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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission file number 001-12929
COMMSCOPE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4135495
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1100 COMMSCOPE PLACE, SE
P.O. BOX 339
HICKORY, NORTH CAROLINA
(Address of principal executive offices)
28602
(Zip Code)
(828) 324-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
As of October 31, 2002 there were 59,219,567 shares of Common Stock
outstanding.
COMMSCOPE, INC.
FORM 10-Q
SEPTEMBER 30, 2002
TABLE OF CONTENTS
Page No.
--------
Part I - Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statements of
Stockholders' Equity and Comprehensive
Income (Loss) 6
Notes to Condensed Consolidated Financial
Statements 7 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17 - 24
Item 4. Controls and Procedures 25
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Certifications 27 - 28
2
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED -- IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 147,819 $ 177,702 $ 462,584 $ 594,961
--------- --------- --------- ---------
Operating costs and expenses:
Cost of sales 120,743 133,755 368,360 449,910
Selling, general and administrative 20,508 19,019 82,801 61,564
Research and development 1,069 1,834 4,847 5,459
Amortization of goodwill -- 1,340 -- 4,023
Terminated acquisition costs -- 9,294 -- 9,294
Impairment charges for fixed assets
and investments 25,096 -- 25,096 12,615
--------- --------- --------- ---------
Total operating costs and expenses 167,416 165,242 481,104 542,865
--------- --------- --------- ---------
Operating income (loss) (19,597) 12,460 (18,520) 52,096
Other income (expense), net 392 (472) 751 (603)
Interest expense (2,419) (2,211) (6,860) (6,285)
Interest income 696 294 1,702 669
--------- --------- --------- ---------
Income (loss) before income taxes and equity
in losses of OFS BrightWave, LLC (20,928) 10,071 (22,927) 45,877
Provision for income tax benefit (expense) 7,725 (3,726) 8,465 (16,975)
--------- --------- --------- ---------
Income (loss) before equity in losses of
OFS BrightWave, LLC (13,203) 6,345 (14,462) 28,902
Equity in losses of OFS BrightWave, LLC (6,359) -- (49,239) --
--------- --------- --------- ---------
Net income (loss) $ (19,562) $ 6,345 $ (63,701) $ 28,902
========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.32) $ 0.12 $ (1.03) $ 0.56
Assuming dilution $ (0.32) $ 0.12 $ (1.03) $ 0.55
Weighted average shares outstanding:
Basic 61,763 51,440 61,745 51,384
Assuming dilution 61,763 52,350 61,745 52,208
See notes to condensed consolidated financial statements.
3
COMMSCOPE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
September 30, December 31,
2002 2001
--------- ---------
ASSETS
Cash and cash equivalents $ 131,575 $ 61,929
Accounts receivable, less allowance for doubtful accounts of
$14,502 and $12,599, respectively 80,438 105,402
Inventories 44,365 47,670
Prepaid expenses and other current assets 20,925 12,724
Deferred income taxes 19,483 18,143
--------- ---------
Total current assets 296,786 245,868
Property, plant and equipment, net 221,060 277,169
Goodwill, net of accumulated amortization of
$59,518 and $59,493, respectively 151,322 151,307
Other intangibles, net of accumulated amortization of
$39,303 and $37,421, respectively 9,462 11,344
Deferred income taxes 2,575 --
Investment in and advances to OFS BrightWave, LLC 112,489 196,860
Other assets 9,960 6,457
--------- ---------
Total Assets $ 803,654 $ 889,005
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 20,504 $ 16,339
Other accrued liabilities 34,336 27,753
Current portion of long-term debt 10,300 2,651
--------- ---------
Total current liabilities 65,140 46,743
Long-term debt, less current portion 183,300 191,918
Deferred income taxes -- 22,899
Other noncurrent liabilities 25,024 20,931
--------- ---------
Total Liabilities 273,464 282,491
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; Authorized shares:
20,000,000; Issued and outstanding shares: None at
September 30, 2002 and December 31, 2001 -- --
Common stock, $.01 par value; Authorized shares:
300,000,000; Issued and outstanding shares: 61,762,667
at September 30, 2002; 61,688,256 at December 31, 2001 618 617
Additional paid-in capital 382,995 381,823
Retained earnings 164,966 228,667
Accumulated other comprehensive loss (18,389) (4,593)
--------- ---------
Total Stockholders' Equity 530,190 606,514
--------- ---------
Total Liabilities and Stockholders' Equity $ 803,654 $ 889,005
========= =========
See notes to condensed consolidated financial statements.
4
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED -- IN THOUSANDS)
Nine Months Ended
September 30,
----------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ (63,701) $ 28,902
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 27,906 30,080
Equity in losses of OFS BrightWave, LLC 78,280 --
Impairment charges for fixed assets and investments 25,096 12,615
Deferred income taxes (26,421) (5,826)
Tax benefit from stock option exercises 128 617
Changes in assets and liabilities:
Accounts receivable 24,144 52,199
Inventories 2,162 15,525
Prepaid expenses and other current assets (9,310) (3)
Accounts payable and other accrued liabilities 9,715 (15,182)
Other noncurrent liabilities 4,023 3,515
Other 101 72
--------- ---------
Net cash provided by operating activities 72,123 122,514
INVESTING ACTIVITIES:
Additions to property, plant and equipment (8,335) (59,465)
Investment in unconsolidated affiliate -- (1,792)
Net proceeds from repayment of advance to OFS
BrightWave, LLC 6,146 --
Proceeds from disposal of fixed assets 333 912
--------- ---------
Net cash used in investing activities (1,856) (60,345)
FINANCING ACTIVITIES:
Repayments under revolving credit facility -- (30,000)
Principal payments on long-term debt (2,107) (1,326)
Debt issuance costs (345) --
Proceeds from exercise of stock options 1,029 2,612
--------- ---------
Net cash used in financing activities (1,423) (28,714)
Effect of exchange rate changes on cash 802 (231)
--------- ---------
Change in cash and cash equivalents 69,646 33,224
Cash and cash equivalents, beginning of period 61,929 7,704
--------- ---------
Cash and cash equivalents, end of period $ 131,575 $ 40,928
========= =========
See notes to condensed consolidated financial statements.
