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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
COMMISSION FILE NO. 001-12561
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BELDEN CDT INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 36-3601505
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7701 FORSYTH BOULEVARD, SUITE 800
ST. LOUIS, MISSOURI 63105
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(314) 854-8000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
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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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 AUGUST 1, 2005
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Common Stock, $0.01 Par Value 45,903,856
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Exhibit Index on Pages 56 Page 1 of 57
-1-
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BELDEN CDT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
2005 2004
------------ ------------
(in thousands) UNAUDITED
ASSETS
Current assets
Cash and cash equivalents $ 220,507 $ 188,798
Receivables 205,599 174,554
Inventories 238,824 227,034
Deferred income taxes 14,252 15,911
Other current assets 7,745 8,883
Current assets of discontinued operations 18,332 34,138
------------ ------------
Total current assets 705,259 649,318
Property, plant and equipment, less accumulated depreciation 324,820 338,247
Goodwill, less accumulated amortization 285,044 286,163
Other intangibles, less accumulated amortization 74,270 78,266
Other long-lived assets 5,780 6,460
Long-lived assets of discontinued operations 12,782 36,984
------------ ------------
$ 1,407,955 $ 1,395,438
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 223,480 $ 185,035
Current maturities of long-term debt 15,327 15,702
Current liabilities of discontinued operations 10,079 17,534
------------ ------------
Total current liabilities 248,886 218,271
Long-term debt 231,052 232,823
Postretirement benefits other than pensions 30,716 30,089
Deferred income taxes 73,556 68,158
Other long-term liabilities 17,257 25,340
Long-term liabilities of discontinued operations 1,670 1,516
Minority interest 8,208 9,241
Stockholders' equity
Common stock 503 502
Additional paid-in capital 535,172 531,984
Retained earnings 279,505 252,114
Accumulated other comprehensive income (loss) (2,580) 27,862
Unearned deferred compensation (984) (2,462)
Treasury stock (15,006) --
------------ ------------
Total stockholders' equity 796,610 810,000
------------ ------------
$ 1,407,955 $ 1,395,438
============ ============
The accompanying notes are an integral part of these Consolidated
Financial Statements
-2-
BELDEN CDT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(in thousands, except per share data)
Revenues $ 337,701 $ 184,307 $ 646,812 $ 354,410
Cost of sales (262,487) (150,202) (506,467) (286,207)
---------- ---------- ---------- ----------
Gross profit 75,214 34,105 140,345 68,203
Selling, general and administrative expenses (56,480) (24,229) (105,410) (49,458)
---------- ---------- ---------- ----------
Operating income 18,734 9,876 34,935 18,745
Interest expense, net (2,564) (3,167) (5,484) (6,333)
Minority interest (169) -- (336) --
Other nonoperating income -- 1,732 -- 1,732
---------- ---------- ---------- ----------
Income from continuing operations before taxes 16,001 8,441 29,115 14,144
Income tax expense (5,455) (2,246) (10,045) (4,186)
---------- ---------- ---------- ----------
Income from continuing operations 10,546 6,195 19,070 9,958
Loss from discontinued operations, net of tax benefit of
$324, $3,276, $1,281 and $4,117, respectively (544) (5,823) (2,425) (7,319)
Gain on disposal of discontinued operations, net of tax
expense of $4,929, $1,699, $8,529 and $1,699,
respectively 8,763 3,020 15,163 3,020
---------- ---------- ---------- ----------
Net income $ 18,765 $ 3,392 $ 31,808 $ 5,659
========== ========== ========== ==========
Weighted average number of common shares and equivalents:
Basic 46,971 25,546 46,989 25,504
Diluted 53,472 25,832 53,568 25,827
========== ========== ========== ==========
Basic income (loss) per share:
Continuing operations $ .22 $ .24 $ .41 $ .39
Discontinued operations (.01) (.23) (.05) (.29)
Disposal of discontinued operations .19 .12 .32 .12
Net income .40 .13 .68 .22
========== ========== ========== ==========
Diluted income (loss) per share:
Continuing operations $ .21 $ .24 $ .38 $ .39
Discontinued operations (.01) (.23) (.04) (.29)
Disposal of discontinued operations .16 .12 .28 .12
Net income .36 .13 .62 .22
========== ========== ========== ==========
Dividends declared per share $ .05 $ .05 $ .10 $ .10
========== ========== ========== ==========
The accompanying notes are an integral part of these Consolidated
Financial Statements
-3-
BELDEN CDT INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
(UNAUDITED)
Six Months Ended June 30, 2005 2004
- --------------------------------------------------------------------------------- ------------ ------------
(in thousands)
Cash flows from operating activities:
Net income $ 31,808 $ 5,659
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization 18,736 12,132
Deferred income tax expense 7,057 305
Gain on disposal of tangible assets (23,692) (4,719)
Stock-based compensation 1,314 523
Gain on business divestiture -- (2,156)
Retirement savings plan contributions -- 2,123
Changes in operating assets and liabilities, net of the effects of foreign
currency exchange rate changes and acquired businesses:
Receivables (26,951) (7,339)
Inventories (14,406) (10,293)
Accounts payable and accrued liabilities 25,317 (739)
Current income taxes, net 7,549 401
Other assets and liabilities, net 3,435 (806)
------------ ------------
Net cash provided by (used for) operating activities 30,167 (4,909)
Cash flows from investing activities:
Capital expenditures (13,690) (3,536)
Proceeds from disposal of tangible assets 36,894 84,625
Proceeds from business divestiture -- 431
------------ ------------
Net cash provided by investing activities 23,204 81,520
Cash flows from financing activities:
Payments on borrowing arrangements (1,986) --
Proceeds from exercise of stock options 2,615 46
Share repurchase program payments (14,654) --
