit sales of products with transportation/defense applications that
contributed 0.3 percentage points of revenue increase. Negative factors
contributing to the volume decrease and positive factors partially mitigating
the volume decrease are listed under Consolidated Revenues on Page 28 of this
Quarterly Report on Form 10-Q. Each of the factors listed, with the exception of
decreased unit purchasing by a large telecommunications customer in the United
Kingdom, a shift from Belden-branded networking products to Mohawk-branded
networking products, and reduced stocking orders from distribution customers in
Asia, applies to the Electronics segment.
Operating earnings increased 77.4% to $22.2 million for the quarter ended March
31, 2005 from $12.5 million for the quarter ended March 31, 2004 due mainly to
the addition of operating earnings generated by the CDT operations, the impact
of sales price increases implemented during 2004 and the first quarter of 2005,
the current-quarter impact of manufacturing, SG&A cost reduction initiatives,
favorable currency translation on operating earnings generated by the Company's
international operations, the impact on first quarter 2004 operating earnings of
the 2003 production capacity rationalization initiative in Europe discussed
above, and severance and other related benefits costs totaling $0.6 million
related to personnel reductions within the segment.
These positive factors were partially offset by lower sales volumes, higher
product costs resulting from increased purchase prices for copper, Teflon(R) FEP
and commodities derived from both petroleum and natural gas, and severance and
other benefits costs of $0.5 million recognized in the current quarter related
to the pending closure of a manufacturing facility in the United States.
As a percent of total revenues generated by the segment, operating earnings
increased to 10.5% in the first quarter of 2005 from 9.1% in the first quarter
of 2004 because of the previously mentioned items and the segment's favorable
leveraging of fixed costs over a higher revenue base.
NETWORKING SEGMENT
Revenues generated on sales to external customers increased 117.4% to $124.3
million for the quarter ended March 31, 2005 from $57.2 million for the quarter
ended March 31, 2004. The revenue increase was due primarily to the Merger,
increased selling prices, and favorable currency translation on revenues
generated by the Company's international operations partially offset by
decreased sales volume (excluding the impact of the Merger).
Revenues generated through the addition of the CDT operations during the first
quarter of 2005 totaled $69.5 million and contributed 121.6 percentage points of
revenue increase.
The impact of increased product pricing contributed 5.7 percentage points of
revenue increase during the first quarter of 2005. This price improvement
resulted primarily from the impact of sales price increases implemented by the
segment during 2004 and the first quarter of 2005 across all product lines in
response to increases in the costs in copper and commodities derived from
petroleum and natural gas.
Favorable foreign currency translation on international revenues contributed 1.7
percentage points of revenue increase.
-32-
Decreased unit sales generated during the three months ended March 31, 2005
offset the positive impact that the Merger, increased sales prices and favorable
currency translation had on the revenue comparison by 11.7 percentage points.
Lower unit sales of products with networking/communications and industrial
applications offset the overall revenue increase by 11.6 and 0.6 percentage
points, respectively. The negative impact that these volume decreases had on the
revenue comparison was partially offset by an increase in unit sales of products
with video/sound/security applications that contributed 0.4 percentage points of
revenue increase. Negative factors contributing to the volume decrease and
positive factors partially mitigating the volume decrease are listed under
Consolidated Revenues on Page 28 of this Quarterly Report on Form 10-Q. Each of
the factors listed, with the exception of increased demand for multi-mode fiber
optic cables and structured wiring components and increased project activity
requiring products with transportation/defense applications, applies to the
Networking segment.
Operating earnings increased 95.2% to $8.1 million for the quarter ended March
31, 2005 from $4.1 million for the quarter ended March 31, 2004 due mainly to
the addition of operating earnings generated by the CDT operations, the impact
of sales price increases implemented during 2004 and the first quarter of 2005,
the current-quarter impact of manufacturing, SG&A cost reduction initiatives,
favorable currency translation on operating earnings generated by the Company's
international operations, and the impact of production outsourcing in Europe
during the first quarter of 2004.