5
COMMSCOPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED -- IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Nine Months Ended
September 30,
----------------------------
2002 2001
------------ ------------
Number of common shares outstanding:
Balance at beginning of period 61,688,256 51,263,703
Issuance of shares to nonemployee director 1,000 --
Issuance of shares for stock option exercises 73,411 202,451
------------ ------------
Balance at end of period 61,762,667 51,466,154
------------ ------------
Common stock:
Balance at beginning of period $ 617 $ 513
Issuance of shares for stock option exercises 1 2
------------ ------------
Balance at end of period $ 618 $ 515
------------ ------------
Additional paid-in capital:
Balance at beginning of period $ 381,823 $ 175,803
Issuance of shares to nonemployee director 16 --
Issuance of shares for stock option exercises 1,028 2,610
Tax benefit from stock option exercises 128 617
------------ ------------
Balance at end of period $ 382,995 $ 179,030
------------ ------------
Retained earnings:
Balance at beginning of period $ 228,667 $ 200,802
Net income (loss) (63,701) 28,902
------------ ------------
Balance at end of period $ 164,966 $ 229,704
------------ ------------
Accumulated other comprehensive loss:
Balance at beginning of period $ (4,593) $ (2,598)
Other comprehensive loss (13,796) (6,072)
------------ ------------
Balance at end of period $ (18,389) $ (8,670)
------------ ------------
Total stockholders' equity $ 530,190 $ 400,579
============ ============
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Comprehensive income (loss):
Net income (loss) $ (19,562) $ 6,345 $ (63,701) $ 28,902
Other comprehensive loss, net of tax:
Foreign currency translation gain (loss) -
foreign subsidiaries 1,276 788 3,413 (57)
Foreign currency transaction loss on long-term
intercompany loans - foreign subsidiaries (10,311) (2,490) (16,403) (6,376)
Hedging gain (loss) on nonderivative instrument 74 (617) (717) 339
Effect of adopting SFAS No. 133 -- -- -- 229
Loss on derivative financial instrument
designated as a cash flow hedge (102) (112) (89) (207)
------------ ------------ ------------ ------------
Total other comprehensive loss, net of tax (9,063) (2,431) (13,796) (6,072)
------------ ------------ ------------ ------------
Total comprehensive income (loss) $ (28,625) $ 3,914 $ (77,497) $ 22,830
============ ============ ============ ============
See notes to condensed consolidated financial statements.
6
COMMSCOPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
CommScope, Inc. ("CommScope" or the "Company"), through its wholly owned
subsidiaries and equity method investee, operates in the cable manufacturing
business, with manufacturing facilities located in the United States, Europe
and Latin America. CommScope is a leading worldwide designer, manufacturer
and marketer of a wide array of broadband coaxial cables and other
high-performance electronic and fiber optic cable products for cable
television, telephony, Internet access and wireless communications.
Management believes CommScope is the world's largest manufacturer of coaxial
cable for hybrid fiber coax (HFC) broadband networks. CommScope is also a
leading supplier of coaxial, twisted pair, and fiber optic cables for premise
wiring (local area networks), wireless and other communication applications.
Basis of Presentation
The condensed consolidated balance sheet as of September 30, 2002, and the
condensed consolidated statements of operations and comprehensive income
(loss) for the three and nine months ended September 30, 2002 and 2001 and
the condensed consolidated statements of cash flows and stockholders' equity
for the nine months ended September 30, 2002 and 2001 are unaudited and
reflect all adjustments of a normal recurring nature which are, in the
opinion of management, necessary for a fair presentation of the interim
period financial statements. The results of operations for the interim
period are not necessarily indicative of the results of operations to be
expected for the full year.
The unaudited interim condensed consolidated financial statements of
CommScope have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted. These interim condensed
consolidated financial statements should be read in conjunction with the
Company's December 31, 2001 audited consolidated financial statements and
notes thereto included in the Company's 2001 Annual Report on Form 10-K.
Concentrations of Risk
Net sales to AT&T Broadband accounted for 18% of the Company's net sales
during the three months ended September 30, 2002 and 13% of the Company's net
sales for the nine months ended September 30, 2002, compared to approximately
4% of the Company's net sales in the comparable prior periods. No other
customer accounted for more than 10% of the Company's net sales during the
current year or comparable prior year periods. Accounts receivable from AT&T
Broadband were approximately 12% of the Company's net accounts receivable as
of September 30, 2002.
Accounts Receivable
During the nine months ended September 30, 2002, the Company wrote off
$21.4 million of Adelphia Communications Corporation ("Adelphia") receivables
as a result of Adelphia's Chapter 11 bankruptcy, which was announced by
Adelphia in June 2002. The Company has reached agreement with Adelphia on
the terms under which the Company will do business after the Chapter 11
bankruptcy filing date.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use
of the purchase accounting method for business combinations and broadens the
criteria for recording intangible assets separate from goodwill. SFAS No.
142 uses a nonamortization approach to account for purchased goodwill and
certain intangible assets with indefinite useful lives and also requires at
least an annual assessment for impairment by applying a fair-value-based
test. Intangible assets with finite useful lives will continue to be
amortized over their useful lives.
Under SFAS No. 142, goodwill must be tested for impairment as of the
beginning of the year in which the statement is adopted in its entirety.
SFAS No. 142 allowed six months from the date the statement was initially
applied to complete the transitional goodwill impairment test. CommScope
completed the process of performing the transitional goodwill impairment test
as of January 1, 2002 in the second quarter of 2002, and as a result of the
test performed, management believes that goodwill was not impaired as of
January 1, 2002.
SFAS No.142 also requires that goodwill be tested for impairment annually
at the same time each year and on an interim basis when events or
circumstances change. The Company elected to perform its annual goodwill
impairment test as of August 31. Management has completed the annual
goodwill impairment test as of August 31, 2002 and believes that goodwill was
not impaired as of this date. Subsequent impairment losses, if any, will be
reflected in operating income in the statement of operations.
The carrying value of other intangible assets as of September 30, 2002 in
the amount of $9.5 million, net of accumulated amortization of $39.3 million,
represents patented technology, with a carrying value of $0.1 million, and
customer relationship assets, with a carrying value of $9.4 million. These
intangible assets were determined by management to meet the criterion for
recognition apart from goodwill and to have finite lives. CommScope did not
have any indefinite-lived intangible assets, other than goodwill, as of the
January 1, 2002 transition date or the September 30, 2002 balance sheet
date. Based on management's analysis of all pertinent factors, no
adjustments were necessary to the remaining useful lives of these assets,
which will continue to be amortized on a straight-line basis through 2006.
Amortization expense associated with these intangible assets was $627 and
$1.9 million for the three and nine months ended September 30, 2002,
respectively and $656 and $2.0 million for the three and nine months ended
September 30, 2001, respectively. Annual amortization expense for these
intangible assets is expected to be $2.5 million in 2002, $2.5 million in
2003, $2.4 million in 2004, $2.4 million in 2005 and $1.5 million in 2006.
The slight change in goodwill for the three and nine months ended September
30, 2002 was due to the impact of translating the euro-denominated goodwill
on the balance sheet of the Company's Belgian subsidiary into CommScope's US
dollar reporting currency.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
The adoption of SFAS No. 142 effective January 1, 2002 resulted in the
elimination of pretax goodwill amortization expense in the amount of $1.3
million and $4 million for the three and nine months ended September 30,
2002, respectively. The following table provides a reconciliation of net
income (loss) and net income (loss) per share, reflecting the impact of the
adoption of SFAS No. 142 on a pro forma basis for the three and nine months
ended September 30, 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net income (loss) $ (19,562) $ 6,345 $ (63,701) $ 28,902
Elimination of goodwill
amortization expense, net of
tax effects -- 844 -- 2,534
---------- ---------- ---------- ----------
Net income (loss) - pro forma for
2001 $ (19,562) $ 7,189 $ (63,701) $ 31,436
========== ========== ========== ==========
Net income (loss) per share,
basic - pro forma for 2001 $ (0.32) $ 0.14 $ (1.03) $ 0.61
Net income (loss) per share,
assuming dilution - pro forma
for 2001 $ (0.32) $ 0.14 $ (1.03) $ 0.60
Impact of Newly Issued Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets." SFAS No. 143 will require the accrual, at fair value, of
the estimated retirement obligation for tangible long-lived assets if the
Company is legally obligated to perform retirement activities at the end of
the related asset's life. The Company is currently assessing the impact of
this statement, which will be effective for the Company on January 1, 2003.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." First, SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt" and an amendment of that Statement, SFAS
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."
