20SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark(Mark One)
[X]
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 2002 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 28, 2001 ----------------------------------------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ___________________
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period fromto Commission file number 1-5517
SCIENTIFIC-ATLANTA, INC.
(Exact(Exact name of Registrant as specified in its charter)
Georgia 58-0612397 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5030 Sugarloaf Parkway 30042-5447 Lawrenceville, Georgia (Zip Code) (Address of principal executive offices)
Georgia
58-0612397
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
5030 Sugarloaf Parkway
Lawrenceville, Georgia
30044
(Address of principal executive offices)
(Zip Code)
770-236-5000
(Registrant's(Registrant’s telephone number, including area code)
Indicate by check
markx whether theregistrantregistrant: (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. YesX No_____ ------x No ¨Indicate by check markx whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
As of
January 25, 2002,February 7, 2003, Scientific-Atlanta, Inc. had outstanding156,432,136152,867,977 shares of common stock.PART I
-– FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended ---------------------------------- ---------------------------------- December 28, December 29, December 28, December 29, 2001 2000 2001 2000 ---------------- --------------- --------------- ---------------SALES $ 418,194 $ 631,430 $ 828,291 $ 1,228,670 --------- ---------- ---------- ----------- COSTS AND EXPENSES Cost of sales 278,567 436,984 557,483 857,075 Sales and administrative 46,392 57,170 91,080 108,409 Research and development 35,550 38,600 73,197 73,309 Restructuring 18,737 - 18,737 - Interest expense 133 87 216 194 Interest income (5,803) (10,350) (11,912) (19,343) Other (income) expense, net (14,955) 1,663 (16,312) (74,727) --------- ---------- ---------- ----------- Total costs and expenses 358,621 524,154 712,489 944,917 --------- ---------- ---------- ----------- EARNINGS BEFORE INCOME TAXES 59,573 107,276 115,802 283,753 PROVISION (BENEFIT) FOR INCOME TAXES Current 22,277 44,368 38,224 109,595 Deferred (1,859) (7,894) 1,312 (9,927) --------- ---------- ---------- ------------ NET EARNINGS $ 39,155 $ 70,802 $ 76,266 $ 184,085 ========= ========== ========== =========== EARNINGS PER COMMON SHARE BASIC $ 0.25 $ 0.44 $ 0.49 $ 1.15 ========= ========== ========== =========== DILUTED $ 0.25 $ 0.42 $ 0.48 $ 1.09 ========= ========== ========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING BASIC 156,072 161,167 157,042 160,731 ========= ========== ========== =========== DILUTED 157,559 167,247 158,738 168,115 ========= ========== ========== =========== DIVIDENDS PER SHARE PAID $ 0.01 $ 0.01 $ 0.02 $ 0.02 ========= ========== ========== ===========
Three Months Ended
Six Months Ended
December 27,
2002
December 28,
2001
December 27,
2002
Decembera 28,
2001
SALES
$
352,008
$
418,194
$
663,563
$
828,291
COSTS AND EXPENSES
Cost of sales
240,638
278,567
439,469
557,483
Sales and administrative
48,009
46,392
95,033
91,080
Research and development
36,808
35,550
76,623
73,197
Restructuring
2,566
18,737
11,235
18,737
Interest expense
247
133
1,097
216
Interest income
(5,817
)
(5,803
)
(11,682
)
(11,912
)
Other (income) expense, net
6,604
(14,955
)
12,118
(16,312
)
Total costs and expenses
329,055
358,621
623,893
712,489
EARNINGS BEFORE INCOME TAXES
22,953
59,573
39,670
115,802
PROVISION FOR (BENEFIT FROM) INCOME TAXES
Current
15,879
22,277
27,203
38,224
Deferred
(8,074
)
(1,859
)
(13,695
)
1,312
NET EARNINGS
$
15,148
$
39,155
$
26,162
$
76,266
EARNINGS PER COMMON SHARE
BASIC
$
0.10
$
0.25
$
0.17
$
0.49
DILUTED
$
0.10
$
0.25
$
0.17
$
0.48
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDINGBASIC
154,380
156,072
154,754
157,042
DILUTED
154,754
157,559
155,232
158,738
DIVIDENDS PER SHARE PAID
$
0.01
$
0.01
$
0.02
$
0.02
SEE ACCOMPANYING NOTES
2 of
1220 SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
In Thousands -------------------------------------- December 28, June 29, 2001 2001 ---------------- ---------------- (UNAUDITED)ASSETS CURRENT ASSETS Cash and cash equivalents $ 533,952 $ 563,322 Short-term investments 194,719 191,001 Receivables, less allowance for doubtful accounts of $5,458,000 at December 28 and $5,982,000 at June 29 389,118 502,289 Inventories 184,782 201,762 Deferred income taxes 55,280 57,195 Other current assets 27,597 33,165 --------- --------- TOTAL CURRENT ASSETS 1,385,448 1,548,734 --------- --------- PROPERTY, PLANT AND EQUIPMENT, at cost Land and improvements 22,266 22,218 Building and improvements 68,993 67,946 Machinery and equipment 249,308 246,385 --------- --------- 340,567 336,549 Less - Accumulated depreciation and amortization 126,812 108,934 --------- --------- 213,755 227,615 --------- --------- GOODWILL 58,066 58,063 --------- --------- INTANGIBLE ASSETS 32,873 35,790 --------- --------- NON-CURRENT MARKETABLE SECURITIES 29,515 17,159 --------- --------- DEFERRED INCOME TAXES 25,699 26,732 --------- --------- OTHER ASSETS 95,338 88,735 --------- --------- TOTAL ASSETS $1,840,694 $2,002,828 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt and current maturities of long-term debt $ - $ 91 Accounts payable 165,199 223,990 Accrued liabilities 140,558 164,991 Income taxes currently payable 13,859 5,051 --------- --------- TOTAL CURRENT LIABILITIES 319,616 394,123 --------- --------- OTHER LIABILITIES 124,483 99,766 --------- --------- STOCKHOLDERS' EQUITY Preferred stock, authorized 50,000,000 shares; - - no shares issued Common stock, $0.50 par value, authorized 350,000,000 shares; issued 164,992,376 shares at December 28 and 164,899,158 shares at June 29 82,496 82,450 Additional paid-in capital 548,392 545,602 Retained earnings 1,008,181 935,038 Accumulated other comprehensive income, net of taxes of $5,172,000 at December 28 and $3,723,000 at June 29 (8,438) (6,075) --------- --------- 1,630,631 1,557,015 Less - Treasury stock, at cost (8,667,770 shares at December 28 and 859,339 shares at June 29) 234,036 48,076 --------- --------- 1,396,595 1,508,939 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,840,694 $2,002,828 ========= =========(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
December 27,
2002
June 28,
2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
396,545
$
376,429
Short-term investments
386,666
354,848
Receivables, less allowance for doubtful accounts of $7,629 at December 27 and $5,723 at
June 28
248,471
261,149
Inventories
143,671
217,452
Deferred income taxes
55,397
47,908
Other current assets
29,051
50,608
TOTAL CURRENT ASSETS
1,259,801
1,308,394
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and improvements
22,103
21,943
Building and improvements
81,970
78,464
Machinery and equipment
247,477
241,420
351,550
341,827
Less—Accumulated depreciation and amortization
138,584
119,407
212,966
222,420
GOODWILL
219,666
195,645
INTANGIBLE ASSETS
54,593
48,909
NON-CURRENT MARKETABLE SECURITIES
7,421
28,498
DEFERRED INCOME TAXES
28,804
29,861
OTHER ASSETS
67,964