These positive factors were partially offset by lower sales volumes and higher
product costs resulting from increased purchase prices for copper and
commodities derived from both petroleum and natural gas.
Operating earnings as a percent of total revenues generated by the segment
decreased to 6.5% in the quarter ended March 31, 2005 from 7.3% for the quarter
ended March 31, 2004 because of the previously mentioned items.
DISCONTINUED OPERATIONS
Loss from discontinued operations for the quarter ended March 31, 2005 includes:
- $1.9 million of revenues and $0.4 million of loss before income tax
benefits related to the discontinued operations of the Company's
Electronics segment; and
- $2.4 million of loss before income tax benefits related to the
discontinued operations of the Company's Networking segment.
The Company recognized a gain on the disposal of discontinued operations in the
amount of $10.0 million before tax ($6.4 million after tax) during the first
quarter of 2005.
Loss from discontinued operations for the quarter ended March 31, 2004 includes
$45.2 million of revenues and $2.3 million of loss before income tax benefits
related to the discontinued operations of the Company's Networking segment.
-33-
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash liquidity included cash and cash equivalents, cash
from operations and amounts available under credit facilities. Generally, the
Company's primary source of cash has been from business operations. Cash sourced
from credit facilities and other borrowing arrangements has historically been
used to fund business acquisitions. The Company believes that the sources listed
above are sufficient to fund the current requirements of working capital, to
make scheduled pension contributions for the Company's retirement plans, to fund
scheduled debt maturity payments, to fund quarterly dividend payments and to
support its short-term and long-term operating strategies.
The Company expects that its cash tax payments will be minimal in 2005 because
of NOL carryforwards as of December 31, 2004 in Australia, Germany, the
Netherlands and the United States. These NOL carryforwards arise from lowered
operating earnings during the recent economic downturns in the United States and
Europe, costs associated with divestiture or closure of manufacturing plants in
the United States, Germany and Australia, and transaction and other costs
associated with the Merger.
Planned capital expenditures for 2005 are approximately $25.0 million to $30.0
million, of which approximately $12.0 million relates to capacity maintenance
and enhancement. The Company has the ability to revise and reschedule the
anticipated capital expenditure program should the Company's financial position
require it.
Any materially adverse reaction to customer demand, uncertainties related to the
effect of competitive products and pricing, customer acceptance of the Company's
product mix or economic conditions worldwide could affect the ability of the
Company to continue to fund its needs from business operations.
Net cash inflow during the three months ended March 31, 2005 totaled $1.5
million. The continuing operations provided $1.5 million in cash during the
first three months of 2005. The discontinued operations neither used nor
provided cash during the first three months of 2005.
Net cash outflow during the three months ended March 31, 2004 totaled $11.6
million. The continuing operations and the discontinued operations used cash
totaling $11.2 million and $0.4 million, respectively, during the first three
months of 2004.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used for operating activities in the first three months of 2005 totaled
$3.6 million and included $9.8 million of other non-cash operating expenses and
a $26.4 million net increase in operating assets and liabilities. Other non-cash
operating expenses consisted of depreciation, amortization, deferred tax
provision, stock compensation, and a gain on the disposal of tangible assets.
The net increase in operating assets and liabilities resulted primarily from
increased receivables, increased inventories and increased net current and
deferred tax assets partially offset by increased accounts payable and accrued
liabilities and decreased other net operating assets and liabilities.
-34-
Net cash used for operating activities in the first three months of 2004 totaled
$8.6 million and included $9.3 million of non-cash operating expenses and a
$20.3 million net increase in operating assets and liabilities. Non-cash
operating expenses, other than depreciation, amortization and deferred tax
benefit, consisted of certain retirement savings plan contributions funded with
common stock held in treasury rather than with cash, employee stock purchase
plan settlements funded with common stock held in treasury, and amortization of
unearned deferred compensation on restricted shares granted to certain of the
Company's key employees. The net increase in operating assets and liabilities
resulted from increased receivables, increased inventories, and increased other
net assets and liabilities partially offset by increased accounts payable and
accrued liabilities and decreased current and deferred tax assets.
