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 March 29, 2002
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission file number 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 April 26, 2002, Scientific-Atlanta, Inc. had outstanding 156,620,459
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 Nine Months Ended
--------------------------- -----------------------------
March 29, March 30, March 29, March 30,
2002 2001 2002 2001
--------- ---------- ---------- ----------
SALES $ 452,690 $ 663,700 $1,280,981 $1,892,370
--------- ---------- ---------- ----------
COSTS AND EXPENSES
Cost of sales 285,324 456,129 842,807 1,313,204
Sales and administrative 52,326 55,516 143,406 163,925
Research and development 37,505 40,978 110,702 114,287
Restructuring 3,788 - 22,525 -
Interest expense 376 128 592 322
Interest income (4,697) (9,590) (16,609) (28,933)
Other (income) expense, net 11,771 5,030 (4,541) (69,697)
--------- ---------- ---------- ----------
Total costs and expenses 386,393 548,191 1,098,882 1,493,108
--------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 66,297 115,509 182,099 399,262
PROVISION (BENEFIT) FOR INCOME TAXES
Current 38,950 53,046 77,174 162,641
Deferred (16,436) (13,773) (15,124) (23,700)
--------- ---------- ---------- ----------
NET EARNINGS $ 43,783 $ 76,236 $ 120,049 $ 260,321
========= ========== ========== ==========
EARNINGS PER COMMON SHARE
BASIC $ 0.28 $ 0.47 $ 0.77 $ 1.62
========= ========== ========== ==========
DILUTED $ 0.28 $ 0.46 $ 0.76 $ 1.55
========= ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
BASIC 156,439 161,651 156,841 161,038
========= ========== ========== ==========
DILUTED 158,338 167,036 158,605 167,755
========= ========== ========== ==========
DIVIDENDS PER SHARE PAID $ 0.01 $ 0.01 $ 0.03 $ 0.03
========= ========== ========== ==========
SEE ACCOMPANYING NOTES
2 of 16
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
In Thousands
------------------------------------
March 29, June 29,
2002 2001
-------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 526,564 $ 563,322
Short-term investments 225,813 191,001
Receivables, less allowance for doubtful
accounts of $8,309,000 at March 29
and $5,982,000 at June 29 335,372 502,289
Inventories 181,635 201,762
Deferred income taxes 55,786 57,195
Other current assets 19,000 33,165
----------- ----------
TOTAL CURRENT ASSETS 1,344,170 1,548,734
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land and improvements 22,011 22,218
Building and improvements 79,697 67,946
Machinery and equipment 251,326 246,385
----------- ----------
353,034 336,549
Less - Accumulated depreciation and amortization 130,421 108,934
----------- ----------
222,613 227,615
----------- ----------
GOODWILL 166,750 58,063
INTANGIBLE ASSETS 64,095 35,790
NON-CURRENT MARKETABLE SECURITIES 26,893 17,159
DEFERRED INCOME TAXES 40,269 26,732
OTHER ASSETS 74,991 88,735
----------- ----------
TOTAL ASSETS $ 1,939,781 $2,002,828
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,265 $ 91
Accounts payable 162,742 223,990
Accrued liabilities 170,998 164,991
Income taxes currently payable 31,918 5,051
----------- ----------
TOTAL CURRENT LIABILITIES 366,923 394,123
----------- ----------
LONG-TERM DEBT, LESS CURRENT MATURITIES 8,069 -
----------- ----------
OTHER LIABILITIES 127,591 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 March 29 and 164,899,158 82,496 82,450
shares at June 29
Additional paid-in capital 539,658 545,602
Retained earnings 1,050,400 935,038
Accumulated other comprehensive loss, net of taxes of
$8,589,000 at March 29 and $3,723,000 at June 29 (14,012) (6,075)
----------- ----------
1,658,542 1,557,015
Less--Treasury stock, at cost (8,493,585 shares at March 29
and 859,339 shares at June 29) 221,344 48,076
----------- ----------
1,437,198 1,508,939
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,939,781 $2,002,828
=========== ==========
SEE ACCOMPANYING NOTES
3 of 16
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
----------------------
March 29, March 30,
2002 2001
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 362,031 $ 195,112