80,900
TOTAL ASSETS
$
1,851,215
$
1,914,627
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term debt and current maturities of long-term debt
$
874
$
1,739
Accounts payable
117,363
170,308
Accrued liabilities
118,655
145,606
Income taxes currently payable
15,474
—
TOTAL CURRENT LIABILITIES
252,366
317,653
LONG-TERM DEBT, LESS CURRENT MATURITIES
8,822
8,600
OTHER LIABILITIES
144,035
151,583
STOCKHOLDERS’ EQUITY
Preferred stock, authorized 50,000,000 shares; no shares issued
—
—
Common stock, $0.50 par value, authorized 350,000,000 shares;
issued 164,992,376 shares at December 27 and at June 28
82,496
82,496
Additional paid-in capital
514,240
530,712
Retained earnings
1,056,244
1,033,168
Accumulated other comprehensive income (loss), net of tax expense (benefit) of $7,053 at December 27 and $(121) at June 28
11,507
(197
)
1,664,487
1,646,179
Less—Treasury stock, at cost (10,548,571 shares at December 27
and 8,361,862 shares at June 28)
218,495
209,388
1,445,992
1,436,791
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,851,215
$
1,914,627
SEE ACCOMPANYING NOTES
3 of
1220 SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN(IN THOUSANDS)
(UNAUDITED)
Six Months Ended ----------------------------------- December 28, December 29, 2001 2000 --------------- ---------------NET CASH PROVIDED BY OPERATING ACTIVITIES $ 173,761 $ 22,492 --------- ------- INVESTING ACTIVITIES: Proceeds from the sale of investments - 84,158 Purchases of short-term investments, net (3,718) (73,737) Purchases of property, plant, and equipment (14,784) (66,831) Investments - (9,000) Acquisition of business - (2,529) Other 75 62 --------- ------- Net cash used by investing activities (18,427) (67,877) --------- ------- FINANCING ACTIVITIES: Issuance of common stock 2,503 33,858 Treasury shares acquired (183,993) - Dividends paid (3,123) (3,219) Principal payments on debt (91) (190) --------- ------- Net cash provided (used) by financing activities (184,704) 30,449 --------- ------- DECREASE IN CASH AND CASH EQUIVALENTS (29,370) (14,936) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 563,322 462,496 --------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 533,952 $ 447,560 ========= ======= SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid during the period: Interest $ 185 $ 164 ========= ======= Income taxes, net $ 24,947 $ 26,551 ========= ======= Non-cash investing activities: Net assets of business acquired for subsidiary stock: Fair value of assets, including goodwill $ - $ 32,184 Liabilities assumed $ - $ 17,191
Six Months Ended
December 27,
2002
December 28,
2001
NET CASH PROVIDED BY OPERATING ACTIVITIES
$
114,442
$
173,761
INVESTING ACTIVITIES:
Proceeds from the settlement of a collar on a warrant to
purchase shares of common stock
20,821
—
Purchases of short-term investments, net
(31,818
)
(3,718
)
Purchases of property, plant, and equipment
(14,321
)
(14,784
)
Acquisition of certain assets of Arris Group
(30,000
)
—
Acquisition of certain assets of ChanneLogics, Inc.
(1,600
)
—
Purchase of PowerTV Shares
(4,580
)
—
Proceeds from sale of an investment
1,763
—
Other
6
75
Net cash used in investing activities
(59,729
)
(18,427
)
FINANCING ACTIVITIES:
Issuance of common stock
1,938
2,503
Treasury shares acquired
(32,410
)
(183,993
)
Dividends paid
(3,086
)
(3,123
)
Principal payments on debt, net
(1,039
)
(91
)
Net cash used in financing activities
(34,597
)
(184,704
)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
20,116
(29,370
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
376,429
563,322
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
396,545
$
533,952
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period:
Interest
$
1,058
$
185
Income taxes paid (refunded), net
$
(25,402
)
$
24,947
SEE ACCOMPANYING NOTES
4 of
1220 SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTSTATEMENTS OF COMPREHENSIVE INCOME(LOSS) (IN(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
Six Months Ended
December 27,
2002
December 28,
2001
December 27,
2002
December 28,
2001
NET EARNINGS
$
15,148
$
39,155
$
26,162
$
76,266
OTHER COMPREHENSIVE INCOME (LOSS) NET OF TAX (1)
Unrealized gains (losses) on marketable securities, net (2)
1,124
3,142
(162
)
(2,600
)
Minimum liability adjustments on retirement plans
—
—
—
62
Foreign currency translation adjustments
8,324
(958
)
6,812
529
Changes in fair value of derivatives
50
244
884
(354
)
COMPREHENSIVE INCOME
$
24,646
$
41,583
$
33,696
$
73,903
Three Months Ended Six Months Ended ------------------ ---------------- December 28, December 29, December 28, December 29, 2001 2000 2001 2000 ------------ ------------ ------------ ------------NET EARNINGS $ 39,155 $ 70,802 $ 76,266 $ 184,085 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX/(1) / Unrealized gains (losses) on marketable securities, netAssumed 38 percent tax in fiscal years 2003 and 2002.
(2) Net of reclassification adjustments of $0$1,916 and $4,170 in the three and six months ended December28, 2001, $027, 2002, respectively. No such adjustments were made in the threemonths ended December 29, 2000 and $65,791 in theor six months ended December29, 2000 3,142 (80,368) (2,600) (195,847) Minimum liability adjustments on retirement plans - - 62 (416) Foreign currency translation adjustments (958) 809 529 (230) Changes in fair value of derivatives 244 - (354) - ------------ ----------- ------------ ------------ COMPREHENSIVE INCOME (LOSS) $ 41,583 $ (8,757) $ 73,903 $ (12,408) ============ =========== ============ ============28, 2001./(1)/ Assumed 38 percent tax in fiscal years 2002 and 2001.SEE ACCOMPANYING NOTES
5 of 12NOTES:
(Amounts(Amounts in thousands, except share data)
. A. The accompanying consolidated financial statements include the accounts5 of
Scientific-Atlanta and all subsidiaries after elimination of all material intercompany accounts and transactions. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our fiscal year 200120
A. The accompanying consolidated financial statements include the accounts of Scientific-Atlanta and all subsidiaries after elimination of all material intercompany accounts and transactions. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These condensed financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our fiscal year 2002 Annual Report on Form 10-K. The financial information presented in the accompanying statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the periods indicated. All such adjustments are of a normal recurring nature. Amounts in the Consolidated Statements of Financial Position at June 28, 2002 contained in this Form 10-Q were derived from the Consolidated Statements of Financial Position contained in our fiscal year 2002 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.
B. Basic earnings per share were computed based onAccruals for warranty obligations exceeding one year and theweighted average number of shares of common stock outstanding. Diluted earnings per share were computed based on the weighted average number of outstanding common shares and potentially dilutive shares.related deferred income taxes have been reclassified to Other Liabilities from Accrued Liabilities.