Because of the rescission of SFAS No. 4, the gains and losses from the
extinguishment of debt are no longer required to be classified as
extraordinary items. SFAS No. 64 amended SFAS No. 4 and is no longer needed
because SFAS No. 4 is rescinded. Second, SFAS No. 145 rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." This statement was
originally issued to establish accounting requirements for the effects of
transition to the provisions of the Motor Carrier Act of 1980. As those
transitions are complete, SFAS No. 44 is no longer needed. Third, SFAS No.
145 amends SFAS No. 13, "Accounting for Leases," to require sale-leaseback
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. The amendment of SFAS No. 13 is
effective for transactions occurring after May 15, 2002. There has been no
impact on the Company due to the amendment of SFAS No. 13. Last, SFAS No.
145 makes various technical corrections to existing pronouncements that are
not substantive in nature. The Company is currently assessing the impact of
the rescission of SFAS No. 4, 44 and 64 and the other technical corrections
prescribed by the Statement, which will be effective for the Company on
January 1, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
is incurred. This Statement also establishes that fair value is the
objective for initial measurement of the liability. The Company currently
plans to adopt SFAS No. 146 as of the effective date of January 1, 2003, and
does not currently expect the adoption of this Statement to have a material
impact on its financial condition or results of operations.
2. INVENTORIES
September 30, December 31,
2002 2001
------- -------
Raw materials $17,609 $23,037
Work in process 11,489 9,688
Finished goods 15,267 14,945
------- -------
$44,365 $47,670
======= =======
3. LONG-TERM DEBT
September 30, December 31,
2002 2001
--------- ---------
Credit Agreement $ -- $ --
Convertible Notes 172,500 172,500
Eurodollar Credit Agreement 10,300 11,269
IDA Notes 10,800 10,800
--------- ---------
193,600 194,569
Less current portion (10,300) (2,651)
--------- ---------
$ 183,300 $ 191,918
========= =========
In June 2002, the Company amended its $350 million revolving credit
agreement and its eurodollar credit agreement. These amendments, among other
things, provided for the exclusion of the noncash equity method income and
losses of OFS BrightWave, LLC ("OFS BrightWave") from the definition of
EBITDA, which is used to calculate compliance with certain covenants. In
addition, the size of the revolving credit agreement was reduced from $350
million to $250 million. The amendments further limited the Company's
ability to make additional investments in, or guarantee the obligations of,
OFS BrightWave. Furthermore, the amendments reduced the maximum amount of
payments the Company may make for dividends and stock repurchases from a
total of $75 million to $50 million and included additional investments in
OFS BrightWave under this maximum payment limitation. These amendments
resolved covenant compliance issues related to the Company's equity in losses
of OFS BrightWave (see note 5 for discussion of the Company's equity in
losses of OFS BrightWave).
As of November 4, 2002, the Company terminated its amended $250 million
revolving credit agreement, which was scheduled to expire on December 31,
2002. The Company had no outstanding indebtedness under this terminated
facility and ended the third quarter of 2002 with $132 million of cash and
cash equivalents on the balance sheet. Management expects to enter into a
new secured credit facility of up to $125 million during the fourth quarter
of 2002.
The $10.3 million eurodollar credit agreement contains covenants requiring
the Company to maintain a total debt to EBITDA ratio, an interest coverage
ratio, and a minimum net worth. The Company's noncompliance with these
covenants could create a default under this agreement, resulting in potential
acceleration of repayment of the associated obligation. The Company was not
in compliance with the amended total debt to EBITDA ratio covenant under the
eurodollar credit agreement as of September 30, 2002, but was able to obtain
a temporary covenant waiver, which expires on December 31, 2002. Management
intends to further amend or replace this agreement, if able to do so under
acceptable terms; otherwise, management intends to repay the associated
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
obligation using existing cash balances or pursue an extension of the existing
temporary covenant waiver.
4. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding during the
applicable periods. Diluted net income (loss) per share is based on net
income (loss) adjusted for after-tax interest and amortization of debt
issuance costs related to convertible debt, if dilutive, divided by the
weighted average number of common shares outstanding adjusted for the
dilutive effect of stock options and convertible securities.
On December 15, 1999, the Company issued $172.5 million in convertible
notes, which are convertible into shares of common stock at a conversion rate
of 20.7512 shares per $1,000 principal amount. The effect of the assumed
conversion of these notes was excluded from the calculation of net income
(loss) per share, assuming dilution, for the three and nine months ended
September 30, 2002 and 2001 because it would have been antidilutive in all
periods.
Below is a reconciliation of weighted average common shares outstanding for
basic net income (loss) per share to weighted average common and potential
common shares outstanding for diluted net income (loss) per share.
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
NUMERATOR:
Net income (loss) for basic and
diluted net income (loss) per
share $(19,562) $ 6,345 $(63,701) $ 28,902
======== ======== ======== ========
DENOMINATOR:
Weighted average number of common
shares outstanding for basic net
income (loss) per share 61,763 51,440 61,745 51,384
Effect of dilutive employee stock
options (a) -- 910 -- 824
-------- -------- -------- --------
Weighted average number of common
and potential common shares
outstanding for diluted net income
(loss) per share 61,763 52,350 61,745 52,208
======== ======== ======== ========
(a) Options to purchase approximately 6.3 million and 4.0 million common
shares were excluded from the computation of net loss per share, assuming
dilution, for the three and nine months ended September 30, 2002,
respectively, because they would have been antidilutive in both periods.
Options to purchase approximately 944 thousand common shares, at prices
ranging from $22.00 to $47.06 per share, were excluded from the computation
of net income per share, assuming dilution, for the three months ended
September 30, 2001 because the exercise prices of such options were greater
than the average market price of the common shares during this period.
Similarly, options to purchase approximately 793 thousand common shares, at
prices ranging from $20.55 to $47.06 per share, were excluded from the
computation of net income per share, assuming dilution, for the nine months
ended September 30, 2001.
5. EQUITY IN LOSSES OF OFS BRIGHTWAVE, LLC
Effective November 16, 2001, CommScope acquired an approximate 18.4%
ownership interest in OFS BrightWave, an optical fiber and fiber cable
venture between CommScope and The Furukawa Electric Co., Ltd. of Japan
("Furukawa"). CommScope's portion of the losses of OFS BrightWave for the
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
three and nine months ended September 30, 2002 were included in the condensed
consolidated financial statements of CommScope for the respective periods.