--------- ---------
INVESTING ACTIVITIES:
Proceeds from the sale of investments - 84,158
Purchases of short-term investments, net (23,741) (78,139)
Purchases of property, plant, and equipment (23,618) (93,544)
Investments - (14,000)
Acquisition of business, net of cash acquired (143,286) (2,529)
Other 164 67
--------- ---------
Net cash used by investing activities (190,481) (103,987)
--------- ---------
FINANCING ACTIVITIES:
Issuance of common stock 3,591 41,089
Treasury shares acquired (183,993) -
Dividends paid (4,687) (4,837)
Debt payments (23,219) (354)
--------- ---------
Net cash provided (used) by financing activities (208,308) 35,898
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (36,758) 127,023
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 563,322 462,496
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 526,564 $ 589,519
--------- =========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period:
Interest $ 302 $ 274
========= =========
Income taxes, net $ 43,803 $ 71,422
========= =========
Non-cash investing activities:
Net assets of business acquired for subsidiary stock:
Fair value of assets, including goodwill $ - $ 30,703
Liabilities assumed $ - $ 11,563
SEE ACCOMPANYING NOTES
4 of 16
SCIENTIFIC-ATLANTA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -----------------
March 29, March 30, March 29, March 30,
2002 2001 2002 2001
--------- --------- --------- ---------
NET EARNINGS $ 43,783 $ 76,236 $ 120,049 $ 260,321
OTHER COMPREHENSIVE
INCOME (LOSS), NET OF TAX/(1)/
Unrealized gains (losses) on
marketable securities, net (3,116) (23,756) (5,716) (153,812)
Reversal of unrealized (gains) losses
on marketable securities sold - 79 - (65,712)
Retirement plans minimum
liability adjustment (2) - 60 (416)
Foreign currency translation adjustments (2,264) (402) (1,735) (632)
Changes in fair value of derivatives (192) - (546) -
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 38,209 $ 52,157 $ 112,112 $ 39,749
========= ========= ========= =========
/(1)/ Assumed 38 percent tax in fiscal years 2002 and 2001.
SEE ACCOMPANYING NOTES
5 of 16
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 March 29, 2002 Three Months Ended March 30, 2001
------------------------------------ ---------------------------------------
Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount
-------- ------ ------ -------- ------ ------
Basic earnings per common share:
Net earnings $ 43,783 156,439 $ 0.28 $ 76,236 161,651 $ 0.47
Diluted earnings per common share:
Net earnings $ 43,783 158,338 $ 0.28 $ 76,236 167,036 $ 0.46
-------- ------- ------- --------- ------- -------
Effect of dilutive stock options $ - 1,899 $ - $ - 5,385 $ (0.01)
======== ======= ======= ========= ======= =======
Nine Months Ended March 29, 2002 Nine Months Ended March 30, 2001
--------------------------------------- ---------------------------------------
Net Per Share Net Per Share
Earnings Shares Amount Earnings Shares Amount
-------- ------ ------ -------- ------ ------
Basic earnings per common share:
Net earnings $120,049 156,841 $ 0.77 $ 260,321 161,038 $ 1.62
Diluted earnings per common share:
Net earnings $120,049 158,605 $ 0.76 $ 260,321 167,755 $ 1.55
-------- ------- ------- --------- ------- -------
Effect of dilutive stock options $ - 1,764 $ (0.01) $ 6,717 $ (0.07)
======== ======= ======= ========= ======= =======
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:
March 29, March 30,
2002 2001
------------- ------------
Number of options outstanding 9,863,313 8,204,337
Weighted average exercise price $ 52.549 $ 54.136
6 of 16
March 29, June 29,
C. Inventories consist of the following: 2002 2001
-------------- ------------
Raw materials and work-in-process $ 110,814 $ 144,270
Finished goods 70,821 57,492
---------- ---------
Total inventory $ 181,635 $ 201,762
========== =========
D. During the nine months ended March 29, 2002, 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 nine months ended March 29, 2002 and March 30,
2001, 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 nine months ended March 29, 2002 and March 30, 2001, respectively.
