SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999
Commission File No. 0-22724
CABLE DESIGN TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3601505
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Foster Plaza 7
661 Andersen Drive
Pittsburgh, PA 15220
(Address of principal executive offices)
(412) 937-2300
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at 03/5/99
----- ----------------------
Common Stock, $.01 Par Value 28,148,501
CABLE DESIGN TECHNOLOGIES CORPORATION
-------------------------------------
TABLE OF CONTENTS
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Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements........................................... 3
Review Report of Independent Public Accountants for
the Three Months and Six Months Ended January 31, 1999 and 1998 4
Condensed Consolidated Statements of
Income - Unaudited for the Three Months and Six Months Ended
January 31, 1999 and 1998...................................... 5
Condensed Consolidated Balance Sheets
as of January 31, 1999 (Unaudited), and July 31, 1998.......... 6
Condensed Consolidated Statements of
Cash Flows - Unaudited for the Six Months
Ended January 31, 1999 and 1998................................ 7
Notes to Condensed Consolidated
Financial Statements - Unaudited............................... 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings.............................................. 19
Item 2 Changes in Securities.......................................... 19
Item 3 Defaults upon Senior Securities................................ 19
Item 4 Submission of Matters to a Vote of Security Holders............ 19
Item 5 Other Information.............................................. 20
Item 6 Exhibits and Reports on Form 8-K............................... 20
Signatures ............................................................... 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
In the opinion of Cable Design Technologies Corporation's (the "Company")
management, the unaudited condensed consolidated financial statements included
in this filing on Form 10-Q reflect all adjustments which are considered
necessary for a fair presentation of financial information for the periods
presented.
REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP has made a review, based upon procedures adopted by the
American Institute of Certified Public Accountants, of the unaudited condensed
consolidated financial statements as of and for the three month and six month
periods ended January 31, 1999 and 1998, contained in this report. As stated on
page 4, Arthur Andersen LLP did not audit and accordingly does not express an
opinion on the unaudited consolidated financial statements; however as a result
of such review, they are not aware of any material modifications that should be
made to the financial statements referred to above for them to be in conformity
with generally accepted accounting principles.
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Report of Independent Public Accountants
----------------------------------------
To the Board of Directors and Stockholders of Cable Design Technologies
Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of Cable
Design Technologies Corporation (a Delaware corporation) and Subsidiaries as of
January 31, 1999, and the related condensed consolidated statements of income
for the three month and six month periods ended January 31, 1999 and 1998, and
the condensed consolidated statements of cash flows for the six month periods
ended January 31, 1999 and 1998. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Cable Design Technologies
Corporation and Subsidiaries as of July 31, 1998, and, in our report dated
September 11, 1998, we expressed an unqualified opinion on that statement. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of July 31, 1998, is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
Pittsburgh, Pennsylvania, Arthur Andersen LLP
February 24, 1999
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CABLE DESIGN TECHNOLOGIES CORPORATION AND SUBSIDIARIES
--------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
-------------------------------------------------------
(In thousands, except share and per share data)
-----------------------------------------------
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------- ------------------------
1999 1998 1999 1998
-------------- ------------ ------------ -----------
Net sales $ 160,896 $ 155,638 $ 334,520 $ 317,782
Cost of sales 114,030 109,924 233,913 224,470
-------------- ------------ ------------ -----------
Gross profit 46,866 45,714 100,607 93,312
Selling, general and administrative expenses 27,011 26,524 55,215 52,513
Research and development expenses 1,430 1,779 2,897 3,617
Non-recurring charge 6,307 - 6,307 -
-------------- ------------ ------------ -----------
Income from operations 12,118 17,411 36,188 37,182
Interest expense, net 3,196 1,917 6,418 3,831
Other expense (income) 351 (566) 603 (1,095)
-------------- ------------ ------------ -----------
Income before income taxes 8,571 16,060 29,167 34,446
Income tax provision 3,765 6,134 11,997 13,070
-------------- ------------ ------------ -----------
Net income $ 4,806 $ 9,926 $ 17,170 $ 21,376
============== ============ ============ ===========
Per share data:
Basic earnings per common share $0.17 $0.35 $0.58 $0.75
Diluted earnings per common share $0.16 $0.32 $0.58 $0.68
============== ============ ============ ===========
Weighted average common shares 28,833,632 28,499,853 29,405,214 28,348,233
============== ============ ============ ===========
Weighted average common and common equivalent shares 29,337,393 31,290,412 29,802,247 31,322,508
============== ============ ============ ===========
The accompanying notes are an integral part of these statements.