B. Basic earnings per share were computed based on the weighted average number of shares of common stock outstanding. Diluted earnings per share were computed based on the weighted average number of outstanding common shares and potentially dilutive shares. Basic and diluted earnings per share are computed as follows:
Three Months Ended December 28, 2001 Three Months Ended December 29, 2000 --------------------------------------- ------------------------------------------ Net Per Share Net Per Share Earnings Shares Amount Earnings Shares Amount -------- ------ ------ -------- ------ ------Basic earnings per common share: Net earnings $ 39,155 156,072 $ 0.25 $ 70,802 161,167 $ 0.44 Diluted earnings per common share: Net earnings $ 39,155 157,559 $ 0.25 $ 70,802 167,247 $ 0.42 -------- ------- ------- --------- ------- ------- Effect of dilutive stock options $ - 1,487 $ - $ - 6,080 $ (0.02) ======== ======= ======= ========= ======= =======Six Months Ended December 28, 2001 Six Months Ended December 29, 2000 --------------------------------------- ------------------------------------------ Net Per Share Net Per Share Earnings Shares Amount Earnings Shares Amount -------- ------ ------ -------- ------ ------Basic earnings per common share: Net earnings $ 76,266 157,042 $ 0.49 $ 184,085 160,731 $ 1.15 Diluted earnings per common share: Net earnings $ 76,266 158,738 $ 0.48 $ 184,085 168,115 $ 1.09 -------- ------- ------- --------- ------- ------- Effect of dilutive stock options $ - 1,696 $ (0.1) $ - 7,384 $ (0.06) ======== ======= ======= ========= ======= =======
Quarter Ended December 27, 2002
Net Earnings
Shares
Per Share Amount
Basic earnings per common share
$
15,148
154,380
$
0.10
Effect of dilutive stock options
—
374
—
Diluted earnings per common share
$
15,148
154,754
$
0.10
Quarter Ended December 28, 2001
Net
Earnings
Shares
Per Share Amount
Basic earnings per common share
$
39,155
156,072
$
0.25
Effect of dilutive stock options
—
1,487
—
Diluted earnings per common share
$
39,155
157,559
$
0.25
6 of 20
Six Months Ended December 27, 2002
Net Earnings
Shares
Per Share Amount
Basic earnings per common share
$
26,162
154,754
$
0.17
Effect of dilutive stock options
—
478
—
Diluted earnings per common share
$
26,162
155,232
$
0.17
Six Months Ended December 28, 2001
Net
Earnings
Shares
Per Share Amount
Basic earnings per common share
$
76,266
157,042
$
0.49
Effect of dilutive stock options
—
1,696
(0.1
)
Diluted earnings per common share
$
76,266
158,738
$
0.48
The following information pertains to options to purchase shares of common stock which were not included in the computation of diluted earnings per common share because the
option'soption’s exercise price was greater than the average market price of the common shares:
December 27,
2002
December 28, 2001
Number of options outstanding
16,151,386
12,506,060
Weighted average exercise price
$
40.00
$
46.84
C. During the six months ended December 27, 2002, we purchased 2,685,200 shares and inclusion of the options in the earnings per share calculation would have been anti-dilutive: December 28, December 29, 2001 2000 ------------ ------------ Number of options outstanding 12,506,060 2,018,399 Weighted average exercise price $ 46.84 $ 63.57 6 of 12
C. Inventories consistofthe following: December 28, June 29,our common stock at an aggregate cost of $32,410 pursuant to a program announced in July 20012001 ------------ ----------Raw materials and work-in-process $ 104,014 $ 144,270 Finished goods 80,768 57,492 ---------- ---------- Total inventory $ 184,782 $ 201,762 ========== ==========to buy back up to 8,000,000 shares.D.During the six months ended December 28, 2001, we purchased 7,925,000 shares of our common stock at an aggregate cost of $183,993 pursuant to a stock buyback program announced in March 2000.
In JulyDuring the six months ended December 28, 2001, weannounced a buyback program for the purchase of up to 8,000,000 additional shares of our common stock. We plan to use the shares repurchased for issuance under our employee stock option plans and other benefit plans. Wealso acquired 111,682shares and 138,188shares of our common stock from thedeferral andconversionto cashof thepayment of restrictedright to receive common stockthat vested duringinto thesix months ended December 28, 2001right to receive cash andDecember 29, 2000, respectively. In addition, we acquired55,719shares and 42,770shares of our common stock from the payment in stock rather than cash by employees of tax withholding on restricted stock that vested during the six months ended December 28,2001 and December 29, 2000, respectively. E.2001.
D. Other (income) expense for the quarter ended December 27, 2002 included $6,465 of losses from other-than-temporary declines in the market value of marketable securities and investments in privately-held companies. Other (income) expense for the six months ended December 27, 2002 included losses of $11,042 from other-than-temporary declines in the market value of marketable securities and investments in privately-held companies and $1,899 from the decline in the cash surrender value of life insurance. These losses were partially offset by a net gain of $2,491 from the settlement of a collar on a warrant to purchase common stock of a public company and the related warrant. There were no other significant items in other (income) expense for the three or six months ended December 27, 2002. Other (income) expense for the three and six months ended December 28, 2001 included a gain of $16,200 from the appreciation in the market value of a warrant to purchase common
stock. Other (income) expense for the six months ended December 29, 2000 included a gain of $78,757 from the salestock of aportion of our investment in Bookham Technology plc, a UK-based developer and supplier of optical components. This gain was partially offset by other miscellaneous expenses.public company. There were no other significant items in other (income) expense for thequarterthree or six months ended December29, 2000. F. In July 2000,28, 2001.
E. Inventories consist of the following:
December 27,
2002
June 28,
2002
Raw materials and work-in-process
$
92,843
$
117,938
Finished goods
50,828
99,514
Total inventory
$
143,671
$
217,452
7 of 20
F. During the second quarter of fiscal year 2003, we acquired certain assets of the Network Technologies business of Arris Group (Arris) for $37,500, subject to adjustments. We made an initial cash payment of $30,000 during the quarter and expect to finalize the purchase price adjustments during the quarter ended March 28, 2003. We also acquired the software, technology and other assets of ChanneLogics, Inc. (ChanneLogics) for $1,600 of cash. The acquired assets were recorded at their estimated fair value at the date of acquisition. The initial $30,000 paid to Arris has been allocated to the assets including $11,533 of goodwill and $10,830 of other intangible assets, primarily existing technology and customer base, which are being amortized over varying periods of up to four years. The purchase price of ChanneLogics has been allocated to the assets including $549 of goodwill and $530 of other intangible assets, primarily existing technology, which are being amortized over varying periods of up to five years. During the first quarter of fiscal year 2003, we acquired a portion of the shares held by the minority shareholders of PowerTV, Inc., a majority-owned subsidiary, for $4,580 of
Scientific-Atlanta, acquired 100cash. The entire purchase price was recorded as goodwill.