E. Other (income) expense of $11,771 for the quarter ended March 29, 2002
included losses of $13,762 related to other than temporary declines in
the market value of equity investments and $13,280 from the decline in
the market value of a warrant to purchase common stock. These losses
were partially offset by gains of $10,575 from a collar on a warrant
to purchase common stock and $6,842 from insurance proceeds. Other
(income) expense of $4,541 for the nine months ended March 29, 2002
included gains of $2,920 and $10,686 from the appreciation in the
market value of a warrant to purchase common stock and the related
collar on the warrant, respectively, a gain of $6,842 from insurance
proceeds and losses of $13,762 from the other than temporary declines
in the market value of equity investments
Other (income) expense of $5,030 for the quarter ended March 30, 2001
was comprised primarily of losses related to other than temporary
declines in the market value of investments and the disposition of
assets and expenses related to buildings that were vacated during the
quarter as part of a consolidation of facilities in Georgia. Other
(income) expense of $69,697 for the nine months ended March 30, 2001
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. Other miscellaneous gains and losses
for the three and nine months ended March 30, 2001 were not
significant.
F. During the quarter ended March 29, 2002, Scientific-Atlanta acquired
approximately 98 percent of the equity securities of BarcoNet NV, a
Belgium based manufacturer of cable television equipment, for a cash
payment of $151,850. The remaining equity securities were acquired in
April 2002 for a cash payment of approximately $4,100. 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 $107,229 of goodwill and $36,720 of other intangible
assets. The results of operations of BarcoNet for the three months
ended March 29, 2002 are included in the Consolidated Statements of
Earnings from the date of acquisition.
The unaudited pro forma summary below presents certain financial
information as if the BarcoNet acquisition had occurred as of July 1,
2000. The pro forma results have been prepared for comparative
purposes and do not purport to be indicative of what would have
occurred had the acquisition been made on the first day of our fiscal
year. Additionally, these pro forma results are not indicative of
future results.
7 of 16
Three Months Ended Nine Months Ended
March 29, 2002 March 30, 2001 March 29, 2002 March 30, 2001
-------------- -------------- -------------- --------------
Sales $452,690 $687,459 $1,323,098 $1,966,041
Net income from continuing
operations $ 43,783 $ 76,740 $ 105,708 $ 264,665
Loss from discontinued
operations - $ (8,010) $ (33,890) $ (7,854)
Net income $ 43,783 $ 68,730 $ 71,818 $ 256,811
Diluted earnings per share $ 0.28 $ 0.41 $ 0.45 $ 1.53
Losses from discontinued operations resulted from the discontinuance of
Internet services activities by BarcoNet in fiscal year 2001.
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 nine months ended March
30, 2001, goodwill amortization expense, net of tax, was $676 and $1,996
respectively. The impact of goodwill amortization on basic and diluted
earnings per share follows:
Three Months Ended Nine Months Ended
March 29, March 30, March 29, March 30,
2002 2001 2002 2001
--------------- --------------- -------------- ---------------
Reported net earnings $ 43,783 $ 76,236 $ 120,049 $ 260,321
Add: Goodwill amortization - 676 - 1,996
---------- --------- ---------- ----------
Adjusted net earnings $ 43,783 $ 76,912 $ 120,049 $ 262,317
========== ========= ========== ==========
Basic earnings per share:
Reported net earnings $ 0.28 $ 0.47 $ 0.77 $ 1.62
Goodwill amortization - 0.01 - 0.01
---------- --------- ---------- ----------
Adjusted net earnings $ 0.28 $ 0.48 $ 0.77 $ 1.63
========== ========= ========== ==========
Diluted earnings per share
Reported net earnings $ 0.28 $ 0.46 $ 0.76 $ 1.55
Goodwill amortization - - - 0.01
---------- --------- ---------- ----------
Adjusted net earnings $ 0.28 $ 0.46 $ 0.76 $ 1.56
========== ========= ========== ==========
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.