-5-
CABLE DESIGN TECHNOLOGIES CORPORATION AND SUBSIDIARIES
------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(In thousands, except share and per share data)
-----------------------------------------------
As of As of
January 31, July 31,
1999 1998
------------- --------
(unaudited)
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 7,868 $ 11,143
Accounts receivable, net of allowance for uncollectible amounts of $4,540
and $3,995, respectively 113,142 117,265
Inventories 142,420 130,307
Other current assets 25,859 17,830
---------- ---------
Total current assets 289,289 276,545
Property, plant and equipment, net 199,801 160,891
Goodwill, net 74,367 57,656
Other assets 12,268 8,468
---------- ---------
Total assets $575,725 $503,560
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Current liabilities $131,362 $101,869
Long-term debt, excluding current maturities 188,996 136,052
Other non-current liabilities 24,219 20,741
---------- ---------
Total liabilities 344,577 258,662
---------- ---------
Stockholders' Equity:
Preferred stock, par value $.01 per share -
authorized 1,000,000 shares, no shares issued --- ---
Common stock, par value $.01 per share -
authorized 100,000,000 shares, 30,694,078
and 30,660,472 shares issued, respectively 307 307
Paid in capital 178,815 165,681
Retained earnings 105,775 88,605
Treasury stock, at cost, 2,623,452 and 200,000 shares, respectively (49,297) (4,291)
Currency translation adjustment (4,442) (5,394)
Minimum pension liability (10) (10)
---------- ---------
Total stockholders' equity 231,148 244,898
---------- ---------
Total liabilities and stockholders' equity $575,725 $503,560
========== =========
The accompanying notes are an integral part of these statements.
-6-
CABLE DESIGN TECHNOLOGIES CORPORATION AND SUBSIDIARIES
------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
-----------------------------------------------------------
(Dollars in thousands)
----------------------
Six Months Ended
January 31,
---------------------
1999 1998
----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 22,701 $ 22,885
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (15,604) (27,633)
Acquisition of businesses, including transaction costs,
net of cash acquired (43,646) (10,656)
----------- ---------
Net cash used by investing activities (59,250) (38,289)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving note borrowings 65,633 13,564
Funds provided by long-term debt 11,237 285
Funds used to reduce long-term debt (5,153) (3,320)
Purchase of treasury stock (45,006) ---
Net proceeds from exercise of stock options and related
tax benefits 6,416 1,976
Net proceeds from issuance of common stock --- 5
----------- ---------
Net cash provided by financing activities 33,127 12,510
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS 147 27
----------- ---------
Net decrease in cash (3,275) (2,867)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,143 9,017
----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,868 $ 6,150
=========== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net $ 5,768 $ 4,191
=========== =========
Income taxes $ 8,954 $ 10,414
=========== =========
The accompanying notes are an integral part of these statements.
-7-
CABLE DESIGN TECHNOLOGIES CORPORATION AND SUBSIDIARIES
------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------------------------------------------------------------
1. BASIS OF PRESENTATION:
---------------------
The condensed consolidated financial statements presented herein are unaudited.
Certain information and footnote disclosures normally prepared in accordance
with generally accepted accounting principles have been either condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Although the registrant believes that all adjustments necessary for
a fair presentation have been made, interim period results are not necessarily
indicative of the results of operations for a full year. As such, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the registrant's most recent Form 10-K which was
filed for the fiscal year ended July 31, 1998.
2. INVENTORIES
-----------
Inventories of the Company consist of the following:
January 31, July 31,
1999 1998
-------------- --------
(Dollars in
thousands)
Raw materials $ 37,024 $ 40,089
Work-in-process 34,767 27,485
Finished goods 70,629 62,733
-------------- --------
$142,420 $130,307
============== ========
3. EARNINGS PER SHARE
------------------
Basic earnings per common share are computed based on the weighted average
common shares outstanding. Diluted earnings per common share are computed based
on the weighted average common shares outstanding plus additional shares assumed
to be outstanding to reflect the dilutive effect of common stock equivalents.
The following table sets forth the computation of basic and diluted earnings per
share:
-8-
Three Months Ended Six Months Ended
January 31, January 31,
1999 1998 1999 1998
------------- ----------- ----------- -------------
(Dollars in thousands, except per share data)
Net income $ 4,806 $ 9,926 $ 17,170 $ 21,376
----------- ----------- ----------- -----------
Basic earnings per common share:
Weighted average common shares outstanding 28,833,632 28,499,853 29,405,214 28,348,233
Basic earnings per common share $ 0.17 $ 0.35 $ 0.58 $ 0.75
=========== =========== =========== ===========
Diluted earnings per common share:
Weighted average common shares outstanding 28,833,632 28,499,853 29,405,214 28,348,233
Shares issuable from assumed conversion of
dilutive stock options 503,761 2,790,559 397,033 2,974,275
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares 29,337,393 31,290,412 29,802,247 31,322,508
Diluted earnings per common share $ 0.16 $ 0.32 $ 0.58 $ 0.68
=========== =========== =========== ===========
Options to purchase 106,500 and 899,850 shares of common stock were outstanding
during the three and six month periods, respectively, ended January 31, 1999 and
options to purchase 99,000 shares of common stock were outstanding during the
three and six month periods ended January 31, 1998, but were not included in the
computation of diluted EPS as the option's exercise price was greater than the
average market price of the common stock for the respective periods.
4. OTHER COMPREHENSIVE INCOME
--------------------------
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130") in the first quarter of fiscal
1999. SFAS No. 130 established standards for reporting and displaying
comprehensive income and its components in financial statements. Comprehensive
income is defined as net income and all nonowner changes in stockholders'
equity. The Company's comprehensive income differs from net income due to
foreign currency translation adjustments. Total comprehensive income was $4.7
million and $7.6 million for the three months and $18.1 million and $19.2
million for the six months ended January 31, 1999 and 1998, respectively.