These results were net of elimination of intercompany profit in the amount of
$26 and $79, net of tax, for the three and nine months ended September 30,
2002, respectively. This elimination related to interest payments received
from OFS BrightWave under a $30 million revolving note. OFS BrightWave
elected to be taxed as a partnership, therefore the Company's income tax
benefit from OFS BrightWave's flow-through losses was recorded using the
Company's tax rates. Income tax expense or benefit provided by OFS
BrightWave for income or losses generated by its domestic c-corporation
subsidiary did not flow through to CommScope, and therefore did not impact
CommScope's income tax benefit from flow-through losses of OFS BrightWave.
However, the income tax expense or benefit provided for the income or loss
generated by OFS BrightWave's domestic c-corporation subsidiary did impact
CommScope's equity in the net assets of OFS BrightWave, as shown in the
reconciliation below.
The following table provides summary financial information for OFS
BrightWave as of and for the three months and nine months ended September 30,
2002:
As of
September 30,
2002
---------
Balance Sheet Data:
Current assets $ 138,649
Noncurrent assets 686,321
Current liabilities 129,016
Other noncurrent liabilites 155,661
Minority interests 48,692
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 2002
--------- ---------
Income Statement Data:
Net revenues $ 21,019 $ 69,856
Gross profit (35,684) (147,494)
Loss from continuing operations (53,992) (392,635)
Net loss (53,992) (392,635)
OFS Brightwave incurred significant charges during the nine months ended
September 30, 2002 related to the write-off of goodwill and certain fixed
assets, restructuring and employee separation costs and other cost reduction
activities, which totaled $215 million.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
The reconciliation of CommScope's investment in and advances to OFS
BrightWave compared to CommScope's equity in the net assets of OFS BrightWave
as of September 30, 2002 was as follows:
Net assets of OFS BrightWave, LLC $ 491,601
CommScope ownership percentage 18.43225 %
---------
CommScope equity in net assets of
OFS BrightWave, LLC 90,613
Plus:
Advances, net of repayments 23,854
Direct costs of acquisition 4,763
Pushdown and other adjustments by
majority member in OFS BrightWave, LLC (831)
Less:
Income tax benefit related to losses
generated by OFS BrightWave LLC's
domestic c-corporation subsidiary (5,910)
---------
Investment in and advances to OFS
BrightWave, LLC $ 112,489
=========
6. IMPAIRMENT CHARGES FOR FIXED ASSETS
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121,
"Accounting for the Impairment or Disposal of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," but retains many of its fundamental
provisions. Additionally, this statement expands the scope of discontinued
operations to include more disposal transactions. SFAS No. 144 was effective
for the Company on January 1, 2002. The initial adoption of this statement
did not have a material impact on the Company's financial statements.
However, the Company did reclassify the $4.3 million carrying value of its
idle Kings Mountain facility from property, plant and equipment to other
assets during 2002. Although this facility does not meet the requirements
under SFAS No. 144 for classification as held for sale, it has been
reclassified to other assets since it is not currently being, and has not
been, used in the Company's operations and is currently being actively
marketed for sale. In addition, the Company reclassified $550 from other
current assets to property, plant and equipment during 2002 relating to
assets previously classified as held for sale under SFAS No. 121, but which
do not meet the criteria for classification as held for sale under SFAS No.
144. Long-lived assets will be tested for recoverability in accordance with
SFAS No. 144 whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable.
Due to the difficult business environment in telecommunications and the
continuing decline in demand for the Company's products, management performed
a test of recoverability for its long-lived assets during the third quarter
of 2002. The Company's long-term undiscounted cash flow forecasts indicated
that the carrying amounts of fixed assets used to manufacture CommScope's
wireless, fiber optic cable and other telecom products may not be recoverable
as of September 30, 2002. Management does not currently plan to sell,
abandon, or otherwise dispose of these assets, and they were therefore
classified as assets to be held and used as of September 30, 2002.
The impairment loss recognized during the three months ended September 30,
2002 was measured as the amount by which the carrying values of the impaired
assets exceeded their respective fair values. Fair value of the equipment
used to manufacture fiber optic cable and other telecom products was
determined based on discounted cash flows, which was the best information
available to management. Fair value of the facility and equipment used to
manufacture wireless products was determined based on a combination of
independent appraisal, third-party estimates of current market values, and
internal estimates of current market values.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
In addition, management's quarterly review of idle and obsolete fixed
assets indicated additional impairment for specifically-identified
manufacturing equipment. The fair values of these specifically-identified
fixed assets were determined based on internal estimates of current market
values for used equipment. These idle and obsolete assets did not meet the
criteria for classification as held for sale and were therefore classified as
assets to be held and used as of September 30, 2002.
The Company recognized total impairment charges for fixed assets in the
amount of $25.1 million during the three months ended September 30, 2002.
The breakdown of these impairment charges was as follows (in millions):
Wireless cable manufacturing assets $ 15.1
Fiber optic cable manufacturing assets 5.3
Other telecommunications cable manufacturing assets 3.0
Other manufacturing assets 1.7
------
Total impairment charges $ 25.1
======
7. EMPLOYEE TERMINATION BENEFITS
As previously announced, the Company reduced its workforce by 202
employees during the third quarter of 2002, primarily in response to the
challenging global business environment. The affected employees included
manufacturing and administrative personnel located in North Carolina at the
Company's corporate office and manufacturing facilities. This workforce
reduction resulted in pretax charges of approximately $1.3 million during the
third quarter of 2002 for employee termination benefits, which consisted of
severance pay and related fringe benefits. The Company recorded $1.0 million
of these charges in cost of sales and $0.3 million in selling, general and
administrative expenses. The Company paid $0.8 million of these costs during
the quarter, resulting in a remaining accrual of $0.5 million as of September
30, 2002. Management estimates that these remaining benefits will be paid in
full by June 2003.
8. INCOME TAXES RELATED TO OTHER COMPREHENSIVE LOSS
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- --------------
2002 2001 2002 2001
----- ----- ----- -----
Income tax (expense) benefit for
components of other comprehensive loss:
Hedging gain (loss) on nonderivative instrument $ (13) $ 397 $ 486 (164)
Effect of adopting SFAS No. 133 -- -- -- (135)
Loss on derivative financial instrument
designated as a cash flow hedge 60 66 52 122
----- ----- ----- -----
Total income tax (expense) benefit for components
of other comprehensive loss $ 47 $ 463 $ 538 $(177)
===== ===== ===== =====
9. DERIVATIVES AND HEDGING ACTIVITIES
The only derivative instrument outstanding for the three and nine months
ended September 30, 2002 and 2001 was an interest rate swap, which
effectively converts the variable-rate eurodollar credit agreement to a
fixed-rate basis. This interest rate swap was designated and documented as a
cash flow hedge of the changes in the cash flows attributable to fluctuations
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
in the variable benchmark interest rate associated with the underlying debt
being hedged. This hedging instrument was effective at the balance sheet
date and is expected to continue to be effective for the duration of the swap
contract, resulting in no anticipated hedge ineffectiveness. There were no
material reclassifications from other comprehensive income to earnings during
the three and nine months ended September 30, 2002 and 2001 and the Company
does not anticipate any material reclassifications from accumulated other
comprehensive income during the next twelve months.
