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 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 ___________________
Commission file number 1-5517
SCIENTIFIC-ATLANTA, INC.
(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)
770-236-5000
(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 January 25, 2002, Scientific-Atlanta, Inc. had outstanding
156,432,136 shares of common stock.
PART I - FINANCIAL INFORMATION
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(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
========= ========== ========== ===========
SEE ACCOMPANYING NOTES
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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
========= =========
SEE ACCOMPANYING NOTES
3 of 12
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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
SEE ACCOMPANYING NOTES
4 of 12
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
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, net of reclassification
adjustments of $0 in the three and
six months ended December 28, 2001,
$0 in the three months ended December 29,
2000 and $65,791 in the six months ended
December 29, 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)
============ =========== ============ ============
/(1)/ Assumed 38 percent tax in fiscal years 2002 and 2001.
SEE ACCOMPANYING NOTES
5 of 12
NOTES:
(Amounts in thousands, except share data).
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 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 2001 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. Certain prior year
amounts have been reclassified to conform to the current year
presentation.
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 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)
======== ======= ======= ========= ======= =======
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's exercise price was
greater than the average market price of the common 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 consist of the following: December 28, June 29,
2001 2001
------------ ----------
Raw materials and work-in-process $ 104,014 $ 144,270
Finished goods 80,768 57,492
---------- ----------
Total inventory $ 184,782 $ 201,762
========== ==========
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 July 2001, we announced 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.
We acquired 111,682 shares and 138,188 shares of our common stock from the
deferral and conversion to cash of the payment of restricted stock that
vested during the six months ended December 28, 2001 and December 29, 2000,
respectively. In addition, we acquired 55,719 shares and 42,770 shares 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. Other (income) expense for the quarter 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 sale of
a portion 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. There were no significant items in other (income)
expense for the quarter ended December 29, 2000.
F. In July 2000, PowerTV, Inc., a majority-owned subsidiary of
Scientific-Atlanta, acquired 100 percent of the outstanding stock of
PRASARA Technologies, Inc. for shares of PowerTV common stock and $2,609 in
cash. The acquisition was accounted for under the purchase method of
accounting and, accordingly, the acquired assets and liabilities were
recorded at their estimated fair value at the date of acquisition. The
purchase price has been allocated to the assets acquired and liabilities
assumed including $14,643 of goodwill and $17,065 of other intangibles.
G. 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 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 results of our assessment did not result in any charges to
operations for impairment of goodwill.
7 of 12
H. 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 the fiscal year.
I. On January 3, 2002, Scientific-Atlanta paid $142,518 for 92.4 percent of
the outstanding shares of BarcoNet NV, a European manufacturer 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 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
Scientific-Atlanta had stockholders' equity of $1.4 billion and cash on
hand was $534.0 million at December 28, 2001. Cash decreased $29.4 million
during the six months ended December 28, 2001. The decline was due primarily to
the repurchase of 7,925,000 shares of our common stock for $184.0 million, which
more than offset the $173.8 million of cash generated by operations.
The current ratio of Scientific-Atlanta was 4.3:1 at December 28, 2001, up
from 3.9:1 at June 29, 2001. 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 quarter ended December 28, 2001 were $418.2 million, down 34
percent from the prior year, but up slightly over the preceding quarter. Sales
of subscriber products were $282.8 million, down 33 percent from the prior year.
We shipped approximately 865 thousand Explorer digital set-tops during the
second quarter of fiscal 2002, down from 1.1 million in the prior year. In
support of the on-demand television plans of our customers, we shipped 1,686
MultiQAM Modulators (MQAMs) in the quarter, up 75 percent over the prior year.
MQAMS are capable of bringing video on demand and subscription video on demand
services to digital cable subscribers. Scientific-Atlanta also shipped
approximately 184 thousand cable modems during the quarter. Sales of
transmission products were $117.8 million in the second quarter, down 36 percent
from the prior year. International sales of transmission products increased 10
percent in the second quarter over the same quarter last year primarily from
sales of products and services to Callahan NRW in Germany. Total international
sales were 19 percent of total sales in the second quarter, as compared to 14
percent of total sales in the prior year.
Sales for the six months ended December 28, 2001 were $828.3 million, down
33 percent from the prior year. Sales of subscriber products were $561.5
million, down 31 percent from the prior year. We shipped approximately 1.7
million digital set-tops during the six months ended December 28, 2001, down
from over 2.1 million in the comparable period of the prior year. Sales of
transmission products were $228.1 million, down 38 percent from the prior year.
International sales were 20 percent of total sales in the six months ended
December 28, 2001, up from 16 percent of total sales in the six months ended
December 29, 2000.
9 of 12
Gross margins were 33.4 percent and 32.7 percent of sales for the three and
six months ended December 28, 2001, 2.6 percentage points and 2.5 percentage
points, respectively, higher than the comparable periods of the prior year. The
continued benefit of cost reductions through product design, procurement and
manufacturing more than offset the impact of lower volumes and price reductions
in the quarter and six months ended December 28, 2001 as compared to the prior
year.