5. BUSINESS ACQUISITIONS
---------------------
On August 3, 1998, the Company acquired an 80% interest in HEW-Kabel Heinz
Eilentropp GmbH & Co. KG, and related entities, ("HEW/CDT") located in
Wipperfurth, Germany. The acquisition was accounted for using the purchase
method under APB Opinion No. 16 and the assets and liabilities assumed were as
follows:
(Dollars in thousands)
Assets acquired, net of cash $ 65,679
Liabilities assumed (22,942)
Notes issued (8,566)
-------------
Net cash paid $ 34,171
=============
-9-
On September 25, 1998, the Company acquired the assets of Network Essentials,
Inc., ("Red Hawk") based in Milpitas, California. The acquisition was accounted
for using the purchase method under APB Opinion No. 16.
The operations and financial position of HEW/CDT and Red Hawk are not material
to either the consolidated operations or financial position of the Company,
therefore, pro forma financial information is not presented.
6. RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to the prior year statements to conform
with the current year presentation.
-10-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cable Design Technologies is a leading manufacturer of technologically advanced
electronic data transmission cable for network, communication, specialty
electronics, and automation and process control applications, including complete
voice and data wiring solutions, fiber optic connective solutions and other
components required to build high performance telecommunication infrastructures.
This discussion and analysis of the Company's financial condition and results of
operations should be read in conjunction with the Company's unaudited condensed
consolidated financial statements and the notes thereto.
Results of Operations
Overview
Sales for the six months ended January 31, 1999 ("first half 1999") increased
$16.7 million, or 5%, to $334.5 million compared to $317.8 million for the six
months ended January 31, 1998 ("first half 1998"), including $31.9 million of
additional sales attributable to recently acquired businesses, primarily
HEW/CDT, Orebro/CDT and Red Hawk. Adjusted for the unfavorable effects of
foreign currency translation and the decline in the average price of copper on
communication cable sales, the increase in sales would have been approximately
8%. Income from operations excluding the non-recurring charge increased $5.3
million, or 14%, to $42.5 million for the first half 1999 compared to $37.2
million for the first half 1998. Net income for the first half 1999 excluding
the non-recurring charge was $21.4 million ($0.72 per diluted share) compared to
net income of $21.4 million ($0.68 per diluted share) for the first half 1998.
Reported net income including the non-recurring charge for the first half 1999
was $17.2 million ($0.58 per diluted share). The increase of $5.3 million in
first half 1999 income from operations excluding the non-recurring charge, as
compared to the same period last year, was offset by a $2.6 million increase in
interest expense, a net unfavorable change of $1.7 million in other
income/expense, primarily foreign currency exchange and minority interest, and a
$1.0 million increase in tax expense.
Sales for the three months ended January 31, 1999 ("second quarter 1999")
increased $5.3 million, or 3%, to $160.9 million compared to $155.6 million for
the three months ended January 31, 1998 ("second quarter 1998"), including $15.3
million of additional sales attributable to the recent acquisitions. Adjusted
for the unfavorable effects of foreign currency translation and the decline in
the average price of copper on communication cable sales, the increase in sales
would have been 5%. Income from operations excluding the non-recurring charge
for the second quarter 1999 increased $1.0 million, or 6%, to $18.4 million
compared to $17.4 million for the second quarter 1998. Net income excluding the
non-recurring charge for the second quarter 1999 was $9.0 million ($0.31 per
diluted share) compared to $9.9 million ($0.32 per diluted share) for the second
quarter 1998. The $1.0 million increase in second quarter 1999 income from
operations excluding the non-recurring charge compared to the second quarter
1998 was offset by a $1.3 million increase in interest expense, a $0.9 million
net unfavorable change in other income/expense, primarily foreign currency
exchange and minority interest, and a $0.3 million decrease in tax expense.
Reported net income including non-recurring charge for the second quarter 1999
was $4.8 million ($0.16 per diluted share).
During the second quarter 1999, sales of communication cable were lower in the
U.S. marketplace. The Company believes that the lower domestic demand for
communication cable in the second quarter is in part due to year-end budgetary
constraints at the Regional Bell Operating Companies ("RBOCs") and to the
mergers of major communication companies which affected the order cycle. North
American demand for communication cable is expected to increase during the
spring and summer months as a result of the seasonal pick-up in the laying of
communication cable as the ground thaws in the northern U.S. and Canada as well
as the diminishment of the effects of the RBOC's year end budget constraints and
of the communication company mergers. Also, an industry-wide slowdown in the
U.S. network structured wiring market during the second fiscal quarter 1999
resulted in lower demand and competitive pressure on pricing for network cable
products. The Company believes that the slowdown is in part the result of a
redirection of capital spending by many businesses from investment in network
systems to
-11-
resolving their Year 2000 compliance issues. The Company believes other key
factors contributing to the slowdown are the uncertainty concerning the minimum
required performance specifications of advanced cabling for use with Gigabit
Ethernet technology and the fact that performance specifications for advanced
cables have not been promulgated by the Telecommunication Industry Association.
Network cables generally conforming to the proposed new Category 5e (enhanced
Category 5) and Category 6 cable specifications have previously been referred to
as Level 6 and Level 7, respectively. Although these factors may continue to
influence the U.S. market for network structured wiring products in the near-
term, the Company believes the long-term growth prospects for higher performance
products in this industry to be positive and over the past 18 months the Company
has invested $64.8 million in its manufacturing capabilities to position itself
to benefit from opportunities in the higher performance network structured
wiring, communication and specialty electronic marketplaces.