CASH FLOW FROM INVESTING ACTIVITIES
Net cash provided by investing activities total $6.9 million in the first three
months of 2005. Net cash used for investing activities in the first three months
of 2004 totaled $1.6 million.
CAPITAL EXPENDITURES
Three Months Ended March 31,
(in thousands) 2005 2004
- --------------------------- ------- -------
Continuing operations:
Capacity modernization and enhancement $ 3,157 $ 1,423
Capacity expansion 1,299 106
Other 1,479 370
------- -------
Total continuing operations 5,935 1,899
Discontinued operations - 343
------- -------
$ 5,935 $ 2,242
======= =======
Capital expenditures for the continuing operations during the three months ended
March 31, 2005 and 2004 represented 1.9% and 1.1%, respectively, of revenues for
the same periods. Investment during both the first three months of 2005 and 2004
was utilized principally for maintaining and enhancing existing production
capabilities.
CASH FLOW FROM FINANCING ACTIVITIES
Net cash used for financing activities during the first three months of 2005 and
2004 totaled $0.5 million and $1.2 million, respectively.
During the three months ended March 31, 2005, the Company received proceeds from
the exercise of stock options totaling $2.1 million.
During the three-month periods ended March 31, 2005 and 2004, dividends of $.05
per share were paid to stockholders, resulting in cash outflows of $2.4 million
and $1.3 million, respectively.
During the quarter ended March 31, 2005, there were no material changes outside
the ordinary course of business to the Company's contractual obligations
presented in Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, of the Annual Report on Form 10-K for the period
ended December 31, 2004.
-35-
WORKING CAPITAL
Current assets less cash and cash equivalents increased $28.2 million, or 6.1%,
from $460.5 million at December 31, 2004 to $488.7 million at March 31, 2005.
Receivables increased 17.8% from $174.6 million at December 31, 2004 to $205.7
million at March 31, 2005 due primarily to payment of approximately $8.0 million
in sales incentive rebates, accrued in 2004, to participating customers during
the first quarter of 2005. Inventories increased 3.2% from $227.0 million at
December 31, 2004 to $234.4 million at March 31, 2005 due primarily to increased
production necessary to support higher sales levels Other current assets
increased 3.6% from $25.0 million at December 31, 2004 to $25.9 million at
March 31, 2005 because of a $0.2 million increase in deferred income tax assets
and a $1.5 million increase in income taxes receivable partially offset by a
$0.3 million decrease in prepaid insurance and a $0.5 million decrease in
prepaid taxes. Current assets of discontinued operations decreased by 34.2% from
$34.1 million at December 31, 2004 to $22.5 million at March 31, 2005 due
primarily to the depletion of Raydex and Montrose receivables and inventories
after those facilities ceased production early in the first quarter of 2005.
Current liabilities increased $10.5 million, or 4.8%, from $218.3 million at
December 31, 2004 to $228.8 million at March 31, 2005. Accounts payable and
accrued liabilities increased 7.2% from $185.0 million at December 31, 2004 to
$198.4 million at March 31, 2005 due primarily to increased production and
higher costs on copper, Teflon(R) FEP and commodities derived from petroleum and
natural gas partially offset by severance payments totaling $3.3 million during
the first quarter of 2005. In regard to the severance payments, please refer to
Note 11, Accounts Payable and Accrued Liabilities, to the Consolidated Financial
Statements in this Quarterly Report on Form 10-Q. Current liabilities of
discontinued operations decreased 15.9% from $17.5 million at December 31, 2004
to $14.7 million at March 31, 2005 due primarily to severance payments of $2.8
million applied against the severance reserves for BCC's Phoenix operation ($0.4
million), Montrose ($0.5 million), and Raydex ($1.9 million) during the current
quarter.