Research and development costs were $35.6 million in the quarter ended
December 28, 2001, down 8 percent from the prior year due to the previously
announced worldwide restructuring and expense reduction efforts. Research and
development costs were $73.2 million for the six months ended December 28, 2001,
flat as compared to the prior year. Research and development efforts during the
year continued 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, 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
$18.7 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. We expect to complete the restructuring plan, including the closing
of the Atlanta manufacturing facility, by the end of the fiscal year. We
anticipate that the restructuring will reduce costs and expenses by
approximately $59.0 million on an annual basis, starting in the third quarter of
fiscal year 2002. We also expect to record additional charges of approximately
$9.0 million related to the restructuring plan in the second half of the fiscal
year.
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 sale of a
portion of our investment in Bookham Technology plc. This gain was partially
offset by other miscellaneous expenses. There were no significant items in other
(income) expense for the quarter ended December 29, 2000.
Earnings before income taxes were $59.6 million and $115.8 million for the
three and six months 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 partially offset by lower operating expenses and improved gross margin
rates in fiscal year 2002. In the three months ended December 28, 2001, we also
recorded a gain of $16.3 million from the appreciation in the market value of an
investment.
10 of 12
Scientific-Atlanta's effective income tax rate was 34 percent for the three
and six months ended December 28, 2001, unchanged from the quarter ended
December 29, 2001 but down one percentage point from the six months ended
December 29, 2000. The higher rate in fiscal year 2000 was due to the impact on
the tax rate from research and development credits which was diminished with the
higher levels of pretax earnings, as well as taxes to be paid on the gains from
the sale of investments.
Net earnings for the three and six months ended December 28, 2001 were
$39.2 million and $76.3 million, respectively, compared to $70.8 million and
$184.1 million in the comparable periods of the prior year. The year-over-year
declines were driven primarily by lower volume of sales and charges in the three
and six months ended December 28, 2001 related to our worldwide restructuring.
Any statements in Management'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 Exhibit 99 to this Form 10-Q
for a description of the various risks and uncertainties that could cause
Scientific-Atlanta's actual results and experience to differ materially from the
anticipated results or other expectations expressed in Scientific-Atlanta's
forward-looking statements. Such Exhibit 99 is hereby incorporated by reference
into Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Explorer is a registered trademark of Scientific-Atlanta, Inc.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- ------- -----------------------------------------------------------
(In thousands, except per dollar amounts)
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 firm commitments and assets
denominated in currencies other than the U.S. dollar. These contracts 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. Any ineffectiveness is recorded through
earnings. 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.
Unrealized gains and losses on foreign exchange forward contracts, which do
not meet the criteria for a hedge, are recognized in other (income) expense.
During the quarter ended December 28, 2001, we entered into forward contracts to
purchase 188,500 Euros related to the acquisition of BarcoNet and recorded
realized and unrealized gains of $490 and $35, respectively. At December 28,
2001, we had one of these contracts for 15,000 Euros at a rate of 0.88 to the
U.S. dollar remaining which will be settled in the third quarter of fiscal 2002.
Scientific-Atlanta holds a warrant to purchase common stock that is
recorded at fair value. We also entered into a collar with put and call options
which is designed to limit our exposure to fluctuations in the fair value of the
warrant. During the three and six months ended December 28, 2001, we recorded
unrealized gains of $16,311 from the appreciation in the fair value of the
warrant and collar 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 1.56
Scientific-Atlanta has no derivative exposure beyond the third quarter of fiscal
year 2003.
11 of 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
- -------
On December 3 through December 20, 2001, a hearing was held
before an Administrative Law Judge in the International Trade
Commission action described in Item 3 of the Company's Annual
Report on Form 10-K for the fiscal year ended June 29, 2001. An
initial determination from the Judge is expected on or before
March 21, 2002. The initial determination will be subject to
review by the International Trade Commission, which in turn will
issue a final determination on or before June 21, 2002.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------
The 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
James F. McDonald 130,968,040 1,243,796
Terence F. McGuirk 130,929,420 1,282,416
Marion H. Antonini, William E. Kassling, Mylle Bell
Mangum, David J. McLaughlin, James V. Napier and Sam Nunn
continue as directors
(c)(i) Ratification of the selection of Arthur Andersen LLP as
independent auditors for fiscal year ending June 28, 2002
Votes For Votes Against Abstain
------------------- ------------- ---------------
128,635,097 2,852,600 724,139
Item 6. Exhibits and Reports on Form 8-K.
- -------
(c) Exhibits.
Exhibit No. Description
----------- -----------
99 Cautionary Statements
(d) No reports on Form 8-K were filed during the quarter ended
December 28, 2001.
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, 2002 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)
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