Also, the eurodollar credit agreement was designated and documented as a
partial hedge of the Company's net investment in its Belgian subsidiary.
This hedging instrument was effective at the balance sheet date and is
expected to continue to be effective for the duration of the loan agreement,
resulting in no anticipated reclassifications from accumulated other
comprehensive income to earnings.
Activity in the accumulated net gain (loss) on derivative instrument
included in accumulated other comprehensive loss for the three and nine
months ended September 30, 2002 and 2001 consisted of the following:
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
2002 2001 2002 2001
------ ------ ------ ------
Accumulated net gain on derivative
instrument, beginning of period $ 40 $ 134 $ 27 $ --
Net effect of adopting SFAS No. 133 -- -- -- 229
Net loss on derivative financial instrument
designated as a cash flow hedge (102) (112) (89) (207)
------ ------ ------ ------
Accumulated net gain (loss) on derivative
instrument, end of period $ (62) $ 22 $ (62) $ 22
====== ====== ====== ======
10. COMMITMENTS AND CONTINGENCIES
The Company's operating lease for its corporate office building contains
covenants requiring the Company to maintain a total debt to EBITDA ratio, an
interest coverage ratio, and a minimum net worth. The Company's
noncompliance with these covenants could create a default under this
operating lease, resulting in potential termination of the lease by the
lessor. Upon termination, the Company would be obligated to either purchase
the facility for approximately $13 million or market it for sale on the
lessor's behalf. The Company was not in compliance with the amended total
debt to EBITDA ratio covenant under this operating lease as of September 30,
2002, but was able to obtain a temporary covenant waiver, which expires on
December 31, 2002. Management intends to amend or replace this operating
lease, if able to do so under acceptable terms; otherwise, management intends
to purchase the facility using existing cash balances or pursue an extension
of the existing temporary covenant waiver.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months
Ended
September 30,
--------------------
2002 2001
------- -------
Cash paid during the period for:
Income taxes $ 599 $17,927
Interest (net of capitalized amounts) $ 4,716 $ 4,853
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED - IN THOUSANDS, UNLESS OTHERWISE NOTED)
12. SUBSEQUENT EVENT
As of October 9, 2002, the Company and Furukawa purchased 10.2 million
shares of CommScope common stock from Lucent Technologies Inc. ("Lucent").
The Company issued the 10.2 million shares of common stock to Lucent at a
price of $19.94 per share on November 16, 2001 in connection with the
Company's investment in OFS BrightWave, a venture that the Company and
Furukawa formed to acquire certain fiber cable and transmission fiber assets
from Lucent (see note 5). The total purchase price paid to Lucent by
CommScope and Furukawa on October 9, 2002 for the 10.2 million shares was
approximately $53.0 million, or $5.20 per share. Of the total 10.2 million
shares of the Company's common stock purchased from Lucent, Furukawa
purchased approximately 7.7 million shares, which we understand it plans to
hold for investment purposes. The Company repurchased the remaining
approximately 2.5 million shares, which are classified as treasury stock.
The Company funded its $13.2 million repurchase using existing cash
balances.
In conjunction with this stock purchase, CommScope and Furukawa also
entered into agreements that outline various investment terms, including
resale restrictions, registration rights, standstill provisions, as well as
call and limited put rights related to the CommScope shares held by
Furukawa. Additionally, CommScope and Furukawa agreed to change from 2004 to
2006 the date when CommScope could first exercise its contractual right to
sell its ownership interest in OFS BrightWave to Furukawa for a cash payment
equal to CommScope's original investment in OFS BrightWave.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the unaudited
condensed consolidated financial statements and accompanying notes included
in this document as well as the audited consolidated financial statements,
related notes thereto and management's discussion and analysis of financial
condition and results of operations for the year ended December 31, 2001
included in our 2001 Annual Report on Form 10-K.
HIGHLIGHTS
For the three months ended September 30, 2002, we incurred a net loss of
$19.6 million, or $0.32 per share, compared to net income of $6.3 million, or
$0.12 per diluted share, for the three months ended September 30, 2001. The
net loss for the third quarter of 2002 included after-tax charges of:
o $15.8 million, or $0.26 per share, for the impairment of fixed assets;
and
o $6.4 million, or $0.10 per share, for equity method losses from our
18.4% investment in OFS BrightWave, LLC ("OFS BrightWave"), an optical
fiber and fiber cable venture formed with The Furukawa Electric Co.,
Ltd. of Japan ("Furukawa").
Net income for the third quarter of 2001 included after-tax charges of:
o $5.8 million, or $0.11 per diluted share, related to the financing and
formation of the original joint venture arrangements with Furukawa,
which were subsequently restructured; and
o $0.8 million, or $0.02 per diluted share, for goodwill amortization
expense.
For the nine months ended September 30, 2002, we incurred a net loss of
$63.7 million, or $1.03 per share, compared to net income of $28.9 million,
or $0.55 per diluted share, for the nine months ended September 30, 2001.
The net loss for the nine months ended September 30, 2002 included after-tax
charges of:
o $13.5 million, or $0.22 per share, for the write-off of Adelphia
Communications Corporation ("Adelphia") receivables;
o $15.8 million, or $0.26 per share, for the impairment of fixed assets;
and
o $49.2 million, or $0.80 per share, for equity method losses from our
18.4% investment in OFS BrightWave.
Net income for the nine months ended September 30, 2001 included after-tax
charges of:
o $5.8 million, or $0.11 per diluted share, related to the financing and
formation of the original joint venture arrangements with Furukawa,
which were subsequently restructured;
o $9.3 million, or $0.18 per diluted share, for the impairment of fixed
assets and investments; and
o $2.5 million, or $0.05 per diluted share, for goodwill amortization
expense.
The impact of the 2001 impairment charges for fixed assets and investments
included a $1.3 million, or $0.03 per diluted share, valuation allowance
established for a deferred tax asset arising from the impairment of an
investment in a wireless infrastructure project management company, which
created a capital loss for tax purposes.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE- AND NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 2002 WITH THE THREE- AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2001
Net sales
Net sales for the third quarter ended September 30, 2002 decreased
$29.9 million, or 16.8%, to $147.8 million, compared to the third quarter
ended September 30, 2001. Net sales for the nine months ended September 30,
17
2002 decreased $132.4 million, or 22.3%, to $462.6 million, compared to the
nine months ended September 30, 2001. The decrease in net sales was mainly
due to the challenging global business environment in telecommunications,
which continues to result in reduced demand primarily for fiber optic cable,
wireless and other telecom products. Additionally, net sales were impacted
by reduced shipments to Adelphia and ongoing competitive pricing pressures
for some product lines both domestically and internationally.
Domestic sales decreased 15.8% to $120.8 million in the third quarter and
17.2% to $376.7 million in the nine months ended September 30, 2002, compared
to the same periods in 2001. The year-over-year decline in domestic sales
was primarily due to reduced shipments to Adelphia as well as continued
pricing pressures and declining demand for our wireless and fiber optic cable
products.
For the quarter ended September 30, 2002, international sales decreased
21.3% to $27 million compared to the quarter ended September 30, 2001.