LONG-LIVED ASSETS
Long-lived assets decreased $18.4 million, or 2.5%, from $746.1 million at
December 31, 2004 to $727.7 million at March 31, 2005.
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 $10.5 million during the first three months of 2005 due
mainly to depreciation.
Goodwill and other intangibles includes goodwill, patents, trademarks, backlog,
favorable contracts and customer relations. Goodwill is 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. The carrying amounts of these assets
decreased by $4.0 million during the first three months of 2005 due mainly to
amortization.
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CAPITAL STRUCTURE
MARCH 31, 2005 December 31, 2004
------------------- ---------------------
AMOUNT PERCENT Amount Percent
(in thousands, except % data) ---------- ------- ---------- ---------
Current maturities of long-term debt $ 15,666 1.5% $ 15,702 1.5%
Long-term debt 232,563 22.0% 232,823 22.0%
---------- ------ ---------- -------
Total debt 248,229 23.5% 248,525 23.5%
Stockholders' equity 809,126 76.5% 810,000 76.5%
---------- ------ ---------- -------
$1,057,355 100.0% $1,058,525 100.0%
========== ====== ========== =======
The Company's capital structure consists primarily of current maturities of
long-term debt, long-term debt and stockholders' equity. The capital structure
decreased $1.2 million during the first quarter of 2005 because of a $0.3
million decrease in long-term debt and a $0.9 million decrease in stockholders'
equity.
In 1997, the Company completed a private placement of $75.0 million of unsecured
medium-term notes. The notes bear interest at 6.92% and mature in $15.0 million
annual increments in August 2005 through August 2009. In 1999, the Company
completed a private placement of $64.0, $44.0 and $17.0 million in unsecured
debt. The notes bear interest at the contractual rates of 7.60%, 7.74%, and
7.95%, respectively, and mature in September 2004, September 2006, and September
2009, respectively. The agreements for these notes contain various customary
affirmative and negative covenants and other provisions, including restrictions
on the incurrence of debt, maintenance of maximum leverage ratio and minimum net
worth. The Company was in compliance with these covenants at both March 31, 2005
and the filing date of this Quarterly Report on Form 10-Q. The Company repaid
the $64.0 million tranche of the 1999 placement in September 2004.
At March 31, 2005, the Company had outstanding $110.0 million of unsecured
subordinated debentures. The debentures are convertible into shares of common
stock, at a conversion price of $18.069 per share, upon the occurrence of
certain events. The conversion price is subject to adjustment in certain
circumstances. Holders may surrender their debentures for conversion upon
satisfaction of any of the following conditions: (1) the closing sale price of
the Company's common stock is at least 110% of the conversion price for a
minimum of 20 days in the 30 trading-day period ending on the trading day prior
to surrender; (2) the senior implied rating assigned to the Company by Moody's
Investors Service, Inc. is downgraded to B2 or below and the corporate credit
rating assigned to the Company by Standard & Poor's is downgraded to B or below;
(3) the Company has called the debentures for redemption; or (4) upon the
occurrence of certain corporate transactions as specified in the indenture. As
of March 31, 2005, condition (1) had been met and, with respect to condition
(2), the senior implied rating was Ba2 and the corporate credit rating was BB-.
Interest of 4.0% is payable semiannually in arrears, on January 15 and July 15.
The debentures mature on July 15, 2023, if not previously redeemed. The Company
may redeem some or all of the debentures on or after July 21, 2008, at a price
equal to 100% of the principal amount of the debentures plus accrued and unpaid
interest up to the redemption date. Holders may require the Company to purchase
all or part of their debentures on July 15, 2008, July 15, 2013, or July 15,
2018, at a price equal to 100% of the principal amount of the debentures plus
accrued and unpaid interest up to the redemption date, in which case the
purchase price may be paid in cash, shares of the Company's common stock or a
combination of cash and the Company's common stock, at the Company's option.