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.
In the third quarter of fiscal year 2002 restructuring of operations in
Europe and Latin America resulted in additional headcount reductions of
approximately 30 people. During the nine months ended March 29, 2002, we
recorded restructuring charges of $22,525 which included severance costs of
$10,449 for approximately 780 employees, $5,524 for expenses related to
contractual obligations under leases to be canceled, $4,079 for assets to
be abandoned and $2,473 of miscellaneous expenses, primarily costs incurred
in the period related to the transfer of manufacturing operations from
Atlanta to Juarez. As of March 29, 2002, severance costs of approximately
$4,505 had been paid to approximately 330 employees who had actually been
terminated. The remaining 450 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.
8 of 16
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 $526.6 million at March 29, 2002. Cash decreased $36.8 million during
the nine months ended March 29, 2002. The decline was due primarily to the
repurchase of 7,925,000 shares of our common stock for $184.0 million, and
acquisition of BarcoNet NV for $151.8 million, which more than offset the $362.0
million of cash generated by operations.
During the quarter ended March 29, 2002, Scientific-Atlanta acquired
approximately 98 percent of the equity securities of BarcoNet NV, a Belgium
based manufacturer of cable television equipment, for a cash payment of $151.8
million. The remaining equity securities were acquired in April 2002 for a cash
payment of approximately $4.1 million. 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 $107.2 million of goodwill and $36.7 million of
other intangible assets. The results of operations of BarcoNet for the three
months ended March 29, 2002 are included in the Consolidated Statements of
Earnings from the date of acquisition.
The current ratio of Scientific-Atlanta was 3.7:1 at March 29, 2002, down
slightly 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.
RESULTS OF OPERATIONS
- ---------------------
Scientific-Atlanta experienced declines in sales this quarter and for the
nine 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 fiscal quarter and for the nine
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.
Although the domestic cable industry is comprised of thousands of cable
systems, a small number of large cable television multiple systems operators
(MSOs) own a large portion of the cable television systems and account for a
significant portion of the capital expenditures made by cable television system
operators. A loss of business from a significant MSO could have a material
adverse effect on our business. During the nine months ended March 29, 2002,
sales of our products to AOL Time Warner, Inc. and its affiliates, Charter
Communications, Inc. and its affiliates, Cox Communications, Inc. and its
affiliates, and Adelphia and its affiliates were approximately 31 percent, 13
percent, 12 percent and 10 percent, respectively, of total sales. Accounts
receivable at March 29, 2002 from these customers aggregated $192.7 million, of
which $83.8 million was from Adelphia and its affiliates.
Overall set-top pricing has declined approximately 15 percent in the three
and nine months ended March 29, 2002, compared to the comparable periods of the
prior year. 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 March 29, 2002 were $452.7 million, down 32
percent from the prior year, but up $34.5 million, or 8 percent over the
preceding quarter. Sales of subscriber products were $281.5 million, down 40
percent from the prior year. We shipped approximately 879 thousand Explorer
digital set-tops during the third quarter of fiscal 2002, down from 1.4 million
in the prior year. In support of the on-demand television plans of our
customers, we shipped 3,300 MultiQAM Modulators (MQAMs) in the quarter, up from
approximately 600 in 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 183 thousand cable modems during
the quarter, approximately the same as last quarter.