Three Months Ended January 31, 1999 Compared to
Three Months Ended January 31, 1998
Sales for the second quarter 1999 of $160.9 million increased $5.3 million, or
3%, compared to sales of $155.6 million for the second quarter 1998, including
additional sales of $15.3 million attributable to the Company's recently
acquired businesses. Second quarter 1999 sales for the Network Communication
group of $88.7 million, which includes network structured wiring systems
products and communication cable, decreased $5.3 million, or 6%, compared to
$94.0 million for the second quarter 1998. Adjusted for the unfavorable effects
of foreign currency translation and the decline in the average price of copper
on communication cable sales, the decrease in sales for this group would have
been 3%. Factors which contributed to the decrease in sales for this product
group compared to the second quarter 1998 were lower sales of Category 5 network
cable and communication cable in the U.S. marketplace and the industry-wide
slowdown in the U.S. network structured wiring market during the second quarter
1999 which resulted in lower selling prices for certain network cable products,
particularly for plenum Category 5 and 5e. However, the lower sales of Category
5 network cable and the lower pricing for the Category 5 and 5e cables were
offset by an improvement in product mix due to increased sales of the higher
priced Category 5e and 6 network cables for the second quarter 1999. Second
quarter 1999 sales for the Specialty Electronics group increased $10.5 million,
or 17%, to $72.2 million compared to $61.7 million for the second quarter 1998,
including additional sales of $13.9 million attributable to the recently
acquired businesses. Excluding acquisitions, Specialty Electronics group sales
declined 6% compared to the second quarter 1998 primarily as a result of
continued competitive conditions in the marketplace for automation and process
control cable products. Sales outside of North America increased $11.8 million,
or 45%, to $38.1 million for the second quarter 1999 compared to $26.3 million
for the same period last year, including additional sales of $14.0 million
attributable to the recently acquired businesses. Sales outside of North
America for the second quarter 1999 were unfavorably affected by the continued
sluggish economy in the United Kingdom and the recent economic turmoil in
Russia, Latin America and the Pacific Rim.
Second quarter 1999 gross profit increased $1.2 million, or 3%, to $46.9 million
compared to $45.7 million for the second quarter 1998, including the additional
gross profit of $4.6 million attributable to the recently acquired businesses
which primarily benefitted the Specialty Electronics group. Factors which
contributed to the decrease in gross profit excluding acquisitions were: for
the Network Communication group, lower sales of Category 5 network cables, lower
pricing for Category 5 and 5e network cables, and lower sales of communication
cable, which together were partially offset by an improved product mix due to
increased sales of higher margin Category 5e and 6 network cables and of
structured wiring system component products; and, for the Specialty Electronics
group, continued competitive conditions for automation and process control cable
products and, to a lesser extent, a lower margin on wireless cable products due
to a shift in product mix. The gross margin percentage for the second quarter
1999 decreased slightly to 29.1% compared to 29.4% for the second quarter 1998.
Selling, general and administrative expense ("SG&A") for the second quarter 1999
increased $0.5 million, or 2%, to $27.0 million compared to $26.5 million for
the second quarter 1998, including $2.4 million of additional SG&A attributable
to the recent acquisitions. The reduction in SG&A excluding acquisitions of
$1.9 million was primarily the result of significantly lower expenses at
NORDX/CDT due to the discontinuance of its DynaTraX (TM) product line and other
restructuring activities implemented in July 1998, lower volume related sales
expenses, and the favorable effect of foreign currency translation, which
together almost entirely offset the additional SG&A from
-12-
acquisitions. As a percentage of sales, SG&A for the second quarter 1999 was
16.8% compared to 17.0% for the second quarter 1998. Second quarter 1999
research and development expense decreased $0.4 million to $1.4 million compared
to $1.8 million for second quarter 1998. The decrease in research and
development expense is primarily the result of NORDX/CDT's discontinuance of its
DynaTraX (TM) product line.
On December 14, 1998, the Company purchased 1.6 million shares of the Company's
common stock acquired by key employees through the exercise of incentive stock
options pursuant to a share purchase plan previously adopted by the Board of
Directors (the "Share Purchase Plan"). During the second quarter 1999 the
Company, as part of the Share Purchase Plan, recorded a $6.3 million ($4.2
million, net of tax) non-recurring charge as a result of incentive payments
offered to key employees for the purchase by the Company of such shares. As a
result of the purchase of such shares, the Company obtained a cash benefit of
approximately $12.8 million to be realized through the reduction of income taxes
payable. The incentive payments were made to partially compensate the employees
for the difference between the income tax rates for ordinary income and long
term capital gains. See "Share Purchase Plan".
Income from operations for the second quarter 1999 decreased $5.3 million to
$12.1 million compared to $17.4 million for the second quarter 1998, primarily
as a result of the non-recurring charge discussed above. Income from operations
excluding the non-recurring charge increased $1.0 million, or 6%, to $18.4
million. The operating margin, excluding the non-recurring charge, was 11.5%
for the second quarter 1999 compared to 11.2% for the second quarter 1998. The
improvement in operating margin was primarily the result of the improvement in
both SG&A and research and development expenses as a percentage of sales, which
was partially offset by the slightly lower gross margin percentage.