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The Company entered into a credit agreement with a group of six banks on October
9, 2003 (CREDIT AGREEMENT). The Credit Agreement provides for a secured,
variable-rate and revolving credit facility not to exceed $75.0 million expiring
in June 2006. In general, a portion of the Company's assets in the United
States, other than real property, secures any borrowing under the Credit
Agreement. The amount of any such borrowing is subject to a borrowing base
comprised of a portion of the Company's receivables and inventories located in
the United States. A fixed charge coverage ratio covenant becomes applicable if
the sum of the Company's excess borrowing availability and unrestricted cash
falls below $25.0 million. There were no outstanding borrowings at March 31,
2005 under the Credit Agreement. The Company had $32.8 million in borrowing
capacity available at March 31, 2005.
At March 31, 2005, the Company had unsecured, uncommitted arrangements with ten
banks under which it could borrow up to $12.5 million at prevailing interest
rates. There were no outstanding borrowings under these arrangements at March
31, 2005.
Borrowings have the following scheduled maturities.
Payments Due by Period
-------------------------------------------------------
March 31, 2005 Less than 1 1-3 3-5 After
(in thousands) Total year years years 5 years
- -------------- --------- ------------ --------- -------- ---------
Series 1997 medium-term notes $ 75,000 $ 15,000 $ 30,000 $ 30,000 $ -
Series 1999B medium-term notes 44,000 - 44,000 - -
Series 1999C medium-term notes 17,000 - - 17,000 -
Convertible subordinated debentures 110,000 - - - 110,000
Other borrowings 1,633 666 967 - -
Capital leases 596 - 596
--------- ------------ --------- -------- ---------
$ 248,229 $ 15,666 $ 75,563 $ 47,000 $ 110,000
========= ============ ========= ======== =========
The Company had the following commercial commitments outstanding at March 31,
2005:
Amount of Commitment Expiration Per Period
-------------------------------------------------------
March 31, 2004 Less than 1 1-3 3-5 After
(in thousands) Total year years years 5 years
- ----------------------------------- --------- ------------ --------- -------- ---------
Lines of credit $ 32,836 $ - $ 32,836 $ - $ -
Standby letters of credit 9,590 9,590 - - -
Guarantees 5,118 5,118 - - -
Surety bonds 4,589 4,589 - - -
--------- ------------ --------- -------- ---------
Total commercial commitments $ 52,133 $ 19,297 $ 32,836 $ - $ -
========= ============ ========= ======== =========
Stockholders' equity decreased by $0.9 million, or 0.1%, from December 31, 2004
to March 31, 2005 because of a decrease in accumulated other comprehensive
income and an increase in treasury stock partially offset by increases in both
additional paid-in capital and retained earnings and a decreased in unearned
deferred compensation.
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Accumulated other comprehensive income decreased $14.5 million due primarily to
the negative effect of currency exchange rates on financial statement
translation. Treasury stock increased by $0.3 million because of the forfeiture
of stock by Incentive Plans participants in lieu of cash payment of individual
tax liabilities related to share-based compensation. Additional paid-in capital
increased by $2.4 million due primarily to the use of common stock held in
treasury for the settlement of stock option exercises. Retained earnings
increased $11.0 million due primarily to net income of $13.0 million partially
offset by dividends of $2.4 million and a $0.4 million decrease related to the
Merger. Unearned deferred compensation decreased $0.5 million because of current
quarter amortization.