G. In August 2002, we announced a reduction of our workforce by 400 positions, or approximately 6 percent of our total workforce, to align our costs with reduced sales levels. The workforce reduction was substantially completed by December 27, 2002. The positions eliminated were from manufacturing, engineering, marketing, sales, service and administrative functions. The restructuring also included the consolidation of certain office and manufacturing facilities. We expect these actions to reduce our costs and expenses by approximately $40,000 on an annual basis, starting in the second half of this fiscal year. As a result of these actions and an earlier restructuring announced in October 2001, we recorded restructuring charges of $11,235, primarily for severance, during the six months ended December 27, 2002. During the six months ended December 27, 2002, approximately 400 employees were terminated pursuant to these restructurings, and severance of approximately $10,442 was paid to terminated employees. We anticipate recording additional charges related to the August 2002 restructuring that will total approximately $2,000 in the third quarter of fiscal year 2003. The following reconciles the beginning restructuring liability at June 28, 2002 to the restructuring liability at December 27, 2002:
Contractual Obligations Under Cancelled Leases
Severance
Fixed Assets
Other
Total
Balance at June 28, 2002
$
5,202
$
4,553
$
—
$
—
$
9,755
Restructuring provision
414
9,074
377
1,741
11,606
Charges to the reserve and assets written off
(1,029
)
(10,442
)
(377
)
(1,852
)
(13,700
)
Reserve reversal
(371
)
—
—
—
(371
)
Balance at December 27, 2002
$
4,216
$
3,185
$
—
$
(111
)
$
7,290
8 of 20
H. We offer warranties of various lengths to our customers depending on the specific product and the terms of the agreements with the customer. Our standard warranties require us to repair or replace defective product returned to us during the warranty period at no cost to the customer. We record an estimate for warranty related costs based on our actual historical failure rates and repair costs at the time of sale. Historical failure rates and repair costs are reviewed and the estimated warranty liability is adjusted, if required, quarterly. Expenses related to unusual product warranty problems and product defects are recorded in the period the problem is identified. We offer extended warranties on certain products. Revenue from these extended warranty agreements is deferred at the time of sale and recognized in future periods according to the terms of the
outstanding stock of PRASARA Technologies, Inc. for shares of PowerTV common stock and $2,609 in cash.warranty agreement.The
acquisition was accounted for underfollowing reconciles thepurchase method of accounting and, accordingly, the acquired assets and liabilities were recordedbeginning warranty liability attheir estimated fair value at the date of acquisition. The purchase price has been allocatedJune 28, 2002 to theassetswarranty liability at December 27, 2002:
Accrued warranty at June 28, 2002
$
38,742
Reductions for payments
(11,204
)
Additions for warranties issued during the period
9,090
Other adjustments
(286
)
Accrued warranty at December 27, 2002
$
36,342
I. During fiscal year 2002, Scientific-Atlanta acquired 100 percent of the equity securities of BarcoNet NV (BarcoNet), a Belgium-based manufacturer of cable television equipment, for a cash payment of $157,474. The results of operations of BarcoNet were included in the Consolidated Statements of Earnings from the date of acquisition in January 2002. The unaudited pro forma summary below presents certain financial information as if the BarcoNet acquisition had occurred as of June 30, 2001. The pro forma results have been prepared for comparative purposes and
liabilities assumed including $14,643do not purport to be indicative ofgoodwill and $17,065 of other intangibles. G. Scientific-Atlanta adopted Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" inwhat would have occurred had the acquisition been made on the firstquarter of fiscal year 2002. Under the provisions of SFAS No. 142, goodwill is no longer subject to amortization. In the three and six months ended December 29, 2000, goodwill amortization expense, net of tax, was $657 and $1,293, respectively. The impact of goodwill amortization on basic and diluted earnings per share follows:
Three Months Ended Six Months Ended December 28, December 29, December 28, December 29, 2001 2000 2001 2000 ----------- ------------ ------------ ------------Reported net earnings $ 39,155 $ 70,802 $ 76,266 $ 184,085 Add: Goodwill amortization -- 657 -- 1,293 ----------- ------------ ------------ ------------ Adjusted net earnings $ 39,155 $ 71,459 $ 76,266 $ 185,378 =========== ============ ============ ============ Basic earnings per share: Reported net earnings $ 0.25 $ 0.44 $ 0.49 $ 1.15 Goodwill amortization -- -- -- 0.01 ---------- ------------ ------------ ------------ Adjusted net earnings $ 0.25 $ 0.44 $ 0.49 $ 1.16 ========== ============ ============ ============ Diluted earnings per share Reported net earnings $ 0.25 $ 0.42 $ 0.48 $ 1.09 Goodwill amortization -- 0.01 -- 0.01 ---------- ------------ ------------ ------------ Adjusted net earnings $ 0.25 $ 0.43 $ 0.48 $ 1.10 ========== ============ ============ ============This statement also established a new method of testing goodwill for impairment. The resultsday of ourassessment did not result in any charges to operations for impairment of goodwill. 7 of 12H. In October 2001, we announced a restructuring of our worldwide operations in response to the business decline which included a headcount reduction of approximately 750 people and the consolidation of substantially all of our Atlanta, Georgia manufacturing operations into our Juarez, Mexico facility. During the quarter ended December 28, 2001, we recorded restructuring charges of $18,737 which included severance costs of $9,862 for approximately 750 employees, $4,632 for expenses related to contractual obligations under leases to be cancelled, $2,102 for assets to be abandoned and $2,141 of miscellaneous expenses, primarily costs incurred in the quarter related to the transfer of manufacturing operations from Atlanta to Juarez. As of December 28, 2001, severance costs of approximately $2,729 had been paid to approximately 250 employees who had actually been terminated. The remaining 500 employees are primarily associated with manufacturing operations in Atlanta. We expect to complete the restructuring plan, including the closing of the Atlanta manufacturing facility, by the end of thefiscal year.I. On January 3, 2002, Scientific-Atlanta paid $142,518 for 92.4 percentAdditionally, these pro forma results are not indicative of future results.
Three Months Ended December 28, 2001
Six Months Ended December 28, 2001
Sales
$
439,432
$
870,568
Net earnings from continuing operations
27,336
56,567
Gain (loss) from discontinued operations
2,694
(34,048
)
Net earnings
$
30,030
$
22,519
Diluted earnings per share
$
0.19
$
0.14
The gain (loss) from discontinued operations resulted from the
outstanding sharesdiscontinuance of Internet services activities by BarcoNetNV, a European manufacturerin calendar year 2001.9 of
transmission and headend products for the cable industry, pursuant to a previously announced tender offer. We acquired an additional 4.1 percent of the outstanding shares for approximately $6,000 from a re-opened tender that will settle on February 12, 2002. These transactions had no effect on our second quarter financial results. We intend to do a squeeze-out to acquire all remaining equity securities. 8 of 12MANAGEMENT'S20ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------Scientific-Atlanta had
stockholders'stockholders’ equity of $1.4 billion and cash on hand was$534.0$396.5 million at December28, 2001.27, 2002. Cashdecreased $29.4increased $20.1 million during the six months ended December28, 2001. The decline was due primarily27, 2002. Cash provided by operating activities for the six months ended December 27, 2002 of $114.4 million included net earnings of $26.2 million, reductions in accounts receivable and inventory of $10.6 million and $83.2 million, respectively, and a federal income tax refund of $32.0 million related to therepurchasewrite-off of7,925,000accounts receivable from Adelphia Communications Corporation (Adelphia) resulting from its filing for bankruptcy in June 2002. Net cash provided by operating activities included $38.5 million of non-cash expenses for depreciation and amortization. These were offset partially by reductions in accounts payable and accrued expenses aggregating $83.4 million.During the six months ended December 27, 2002, we received a cash payment of $20.8 million from the settlement of a collar on a warrant to purchase shares of common stock of a public company. We also purchased 2,685,200 shares of our common stock for
$184.0$32.4 million, increased short-term investments by $31.8 million, acquired certain assets of the Network Technologies business of the Arris Group for $37.5 million, subject to adjustments, for whichmore than offsetan initial cash payment of $30.0 million was made, acquired property, plant and equipment for $14.3 million and acquired a portion of the$173.8 millionminority interest ofcash generated by operations.shareholders of a majority-owned subsidiary, PowerTV, Inc., for $4.6 million. We expect to finalize the purchase price adjustments related to the acquisition of certain assets of the Network Technologies business during the quarter ended March 28, 2003. The Network Technologies business includes analog optics, nodes and radio frequency (RF) electronics products.The current ratio of Scientific-Atlanta was
4.3:5.0:1 at December28, 2001,27, 2002, up from3.9:4.1:1 at June29, 2001.28, 2002. At December 27, 2002, we had debt of $9.7 million, primarily mortgages on facilities we assumed in connection with the acquisition of BarcoNet during fiscal year 2002. We believe that funds generated from operations, existing cash balances and our available senior credit facility will be sufficient to support operations.On January 3, 2002 Scientific-Atlanta paid cash of $142.5 million for 92.4 percent of the outstanding shares of BarcoNet NV, a European manufacturer of transmission and headend products for the cable industry throughout Europe and Asia. We acquired an additional 4.1 percent of the outstanding shares for approximately $6.0 million from a re-opened tender that will settle on February 12, 2002. These transactions had no effect on our second quarter financial results. We intend to do a squeeze-out to acquire all remaining equity securities.RESULTS OF OPERATIONS
- --------------------- Scientific-Atlanta experienced declines in sales this quarter and for the first six months of fiscal year 2002 as compared to the prior year. These declines are attributable to lower unit sales volume of both subscriber and transmission products and lower average selling prices for digital set-tops. The number of digital set-tops shipped declined for both the second fiscal quarter and for the six months over comparable periods last year. Sales of digital set-tops depend in large part on the number of new net digital subscribers added by our customers. We believe the reduced sales levels were due, in large part, to the economic recession in the U.S. and other parts of the world and the resulting decline in capital spending by MSOs. A number of MSOs in Europe have publicly reported financial difficulties, which may adversely affect our potential for sales to these customers. Over the last six months, overall set-top pricing has declined approximately 10 percent. We believe these declines will continue in the future for our lower end models. Recently introduced high definition television set-tops and our Explorer(R) 4100 set-tops with integrated DOCSIS cable modems and Explorer 8000 set-tops which contain integrated hard drives and single user interfaces for personal video recording capabilities, which will both be introduced in the fourth fiscal quarter, will sell for higher per unit prices and may favorably impact the average sales price for digital set-tops.Sales for the fiscal quarter ended December
28, 200127, 2002 were$418.2$352.0 million, down3416 percent from the comparable quarter of the prioryear, but up slightly over the preceding quarter.year. Sales of subscriber productswere $282.8 million, down 33declined 19 percent fromthe prior year. We shipped approximately 865 thousand Explorer digital set-tops duringlast year’s second quarter to $229.0 million. In the second quarter of fiscal2002, down from 1.1 millionyear 2003, we sold 804 thousand Explorer® digital set-tops as compared to 865 thousand in the prior year. In support of the on-demand television plans of our customers, weshipped 1,686sold approximately 1,700 MultiQAM Modulators (MQAMs) in the quarter,up 75 percent overapproximately the same quantity as in the prior year.MQAMSMQAMs arecapablecomponents ofbringing video on demanda network that can bring video-on-demand and subscriptionvideo on demandvideo-on-demand services to digital cable subscribers.Scientific-Atlanta also shipped approximatelyDuring the second quarter of fiscal year 2003, we sold 189 thousand WebSTAR™ cable modems, up from 184 thousandcable modems duringin the prior year.During the first quarter of fiscal year 2003, we shipped Explorer set-tops and associated headend equipment to Cablevision Systems Corporation (Cablevision), for which we deferred the recognition of approximately $18 million of sales, pending the execution of an agreement supplementing the original binding agreement. During the second quarter of fiscal year 2003, we executed a supplemental agreement with Cablevison which enabled us to recognize approximately $16 million of sales which had been deferred in the first fiscal quarter. Approximately $2 million of the sales deferred in the first fiscal quarter for development, maintenance and support services will be earned over the remaining term of the contract. Sales of products to Cablevision constituted more than 10 percent of our total sales in the quarter ended December 27, 2002.