9 of 16
Sales of transmission products were $135.8 million in the third quarter,
down 23 percent from the prior year. International sales of transmission
products increased 13 percent in the third quarter over the same quarter last
year primarily from sales of products and services to Kabel Nordrhein-Westfalen
GmbH & Co. KG ("K-NRW") in Germany. On April 26, 2002, K-NRW informed its
syndicate banks that an event of default had occurred under its Senior Credit
Agreement. K-NRW has suspended or cancelled a number of work orders previously
issued to the Cable Upgrade Consortium, of which we are a member and through
which we furnish our products and services. In addition, K-NRW has requested of
all members of the consortium a 120-day payment moratorium on all outstanding
invoices. At the end of the third fiscal quarter, our exposure in accounts
receivable and inventory relating to this customer was approximately $50
million. These events may impact revenues from this customer and the results of
operations in future quarters. Total international sales were 18 percent of
total sales in the third quarter, as compared to 13 percent of total sales in
the prior year. BarcoNet sales for the quarter ended March 29, 2002 were $17.9
million.
Sales for the nine months ended March 29, 2002 were $1,281.0 million, down
32 percent from the prior year. Sales of subscriber products were $843.0
million, down 34 percent from the prior year. We shipped approximately 2.6
million digital set-tops during the nine months ended March 29, 2002, down from
over 3.5 million in the comparable period of the prior year. Sales of
transmission products were $364.0 million, down 33 percent from the prior year.
International sales were 19 percent of total sales in the nine months ended
March 29, 2002, up from 15 percent of total sales in the nine months ended March
30, 2001.
Gross margins were 37.0 percent and 34.2 percent of sales for the three and
nine months ended March 29, 2002, 5.7 percentage points and 3.6 percentage
points, respectively, higher than the comparable periods of the prior year. The
increases in gross margin were attributable to favorable product mix, lower
material costs, and cost reductions related to the ongoing transfer of
manufacturing operations to Juarez, Mexico. Higher volumes of transmission
products, improved margins in our Media Networks business, and the addition of
BarcoNet also contributed to higher gross margins.
Research and development costs were $37.5 million in the quarter ended
March 29, 2002, down 8 percent from the prior year due to the previously
announced worldwide restructuring and expense reduction efforts. Research and
development costs were $110.7 million for the nine months ended March 29, 2002,
down slightly 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. Research
and development for the three and nine months ended March 29, 2002 included $0.7
million of in-process technology purchased in connection with the acquisition of
BarcoNet which had not yet reached technological feasibility and had no
alternative future use.
Selling and administrative expenses were $52.3 million and $143.4 million
for the three and nine months ended March 29, 2002, respectively, down 6 percent
and 13 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 nine
months ended March 29, 2002. These reductions were offset partially by higher
professional fees related to previously disclosed litigation and the acquisition
of BarcoNet in the third quarter of fiscal year 2002.
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 nine months ended March 29, 2001,
sales and administrative expense included goodwill amortization of $1.0 million
and $3.1 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. In
the third quarter of fiscal year 2002, restructuring of operations in Europe and
Latin America resulted in additional headcount reductions of approximately 30
people. During the nine months ended March 29, we recorded restructuring charges
of $22.5 million which included severance costs of $10.4 million for
approximately 780 employees, $5.5 million for expenses related to contractual
obligations under leases to be cancelled, $4.1 million for assets to be
abandoned and $2.5 million of miscellaneous expenses, primarily costs incurred
in the period related to the transfer of manufacturing operations from Atlanta
to Juarez. As of March 29, 2002, severance costs of approximately $4.5
10 of 16
million had been paid to approximately 330 employees who had actually been
terminated. The remaining 450 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 $3 million related to the restructuring plan in the fourth
quarter of fiscal year 2002.
Other (income) expense of $11.8 million for the quarter ended March 29,
2002 included losses of $13.8 million related to other than temporary declines
in the market value of equity investments and $13.3 million from the decline in
the market value of a warrant to purchase common stock. These losses were
partially offset by gains of $10.6 million from a collar on a warrant to
purchase common stock and $6.8 million from insurance proceeds. Other (income)
expense of $4.5 million for the nine months ended March 29, 2002 included gains
of $2.9 million and $10.7 million from the appreciation in the market value of a
warrant to purchase common stock and the related collar on the warrant,
respectively, a gain of $6.8 million from insurance proceeds and losses of $13.8
million from the other than temporary declines in the market value of equity
investments.