OFF-BALANCE SHEET ARRANGEMENTS
The Company was not a party to any of the following types of off-balance sheet
arrangements at March 31, 2005:
- 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; or
- 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
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires the
Company to make judgments, assumptions and estimates that affect the amounts
reported in its Consolidated Financial Statements and accompanying notes. The
Company considers the accounting policies described in Critical Accounting
Policies within Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, of its Annual Report on Form 10-K for the
year ended December 31, 2004 to be its most critical accounting policies. An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that reasonably could have
been used, or changes in the accounting estimates that are reasonably likely to
occur periodically, could materially impact the Consolidated Financial
Statements. The Company bases its estimates on historical experience or various
assumptions that are believed to be reasonable under the circumstances, and the
results form the basis for making judgments about the reported values of assets,
liabilities, revenues and expenses. The Company believes these judgments have
been materially accurate in the past and the basis for these judgments should
not change significantly in the future. The Company's senior management has
discussed the development, selection and disclosure of these estimates with the
Audit Committee of the Company's Board of Directors. Actual results may differ
materially from these estimates under different assumptions or conditions.
-39-
During the three months ended March 31, 2005:
- 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
because of 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 further moderate improvement in the general economies of
both North America and Europe in 2005. The Company has announced price increases
taking effect during the first quarter of 2005 in most markets and regions and
for most products, and these price increases in aggregate are expected to offset
rising costs of copper and other materials. The Company estimates that its 2005
revenues will increase between 5% and 10% compared with pro forma revenues for
2004. Pro forma revenue is a financial measure that is not prepared in
accordance with accounting principles generally accepted in the United States
(GAAP). The Company provides information about pro forma revenues because
management believes it supplies meaningful additional information about the
Company's performance and its ability to service its long-term debt and other
fixed obligations and to fund continued growth. Pro forma revenues should be
considered in addition to, but not as a substitute for, actual revenues prepared
in accordance with GAAP. A reconciliation of actual revenues prepared in
accordance with GAAP for 2004 to pro forma revenues for 2004 is included in Note
3, Business Combinations, to the Consolidated Financial Statements in the
Company's 2004 Annual Report on Form 10-K.
The Company currently believes that company-wide cost-saving initiatives
launched in connection with the Merger in July 2004 will provide annual net
savings of approximately $35.0 million before tax, and that actions to achieve
such savings will be completed by the end of 2005. These initiatives include
purchase cost savings that were implemented in the second half of 2004, plant
closures that were announced in 2004 and will be achieved by mid-year 2005,
personnel reductions, and manufacturing realignments. Partially offsetting these
improvements will be higher information technology expenses, which are included
in the Company's estimate of net savings. Because of the impact of recently
executed plant closures, other cost savings and increased utilization of its
manufacturing capacity, the Company expects that operating margins will improve
and will be between 8.0% and 9.0% of revenues for 2005.
The Company anticipates recognizing increased expenses for its pension plans
during 2005. The Company's expenses for these plans during 2004 were $9.7
million. The Company anticipates expenses for these plans of $12.1 million
during 2005. The increase in expense results primarily from full-year inclusion
of the Canadian plans acquired in the Merger and the continuing impact of
investment losses incurred from 2001 through 2003 on the calculation of plan
expenses.
The Company anticipates funding $25.5 million in pension contributions and $2.5
million in contributions for other postretirement benefit plans in 2005. The
Company also anticipates paying off a tranche of its 1997 medium-term notes in
the amount of $15.0 million in August 2005. The Company anticipates it will have
sufficient funds to satisfy these cash requirements.
-40-
The Company recorded $3.0 million of sales incentive compensation during 2004
from a private-label customer under a minimum requirements contract as the
customer failed to meet purchasing targets. As of the filing of the Quarterly
Report on Form 10-Q, the customer has not paid this $3.0 million receivable and
is disputing the amount. The Company has filed for binding arbitration on this
matter and believes it should prevail. Accordingly, the Company has not
recognized an allowance for bad debts related to this receivable. Should the
Company not prevail in binding arbitration, the write-off of this receivable
would have a negative effect on operating results. The Company expects to
recognize "sales incentive" compensation of up to $3.0 million in 2005 from this
same private-label customer under a minimum requirements contract should the
customer fail to meet purchasing targets. With respect to the 2005 payment, the
Company received a $1.5 million prepayment in 2002 per the terms of the minimum
requirements contract. The remaining 2005 compensation could be reduced by the
gross margin generated from the customer's purchases of certain products from
the Company during upcoming year. Should the Company not prevail in the binding
arbitration discussed above, the Company believes that the customer would also
dispute the 2005 payment.