International sales for the nine months ended September 30, 2002 decreased
38.6% to $85.9 million compared to the same period in 2001. International
sales were down year over year in essentially all regions. The
year-over-year decrease in international sales was primarily driven by
declining demand for broadband products.
Net sales of broadband and other video distribution products
("Broadband/Video Products") for the third quarter of 2002 decreased
$19.1 million, or 13.7%, to $120.3 million, compared to the same period in
2001. For the nine months ended September 30, 2002, net sales of
Broadband/Video Products decreased by $90.4 million, or 19.3%, to $378.6
million, compared to the same period in 2001. Net sales to AT&T Broadband
accounted for 18% of our net sales during the three months ended September
30, 2002 and 13% of our net sales for the nine months ended September 30,
2002, compared to approximately 4% of our net sales in the comparable prior
periods. No other customer accounted for more than 10% of our net sales
during the current year or comparable prior year periods. Although sales to
Comcast Corporation accounted for less than 10% of our total net sales
during the three and nine months ended September 30, 2002 and 2001, we
believe the pending AT&T Broadband-Comcast merger may increase our
concentration of credit risk in the future merged entity, depending upon the
extent of our sales to the future merged entity. The impact of increased
sales to AT&T Broadband was more than offset by both the lower shipments to
Adelphia and the continued pricing pressures and declining demand for fiber
optic cable products. We do not expect a significant recovery of business
with Adelphia in the near term primarily as a result of its Chapter 11
bankruptcy. While we believe that near term domestic and international sales
will be depressed until global business conditions in telecommunications
improve, we remain optimistic about the long-term global opportunities for
broadband cable. The market for fiber optic cable remains challenging with
significant pricing pressure coupled with declining demand. However, we
believe that our ability to offer both coaxial and fiber optic cable as well
as other types of communications cable, continues to be an important
long-term competitive advantage.
Net sales of local area network and other data applications products ("LAN
Products") for the third quarter of 2002 remained relatively stable,
increasing by $1.3 million, or 4.3%, to $24.2 million, compared to the same
period in 2001. For the nine months ended September 30, 2002, sales of LAN
Products decreased by $6.1 million, or 8.3%, to $67.1 million, compared to
the same period in 2001. The year-over-year decrease in year-to-date sales
of LAN Products was primarily driven by lower volume and was also impacted by
pricing pressures on certain products. Although our sales were impacted by
the loss of Graybar Electric Company, Inc., previously one of our leading
distribution channels for LAN and other video-related products, we believe
that we were able to offset the lost LAN sales by redirecting project
business and utilizing our strong brand recognition.
Net sales of wireless and other telecommunications products ("Wireless and
Other Telecom Products") for the third quarter of 2002 declined to
$3.3 million from $15.1 million in the same period last year, primarily due to
18
the combination of lower volume and pricing pressure, particularly in our
Wireless Products. For the nine months ended September 30, 2002, sales of
Wireless and Other Telecom Products were $16.9 million compared to $52.8
million in the same period last year. This year-over-year decrease in
year-to-date sales was primarily driven by a significant decline in volume of
Wireless and Other Telecom Products. We expect ongoing softness and
significant competitive pressures for our Other Telecom Products. In
addition, the general slowdown in telecommunications capital spending and the
inability of certain customers to get financing for their projects has had a
significant impact on sales of our Wireless Products and we continue to
experience aggressive competition in the wireless market.
Gross profit (net sales less cost of sales)
Gross profit for the third quarter ended September 30, 2002 was
$27.1 million, compared to third quarter 2001 gross profit of $43.9 million,
and third quarter gross profit margin declined to 18.3% from 24.7%, year over
year. For the nine months ended September 30, 2002, gross profit decreased
to $94.2 million, compared to $145.1 million for the same period in 2001,
with gross profit margins of 20.4% and 24.4%, respectively. The
year-over-year decreases in gross profit and gross profit margin were
primarily due to lower sales volumes in essentially all product lines and
continued pricing pressure, particularly in wireless and fiber optic cable
products. The lower sales volumes resulted in lower overhead absorption
rates for many products.
As previously announced, we reduced our workforce by approximately 200, or
8%, during the third quarter of 2002, primarily in response to the
challenging global business environment. We recorded pretax charges of
approximately $1 million in cost of sales for employee termination benefits
in the third quarter of 2002. We intend to continue evaluating all aspects
of our business and to take appropriate action to position us for long-term
success and strong competitiveness.
Selling, general and administrative
Selling, general and administrative ("SG&A") expense for the third quarter
ended September 30, 2002 was $20.5 million, or 13.9% of net sales, compared
to $19 million, or 10.7% of net sales, for the same period in 2001. For the
nine months ended September 30, 2002, SG&A expense was $82.8 million or 17.9%
of sales, compared to $61.6 million, or 10.3% of sales, for the same period
in 2001. The year-over-year increase in SG&A expense was primarily due to
the increase in bad debt expense related to the write-off of Adelphia
receivables in 2002, which totaled $21.4 million for the nine months ended
September 30, 2002. Excluding the Adelphia write-off, SG&A expense declined
slightly year over year for the nine months ended September 30, 2002.
However, as a percent of sales, excluding the Adelphia write-off, SG&A
expense increased year over year for the nine months ended September 30,
2002. The increase in SG&A expense as a percent of sales was primarily due
to sales declining faster than sales and marketing expense and ongoing
investment in our information technology infrastructure.
We intend to continue to fund domestic and international sales and
marketing efforts in order to enhance our competitive position around the
world. We believe we have taken appropriate charges for doubtful accounts as
a result of the difficult market environment based on our analysis of
customer financial difficulties, age of receivable balances and other
relevant factors. We also plan to continue investing in our information
technology infrastructure in order to support cost reduction efforts and to
further differentiate our service model through technology.
Research and development
Research and development ("R&D") expense decreased to $1.1 million, or 0.7%
of net sales, for the third quarter ended September 30, 2002 from $1.8
million, or 1.0% of net sales, for the same period in 2001. For the nine
months ended September 30, 2002, R&D expense decreased to $4.8 million, or
1.0% of net sales, compared to $5.5 million, or 0.9% of net sales, for the
19
same period in 2001. We expect R&D expense to remain at approximately 1% of
net sales in the near term.
Impairment charges for fixed assets
We recognized total impairment charges for fixed assets in the amount of
$25.1 million during the three months ended September 30, 2002. The
breakdown of these impairment charges was as follows (in millions):
Wireless cable manufacturing assets $ 15.1
Fiber optic cable manufacturing assets 5.3
Other telecommunications cable manufacturing assets 3.0
Other manufacturing assets 1.7
------
Total impairment charges $ 25.1
======
Due to the difficult business environment in telecommunications and the
continuing decline in demand for our products, we performed a test of
recoverability for our long-lived assets during the third quarter of 2002.
Our long-term undiscounted cash flow forecasts indicated that the carrying
amounts of fixed assets used to manufacture our wireless, fiber optic cable
and other telecom products may not be recoverable as of September 30, 2002.
In addition, our quarterly review of idle and obsolete fixed assets indicated
additional impairment for specifically-identified manufacturing equipment.