Sales of transmission products
were $117.8 million induring the second quarterdown 36of fiscal year 2003 of $104.0 million declined 12 percent from the prior year. Transmission product sales declined, despite the addition of sales from BarcoNet and $4.4 million of sales related to the termination of a contract with German cable operator ish GmbH & Co. KG (ish), due to weak transmission related spending in most regions of the world.During the quarter ended December 27, 2002, we reached an agreement with German cable partner ish related to work orders which had been suspended or cancelled during the fourth quarter of fiscal year 2002 and our exposure in accounts receivable and inventory related to ish. As part of this settlement, we received a cash payment of $22.0 million and notes receivable denominated at $19.0 million. During the quarter, we entered into an agreement to sell these notes receivable for $11.5 million, which we expect to consummate in the third quarter of fiscal year 2003. In connection with this transaction, we recorded sales of $4.4 million and termination
10 of 20
expenses and write-offs of $10.9 million. We also removed from backlog approximately $19 million of orders from ish.
International sales in the second quarter of fiscal year 2003 were $75.2 million, down 4 percent from the prior year, due primarily to lower international sales of transmission products
increased 10 percent in the second quarter over the same quarter last year primarily fromand services. International sales of transmission products and services to Callahan NRW inGermany. Total international sales were 19 percent of total salesGermany in the second quarteras compared to 14 percentoftotal salesfiscal year 2002, which did not recur in theprior year.second quarter of fiscal year 2003, and weak transmission-related spending in all international regions of the world more than offset the incremental sales from BarcoNet, which we acquired in January 2002.Sales for the six months ended December
28, 200127, 2002 were$828.3$663.6 million, down3320 percent from the prior year. Sales of subscriber products were$561.5$423.8 million, down3125 percent from the prior year. Weshippedsold approximately1.71.3 million digital set-tops during the six months ended December28, 2001,27, 2002, down fromover 2.11.7 million in the comparable period of the prior year. Sales of transmission products were$228.1$201.6 million, down3812 percent from the prior year. International sales were20$169.3 million, up 5 percent from the prior year, as the addition oftotalinternational sales generated by BarcoNet more than offset declines in other areas of thesix months ended December 28, 2001, up from 16 percentbusiness, particularly international sales oftotal sales in the six months ended December 29, 2000. 9 of 12other transmission products. Gross margins were
33.4 percent and 32.731.6 percent of sales for the three months ended December 27, 2002, 1.8 percentage points lower than the comparable quarter of the prior year. The decline was due to the negative impact on gross margins of the settlement with ish discussed above, lower sales volumes, and the higher level of shipments of new set-top models, that currently have lower gross margins than the company average, in the second quarter of fiscal 2003 as compared to the prior year. These more than offset the benefit of cost reductions through procurement and the completion of the transfer of our Atlanta, Georgia manufacturing operations to Juarez, Mexico in the fourth quarter of fiscal year 2002.Gross margins were 33.8 percent of sales for the six months ended December
28, 2001, 2.627, 2002, 1.1 percentage pointsand 2.5 percentage points, respectively,higher thanthe comparable periods ofthe prior year. The continued benefit of cost reductions throughproduct design,procurement, lower costs for warranty and scrap and the completion of the transfer of our Atlanta, Georgia manufacturing operations to Juarez, Mexico more than offset the impact of the settlement with ish, lower volumes and pricereductions inreductions.Sales and administrative expenses were $48.0 million and $95.0 million for the
quarterthree and six months ended December28, 2001 as compared to27, 2002, respectively, an increase of approximately 4 percent over the comparable periods of the prior fiscal year.Research and development costs were $35.6 millionSelling expenses in thequarterthree and six months ended December28, 2001, down 8 percent from27, 2002 were lower than the prior year due to thepreviouslyimpact of the restructurings announcedworldwide restructuringin October 2001 and August 2002 and to the lower sales volume which more than offset the addition of BarcoNet’s selling expenses in fiscal year 2003. Administrative expenses in the three and six months ended December 27, 2002 increased year-over-year due to higher amortization expensereduction efforts. Researchof intangible assets established with the acquisition of BarcoNet anddevelopment costs were $73.2certain assets of Arris, the addition of administrative expenses from BarcoNet, higher professional fees and $1.6 millionforof bad debt expense recorded following the bankruptcy filing of TVC’s parent during the six months ended December28, 2001, flat as compared27, 2002.Research and development expenses for the three and six months ended December 27, 2002 were $36.8 million and $76.6 million, respectively, up approximately 5 percent over the comparable periods of the prior fiscal year. The year-over-year increases were due primarily to research and development expenses at BarcoNet, offset in part by expense reductions related to the
prior year.restructurings discussed below. Research and development effortsduring the yearcontinued to focus on the development of applications and enhancements to our interactive broadband networks.Scientific-Atlanta continues to invest in research and development programs to support existing products as well as future potential products and services for our customer base. Selling and administrative expenses were $46.4 million and $91.1 million for the three and six months ended December 28, 2001, respectively, down 19 percent and 16 percent, respectively, from the comparable periods of the prior year. Reduced incentives due to our lower profitability, restructuring and expense reduction efforts and the elimination of amortization expense for goodwill resulted in lower selling and administrative expenses in the three and six months ended December 28, 2001. These reductions were offset partially by higher professional fees related to previously disclosed litigation. Scientific-Atlanta adopted Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" in the first quarter of fiscal year 2002. Under the provisions of SFAS No. 142, goodwill is no longer subject to amortization.In
the quarter and six months ended December 29, 2000, goodwill amortization expense was $0.7 million and $1.3 million, respectively. SFAS No. 142 also requires an impairment test of goodwill upon adoption. The results of our assessment did not result in any charges to operations for impairment of goodwill. In October 2001,August 2002, we announced arestructuringreduction of ourworldwide operations in responseworkforce by 400 positions, or approximately 6 percent of our total workforce, tothe business decline whichalign our costs with reduced sales levels. The workforce reduction was substantially completed by December 27, 2002. The positions eliminated were from manufacturing, engineering, marketing, sales, service and administrative functions. The restructuring also includeda headcount reduction of approximately 750 people andthe consolidation ofsubstantially all of our Atlanta, Georgiacertain office and manufacturingoperations into our Juarez, Mexico facility. During the quarter ended December 28, 2001, we recorded restructuring charges of $18.7 million which included severance costs of $9.9 million for approximately 750 employees, $4.6 million for expenses related to contractual obligations under leases to be cancelled, $2.1 million for assets to be abandoned and $2.1 million of miscellaneous expenses, primarily costs incurred in the quarter related to the transfer of manufacturing operations from Atlanta to Juarez. As of December 28, 2001, severance costs of approximately $2.8 million had been paid to approximately 250 employees who had actually been terminated. The remaining 500 employees are primarily associated with manufacturing operations in Atlanta.facilities. We expect these actions tocomplete the restructuring plan, including the closing of the Atlanta manufacturing facility, by the end of the fiscal year. We anticipate that the restructuring willreduce our costs and expenses by approximately$59.0$40 million on an annual basis, starting in the second half of this fiscal year. As a result of these actions and an earlier restructuring announced in October 2001, we recorded restructuring charges of $2.6 million and $11.2 million, primarily for severance, during the three and six months ended December 27, 2002, respectively. We anticipate recording additional charges related to the August 2002 restructuring that will total approximately $2 million in the third quarter of fiscal year2002. We also expect to record additional charges2003.Interest expense was $1.1 million for the six months ended December 27, 2002, up $0.9 million from the same period of