Interest expense was $3.2 million for the second quarter 1999, an increase of
$1.3 million compared to the second quarter 1998. This increase was primarily
due to the higher average balance of debt outstanding due to the acquisition of
HEW/CDT at the beginning of fiscal 1999 and the purchase of 1.6 million shares
of the Company's common stock pursuant to the Share Purchase Plan. The
effective tax rate increased to 43.9% in the second quarter 1999 compared to
38.2% in the second quarter 1998. The increase in the effective tax rate for
the second quarter 1999 was primarily due to the fact that approximately $0.9
million of the non-recurring charge is non-deductible for income tax purposes.
Excluding the non-recurring charge, the increase in the effective tax rate to
39.5% compared to 38.2% for the second quarter 1998 was primarily the result of
a higher German tax rate applicable to the Company's recently acquired HEW/CDT
subsidiary, lower Canadian research and development tax credits as a result of
the reduction in research and development spending, and a change in the income
mix among domestic and foreign statutory entities.
Net income for the second quarter 1999 excluding the non-recurring charge
decreased $0.9 million, or 9%, to $9.0 million ($0.31 per diluted share)
compared to net income of $9.9 million ($0.32 per diluted share) for the second
quarter 1998. The $1.0 million increase in income from operations excluding the
non-recurring charge was offset by the $1.3 million increase in interest
expense, a $0.9 million net unfavorable change in other income/expense,
primarily foreign currency exchange and minority interest, and the higher
effective tax rate. Reported net income for the second quarter 1999 including
the non-recurring charge was $4.8 million ($0.16 per diluted share).
Six Months Ended January 31, 1999 Compared to
Six Months Ended January 31, 1998
For the six months ended January 31, 1999, sales increased $16.7 million, or 5%,
to $334.5 million, including additional sales of $31.9 million attributable to
the Company's recently acquired businesses, compared to $317.8 million for the
six months ended January 31, 1998. Network Communication group sales for the
first half 1999 were $180.9 million, a decrease of $10.9 million, or 6%,
compared to the first half 1998. However, adjusted for the unfavorable effects
of foreign currency translation and for the decline in the price of copper on
communication cable sales, the sales for this group only declined 3%. The
decrease was primarily the net result of reduced demand in the U.S. marketplace
for communication cable and for plenum Category 5 network cable as well as
competitive pricing pressure on Category 5 and 5e network cables, particularly
in the second quarter of fiscal 1999. An improved product mix due to increased
sales of the higher priced Category 5e and 6 network cables partially offset the
-13-
reduction in communication cable and Category 5 network cable sales. During the
second quarter of fiscal 1999, an industry-wide slowdown in the U.S. network
structured wiring market resulted in reduced demand and competitive pressure on
network cable pricing, particularly for plenum Category 5 network cable.
Specialty Electronics group sales for the first half 1999 increased $27.7
million, to $153.6 million, including additional sales of $30.0 million
attributable to the recently acquired businesses. Excluding acquisitions, sales
for the Specialty Electronics group declined 2%, primarily due to competitive
market conditions for automation and process control cable products in the U.S.
and the United Kingdom. Sales outside of North America for the first half 1999
increased $27.9 million, or 54%, to $79.2 million, including additional sales of
$29.1 million attributable to the recently acquired businesses, compared to
$51.3 million for the first half 1998. Sales outside North America were
unfavorably affected by the sluggish economy in the United Kingdom and the
recent economic turmoil in Russia, Latin America and the Pacific Rim.
First half 1999 gross profit increased $7.3 million, or 8%, to $100.6 million
compared to $93.3 million for the first half 1998. Gross profit for the first
half 1999 included $9.5 million of additional gross profit attributable to the
recently acquired businesses which primarily benefitted the Specialty
Electronics group. Factors which contributed to the decrease in first half 1999
gross profit excluding acquisitions, which primarily occurred during the second
quarter, were: for the Network Communication group, lower sales for Category 5
network cable and lower pricing for Category 5 and 5e network cables, and lower
sales for communication cable, the effects of which were almost entirely offset
by an improved product mix due to increased sales of the higher margin Category
5e and 6 network cable products; and, for the Specialty Electronics group,
continued competitive conditions for automation and process control cable
products and, to a lesser extent, a lower margin on wireless cable products due
to a shift in product mix. The increase in gross profit also reflects the
favorable effect of the reduction in the Canadian exchange rate which resulted
in lower comparative product costs on U.S. denominated sales by the Company's
Canadian businesses. The gross margin percentage for the first half 1999 was
30.1% compared to 29.4% for the first half 1998. The increase in the gross
margin percentage for the first half 1999 compared to the first half 1998
reflects an improved gross margin for the Network Communication group which was
partially offset by a lower margin for the Specialty Electronics group.
SG&A for the first half 1999 increased $2.7 million to $55.2 million, including
$4.7 million of additional SG&A attributable to the recent acquisitions,
compared to $52.5 million for the first half 1998. Excluding acquisitions, the
$2.0 million reduction in SG&A was primarily the result of significantly lower
expenses at NORDX/CDT due to the discontinuance of its DynaTraX (TM) product
line and other restructuring activities implemented in July 1998, lower volume
related sales expenses, and the favorable effect of foreign currency
translation, which almost entirely offset the additional SG&A from acquisitions.