The impairment loss recognized during the three months ended September 30,
2002 was measured as the amount by which the carrying values of the impaired
assets exceeded their respective fair values. Fair values were determined
using the best available information, including independent appraisal,
third-party and internal market value estimates, and discounted cash flows.
Net interest expense
Net interest expense for the third quarter ended September 30, 2002 was
$1.7 million, compared to $1.9 million for the same period in 2001. For the
nine months ended September 30, 2002, net interest expense decreased to $5.2
million, compared to $5.6 million for the same period in 2001. The decrease
in net interest expense was primarily due to interest earned on higher cash
balances and interest income, net of elimination of intercompany profit,
received from OFS BrightWave under a $30 million revolving note established
in the fourth quarter of 2001.
Income taxes
Our effective income tax rate was 37% for the third quarter and nine months
ended September 30, 2002 and 2001.
Equity in losses of OFS BrightWave, LLC
For the three and nine months ended September 30, 2002, our 18.4% equity
interest in the losses of OFS BrightWave, before taxes, was approximately
$10.1 million and $78.3 million, respectively. Since OFS BrightWave elected
to be taxed as a partnership, we recorded a tax benefit of approximately $3.7
million and $29.1 million for the third quarter and nine months ended
September 30, 2002, respectively, related to our 18.4% equity interest in OFS
BrightWave's flow-through losses. OFS BrightWave operates in many of the
same markets we do and its financial results were also adversely affected by
the ongoing slowdown in the global economy and the telecommunications
industry. Due to these conditions, OFS BrightWave incurred significant
charges during the nine months ended September 30, 2002 primarily related to
the write-off of goodwill and certain fixed assets, restructuring and
employee separation costs and other cost reduction activities. The total of
these charges recognized by OFS BrightWave during the nine months ended
20
September 30, 2002 was $215 million, net of a $32 million tax benefit from
losses generated by a domestic c-corporation subsidiary of OFS BrightWave.
In addition, OFS BrightWave is party to manufacturing and supply agreements
with OFS Fitel, LLC ("OFS Fitel"), which is a wholly-owned indirect
subsidiary of Furukawa. As a result of Furukawa's controlling interest in
both ventures, it has significant influence over the structure and pricing of
these agreements. Future changes in these terms, over which we have limited
influence, could have a material impact on the profitability of OFS
BrightWave and ultimately on our results of operations. Due primarily to the
difficult market environment for certain telecommunications products and
challenging global business conditions in telecommunications, we expect
ongoing pricing pressure and weak demand industry wide for fiber optic cable
products. Based on these expectations, we believe that OFS BrightWave will
incur losses at least through the remainder of 2002, and that as a result we
will continue to recognize noncash equity method losses from our investment
in OFS BrightWave.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity both on a short-term and long-term basis
are cash and cash equivalents and cash flows provided by operations. Reduced
sales and profitability could reduce cash provided by operations. In
addition, increases in working capital, excluding cash and cash equivalents,
related to increasing sales could reduce our operating cash flows in the
short term until cash collections of accounts receivable catch up to the
higher level of billings.
Cash provided by operating activities was $72.1 million for the nine months
ended September 30, 2002, compared to $122.5 million for the same period in
2001. This year-over-year decrease in operating cash flow primarily resulted
from lower sales volume and a proportionately smaller decrease in accounts
receivable and inventories during the nine months ended September 30, 2002 as
compared to the nine months ended September 30, 2001.
Working capital was $231.6 million at September 30, 2002, compared to
$199.1 million at December 31, 2001. This increase in working capital during
the nine months ended September 30, 2002 primarily related to an increase in
our cash balance of $69.6 million to $131.6 million as of September 30, 2002,
somewhat offset by a decrease in accounts receivable over the same nine-month
period. The increase in cash during the nine months ended September 30, 2002
was driven by net income from operations before noncash charges. In
addition, we received repayments, net of advances, of $6.1 million from OFS
BrightWave under a $30 million revolving note receivable during the nine
months ended September 30, 2002. As of September 30, 2002, OFS BrightWave
owed $23.9 million under this $30 million revolving note, and we expect to
advance the remaining $6.1 million balance under the note during the fourth
quarter of 2002. We are not required to make any additional cash investments
in the form of loans or capital contributions to OFS BrightWave, other than
this revolving credit commitment.
During the nine months ended September 30, 2002, we invested $8.3 million
in property, plant and equipment compared to $59.5 million during the same
period in 2001. While we may place additional production capability in
important international markets, we expect capital expenditures to remain at
a level below depreciation and amortization expense for the next few years.
We currently expect capital expenditures to be in the range of $12 to $13
million in 2002, primarily for cost reduction efforts and information
technology initiatives, depending upon business conditions.
We owed total long-term debt of $193.6 million, including current portion,
or 27% of our book capital structure, defined as long-term debt, including
current portion, and total stockholders' equity, as of September 30, 2002,
compared to $194.6 million, including current portion, or 24% of our book
capital structure as of December 31, 2001. The decrease in long-term debt
was due to the quarterly repayments of principal under our eurodollar credit
agreement which was somewhat offset by foreign currency losses, included in
21
accumulated other comprehensive loss, incurred on this foreign-currency
denominated debt.
In June 2002, we amended an operating lease for our corporate office
building, our eurodollar credit agreement and our $350 million revolving
credit agreement. These amendments, among other things, provided for the
exclusion of the noncash equity method income and losses of OFS BrightWave
from the definition of EBITDA, which is used to calculate compliance with
certain covenants. In addition, the size of the revolving credit agreement
was reduced from $350 million to $250 million. The amendments further
limited our ability to make additional investments in, or guarantee the
obligations of, OFS BrightWave. Furthermore, the amendments reduced the
maximum amount of payments we may make for dividends and stock repurchases
from a total of $75 million to $50 million and included additional
investments in OFS BrightWave under this maximum payment limitation. These
amendments resolved covenant compliance issues related to our equity in
losses of OFS BrightWave.
As of November 4, 2002, we terminated our amended $250 million revolving
credit agreement, which was scheduled to expire on December 31, 2002. We had
no outstanding indebtedness under this terminated facility and ended the
third quarter of 2002 with $132 million of cash and cash equivalents on our
balance sheet. We expect to enter into a new secured credit facility of up
to $125 million during the fourth quarter of 2002; however, we cannot provide
assurance that we will be able to do so. Further, given the current credit
environment and our recent operating results, we believe it is likely that
the terms of this new secured credit facility will be less favorable to us
than the terms of the recently terminated facility.
An operating lease for our corporate office building and our $10 million
eurodollar credit agreement contain covenants requiring us to maintain a
total debt to EBITDA ratio, an interest coverage ratio, and a minimum net
worth. Our noncompliance with these covenants could create a default under
these agreements, resulting in potential termination of the lease and/or
potential acceleration of repayment of our obligation under the eurodollar
credit agreement. Upon termination of the operating lease, the Company would
be obligated to either purchase the facility for approximately $13 million or
market it for sale on the lessor's behalf. We were not in compliance with
the amended total debt to EBITDA ratio covenant under these two agreements as
of September 30, 2002 and, based on our current forecasted operating results,
we believe it is likely that we will not be in compliance with this covenant
as of December 31, 2002. However, we were able to obtain temporary covenant
waivers, which expire on December 31, 2002, for both agreements. We intend
to further amend or replace these agreements, if able to do so under
acceptable terms; otherwise, we intend to pay the associated obligations
using existing cash balances or pursue extensions of the existing temporary
covenant waivers. However, given the current credit environment and our recent
operating results, we believe it is likely that the terms under which these two
existing agreements can be further amended or replaced, if at all, will be less
favorable to us than the current terms of these agreements.