Cash dividends paid (4,731) (2,580)
------------ ------------
Net cash used for financing activities (18,756) (2,534)
Effect of foreign currency exchange rate changes on cash and cash equivalents (2,906) (130)
------------ ------------
Increase in cash and cash equivalents 31,709 73,947
Cash and cash equivalents, beginning of period 188,798 94,955
------------ ------------
Cash and cash equivalents, end of period $ 220,507 $ 168,902
============ ============
Supplemental cash flow information:
Income tax refunds received $ 3,294 $ 17
Income taxes paid (4,150) --
Interest paid, net of amount capitalized (7,385) (7,603)
============ ============
The accompanying notes are an integral part of these Consolidated
Financial Statements
-4-
BELDEN CDT INC. AND SUBSIDIARIES
CONSOLIDATED STOCKHOLDERS' EQUITY STATEMENTS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
Accumulated
Unearned Other
Common Paid-In Retained Treasury Deferred Comprehensive
Stock Capital Earnings Stock Compensation Income (Loss) Total
------ -------- -------- -------- ------------ ------------- --------
(in thousands)
Balance at December 31, 2003 $ 262 $ 39,022 $244,217 $ (7,722) $ (1,700) $ 7,461 $281,540
Net income 5,659 5,659
Foreign currency translation 329 329
Minimum pension liability 17 17
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Comprehensive income 6,005
Issuance of stock
Exercise of stock options 3 43 46
Stock compensation 384 1,160 (1,821) (277)
Retirement savings plan 434 1,689 2,123
Employee stock purchase plans 2 54 56
Amortization of unearned deferred
compensation 800 800
Cash dividends ($.05 per share) (2,580) (2,580)
------ -------- -------- -------- ------------ ------------- --------
Balance at June 30, 2004 $ 262 $ 39,845 $247,296 $ (4,776) $ (2,721) $ 7,807 $287,713
====== ======== ======== ======== ============ ============= ========
Balance at December 31, 2004 $ 502 $531,984 $252,114 $ -- $ (2,462) $ 27,862 $810,000
Net income 31,808 31,808
Foreign currency translation (30,644) (30,644)
Minimum pension liability 202 202
------------- --------
Comprehensive income 1,366
Issuance (forfeiture) of stock
Exercise of stock options 1 2,614 2,615
Stock compensation 188 (352) (164)
Share repurchase program (14,654) (14,654)
Amortization of unearned deferred
compensation 1,478 1,478
Cash dividends ($.05 per share) (4,731) (4,731)
Merger between Belden and CDT 386 314 700
------ -------- -------- -------- ------------ ------------- --------
Balance at June 30, 2005 $ 503 $535,172 $279,505 $(15,006) $ (984) $ (2,580) $796,610
====== ======== ======== ======== ============ ============= ========
The accompanying notes are an integral part of these Consolidated
Financial Statements
-5-
BELDEN CDT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: FINANCIAL STATEMENT PRESENTATION
Basis of Presentation
The accompanying Consolidated Financial Statements include Belden CDT Inc. and
all of its subsidiaries (the COMPANY). The Company, formerly called Cable Design
Technologies Corporation (CDT), merged with Belden Inc. (BELDEN) and changed its
name to Belden CDT Inc. on July 15, 2004. The merger was treated as a reverse
acquisition under the purchase method of accounting. Belden was considered the
acquiring enterprise for financial reporting purposes. The results of operations
of CDT are included in the Company's Consolidated Statements of Operations from
July 16, 2004. All significant intercompany accounts and transactions are
eliminated in consolidation. The financial information presented as of any date
other than December 31, 2004 has been prepared from the books and records
without audit. The accompanying Consolidated Financial Statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information or all of the Notes to Consolidated Financial Statements
required by accounting principles generally accepted in the United States for
complete statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of such
financial statements have been included. These Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004.
Foreign Currency Translation
For international operations with functional currencies other than the United
States dollar, asset and liability accounts are translated at current exchange
rates, and income and expenses are translated using average exchange rates.
Resulting translation adjustments, as well as gains and losses from certain
affiliate transactions, are reported in accumulated other comprehensive income
(loss), a separate component of stockholders' equity. Exchange gains and losses
on transactions are included in operating income.
Use of Estimates in the Preparation of the Financial Statements
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 assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 2004 Consolidated Financial
Statements in order to conform to the 2005 presentation.
-6-
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Share-Based Payments
During the three- and six-month periods ended June 30, 2005 and 2004, the
Company, Belden or CDT sponsored two stock compensation plans--the Belden 2003
Long-Term Incentive Plan and the CDT 2001 Long-Term Performance Incentive Plan
(together, the ACTIVE INCENTIVE PLANS). During the three- and six-month periods
ended June 30, 2004, either Belden or CDT also sponsored the Belden 2003
Employee Stock Purchase Plan and four additional stock compensation plans--the
Belden 1994 Incentive Plan, the CDT 1999 Long-Term Performance Incentive Plan,
the CDT Supplemental Long-Term Performance Incentive Plan and the CDT Long-Term
Performance Incentive Plan (together, the INACTIVE INCENTIVE PLANS) along with
the Active Incentive Plans.
The Belden 1994 Incentive Plan expired by its own terms in October 2003 and no
future awards are available under this plan. There are no future awards
available under the CDT 1999 Long-Term Performance Incentive Plan, the CDT
Supplemental Long-Term Performance Incentive Plan or the CDT Long-Term
Performance Incentive Plan. Pursuant to the merger agreement between Belden and
CDT, the Belden 2003 Employee Stock Purchase Plan was terminated on July 15,
2004. Options and stock purchase rights granted under these plans affected pro
forma operating results for the three- and six-month periods ended June 30,
2004.