SG&A as a percentage of sales was 16.5% for both the first half 1999 and first
half 1998. Second quarter 1999 research and development expense decreased $0.7
million to $2.9 million compared to $3.6 million for second quarter 1998. The
decrease in research and development expense is primarily the result of the
discontinuance of the DynaTraX (TM) product line.
Income from operations excluding the non-recurring charge increased $5.3
million, or 14%, to $42.5 million compared to the first half 1998. The
operating margin percentage excluding the non-recurring charge was 12.7% for the
first half 1999 compared to 11.7% for the first half 1998. Income from
operations for the first half 1999 including the second quarter 1999 non-
recurring charge of $6.3 million decreased $1.0 million to $36.2 million
compared to $37.2 million for the first half 1998.
Interest expense for the first half 1999 was $6.4 million, an increase of $2.6
million compared to the first half 1998. The increase was primarily the result
of the higher average balance of debt outstanding due to the acquisition of
HEW/CDT at the beginning of the first half 1999 and the purchase of 2.4 million
shares of the Company's common stock during the first half 1999. The effective
tax rate increased to 41.1% in the first half 1999 compared to 37.9% in the
first half 1998. The increase in the effective tax rate for the first half 1999
was primarily due to the fact that approximately $0.9 million of the non-
recurring charge is non-deductible for income tax purposes. Excluding the non-
recurring charge, the increase in the effective tax rate to 39.8% compared to
37.9% for the first half 1998 was primarily the result of a higher German tax
rate applicable to the Company's recently acquired HEW/CDT subsidiary, lower
Canadian research and development tax credits and a change in the income mix
among domestic and foreign statutory entities.
-14-
Net income excluding the non-recurring charge for the first half 1999 of $21.4
million ($0.72 per diluted share) was equal to first half 1998 net income of
$21.4 million ($0.68 per diluted share). The increase of $5.3 million in first
half 1999 income from operations excluding the non-recurring charge compared to
first half 1998 was offset by the $2.6 million increase in interest expense, a
$1.7 million net unfavorable change in other income/expense, primarily foreign
currency exchange and minority interest, and the $1.0 million increase in tax
expense primarily due to the higher effective tax rate. Reported net income for
the first half 1999 including the non-recurring charge was $17.2 million ($0.58
per diluted share).
Financial Condition
Liquidity and Capital Resources
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The Company's primary bank credit agreement (the "Credit Agreement") is
comprised of a U.S. revolving facility of $121.3 million, which includes a USD
$50.0 million Deutschmark sub-facility, and a CDN $115.0 million Canadian
revolving facility equivalent to $76.1 million. The Company also maintains a
bank credit facility in the United Kingdom equivalent to $12.3 million (the
"Foreign Facility"). At January 31, 1999, the Company had $174.7 million and
$9.5 million outstanding under the Credit Agreement and Foreign Facility,
respectively.
Effective December 14, 1998, the Company entered into a 364-day, unsecured bank
revolving credit agreement (the "Revolving Facility"). The Revolving Facility
provides for maximum borrowings of $35.0 million. Outstanding borrowings bear
floating interest rates of either LIBOR plus the applicable margin or the base
rate, as defined, at the Company's election. The applicable margin over LIBOR
ranges from .525% to 1.05% and is determined based on the attainment of
specified leverage ratios. A facility fee of between .10% and .20%, based upon
a specific leverage ratio, is payable quarterly on the maximum facility amount.
The Revolving Facility contains customary financial and non-financial covenants,
except as limited by the terms of the existing Credit Agreement. The Revolving
Facility is to be used for working capital and other general corporate purposes
and was used to fund in part the Share Purchase Plan. At January 31, 1999, the
Company had $25.0 million outstanding under the Revolving Facility.
Based on an analysis of current expectations for its business, management
believes that the Company's cash flow from operations, funds available under its
credit agreements, and ability to attract short term and long term capital will
provide it with sufficient liquidity to meet its current liquidity needs.
Working Capital During the first half 1999, operating working capital increased
- ---------------
$5.1 million, excluding increases resulting from the initial recording of the
working capital of acquired businesses. The change in operating working capital
was primarily the net result of a decrease in accounts payable and accrued
liabilities of $14.3 million and an increase in inventories of $1.4 million,
which were partially offset by a decrease in accounts receivable of $11.2
million. The change in operating working capital excludes changes in cash and
cash equivalents and current maturities of long-term debt.
Cash Flow The Company generated $22.7 million of net cash from operating
- ---------
activities during the first half 1999, after providing for the $5.1 million
increase in operating working capital. Net cash provided by financing
activities during the first half 1999 of $33.1 million included $71.7 million
from debt sources and $6.4 million from the exercise of stock options, which
were partially offset by $45.0 million used for the purchase of 2,423,452 shares
of the Company's common stock. Net cash used by investing activities of $59.3
million included $43.6 million for the acquisition of businesses, primarily
HEW/CDT, and $15.6 million for capital projects, including expenditures for
equipment and machinery to expand production capacity, particularly at NORDX/CDT
for communication cable and network cable products, and at various other
locations for high-performance wire and cable products.