As of October 9, 2002, we, together with Furukawa, purchased 10.2 million
shares of our common stock from Lucent Technologies Inc. ("Lucent"). We
issued the 10.2 million shares of common stock to Lucent at a price of $19.94
per share on November 16, 2001 in connection with our investment in OFS
BrightWave, a venture that we formed with Furukawa to acquire certain fiber
cable and transmission fiber assets from Lucent. The total purchase price
paid to Lucent by us and Furukawa on October 9, 2002 for the 10.2 million
shares was approximately $53.0 million, or $5.20 per share. Of the total
10.2 million shares of our common stock purchased from Lucent, Furukawa
purchased approximately 7.7 million shares, which we understand it plans to
hold for investment purposes. We repurchased the remaining approximately 2.5
million shares, which are classified as treasury stock. We funded our $13.2
million repurchase using existing cash balances. As of the October 9, 2002
closing date of the purchase, Furukawa owned approximately 13% of our
outstanding common stock.
22
In conjunction with this stock purchase, we also entered into agreements
with Furukawa that outline various investment terms, including resale
restrictions, registration rights, standstill provisions, as well as call and
limited put rights related to our shares held by Furukawa. Additionally, we
agreed with Furukawa to change from 2004 to 2006 the date when we could first
exercise our contractual right to sell our investment in OFS BrightWave to
Furukawa for a cash payment equal to our original investment in OFS
BrightWave.
MARKET RISK
As disclosed in our Annual Report on Form 10-K for the year ended December
31, 2001, our major market risk exposure relates to adverse fluctuations in
commodity prices, interest rates and foreign currency exchange rates. We
have established a risk management strategy that includes the reasonable use
of derivative and nonderivative financial instruments primarily to manage our
exposure to these market risks. Our exposure associated with these market
risks has not materially changed since December 31, 2001. However, we did
repay approximately $2.1 million of variable rate debt under our eurodollar
credit agreement, somewhat reducing our exposure to interest rate risk. In
addition, we have not acquired any new derivative financial instruments since
December 31, 2001 or terminated any derivative financial instruments that
existed at that date.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q that are other than historical facts
are intended to be "forward-looking statements" within the meaning of the
Securities Exchange Act of 1934, the Private Securities Litigation Reform Act
of 1995 and other related laws and include but are not limited to those
statements relating to sales and earnings expectations, expected demand, cost
and availability of key raw materials, internal production capacity and
expansion, competitive pricing, relative market position and outlook. While
we believe such statements are reasonable, the actual results and effects
could differ materially from those currently anticipated. These
forward-looking statements are identified, including without limitation, by
their use of such terms and phrases as "intends," "intend," "intended,"
"goal," "estimate," "estimates," "expects," "expect," "expected," "project,"
"projects," "projected," "projections," "plans," "anticipates," "anticipated,"
"should," "designed to," "foreseeable future," "believe," "believes,"
"think," "thinks" and "scheduled" and similar expressions. These statements
are subject to various risks and uncertainties, many of which are outside our
control, including, without limitation, financial performance of OFS
BrightWave, product demand and industry excess capacity, competitive pricing
and acceptance of our products, changes or fluctuations in global business
conditions, expected demand from AT&T Broadband and other major domestic
MSOs, cost and availability of key raw materials (including without
limitation bimetallic center conductors, optical fibers, fine aluminum wire
and fluorinated-ethylene-propylene which are available only from limited
sources), successful operation of bimetal manufacturing and other vertical
integration activities, successful expansion and related operation of our
facilities, margin improvement, developments in technology, industry
competition and ability to retain customers, achievement of sales, growth,
and earnings goals, ability of our customers to secure adequate financing to
fund their infrastructure projects or to pay us, regulatory changes affecting
our business, possible disruption of our business due to customer or supplier
bankruptcy, reorganization or restructuring, ability to obtain financing and
capital on commercially reasonable terms, ability to comply with covenants in
debt and lease agreements, possible restrictions imposed on us by a new
secured credit facility, possible future impairment charges for goodwill and
other long-lived assets, foreign currency fluctuations, technological
obsolescence, the ability to achieve reductions in costs, the ability to
integrate acquisitions, our participation in joint ventures, international
economic and political uncertainties, possible disruption due to terrorist
activity or armed conflict and other factors discussed. Actual results may
also differ due to changes in telecommunications industry capital spending,
which is affected by a variety of factors, including, without limitation,
general business conditions, acquisitions of telecommunications companies by
others, consolidation within the telecommunications industry, the financial
condition of telecommunications companies and their access to financing,
competition among telecommunications companies, technological developments,
23
and new legislation and regulation of telecommunications companies. These
and other factors are discussed in greater detail in Exhibit 99.1 to this
Form 10-Q. The information contained in this Form 10-Q represents our best
judgment at the date of this report based on information currently
available. However, we do not intend, and are not undertaking any duty or
obligation, to update this information to reflect developments or information
obtained after the date of this report.
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ITEM 4. CONTROLS AND PROCEDURES
Our disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Our Chief Executive Officer and our Chief
Financial Officer have reviewed the effectiveness of our disclosure controls
and procedures within the last ninety days and have concluded that the
disclosure controls and procedures are effective. There were no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the last day they were evaluated by our
Chief Executive Officer and our Chief Financial Officer.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Forward-Looking Information
99.2 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.3 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K filed during the three months ended September 30,
2002:
On August 13, 2002, we filed a current report on Form 8-K submitting
the certifications required pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 in connection with the filing of our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
On August 23, 2002, we filed a current report on Form 8-K announcing
our receipt of a demand from Lucent Technologies Inc. for registration
of up to 10.2 million shares of our common stock.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMSCOPE, INC.
November 13, 2002 /s/ Jearld L. Leonhardt
- -------------------- -------------------------------
Date Jearld L. Leonhardt
Executive Vice President and Chief Financial Officer
Signing both in his capacity as Executive Vice
President on behalf of the Registrant and as
Chief Financial Officer of the Registrant
26
CERTIFICATIONS
I, Frank M. Drendel, certify that:
1.I have reviewed this quarterly report on Form 10-Q of CommScope, Inc.;
2.Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3.Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4.The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5.The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (and persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6.The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ Frank M. Drendel
-------------------------------
Frank M. Drendel
Chairman and Chief Executive Officer
27
I, Jearld L. Leonhardt, certify that:
1.I have reviewed this quarterly report on Form 10-Q of CommScope, Inc.;
2.Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3.Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4.The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5.The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (and persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6.The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ Jearld L. Leonhardt
-------------------------------
Jearld L. Leonhardt
Executive Vice President and Chief Financial Officer
28