Under both the Active Incentive Plans and the Inactive Incentive Plans, certain
employees of the Company are eligible to receive awards in the form of stock
options, stock appreciation rights, restricted stock grants and performance
shares. The Company accounts for stock options using the intrinsic value method.
Accordingly, no compensation cost has been recognized for options granted under
the Active Incentive Plans or the Inactive Incentive Plans. The Company accounts
for nonvested restricted stock grants as fixed-plan awards since both the
aggregate number of awards issued and the aggregate amount to be paid by the
participants for the common stock is known. Compensation cost related to the
nonvested restricted stock grants is measured as the difference between the
market price of the Company's common stock at the grant date and the amount to
be paid by the participants for the common stock. Compensation costs associated
with each restricted stock grant are amortized to expense over the grant's
vesting period.
Under the Belden 2003 Employee Stock Purchase Plan, eligible employees received
the right to purchase common stock at the lower of 85% of the fair market value
on the offering date or 85% of the fair market value on the exercise date. The
Company accounted for these purchase rights using the intrinsic value method.
Accordingly, no compensation cost was recognized for purchase rights granted
under the Belden 2003 Employee Stock Purchase Plan.
-7-
The effect on operating results of calculating the Company's stock-based
employee compensation costs as if the fair value method had been applied to all
stock awards is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(in thousands, except per share amounts)
AS REPORTED
Stock-based employee compensation cost, net of tax $ 578 $ 248 $ 910 $ 493
Net income 18,765 3,392 31,808 5,659
Basic net income per share .40 .13 .68 .22
Diluted net income per share .36 .13 .62 .22
PRO FORMA
Stock-based employee compensation cost, net of tax $ 746 $ 351 $ 1,080 $ 898
Net income 18,597 3,289 31,639 5,254
Basic net income per share .40 .13 .67 .21
Diluted net income per share .36 .13 .62 .20
The fair value of common stock options outstanding as well as the fair value of
stock purchase rights outstanding were estimated at the date of grant using the
Black-Scholes option-pricing model.
For the three- and six-month periods ended June 30, 2005, the weighted average
per share fair value of options granted under the Active Incentive Plans and the
weighted average assumptions used to determine the fair values of the options
granted during those periods are presented in the following table. For the
three- and six-month periods ended June 30, 2004, the weighted average per share
fair value of options granted under both the Active Incentive Plans and the
Inactive Incentive Plans as well as the weighted average assumptions used to
determine the fair value of the options granted during those periods are also
presented in the following table.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Fair value of options granted, per share $ 3.95 $ -- $ 4.78 $ 3.53
---------- ---------- ---------- ----------
Dividend yield 7.46% -- 6.45% 7.34%
Expected volatility 38.48% -- 38.41% 39.70%
Expected life (in years) 7.00 -- 7.00 7.00
Risk free interest rate 3.90% -- 4.29% 3.55%
The Black-Scholes option-pricing model was developed to estimate the fair value
of market-traded options. Employee stock options and stock purchase rights have
certain characteristics, including vesting periods and non-transferability,
which market-traded options do not possess. Because of the significant effect
that changes in assumptions and differences in option and purchase right
characteristics might have on the fair values of stock options and stock
purchase rights, the models may not accurately reflect the fair values of the
stock options and stock purchase rights.
-8-
During 2005, the Company granted the following stock options to its employees:
Grant Date Number of Options Exercise Price
- -------------- ----------------- --------------
March 30, 2005 551,000 $ 22.665
April 28, 2005 23,500 20.015
May 19, 2005 5,000 19.145
If an option recipient remains an employee of the Company, that recipient may
exercise one-third of the granted options after the first, second and third
anniversaries of the grant date. The exercise price of each option represents
the average market price of the Company's common stock on the applicable
option's date of grant. Additional provisions would apply in the event of
retirement, disability, death, or termination of employment.
During the second quarter of 2005, the Company granted 22,500 shares of
restricted common stock to the nonemployee members of its Board of Directors
(2,500 shares per Director). Each recipient is restricted from selling,
transferring, pledging or otherwise disposing of the stock until he retires from
the Board of Directors. Additional provisions would apply in the event of
disability, death, change of control, or removal from the Board of Directors for
cause. The Company recognized the aggregate cost of these shares, approximately
$0.4 million, as a selling, general and administrative (SG&A) expense during the
second quarter of 2005.
Shipping and Handling Costs
The Company includes fees earned on the shipment of product to customers in
revenues and includes costs incurred on the shipment of product to customers as
cost of sales. The following handling costs, primarily incurred at the Company's
distribution centers, were included in SG&A expenses:
Three Months Ended Six Months Ended
June 30, June 30
------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(in thousands)
Handling costs $ 1,970 $ 1,762 $ 3,370 $ 3,540
Interest Expense
The Company presents interest expense net of capitalized interest costs and
interest income earned on cash equivalents.
Three Months Ended Six Months Ended
June 30, June 30
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(in thousands)
Gross interest expense $ 3,922 $ 3,382 $ 7,696 $ 6,761
Capitalized interest costs (4) (8) (24) (14)
Interest income earned on cash equivalents (1,354) (207) (2,188) (414)
---------- ---------- ---------- ----------
Net interest expense $ 2,564 $ 3,167 $ 5,484 $ 6,333
========== ========== ========== ==========
-9-
Impact of Newly Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123(R), Share-Based Payments, which replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 123(R) requires compensation costs relating
to share-based payment transactions be calculated using the fair value method
presented in SFAS No. 123 and recognized in the Consolidated Financial
Statements. The pro forma disclosure previously permitted under SFAS No. 123
will no longer be an acceptable alternative to recognition of expenses in the
Consolidated Financial Statements. The Company currently measures compensation
costs related to share-based payments using the intrinsic value method under APB
No. 25, as allowed by SFAS No. 123, and provides disclosure in the section
entitled "Share-Based Payments" of Note 2, Summary of Significant Accounting
Policies, to the Consolidated Financial Statements as to the effect on operating
results of calculating its stock compensation using the fair value method
presented in SFAS No. 123. The Company is required to adopt SFAS No. 123(R)
starting from the first fiscal quarter of 2006. The Company expects that the
adoption of SFAS No. 123(R) will have an adverse impact on its net income and
income per share. The Company is currently in the process of evaluating the
extent of such impact.