approximately $9.0 million relatedthe prior fiscal year. The year-over-year increase was due to therestructuring plandebt we assumed from BarcoNet as a result of the acquisition.11 of 20
Other (income) expense for the quarter ended December 27, 2002 included $6.5 million of losses from other-than-temporary declines in the
second halfmarket value of marketable securities and investments in privately-held companies. Other (income) expense for thefiscal year.six months ended December 27, 2002 included losses of $11.0 million from other-than-temporary declines in the market value of marketable securities and investments in privately-held companies and $1.9 million from the decline in the cash surrender value of life insurance. These losses were partially offset by a net gain of $2.5 million from the settlement of a collar on a warrant to purchase common stock of a public company and the related warrant. There were no other significant items in other (income) expense for the three or six months ended December 27, 2002.Other (income) expense for the three and six months ended December 28, 2001 included a gain of $16.2 million from the appreciation in the market value of a warrant to purchase common
stock. Other (income) expense for the six months ended December 29, 2000 included a gain of $78.8 million from the salestock of aportion of our investment in Bookham Technology plc. This gain was partially offset by other miscellaneous expenses.public company. There were no other significant items in other (income) expense for thequarterthree or six months ended December29, 2000.28, 2001.Earnings before income taxes were
$59.6 million and $115.8$23.0 million for thethreequarter ended December 27, 2002, down $36.6 million from the prior year due primarily to lower sales volume, lower gross margin as a percent of sales andsix monthslosses of $6.5 million from other-than-temporary declines in the market value of marketable securities and privately-held investments in the quarter ended December 27, 2002. Restructuring charges in the quarter ended December 27, 2002 were $16.2 million lower than those in the quarter ended December 28,2001, respectively, down $47.7 million and $168.0 million, respectively, from the comparable periods of the prior year. Lower volume of sales in the three and six months ended December 28, 2001 as compared to the prior year and charges related to our worldwide restructuring plan were the primary drivers in the year-over-year declines. These declines were partially2001. This decline was offset bylower operating expenses and improved gross margin rates in fiscal year 2002. In the three months ended December 28, 2001, we also recordeda gain of$16.3$16.2 million from the appreciation in the market value ofan investment. 10 of 12Scientific-Atlanta'sa warrant to purchase common stock in the prior year which did not recur in the quarter ended December 27, 2002. The effective income tax rate for both periods was approximately 34percentpercent. Net income for thethreequarter ended December 27, 2002 was $15.1 million, down $24.0 million from the prior year.Earnings before income taxes were $39.7 million for the six months ended December 27, 2002, down $76.1 million from the prior year due primarily to lower sales volume, higher administrative expenses and losses of $11.0 million from other-than-temporary declines in the market value of marketable securities and privately-held investments in the six months ended December 27, 2002. Restructuring charges in the six months ended December 27, 2002 were $7.5 million lower than those in the six months ended December 28,
2001, unchanged2001. This decline was more than offset by a gain of $16.2 million from thequarter ended December 29, 2001 but down one percentage point fromappreciation in the market value of a warrant to purchase common stock in the prior year which did not recur in the six months ended December29, 2000.27, 2002. Thehighereffective income tax rate for both periods was approximately 34 percent. Net income for the six months ended December 27, 2002 was $26.2 million, down $50.1 million from the prior year.GENERAL
Scientific-Atlanta continued to experience declines in sales this quarter and for the first six months of fiscal year
2000 was2003 as compared to the prior year. We believe that our sales and results of operations have been affected by: (1) the low consumer confidence in the United States amid a slow economy and difficult economic and political conditions outside the United States, (2) continued significant declines in capital spending by our customers as credit markets have tightened and customer credit ratings have been lowered, (3) our customers’ competition from satellite providers, and (4) the declining financial condition of several of our customers and distributors. These trends have resulted in the failure of certain of our customers to: (1) pay for product that has shipped, (2) take delivery of orders they have previously placed and (3) raise additional capital to fund the purchase of equipment and services. Adelphia filed for bankruptcy in June 2002. During the first quarter of fiscal year 2003, Communications Dynamics, Inc., parent of TVC Communications (TVC), a distributor of our products in Latin America, filed for bankruptcy. If these trends continue, which we are not able to predict, our sales and results of operations could be adversely affected. We periodically assess the impact of these trends on our cost structure and reduce our costs, including, but not limited to, reductions in our workforce and consolidation of operations, to attempt to align such costs with our sales level.In addition, our backlog has declined for the last three quarters from $772.5 million at March 29, 2002 to $382.7 million at December 27, 2002. Due to this decline in backlog, we continue to be more dependent on the shipment of product from orders received during the quarter rather than from backlog to generate sales. Our increased dependence on the receipt of orders during each quarter to generate sales during that quarter and our continued limited visibility to the inventory our customers hold limit our ability to predict our sales volume for the quarter until the end of the quarter. In addition, our quarters tend to be back-end loaded with a larger portion of orders being received and sales being recognized for any quarter at or near the end of the quarter.
12 of 20
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal year 2002 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Financial Statements. Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us. We believe the following items require the most significant judgments and often involve complex estimates.
General
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 liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience and various other factors we believe 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 apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to revenue recognition, the adequacy of receivable and inventory reserves, and accrued liabilities and other liabilities, principally relating to warranty provisions.
Revenue Recognition
Our principal sources of revenues are from sales of digital interactive subscriber systems, broadband transmission networks and content distribution networks. We recognize revenue when (1) there is an agreement with the customer, (2) product is shipped and title has passed, (3) the amount due from the customer is fixed and determinable, (4) collectibility is reasonably assured, and (5) we have no significant future performance obligation. At the time of the transaction, we assess whether the amount due from the customer is fixed and determinable and collection of the resulting receivable is reasonably assured. We assess whether the amount due from the customer is fixed and determinable based on the terms of the agreement with the customer, including, but not limited to, the payment terms associated with the transaction. We assess collection based on a number of factors, including past transaction history with the customer and credit-worthiness of the customer. If we determine that collection of an amount due is not reasonably assured, we defer recognition of revenue until collection becomes reasonably assured.