Other (income) expense of $5.0 million for the quarter ended March 30, 2001
was comprised primarily of losses related to other than temporary declines in
the market value of investments and the disposition of assets and expenses
related to buildings that were vacated during the quarter as part of a
consolidation of facilities in Georgia. Other (income) expense for the nine
months ended March 30, 2001 included a gain of $78.8 million from the sale of a
portion of our investment in Bookham Technology plc, a UK-based developer and
supplier of optical components. Other miscellaneous gains and losses for the
three and nine months ended March 30, 2001 were not significant.
Earnings before income taxes were $66.3 million and $182.1 million for the
three and nine months ended March 29, 2002, respectively, down $49.2 million and
$217.2 million, respectively, from the comparable periods of the prior year.
Lower volume of sales in the three and nine months ended March 29, 2002, 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.
Scientific-Atlanta's effective income tax rate was 34 percent for the three
and nine months ended March 29, 2002, compared to 34 percent and 35 percent for
the three and nine months ended March 30, 2001, respectively. The higher rate in
fiscal year 2001 was related to higher taxes paid on gains from the sale of
investments.
Net earnings for the three and nine months ended March 29, 2002 were $43.8
million and $120.0 million, respectively, compared to $76.2 million and $260.3
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 nine
months ended March 29, 2002 related to our worldwide restructuring.
SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------
Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal
year 2001 includes a summary of the significant accounting policies or methods
used in the preparation of our Consolidated Financial Statements. The following
is a brief description of the more significant accounting policies and methods
used.
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, principally relating to warranty provisions.
11 of 16
Revenue Recognition
- -------------------
Our principal sources of revenues are from sales of broadband transmission
networks, digital interactive subscriber systems and content distribution
networks. Scientific-Atlanta's revenue recognition policies are in compliance
with Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" issued by the Securities and Exchange Commission. 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, and (4) collectibility is reasonably
assured. Revenue is also recognized only when 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.
Our right of return policy, which is standard for virtually all sales,
allows 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. Our agreements generally do not include acceptance
clauses. However, 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 or weakening in economic trends
could have a significant impact on the collectibility of receivables and our
operating results.
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 and 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.
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 return rates and repair
costs at the time of sale. Expenses related to unusual product warranty problems
and product defects are recorded in the period the problem is identified. A
significant increase in product return rates or in the costs to repair our
products could have a significant impact on our operating results.
12 of 16
OFF-BALANCE SHEET FINANCING
---------------------------
In July 1997, we entered into a long-term operating lease arrangement,
which provided $38 million to finance the construction of the initial phase of
our consolidated office site in Gwinnett County, Georgia, which was completed in
the third quarter of fiscal year 1999. The initial occupancy term is five years
and expires in July 2004. Three five-year extensions of the lease term are
available to Scientific-Atlanta. Lease payments equal the interest on the $38
million at a fixed rate of 6.51 percent per annum. A final lease payment of $38
million is due at the termination of the lease. We can also purchase the
buildings financed with this arrangement at any time for $38 million. The lessor
is a non-bank general-purpose corporation owned by a financial institution that
has engaged in many types of transactions with parties other than
Scientific-Atlanta and activities other than lease transactions.
Scientific-Atlanta has no ownership interest in the lessor or the financial
institution.
The lease qualifies as an operating lease under Statement of Financial
Accounting Standards No. 13 "Accounting for Leases", as amended. The assets,
liabilities, results of operations and cash flows of the lessor have not been
included in the consolidated financial statements of Scientific-Atlanta because
the lessor does not meet the conditions for consolidation under Emerging Issues
Task Force Issue 90-15 "Impact of Nonsubstantive Lessors, Residual Value
Guarantees, and Other Provisions in Lease Transactions."