NOTE 3: BUSINESS COMBINATION
Belden and CDT entered into an Agreement and Plan of Merger, dated February 4,
2004 (the MERGER AGREEMENT), pursuant to which Belden merged with and became a
wholly owned subsidiary of CDT (the MERGER). On July 15, 2004, after both
parties received the appropriate stockholder approvals, after CDT effected a
one-for-two reverse split of its common stock, and pursuant to the Merger
Agreement, Belden and CDT completed the Merger. Pursuant to the Merger
Agreement, 25.6 million shares of Belden common stock, par value $.01 per share,
were exchanged for 25.6 million shares of CDT common stock, par value $.01 per
share, and CDT changed its name to Belden CDT Inc. After the Merger consummation
on July 15, 2004, the Company had approximately 46.6 million shares of common
stock outstanding. On that date, the former CDT stockholders and former Belden
stockholders respectively owned approximately 45% and 55% of the Company.
The Merger was treated as a reverse acquisition under the purchase method of
accounting. Belden was considered the acquiring enterprise for financial
reporting purposes because Belden's owners as a group retained or received the
larger portion of the voting rights in the Company and Belden's senior
management represented a majority of the senior management of the Company. For
financial reporting purposes, the results of operations of CDT are included in
the Company's Consolidated Statements of Operations from July 16, 2004.
The cost to acquire CDT was $490.7 million and consisted of the exchange of
common stock discussed above, change of control costs for legacy CDT management
and costs incurred by Belden related directly to the acquisition. The purchase
price was established primarily through the negotiation of the share exchange
ratio. The share exchange ratio was intended to value both Belden and CDT so
that neither company paid a premium over equity market value for the other. The
Company established a new accounting basis for the assets and liabilities of CDT
based upon the fair values thereof as of the Merger date. An allocation of the
cost to acquire CDT to each major asset and liability caption of CDT as of the
July 15, 2004 effective date of the Merger is included in Note 3, Business
Combinations, to the Consolidated Financial Statements reflected in the
Company's 2004 Annual Report on Form 10-K.
-10-
The Company recognized goodwill of $206.1 million related to the Merger. The
Company recorded goodwill of $144.0 million during the third quarter of 2004.
The Company increased the carrying cost of goodwill by $59.0 million during the
fourth quarter of 2004 at the same time it decreased the carrying costs of
acquired amortizable intangible assets based on a finalized independent
valuation of the acquired assets and it increased to its merger-date market
value an imbedded swap within the assumed subordinated convertible debentures.
Goodwill increased by $0.3 million during the first quarter of 2005 at the same
time the carrying costs of certain tangible assets held for sale increased to
the amount of proceeds received upon their disposition. Goodwill increased by
$2.8 million during the second quarter of 2005 at the same time accrued
severance and other merger-related liabilities increased based on finalization
of the costs necessary to complete restructuring, facility rationalization, and
other merger-related activities.
Belden CDT's consolidated results of operations for the three- and six-month
periods ended June 30, 2005 include the results of operations of the CDT
entities. The following table presents pro forma combined results of operations
for Belden CDT that are intended to provide information regarding how Belden CDT
might have looked if the Merger had occurred as of the beginning of the periods
presented. The amounts for the CDT entities included in this pro forma
information are based on the historical results of the CDT entities and,
therefore, may not be indicative of the actual results of the CDT entities when
operated as part of Belden CDT. Moreover, the pro forma information does not
reflect all of the changes that may result from the Merger, including, but not
limited to, challenges of transition; integration and restructuring associated
with the transaction; achievement of synergies; ability to retain qualified
employees and existing business alliances; and customer demand for CDT products.
The pro forma adjustments represent management's best estimates. Accordingly,
the pro forma financial information should not be relied upon as being
indicative of the historical results that would have been realized had the
Merger actually occurred as of the dates indicated or that may be achieved in
the future.
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2004
------------------ ----------------
(in thousands, except per share data) Pro forma Pro forma
Revenues $ 311,860 $ 607,140
Income from continuing operations 11,141 14,433
Net income 7,088 8,944
Diluted income per share:
Continuing operations $ .22 $ .30
Net income .15 .19
These pro forma results reflect adjustments for interest expense, depreciation,
amortization and related income taxes.
-11-
Actual operating results include certain material charges and Merger-related
items incurred during the respective periods, as listed below on an after-tax
basis.
Income from Diluted
Continuing Net Income
Three Months Ended June 30, 2005 Operations Net Income per Share
- -------------------------------------------------------------- ----------- ---------- ----------
(in thousands, except per share data)
Executive succession charges $ 3,126 $ 3,126 $ .06
Merger-related plant closings and other restructuring actions 394 394 .01
Merger-related retention awards and other compensation 388 388 .01
Business restructuring expense and severance charges 134 154 --
Impact of short-lived intangibles purchase adjustments 13 13 --
Income from Diluted
Continuing Net Income
Six Months Ended June 30, 2005 Operations Net Income per Share
- -------------------------------------------------------------- ------------ ---------- ----------
(in thousands, except per share data)
Executive succession charges $ 3,126 $ 3,126 $ .06
Merger-related plant closings and other restructuring actions 772 772 .02
Merger-related retention awards and other compensation 683 683 .01
Business restructuring expense and severance charges 539 630 .01
Impact of short-lived intangibles purchase adjustments 231 231 --
NOTE 4: DISCONTINUED OPERATIONS
The Company currently reports four operations--Belden Communications Company
(BCC) in Phoenix, Arizona; Raydex/CDT Ltd. (RAYDEX) in Skelmersdale, United
Kingdom; Montrose/CDT (MONTROSE) in Auburn, Massachusetts; and Admiral/CDT
(ADMIRAL) in Wadsworth, Ohio and Barberton, Ohio--as discontinued operations.