Management expects that the Company's effective tax rate for continuing
operations in 2005 will be 35%. Because of NOL carryforwards, the Company
anticipates that it will not make cash payments of United States income taxes
during 2005. Cash payments of income taxes will occur for some state and local
jurisdictions in the United States and some national jurisdictions outside the
United States.
Management expects that the Company's discontinued operations will generate a
loss of $2.0 million to $3.0 million during 2005, net of tax benefit, and that
this loss will be concentrated mainly in the first half of the year, after which
time the affected plants will have ceased operations and the majority of the
assets will be disposed. The Company anticipates the liquidation of assets of
discontinued operations will generate cash that will largely offset cash
required for severance associated with the discontinuance of these operations.
The Company is engaged in an effort to liquidate its excess real estate in the
United States, Canada and Europe. The Company has several buildings listed for
sale and has contracts to sell real estate during the first six months of 2005
with estimated cash proceeds of approximately $37.0 million (including the $20.7
million received in April 2005 as discussed in Note 4, Discontinued Operations,
to the Consolidated Financial Statements reflected in this Quarterly Report on
Form 10-Q). The Company expects to recognize a gain on disposal of discontinued
operations in the amount of $13.2 million pretax ($8.4 million after tax)
during the second quarter of 2005.
Depreciation and amortization for the year 2005 are expected to be $38.0
million. Capital expenditures for Belden CDT during 2005 are expected to be
between $25.0 million and $30.0 million.
The Company has incurred severance charges having to do with the discontinuation
of certain operations and with other actions intended to reduce costs. The
amount of the charges recognized but not funded as of March 31, 2005 is $14.3
million. Management expects that that all of these charges will be funded in
2005. This will have a negative effect on cash flow.
In connection with the Merger, the Company granted retention and integration
awards to certain employees. These awards consist of cash and restricted stock
and are payable in three installments. The first installment was paid to the
grantees in the third quarter of 2004. The second and third installments will be
paid on the first and second anniversary dates of the merger (July 15, 2005 and
2006) subject to certain conditions with respect to the grantees' continued
employment with the Company. The Company plans to accrue the expense for the
second and third installments quarterly, having begun with the third quarter of
2004 and ending with the second quarter of 2006. Management anticipates that the
amount of the expense will be $0.7 million quarterly or $2.8 million annually.
The cash expenditure in July 2005 and 2006 will be approximately $2.2 million in
each year.
-41-
The Company's outlook for the second quarter of 2005 is that revenues will be
approximately $340.0 million and the operating margin will range from 7.0% to
7.5% of revenues.
The Company anticipates that annual dividends in the aggregate of $.20 per
common share ($.05 per common share each quarter) will be paid to all common
stockholders.
FORWARD-LOOKING STATEMENTS
The statements set forth in this report 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:
- Changing economic conditions in the United States, Europe and parts
of Asia (and the impact such conditions may have on the Company's
sales);
- The level of business spending in the United States, Canada, Europe,
and other markets on information technology and the building or
reconfiguring of network infrastructure;
- Increasing price, product and service competition from United States
and international competitors, including new entrants;
- The creditworthiness of the Company's customers;
- 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 restructure the Company's operations;
- The ability to transfer production among the Company's facilities;
- The Company's abilities to integrate the operations of Belden and
CDT and to achieve the expected synergies and cost savings;
- 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 (specifically, costs for copper,
Teflon FEP(R) and commodities derived from petroleum and natural
gas) and availability;
- Changes in foreign currency exchange rates;
- The pricing of the Company's products (including the Company's
ability to adjust product pricing in a timely manner in response to
raw material cost volatility);
- The success of implementing cost-saving programs and initiatives;
- Reliance on large distributor customers and the reliance of the
Networking segment on sales to large telecommunications customers in
Europe;
- The threat of war and terrorist activities;
- General industry and market conditions and growth rates; and
- Other factors noted in this report and other Securities Exchange Act
of 1934 filings of the Company.