After the completion of the initial phase of our consolidated office site,
all facility expansions were financed with existing cash balances and cash
generated from operations.
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. Prisma IP is a
trademark of Scientific-Atlanta, Inc.
13 of 16
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. At March 29, 2002, we had a forward contract to sell 68,525
Euros. This contract hedges our foreign currency exposure on a Euro-denominated
receivable.
Firmly committed purchase (sales) exposure and related hedging instruments at
March 29, 2002 are as follows:
Euros Canadian Dollars
--------- --------------------
Firmly committed purchase (sales)
contracts (55,620) 25,278
Notional amount of forward exchange
contracts (35,930) 16,800
Average contract amount
(Foreign currency/United States
dollar) 0.88 1.58
Scientific-Atlanta has no derivative exposure beyond the third quarter of fiscal
year 2003.
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 nine months ended March 29, 2002, we recorded unrealized
gains of $2,920 and $10,686 from the appreciation in the fair value of the
warrant and collar, respectively, in other (income) expense.
14 of 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
- -------
Following a hearing held before the International Trade Commission in
Washington, DC, in December, closing briefs were filed by the parties
on January 31, 2002. Closing arguments were scheduled for February 20,
2002, but canceled by the judge. A decision in the matter was
originally due by March 21, 2002, however the judge extended the ruling
date to June 21, 2002.
In the Atlanta Federal court, Gemstar filed a motion for summary
judgment in its favor on March 1, 2002. This motion relates to one
claim of one of the patents construed in the so-called "Markman Order."
That patent expired in 2001. On April 5, 2002 Scientific-Atlanta
responded to Gemstar's motion and filed a motion for summary judgment
in its favor with respect to all claims of both patents construed in
the Markman Order.
A purported shareholder derivative action, styled Thompson v. McDonald,
---------------------
et al., was filed in Gwinnett County Superior Court against all of our
------
directors and certain officers. Although a courtesy copy of the
complaint has been supplied to us by counsel to the plaintiff
shareholder, neither we nor the other defendants have been served with
the complaint. This action is based upon substantially the same facts
alleged in the securities class action litigation filed in July 2001
and described in our Form 10-K for the year ended June 29, 2001. This
plaintiff shareholder is seeking to recover damages for us in an
unspecified amount.
Item 5. Other Information.
- -------
In separate press releases issued on April 3 and September 26 of 2001,
we announced that the Prisma IP(TM) CMTS Line Card, which was to be
jointly developed with Pacific Broadband Communications, Inc. ("PBC")
and integrated with our Prisma IP optical transport platform, would be
commercially available in calendar year 2002. Since that time, Juniper
Networks, Inc. ("Juniper"), which acquired PBC, and Scientific-Atlanta
have determined to strategically postpone the development and
commercial introduction of the Prisma IP Line Card pending the
development of additional video applications for the Prisma IP optical
transport platform. Because it is uncertain when these applications
will be completed, we are unable, at this time, to state when the
Prisma IP Line Card will be commercially available.
We previously stated that we expected the AOL Time Warner applications
of instant messaging, e-mail and chat to be broadly available in
calendar year 2002, via graphic "buttons" placed on TVs using our
Explorer set-tops. We currently do not expect such applications to be
broadly available via our Explorer set-tops by the end of calendar
year 2002.
15 of 16
Item 6. Exhibits and Reports on Form 8-K.
- -------
(a) Exhibits.
Exhibit No. Description
----------- -----------
99 Cautionary Statements
(b) No reports on Form 8-K were filed during the quarter ended
March 29, 2002. On May 3, 2002, Scientific-Atlanta filed
Amendment No. 1 to Form 8-K, which was filed April 26, 2002,
reporting the appointment of Ernst & Young LLP as the Company's
independent auditor for fiscal year 2002 and the dismissal of
Arthur Andersen LLP as the Company's independent auditor on
April 19, 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: May 13, 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)
16 of 16