The Raydex, Montrose and Admiral operations were acquired through the Merger. As
of the effective date of the Merger, management had formulated a plan to dispose
of these operations. In regard to all discontinued operations, the remaining
assets of these operations were held for sale during the three- and six-month
periods ended June 30, 2005.
BCC-Phoenix Operation
In March 2004, the Board of Directors of Belden decided to sell the assets of
the BCC manufacturing facility in Phoenix, Arizona. BCC's Phoenix facility
manufactured communications cables for the telecommunications industry. In June
2004, Belden sold certain assets to Superior Essex Communications LLC
(SUPERIOR). Superior purchased certain inventory and equipment, and assumed
Belden's supply agreements with major telecommunications customers, for an
amount not to exceed $92.1 million. At the time the transaction closed, Belden
received $82.1 million in cash ($47.1 million for inventory and $35.0 million
for equipment). During the third quarter of 2004, the Company and Superior
agreed to the closing-date inventory adjustment that resulted in the Company
paying $3.9 million to Superior and retaining certain inventory. The Company
recognized a gain of $0.4 million pretax ($0.3 million after tax) on the
disposal of the inventory. The sale of the equipment resulted in no material
gain or loss.
The remaining payment of $10.0 million was contingent upon Superior's retention
of the assumed customer agreements. The Company received this $10.0 million
payment from Superior in March 2005 and recorded an additional $6.4 million
after-tax gain on the disposal of this discontinued operation during the first
quarter of 2005.
-12-
In April 2005, the Company sold the land and facilities of BCC's discontinued
Phoenix operation to Phoenix Van Buren Partners, LLC for $20.7 million cash. The
Company recognized a gain on disposal of discontinued operations in the amount
of $13.7 million pretax ($8.8 million after tax) during the second quarter of
2005.
Raydex-Skelmersdale Operation
In September 2004, the Company announced that it was in discussions with
employee representatives regarding its intention to close the Raydex
manufacturing facility in Skelmersdale, United Kingdom. The Skelmersdale
facility manufactures twisted-pair and coaxial cables for data networking,
telecommunications, and broadcast applications. During the first quarter of
2005, some of the Raydex-Skelmersdale equipment was transferred to other
European locations of Belden CDT. Management does not believe the migration of
revenues and cash flows from Raydex-Skelmersdale to the Company's continuing
operations is material.
In July 2005, the Company sold the Skelmersdale land and buildings for $5.4
million cash. The proceeds received from the sale exceeded the carrying value of
these assets by $1.9 million. The Company increased the portion of Merger
consideration it previously allocated to the tangible assets of the
Raydex-Skelmersdale operation and reduced the portion of Merger consideration it
previously allocated to goodwill by this excess amount during the second quarter
of 2005. The Company will record the disposition of the Skelmersdale facility
and receipt of the $5.4 million cash in the third quarter of 2005.
Montrose Operation
In September 2004, the Company announced the pending closure and sale of its
Montrose cable operation in Auburn, Massachusetts. Montrose, an unincorporated
operating division of the Company, manufactures and markets coaxial and
twisted-pair cable products principally for the telecommunications industry.
Montrose has faced declining demand in recent years. Select equipment was
transferred to other Belden CDT manufacturing locations beginning in December
and the Company closed the operation during the first quarter of 2005.
Management does not believe the migration of revenues and cash flows from
Montrose to the Company's continuing operations is material.
In June 2005, the Company sold the land and facilities of its discontinued
Montrose operation for $2.4 million cash. The carrying value of these assets
exceeded the proceeds received from the sale by $1.7 million. The Company
reduced the portion of Merger consideration it previously allocated to the
tangible assets of Montrose and increased the portion of Merger consideration it
previously allocated to goodwill by this excess amount.
Admiral Operation
In December 2004, a management buyout group purchased certain assets and assumed
certain liabilities of the Company's Admiral operation in Wadsworth, Ohio for
$0.3 million cash. In March 2005, the Company sold a former Admiral
manufacturing facility in Barberton, Ohio for $1.5 million cash. The carrying
value of this facility exceeded the proceeds received from the sale by less than
$0.1 million. The Company reduced the portion of Merger consideration it
previously allocated to the tangible assets of Admiral and increased the portion
of Merger consideration it previously allocated to goodwill by this excess
amount. Admiral, which was an unincorporated operating division of the Company,
manufactured precision tire castings and was not considered a core business of
the Company.
Disclosure regarding severance and other benefits related to these discontinued
operations is included in Note 11, Accounts Payable and Accrued Liabilities, to
the Consolidated Financial Statements.