Share Purchase Plan On December 1, 1998, the Company's Board of Directors
- -------------------
approved the purchase of up to 1.9 million shares of the Company's common stock
that was acquired by certain key employees upon the exercise of certain
incentive stock options granted primarily in 1988 and 1989 and expiring in 1998
and 1999. The offer to the employees to purchase such stock was made on
December 14, 1998, and 1,596,052 shares were purchased at a total cost of
$33,118,079, or $20.75 per share, the closing price of the Company's common
stock on the date of the
-15-
purchase. The Company obtained a cash benefit of approximately $12.8 million to
be realized through the reduction of income taxes payable as a result of the
disqualification of the qualified status of the incentive stock options upon the
purchase. Under GAAP, the tax benefit obtained will not be reflected in the
income statement of the Company. In connection with the Company's purchase of
this stock, the employees were offered an incentive payment to induce them to
sell such shares so that the Company would receive the related tax benefit. The
Company shared the tax benefit by making an incentive payment to each employee
equal to 19.6% of the tax deduction obtained as a result of the shares purchased
from such employee. The incentive payments partially compensated the employees
for the difference between the income tax rates for ordinary income and for long
term capital gains, and resulted in a non-recurring charge to operating earnings
of $6.3 million ($4.2 million, net of tax) in the second quarter 1999. The
incentive payments are payable in two equal installments, the first of which was
made in January 1999 and the second is to be made in August 1999. The purchase
price for the shares and the incentive payments made during the second quarter
1999 were paid in cash and funded through borrowings under the Credit Agreement
and the Revolving Facility.
Fluctuation in Copper Price
The cost of copper in inventories (including finished goods) reflects purchases
over various periods of time ranging from one to several months for each of the
Company's individual operating units. For communication cable products,
profitability is generally not significantly affected by volatility of copper
prices as changes in copper prices are generally passed along to customers,
however, differences in the timing of selling price adjustments do occur and may
impact near term results. For other product lines, although selling prices are
not generally adjusted to directly reflect changes in copper prices, the relief
of copper costs from inventory for those operating units having longer inventory
cycles may affect profitability from one period to the next following periods of
significant movement in the cost of copper. The Company does not engage in
activities to hedge the underlying value of its copper inventory.
New Accounting Standards
The FASB issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") in June 1997. SFAS No. 131 establishes standards for reporting
information about operating segments. SFAS No. 131 is effective for the
Company's fiscal year ending July 31, 1999. Adoption of this standard will not
change the reported results of operations or financial position of the Company,
however compliance with the provisions of this standard will add, expand and/or
modify various disclosures made in conjunction with the financial statements.
The Company plans to provide appropriate financial statement disclosure under
SFAS No. 131 in its Form 10-K for the fiscal year ended July 31, 1999.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition in the balance sheet of all derivative instruments as
either assets or liabilities, measured at fair value. SFAS No. 133 is effective
for the Company's fiscal year ending July 31, 2000. The Company does not
believe the adoption of SFAS No. 133 will have a material effect on the
Company's results of operations, financial position or cash flows.
Year 2000 Compliance
Readers are cautioned that forward-looking statements contained in the Year 2000
discussion below should be read in conjunction with the Company's disclosures
under the heading "Forward-Looking Statements".
Each of the Company's operating units has established a Year 2000 project leader
and, in the case of the larger units, a project team. In addition, CDT's
corporate headquarters has established a Year 2000 project team. The function
of each unit's project team is to identify and remediate Year 2000 issues at
their respective facilities. The function of the corporate team is to review
and remediate any corporate-wide Year 2000 issues and monitor the status of the
remediation activities of the operating units.
-16-
Each operating unit has assessed their internal information systems ("IT
systems") and non-IT systems, such as manufacturing equipment and control
devices. Operating units representing approximately 78% of the Company's
consolidated revenues have completed any Year 2000 remediation believed
necessary with respect to their IT systems. The remaining operating units have
either purchased and are in the process of implementing compliant hardware
and/or software or identified compliant hardware and/or software and are in the
process of obtaining such items. All units are expected to complete their
remediation activities by fiscal year-end, July 31, 1999.
The remediation of such IT systems has included the purchase of new hardware and
software or the modification of existing software. In certain cases, new IT
systems were acquired to improve functionality and provide additional system
capabilities, as well as address Year 2000 issues. The cost to maintain or
modify existing IT systems is expensed as incurred, while the cost of new and
functionally improved IT systems are capitalized and amortized over their
estimated useful lives. As of January 31, 1999, the Company has expended $2.8
million with respect to IT systems, which represents approximately 75% of the
total costs expected to be incurred. Based on management's review,
expenditures associated with modifying or replacing existing IT systems to
resolve the Year 2000 issue will not have a material adverse effect on the
Company's results of operations, liquidity or capital resources. The Company
does not anticipate any material issues or delays regarding implementation
schedules for IT system remediations.
Each of the operating units has undertaken an assessment of non-IT systems.
Such reviews are substantially completed. While certain items of equipment have
been found to contain potentially non-compliant components, neither the number
or function of such items are material. Such equipment is either being modified
or replaced. To-date, the Company does not anticipate material Year 2000
compliance issues with respect to non-IT systems, and does not expect
expenditures to remediate non-compliant non-IT systems to have a material
adverse effect on the Company's results of operations, liquidity or capital
resources.
The Company and its operating units are in the process of assessing third party
Year 2000 compliance. As many of the Company's suppliers and customers are
still engaged in executing their Year 2000 programs, the Company cannot fully
evaluate such compliance.