The standard terms and conditions under which we ship allow a customer the right to return product for refund only if the product does not conform to product specifications; the non-conforming product is identified by the customer; and the customer rejects the non-conforming product and notifies us within ten days of receipt. If an agreement contains a non-standard right of return, we defer recognizing revenue until the conditions of the agreement are met. From time to time, our agreements include acceptance clauses. If an agreement includes an acceptance clause, revenue is recorded at the time of acceptance.
Allowance for Doubtful Accounts
Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness, as in the case of the bankruptcies of Adelphia and the parent of TVC, or weakening in economic trends could have a significant impact on the
tax rate from researchcollectibility of receivables and our operating results. Generally, we do not require collateral or other security to support accounts receivable.Inventory Reserves
We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twelve months. In addition, our industry is characterized by rapid technological change, frequent new product development
credits whichand rapid product obsolescence that could result in an increase in the amount of obsolete inventory on hand. Any significant, unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and operating results.13 of 20
Non-Current Marketable Securities
Non-current marketable securities consist of investments in common stock, primarily technology companies, warrants of publicly traded companies and a collar on a warrant and are stated at market value. (The collar on the warrant held at June 28, 2002 was
diminishedsettled during the first quarter of fiscal year 2003.) We have market risks associated with thehigher levelsvolatility in the value ofpretax earnings,our non-current marketable securities. All investments in common stock are classified aswell as“available for sale” under the provisions of SFAS No. 115, and thus, changes in the fair value of these securities are not included in our Consolidated Statements of Earnings until realized. Unrealized holding gains and losses are included, net of taxes, in accumulated other comprehensive income. Realized gains and losses and declines in value judged to bepaidother-than-temporary are included in other (income) expense. We periodically evaluate the carrying value of our investments in common stock to determine if declines in fair value are other-than-temporary. This evaluation requires judgment and is based on several factors including the market price of the security generally over the preceding six months, analysts’ reports on the security, the performance of the stock market index of the security and the overall economic environment. Unrealized gains and losses on the warrants and collar are included in other (income) expense.During the six months ended December 27, 2002, we recorded losses of $6.8 million from the
saleother-than-temporary decline in value ofinvestments. Net earnings formarketable securities. No such losses were recorded during thethree andsix months ended December 28,2001 were $39.2 million2001. At December 27, 2002, we had unrealized holding gains on marketable securities, net of tax, of $54 thousand.Investments in Privately-Held Companies
Investments in privately-held companies consist primarily of securities of emerging technology companies for which readily determinable fair values are not available. These investments are carried at cost and
$76.3 million, respectively, comparedare evaluated periodically to$70.8 milliondetermine if declines in fair value are other-than-temporary. This evaluation requires judgment and$184.1 million inis based on several factors including recent private offerings by thecomparable periodscompany, the performance of theprior year. The year-over-year declinesstock market index of similar publicly traded securities and the overall economic environment. Declines in value judged to be other-than-temporary are included in other (income) expense. During the six months ended December 27, 2002, we recorded losses of $4.2 million from the other-than-temporary decline in value of investments in privately held companies. No such losses weredriven primarily by lower volume of sales and charges inrecorded during thethree andsix months ended December 28,20012001. Investments in privately-held companies are included in Other assets in the Consolidated Statements of Financial Position.Warranty Costs
We offer warranties of various lengths to our customers depending on the specific product and the terms of the agreements with the customer. Our standard warranties require us to repair or replace defective product returned to us during the warranty period at no cost to the customer. We record an estimate for warranty related costs based on our actual historical failure rates and repair costs at the time of sale. We repair products in our manufacturing facilities as well as outsource warranty repairs. Expenses related to unusual product warranty problems and product defects are recorded in the period the problem is identified. A significant increase in product failure rates, in the costs to repair our
worldwide restructuring.products or in the amount of warranty repairs outsourced could have a significant impact on our operating results.Any statements in
Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations that are not statements about historical facts are forward-looking statements. Such forward-looking statements are based upon current expectations but involve risks and uncertainties. Investors are referred to the Cautionary Statements contained in Exhibit9999.1 to this Form 10-Q for a description of the various risks and uncertainties that could causeScientific-Atlanta'sScientific-Atlanta’s actual results and experience to differ materially from the anticipated results or other expectations expressed inScientific-Atlanta's forward-lookingScientific-Atlanta’s forward- looking statements. Such Exhibit9999.1 is hereby incorporated by reference intoManagement'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.Scientific-Atlanta and Explorer are registered trademarks of Scientific-Atlanta, Inc.
WebSTAR is a trademark of Scientific-Atlanta, Inc. PowerTV is a registered trademark of
Scientific-Atlanta,PowerTV, Inc.ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS - ------- ----------------------------------------------------------- (In thousands, except per dollar amounts)RISK(Amounts in thousands)
We are exposed to market risks from changes in foreign exchange rates and have a process to monitor and manage these risks. Scientific-Atlanta enters into foreign exchange forward contracts to hedge certain forecasted
14 of 20
transactions, firm commitments and assets denominated in currencies other than the U.S. dollar. These contracts, which qualify as cash flow hedges, are designated as hedging instruments at inception, are for periods consistent with the exposure being hedged and generally have maturities of one year or less. Contracts are recorded at fair value. Changes in the fair value of derivatives are recorded in other comprehensive income until the underlying transaction affects earnings. The effectiveness of the hedge is based on a high correlation between the changes in its value and the value of the underlying hedged item. Any ineffectiveness is recorded through
earnings.earnings in other (income) expense. There were no charges for ineffectiveness recorded during the first six months of fiscal years 2003 or 2002. Our foreign exchange forward contracts do not significantly subject our results of operations to risk due to exchange rate fluctuations because gains and losses on these contracts generally offset losses and gains on the exposure being hedged.Firmly committed purchase exposure and related hedging instruments at December 27, 2002 were as follows:
Canadian Dollars
Firmly committed purchase contracts
17,463
Notional amount of forward contracts
14,450
Average contract amount (Foreign currency/United States dollar)
1.57
At December 27, 2002, we had unrealized losses of $133, net of tax benefit of $81, related to these derivatives which were included in accumulated other comprehensive income. Scientific-Atlanta has no derivative exposure beyond the first quarter of fiscal year 2004.