-42-
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. Item 7A, Quantitative and Qualitative
Disclosures About Market Risks, of the Company's Annual Report on Form 10-K for
the year ended December 31, 2004 provides more information as to the types of
practices and instruments used to manage risk. There was no material change in
the Company's exposure to market risks since December 31, 2004.
ITEM 4: 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). 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.
As described in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004, the business operations of CDT acquired in 2004 were excluded
from the Company's evaluation of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004.
-43-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings and administrative actions
that are incidental to its operations. These proceedings include personal injury
cases (about 140 of which the Company was aware at May 1, 2005) in which the
Company is one of many defendants, 10 of which are scheduled for trial during
2005.
Electricians have filed a majority of these cases, primarily in New Jersey and
Pennsylvania. Plaintiffs in these cases generally seek compensatory, special and
punitive damages. As of May 1, 2005, in 16 of these cases, plaintiffs generally
allege only damages in excess of some dollar amount (i.e., in one case, not less
than $15 thousand, in another case, in excess of $50 thousand and in the other
cases, in excess of $50 thousand in compensatory damages and $50 thousand in
punitive damages). In 120 of these cases, plaintiffs generally do not allege a
specific damage demand. As to the other four cases, the plaintiffs generally
allege monetary damages for a specified amount, the largest amount claimed being
$10 million compensatory and $10 million punitive damages (which has been
asserted in two of these cases). In none of these cases do plaintiffs allege
claims for specific dollar amounts as to any defendant. Based on the Company's
experience in such litigation, the amounts pleaded in the complaints are not
typically meaningful as an indicator of the Company's ultimate liability.
Typically in these cases, the claimant alleges injury from alleged exposure to
heat-resistant asbestos fiber, which was usually encapsulated or embedded and
lacquer-coated or covered by another material. Exposure to the fiber would have
occurred, if at all, while stripping (cutting) the wire or cable that had such
fiber. It is alleged by claimants that exposure to the fiber may result in
respiratory illness. Generally, stripping was done to repair or to attach a
connector to the wire or cable. Alleged predecessors of the Company had a small
number of products that contained the fiber, but ceased production of such
products more than fifteen years ago.
Through May 1, 2005, the Company had been dismissed (or had reached agreement to
be dismissed) in approximately 138 similar cases without any going to trial or
any payment to the claimant. Some of these cases were dismissed without
prejudice primarily because the claimants could not show any injury, or could
not show that injury was caused from exposure to products of alleged
predecessors of the Company. Only two cases have involved a settlement, with
three of the Company's insurers paying most or all of the settlement amount. The
Company has insurance that it believes should cover a significant portion of any
defense, settlement or judgment costs borne by the Company in these types of
cases.
The Company vigorously defends these cases. As a separate matter, liability for
any such injury generally should be allocated among all defendants in such cases
in accordance with applicable law. From 1996 through May 1, 2005, the total
amount of litigation costs paid by the Company for all cases of this nature was
approximately $140 thousand. In the opinion of the Company's management, the
proceedings and actions in which the Company is involved should not,
individually or in the aggregate, have a material adverse effect on the
Company's results of operations or financial condition.
-44-
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit 10.1 Belden CDT Inc. Terms and Conditions -- Stock Option Grant
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.
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 CDT INC.
Date: May 10, 2005 By: /s/ C. Baker Cunningham
------------------------------------
C. Baker Cunningham
President and Chief Executive
Officer
Date: May 10, 2005 By: /s/ Richard K. Reece
------------------------------------
Richard K. Reece
Vice President, Finance
and Chief Financial Officer
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