Neither the Company nor its operating units have adopted formal contingency
plans regarding Year 2000 compliance issues, but are in the process of
identifying areas where contingency plans may be appropriate as well as the
potential cost and feasibility of implementing such plans.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. However, since it is not
possible to anticipate all possible future outcomes, especially in the case of
third parties, there could be "worst-case scenarios" in which one or more
operating units of the Company would be unable to conduct normal operations due
to Year 2000 related matters, such as the inability to take customer orders,
manufacture and ship products, invoice customers or collect payments. In
addition, there is still uncertainty about the broader scope of the Year 2000
issue as it may affect the Company and third parties who are critical to the
Company's operations. For example, lack of readiness by electrical and water
utilities, financial institutions, government agencies or other providers of
general infrastructure could, in some geographic areas, pose significant
impediments to one or more of the Company's operating units to carry on their
normal operations in the area or areas so affected. In the event that the
Company or third parties (including those described above) do not properly
complete their Year 2000 remedial actions or unanticipated Year 2000 events
occur there could be a material adverse effect on the Company's business,
results of operations or financial condition.
Introduction of the Euro Currency
The European Economic Monetary Union's ("EEMU") common currency, the Euro, was
implemented effective January 1, 1999, at which time fixed exchange rates were
established between the legacy currencies of the participating countries and the
Euro. During the transition period, which extends through June 30, 2002,
transactions may be conducted in either the Euro or the legacy currencies. The
Company has subsidiaries in the United Kingdom, Sweden, Denmark and Germany
which have customers and suppliers in participating EEMU countries. The
Company's German subsidiary is the only subsidiary domiciled in a participating
country. These
-17-
subsidiaries currently have the ability to support transactions in both the Euro
and their respective legacy currencies. Conversion to the Euro as the functional
currency for the Company's German subsidiary will be phased in prior to January
1, 2002, and conversion costs are not expected to be significant. The EEMU's
introduction of the Euro may potentially have economic and business
implications, such as changes in product pricing and currency exchange risks,
for businesses within the EEMU as well as for businesses outside the EEMU that
do business with companies within the EEMU. The nature and extent of such
effects, whether beneficial or adverse, are unknown at this time. However, the
Company does not believe that such effects will have a material impact on its
consolidated results of operations or financial condition, although there can be
no assurance that unanticipated effects will not have an adverse impact on the
Company's future results of operations.
Forward-Looking Statements -- Under the Private Securities Litigation Act of
1995
Certain statements in this quarterly report are forward-looking statements,
including, without limitation, statements regarding future financial results and
performance, Year 2000 compliance, introduction of the Euro, increase in
communication cable demand and long-term growth prospects, and the Company's or
management's beliefs, expectations or opinions. These statements are subject to
various risks and uncertainties, many of which are outside the control of the
Company, including the level of market demand for the Company's products,
competitive pressures, the ability to achieve reductions in operating costs and
to continue to integrate acquisitions, price fluctuations of raw materials and
the potential unavailability thereof, foreign currency fluctuations,
technological obsolescence, environmental matters and other specific factors
discussed in this report, the Company's Annual Report on Form 10-K for the year
ended July 31, 1998, and other Securities and Exchange Commission filings. The
information contained herein represents management's best judgement as of the
date hereof based on information currently available; however, the Company does
not intend to update this information to reflect developments or information
obtained after the date hereof and disclaims any legal obligation to the
contrary.
-18-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) Cable Design Technologies Corporation annual meeting of stockholders
was held on December 9, 1998.
(b) Proxies were solicited by Cable Design Technologies Corporation and
there was no solicitation in opposition to the nominees as listed in
the proxy statement. All such nominees were elected pursuant to the
vote of the stockholders as follows:
VOTES
-----
For Withheld
--- --------
Bryan C. Cressey 26,187,606 873,254
Paul M. Olson 26,188,356 872,504
George C. Graeber 26,188,556 872,304
Myron S. Gelbach, Jr. 26,162,583 898,277
Michael F.O. Harris 26,187,911 872,949
Glenn Kalnasy 26,186,781 874,079
Richard C. Tuttle 26,186,276 874,584
A proposal to adopt the Cable Design Technologies Corporation 1998
Employee Stock Purchase Plan was approved by a vote of:
For: 26,846,091
Against: 182,278
Abstain: 32,491
The firm of Arthur Andersen LLP was re-elected to serve as auditors for
the fiscal year ending July 31, 1999, by a vote of:
For: 26,410,314
Against: 8,354
Abstain: 642,192
-19-
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
15.1 Letter of Arthur Andersen LLP regarding unaudited interim
financial statement information.
27.1 Financial data schedule.
99.1 Revolving Line of Credit Letter Agreement dated December 14, 1998,
between CDT and ABN AMRO Bank N.V..
99.2 Master Revolving Line of Credit Promissory Note issued by CDT in
favor of ABN AMRO Bank N.V..
(b) Form 8-Ks
---------
None
-20-
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.
CABLE DESIGN TECHNOLOGIES CORPORATION
March 16, 1999 /s/ Paul M. Olson
------------------------------------------
Paul M. Olson
President and Chief Executive Officer
March 16, 1999 /s/ Kenneth O. Hale
------------------------------------------
Kenneth O. Hale
Vice President and Chief Financial Officer
-21-