Unrealized gains and losses on foreign exchange forward contracts which do not meet the criteria for
ahedge accounting in accumulated other comprehensive income are recognized in other (income) expense.DuringWe recorded losses of $2,174 during thequartersix months ended December 27, 2002 and gains of $35 during the six months ended December 28, 2001we entered into forward contracts to purchase 188,500 Eurosrelated to these contracts.We have market risks associated with the
acquisitionvolatility in the value ofBarcoNetour non-current marketable securities which consist of investments in common stock, primarily technology companies, warrants of publicly traded companies andrecorded realizeda collar on a warrant andunrealized gainsare stated at market value. All investments in common stock are classified as “available for sale” under the provisions of$490SFAS No. 115, “Accounting for Certain Investments in Debt and$35, respectively. At December 28, 2001, we had oneEquity Securities,” and thus, changes in the fair value of thesecontracts for 15,000 Euros at a ratesecurities are not included in our Consolidated Statements of0.88 to the U.S. dollar remaining which will be settledEarnings until realized. Unrealized holding gains and losses are included, net of taxes, in accumulated other comprehensive income. We recorded after-tax, unrealized holding losses of $162 and $2,600 in thethird quarterfirst six months of fiscal years 2003 and 2002, respectively. Realized gains and losses and declines in value judged to be other-than-temporary are included in other (income) expense. We recorded losses of $6,818 in the first six months of fiscal year 2003 from the other-than-temporary decline in the market value of marketable securities. No such gains, losses or declines in value were recorded in the first six months of fiscal year 2002.Scientific-Atlanta holds
a warrantwarrants to purchase common stock thatisare recorded at fair value. We also entered into a collar with put and call options whichiswas designed to limit our exposure to fluctuations in the fair value of one of thewarrant.warrants. The warrants and the collar, which are included in Non-current marketable securities in the Consolidated Statements of Financial Position, were valued using the Black-Scholes pricing model. Fluctuations in the volatility of the market price of the common stock for which we hold a warrant, risk free rate of return and expiration date of the warrant impact the valuation. During thethree andfirst six monthsended December 28, 2001,of fiscal year 2003, we recorded unrealizedgainslosses of$16,311 from$632 related to theappreciationdecline in the fair value of the warrants and a realized gain of $2,491 from the settlement of the collar and related warrantand collarto purchase common stock in a public company in other (income) expense.Firmly committed purchase (sales) exposure and related hedging instruments at December 28, 2001 are as follows:
Canadian Euros Dollars ------------ -----------Firmly committed purchase (sales) contracts (27,540) 23,446 Notional amount of forward exchange contracts (26,858) 17,200 Average contract amount (Foreign currency/United States dollar) 0.90 1.56Scientific-Atlanta has no derivative exposure beyondNo such gains or losses were recorded in thethird quarterfirst six months of fiscal year2003. 112002.We also have market risks associated with the volatility of
12our investments in privately-held companies which consist primarily of securities of emerging technology companies. These investments are carried at cost and are evaluated periodically to determine if declines in fair value are other-than-temporary. Declines in value judged to be other-than-temporary are included in other (income) expense. We recorded losses of $4,224 in the first six months of fiscal year 2003 from other-than-temporary declines in the fair value of our investments in privately-held companies. During the first six months of fiscal year 2002, we recorded a gain of $16,200 from the appreciation in the market value of a warrant to purchase common stock of a public company. 15 of 20
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman of the Board, President, and Chief Executive Officer, James F. McDonald, and Senior Vice President, Chief Financial Officer and Treasurer, Wallace G. Haislip, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chairman of the Board, President and Chief Executive Officer and Senior Vice President, Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including its consolidated subsidiaries) required to be included in our periodic SEC filings. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date Messrs. McDonald and Haislip completed their evaluation.
16 of 20
PART II
-– OTHER INFORMATIONItem 1. Legal
Proceedings. - ------- OnProceedingsIn connection with the lawsuit filed by us against Gemstar-TV Guide International, Inc. on December 3,
through December 20, 2001, a hearing was held before an Administrative Law Judge in the International Trade Commission action1998 and described inItem 3 of the Company'sour Annual Report on Form 10-K for thefiscalyear ended June29, 2001. An initial determination28, 2002, the U.S. District Court in Atlanta issued a “Markman Order” on October 25, 2002 interpreting the claims of the so-called Reiter ‘578 patent and Hallenbeck ‘211 and ‘357 patents. We filed motions for summary judgment of non-infringement as to the Reiter and Hallenbeck patents. Gemstar agreed that, based on the interpretations set forth in the Markman Order, our accused products do not infringe the ‘211 patent. A hearing on the remaining patents will be held in February. The District Court in Atlanta also issued an Order on November 1, 2002 granting our Motion for Summary Judgment of non-infringement of the Levine ‘815 and ‘272 patents as to our analog set-top products.In connection with the securities class action litigation filed in July 2001 and described in our Annual Report on Form 10-K for the year ended June 28, 2002, the U.S. District Court for the Northern District of Georgia denied on December 23, 2003 our motion to dismiss the consolidated complaint filed by the lead counsel. Scientific-Atlanta and the individual defendants have filed a motion requesting the Court to certify the denial for appeal to the 11th Circuit Court of Appeals, or, in the alternative, to re-consider its decision.
On January 3, 2003, a purported class action alleging violations of the Employee Retirement Income Security Act (ERISA) was also filed in the U.S. District Court for the Northern District of Georgia. The action was brought against us and several of our officers and directors alleging breaches of fiduciary obligations to participants in Scientific-Atlanta’s 401(k) plan and is based on substantially the same factual allegations as the class action described above.
In January 2003, Scientific-Atlanta received a subpoena from the
Judge is expected on or before March 21, 2002. The initial determination will be subject to review byU.S. Department of Justice in theInternational Trade Commission, whichEastern District of Missouri regarding the production of documents inturn will issue a final determination on or before June 21, 2002.connection with our marketing support arrangement with Charter Communications. We are cooperating in that investigation.During the second quarter of fiscal year 2003, we resigned from the Creditors’ Committee in the Adelphia bankruptcy proceeding.
Item 4. Submission of Matters to a Vote of Security
Holders. - -------HoldersThe following information is furnished with respect to matters submitted to a vote of security holders through the solicitation of proxies:
(a) The matters described below were submitted to a vote of security holders at the Annual Meeting of Shareholders held on November 7, 2001. (b) Election of directors:
Votes For Withhold Authority ----------- ------------------James I. Cash, Jr 130,847,648 1,364,188 David W. Dorman 130,990,986 1,220,850(a) The matters described below were submitted to a vote of security holders at the Annual Meeting of Shareholders held on November 7, 2002.
(b) Election of directors:
Votes for
Withhold Authority
David W. Dorman
121,947,286
7,060,450
William E. Kassling
122,783,135
6,224,601
Mylle Bell Mangum
126,140,329
2,867,407
James I. Cash, Jr., James F. McDonald,
130,968,040 1,243,796Terence F. McGuirk,130,929,420 1,282,416Marion H. Antonini, William E. Kassling, Mylle Bell Mangum,David J. McLaughlin, James V. Napier and Sam Nunn continue asdirectors (c)(i) Ratificationdirectors. Marion H. Antonini retired from the Board ofthe selectionDirectors when his term ofArthur Andersen LLP as independent auditors for fiscal year ending June 28, 2002 Votes For Votes Against Abstain ------------------- ------------- --------------- 128,635,097 2,852,600 724,139office expired on November 7, 2002.17 of 20
Item 6. Exhibits and Reports on Form 8-K.
- ------- (c)(a) Exhibits.
Exhibit No. Description ----------- ----------- 99 Cautionary Statements (d)
Exhibit No.
Description
3.0
By-laws of Scientific-Atlanta, Inc.
99.1
Cautionary Statements
99.2
Certification of Chief Executive Officer Regarding Periodic Report Containing Financial Statements Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.3
Certification of Chief Financial Officer Regarding Periodic Report Containing Financial Statements Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) No reports on Form 8-K were filed during the quarter ended December
28, 2001.27, 2002.SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SCIENTIFIC-ATLANTA, INC. ------------------------ (Registrant) Date: February 11,
SCIENTIFIC-ATLANTA, INC.
(Registrant)
Date:
February 7, 2003
By:
/s/ Wallace G. Haislip
Wallace G. Haislip
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and duly authorized signatory of the Registrant)
18 of 20
Certification of Chief Executive Officer Regarding Periodic Report
Containing Financial Statements Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
By: /s/I, James F. McDonald, the Chief Executive Officer of Scientific-Atlanta, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Scientific-Atlanta, 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 officers 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 officers 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 (or 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 officers 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: February 7, 2003
/s/ James F. McDonald
Name:
James F. McDonald
Title:
Chairman of the Board, President and Chief Executive Officer
19 of 20
Certification of Chief Financial Officer Regarding Periodic Report
Containing Financial Statements Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Wallace G. Haislip,
-------------------- -------------------------------------- Wallace G. Haislip Senior Vice President,the Chief Financial Officerand Treasurer (Principal Financial Officer and duly authorized signatoryofthe Registrant) 12Scientific-Atlanta, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Scientific-Atlanta, 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 officers 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 officers 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 (or 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 officers 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: February 7, 2003
/s/ Wallace G. Haislip
Name:
Wallace G. Haislip
Title:
Senior Vice President, Chief Financial Officer and Treasurer
20 of
12