-13-
Results from discontinued operations include the following revenues and income
(loss) before taxes:
REVENUES
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(in thousands)
BCC--Phoenix $ -- $ 47,904 $ -- $ 93,137
Raydex--Skelmersdale -- -- 137 --
------------ ------------ ------------ ------------
Networking Segment -- 47,904 137 93,137
------------ ------------ ------------ ------------
Montrose 338 -- 2,189 --
Admiral -- -- -- --
------------ ------------ ------------ ------------
Electronics Segment 338 -- 2,189 --
------------ ------------ ------------ ------------
Total $ 338 $ 47,904 $ 2,326 $ 93,137
============ ============ ============ ============
INCOME (LOSS) BEFORE TAXES
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(in thousands)
BCC--Phoenix $ 13,270 $ (4,380) $ 22,254 $ (6,717)
Raydex--Skelmersdale (64) -- (1,438) --
------------ ------------ ------------ ------------
Networking Segment 13,206 (4,380) 20,816 (6,717)
------------ ------------ ------------ ------------
Montrose (357) -- (798) --
Admiral (25) -- (32) --
------------ ------------ ------------ ------------
Electronics Segment (382) -- (830) --
------------ ------------ ------------ ------------
Total $ 12,824 $ (4,380) $ 19,986 $ (6,717)
============ ============ ============ ============
Listed below are the major classes of assets and liabilities belonging to the
discontinued operations of the Company at June 30, 2005 that remain as part of
the disposal group:
Networking Segment Electronics Segment
------------------------------ -----------------------
BCC Raydex
(in thousands) Phoenix Skelmersdale Montrose Admiral Total
- -------------------------------------------- ------------- --------------- ---------- ----------- -----------
Assets:
Deferred income taxes $ 8,356 $ -- $ -- $ 5 $ 8,361
Assets held for sale -- 3,476 -- -- 3,476
Other current assets 2,423 2,018 2,034 20 6,495
------------- --------------- ---------- ----------- -----------
Total current assets $ 10,779 $ 5,494 $ 2,034 $ 25 $ 18,332
------------- --------------- ---------- ----------- -----------
Total long-lived assets $ 11,272 $ 90 $ 1,420 $ -- $ 12,782
------------- --------------- ---------- ----------- -----------
Liabilities:
Accounts payable and accrued liabilities $ 1,381 $ -- $ 682 $ -- $ 2,063
Other current liabilities 8,016 -- -- -- 8,016
------------- --------------- ---------- ----------- -----------
Total current liabilities $ 9,397 $ -- $ 682 $ -- $ 10,079
------------- --------------- ---------- ----------- -----------
Total long-term liabilities $ 1,507 $ -- $ -- $ 163 $ 1,670
============= =============== ========== =========== ===========
-14-
NOTE 5: SHARE INFORMATION
Common Treasury
Stock Stock
------ --------
(number of shares in thousands)
Balance at December 31, 2003 26,204 (547)
Issuance of stock:
Exercise of stock options -- 3
Stock compensation -- 95
Employee stock purchase plan settlement -- 4
Retirement savings plan contributions -- 111
Receipt of stock:
Forfeiture of stock by Incentive Plans participants in lieu of cash payment of
individual tax liabilities related to share-based compensation -- (13)
------ --------
Balance at June 30, 2004 26,204 (347)
====== ========
Balance at December 31, 2004 50,211 (3,009)
ISSUANCE OF STOCK:
EXERCISE OF STOCK OPTIONS 122 29
STOCK COMPENSATION -- 10
RECEIPT OF STOCK:
FORFEITURE OF STOCK BY INCENTIVE PLANS PARTICIPANTS IN LIEU OF CASH PAYMENT
OF INDIVIDUAL TAX LIABILITIES RELATED TO SHARE-BASED COMPENSATION -- (13)
SHARE REPURCHASE PROGRAM -- (713)
------ --------
BALANCE AT JUNE 30, 2005 50,333 (3,696)
====== ========
On May 23, 2005, the Board of Directors authorized the Company to repurchase up
to $125.0 million of common stock in the open market. From that date through
June 30, 2005, the Company repurchased approximately 0.7 million shares of its
common stock at an aggregate cost of $14.7 million. From July 1, 2005 through
August 1, 2005, the Company repurchased approximately an additional 0.5 million
shares of its common stock at an aggregate cost of $11.1 million.
NOTE 6: INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed by dividing income (loss) by the
weighted average number of common shares outstanding. Diluted income (loss) per
share is computed by dividing income (loss) by the weighted average number of
common shares outstanding plus additional potential dilutive shares assumed to
be outstanding. Except for additional potential shares associated with
convertible subordinated debentures, additional potential shares are calculated
based on the treasury stock method, under which repurchases are assumed to be
made at the average fair market value price per share of the Company's common
stock during the period. Additional potential shares associated with convertible
subordinated debentures are calculated by dividing the principal amount of the
debentures by their conversion price. The Company's additional potential
dilutive shares currently consist of stock options, nonvested restricted stock
and convertible subordinated debentures. Nonvested restricted stock carries
dividend and voting rights but is not included in the weighted average number of
common shares outstanding used to compute basic income (loss) per share.
-15-
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(in thousands, except per share amounts)
Numerator for basic income (loss) per share:
Income from continuing operations $ 10,546 $ 6,195 $ 19,070 $ 9,958
Loss from discontinued operations (544) (5,823) (2,425) (7,319)
Gain on disposal of discontinued operations 8,763 3,020 15,163 3,020
---------- ---------- ---------- ----------
Net income $ 18,765 $ 3,392 $ 31,808 $ 5,659
========== ========== ========== ==========
Numerator for diluted income (loss) per share:
Income from continuing operations $ 10,546 $ 6,195 $ 19,070 $ 9,958
Tax-effected interest expense on convertible
subordinated debentures 678 -- 1,356 --
---------- ---------- ---------- ----------
Adjusted income from continuing operations 11,224 6,195 20,426 9,958
Loss from discontinued operations (544) (5,823) (2,425) (7,319)
Gain on disposal of discontinued operations 8,763 3,020 15,163 3,020
---------- ---------- ---------- ----------
Adjusted net income $ 19,443 $ 3,392 $ 33,164 $ 5,659
========== ========== ========== ==========
Denominator:
Denominator for basic income (loss) per share--weighted
average shares 46,971 25,546 46,989 25,504
Effect of dilutive common stock equivalents 6,501 286 6,579 323
---------- ---------- ---------- ----------
Denominator for diluted income (loss) per share--
adjusted weighted average shares 53,472 25,832 53,568 25,827
========== ========== ========== ==========
Basic income (loss) per share:
Continuing operations $ .22 $ .24 $ .41 $ .39
Discontinued operations (.01) (.23) (.05) (.29)
Disposal of discontinued operations .19 .12 .32 .12
Net income .40 .13 .68 .22
========== ========== ========== ==========
Diluted income (loss) per share:
Continuing operations $ .21 $ .24 $ .38 $ .39
Discontinued operations (.01) (.23) (.04) (.29)
Disposal of discontinued operations .16 .12 .28 .12
Net income .36 .13 .62 .22
========== ========== ========== ==========
For the three months ended June 30, 2005 and 2004, the Company did not include
3.2 million and 2.4 million outstanding stock options, respectively, in its
development of the denominators used in the diluted income (loss) per share
computations because the exercise prices of these options were greater than the
respective average market price of the Company's common stock during those
periods.
For the six months ended June 30, 2005 and 2004, the Company did not include 2.8
million and 2.4 million outstanding stock options, respectively, in its
development of the denominators used in the diluted income (loss) per share
computations because the exercise prices of these options were greater than the
respective average market price of the Company's common stock during those
periods.
The Company repurchased approximately 0.5 million shares of its common stock in
the open market between July 1, 2005 and August 1, 2005. Had the Company
purchased these shares prior to June 30, 2005, the denominators used for the
calculation of basic income per share and diluted income per share would have
been approximately 46.7 million and 53.2 million, respectively, for the three
months ended June 30, 2005 and 46.8 million and 53.4 million, respectively, for
the six months ended June 30, 2005.
-16-
NOTE 7: COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of two components--net income (loss) and
other comprehensive income (loss). Other comprehensive income (loss) refers to
revenues, expenses, gains and losses that under accounting principles generally
accepted in the United States are recorded as an element of stockholders' equity
but are excluded from net income. The Company's other comprehensive income
(loss) is comprised of (a) adjustments that result from translation of the
Company's foreign entity financial statements from their functional currencies
to United States dollars, (b) adjustments that result from translation of
intercompany foreign currency transactions that are of a long-term investment
nature (that is, settlement is not planned or anticipated in the foreseeable
future) between entities that are consolidated in the Company's financial
statements, and (c) minimum pension liability adjustments.
The components of comprehensive income (loss) were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------\
(in thousands)
Net income $ 18,765 $ 3,392 $ 31,808 $ 5,659
Adjustments to foreign currency translation component of
equity (16,003) 800 (30,644) 329
Adjustments to minimum pension liability 96 (1) 202 17
---------- ---------- ---------- ----------
Comprehensive income $ 2,858 $ 4,191 $ 1,366 $ 6,005
========== ========== ========== ==========
The components of accumulated other comprehensive income (loss) were as follows:
JUNE 30, December 31,
2005 2004
------------ ------------
(in thousands)
Foreign currency translation component of equity $ 15,122 $ 45,766
Minimum pension liability, net of deferred tax benefit of
$10,371 at June 30, 2005 and $10,421 at December 31,
2004 (17,702) (17,904)
------------ ------------
Accumulated other comprehensive income (loss) $ (2,580) $ 27,862
============ ============
NOTE 8: INVENTORIES
The major classes of inventories were as follows:
JUNE 30, December 31,
2005 2004
------------ ------------
(in thousands)
Raw materials $ 60,377 $ 55,229
Work-in-process 45,202 38,921
Finished goods 147,880 151,753
Perishable tooling and supplies 3,761 3,822
------------ ------------
Gross inventories 257,220 249,725
Obsolescence and other reserves (18,396) (22,691)
------------ ------------
Net inventories $ 238,824 $ 227,034
============ ============
-17-
Inventories are stated at the lower of cost or market. The Company determines
the cost of all raw materials, work-in-process and finished goods inventories by
the first in, first out method. Cost components include direct labor, applicable
production overhead and amounts paid to suppliers of materials and products as
well as freight costs and, when applicable, duty costs to import the materials
and products.
NOTE 9: PROPERTY, PLANT AND EQUIPMENT
The carrying values of property, plant and equipment were as follows:
JUNE 30, December 31,
2005 2004
------------ ------------
(in thousands)
Land and land improvements $ 30,700 $ 33,089
Buildings and leasehold improvements 134,435 139,990
Machinery and equipment 427,789 442,078
Construction in process 21,452 10,071
------------ ------------
Gross property, plant and equipment 614,376 625,228
Accumulated depreciation (289,556) (286,981)
------------ ------------
Net property, plant and equipment $ 324,820 $ 338,247
============ ============
Disposals
In February 2005, the Company sold a Fort Lauderdale, Florida manufacturing
facility that was acquired in the Merger for $1.4 million. The proceeds received
from the sale exceeded the carrying value of this facility by less than $0.1
million. The Company increased the portion of Merger consideration it previously
allocated to the assets and reduced the portion of Merger consideration it
previously allocated to goodwill by this excess amount.
The Company sold certain fully impaired equipment and technology used for the
production of deflection coils during the second quarter of 2003 and received a
cash payment of $1.3 million. The Company could not receive the remaining $0.4
million of the contracted purchase amount or recognize a gain on the sale of the
equipment until certain technical conditions of the sale were fulfilled. During
the second quarter of 2004, the technical conditions of the sale were fulfilled,
the Company received the remainder of the contracted purchase amount, and the
Company recognized a gain on the divestiture in the amount of $1.7 million
pretax ($1.1 million after tax) as other nonoperating income in the Consolidated
Statement of Operations.
-18-
NOTE 10: INTANGIBLE ASSETS
The carrying values of intangible assets were as follows:
JUNE 30, December 31,
2005 2004
------------ ------------
(in thousands)
Customer relations $ 54,792 $ 55,702
Developed technologies 6,216 6,558
Favorable contracts 1,094 1,094
Backlog 2,000 2,357
------------ ------------
Gross amortizable intangible assets 64,102 65,711
Accumulated amortization (4,886) (3,093)
------------ ------------
Net amortizable intangible assets 59,216 62,618
Trademarks, net of accumulated amortization of $309 at June 30, 2005 and $341
at December 31, 2004 15,054 15,648
Goodwill, net of accumulated amortization of $12,504 at June 30, 2005 and
$12,640 at December 31, 2004 285,044 286,163
------------ ------------
Net intangible assets $ 359,314 $ 364,429
============ ============
Segment Allocation
The Electronics segment and the Networking segment reported goodwill, net of
accumulated amortization, at June 30, 2005 in the amounts of $128.5 million and
$7.1 million, respectively. Goodwill allocated to the Electronics segment and
the Networking segment decreased by $0.4 million and $0.7 million, respectively,
from December 31, 2004 because of the impact of translation on goodwill
denominated in currencies other than the United States dollar. Goodwill of
$149.4 million has not been assigned to any specific segment. Management
believes it benefits the entire Company because it represents acquirer-specific
synergies unique to the Merger and is therefore recognized in the F&A financial
records. Goodwill recognized in the Finance & Administration (F&A) financial
records decreased by $0.1 million from December 31, 2004 because of adjustments
in the allocation of the Merger consideration to the assets of the legacy CDT
operations.
NOTE 11: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The carrying values of accounts payable and accrued liabilities were as follows:
JUNE 30, December 31,
2005 2004
------------ ------------
(in thousands)
Trade accounts payable $ 109,477 $ 77,591
Wages, severance and related taxes 35,048 39,876
Employee benefits 39,308 37,351
Interest 5,767 5,804
Other (individual items less than 5% of total current liabilities) 33,880 24,413
------------ ------------
Total accounts payable and accrued liabilities $ 223,480 $ 185,035
============ ============
-19-
Accrued Severance and Other Related Benefits Under 2003 Restructuring Plans
The Company recorded severance and other related benefits costs in the amount of
$2.7 million in 2003 related to personnel reductions within the Electronics
segment in the United States, Canada and the Netherlands and within the
Networking segment in the United Kingdom as operating expense ($1.4 million in
cost of sales and $1.3 million in SG&A expenses). The Company notified 132
employees, prior to December 31, 2003, of the pending terminations as well as
the amount of severance and other related benefits they each should expect to
receive. During the first quarter of 2004, the Company recorded additional
severance and other related benefits costs in the amount of $0.2 million related
to personnel reductions within the Electronics segment in the Netherlands as
SG&A expenses. One employee was notified, prior to March 31, 2004, of the
pending termination as well as the amount of severance and other related
benefits he should expect to receive.
In the second quarter of 2004, the Company was notified by Inland Revenue that
it owed an additional $0.4 million in other benefits related to severance paid
in the fourth quarter of 2003 to terminated employees within the Company's
Networking segment in the United Kingdom. The Company recorded these other
benefits costs as cost of sales during the second and fourth quarters of 2004.
Accrued Severance and Other Related Benefits Under 2004 Restructuring Plans
The Company recorded severance and other related benefits costs in the amount of
$0.3 million in the first quarter of 2004 related to personnel reductions within
the Electronics segment in Canada as SG&A expense. Two employees were notified,
prior to March 31, 2004, of the pending terminations as well as the amount of
severance and other related benefits they each should expect to receive. The
Company recorded severance and other related benefits costs in the amount of
$10.7 million in the second, third and fourth quarters of 2004 related to (1)
personnel reductions within the Electronics segment in the United States,
Canada, the Netherlands and Germany and (2) personnel reductions in the
Networking segment in the United States as operating expense ($9.9 million in
cost of sales and $0.8 million in SG&A expenses). The Company also recorded
severance and other related benefits costs in the amount of $1.1 million in the
third and fourth quarters of 2004 and $0.7 million in the first and second
quarters of 2005 related to the pending closure of its Electronics segment
manufacturing facility in Essex Junction, Vermont in cost of sales. The Company
notified 232 employees, prior to December 31, 2004, of the pending terminations
as well as the amount of severance and other related benefits they each should
expect to receive.
On June 1, 2004, the Company announced its decision to close its BCC
manufacturing facility in Phoenix, Arizona. The Company recognized severance and
other related benefits costs of $4.8 million, $0.8 million, and $0.1 million in
loss from discontinued operations during the second and third quarters of 2004
and the first quarter of 2005, respectively. The Company notified 889 employees,
prior to June 30, 2004, of the pending terminations as well as the amount of
severance and other related benefits they each should expect to receive.
On September 10, 2004, the Company announced its decision to close legacy CDT
operations in Skelmersdale, United Kingdom and Auburn, Massachusetts and to
reduce personnel at several other legacy CDT locations. As of the acquisition
date, the Company accrued severance and other related benefits costs of $16.7
million associated with the closures and the personnel reductions. During the
second quarter of 2005, the Company accrued an additional $2.6 million of
severance and other related benefits costs resulting from the finalization of
restructuring plans. These costs were recognized as a liability assumed in the
purchase and included in the allocation of the cost to acquire CDT in accordance
with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination. The number of employees eligible for severance payments
because of these actions was 523.
-20-
During the second quarter of 2005, the Company decided to terminate its
restructuring plans for certain legacy CDT operations in North America because
of improved capacity utilization at those operations. The Company reduced
accrued severance and other related benefits by $0.9 million and reduced the
portion of Merger consideration it had previously allocated to goodwill by this
same amount. This action reduced the number of employees eligible for severance
payments at June 30, 2005 by 71.
The Company recorded severance and other related benefits costs in the amount of
$0.3 million in the fourth quarter of 2004 related to personnel reductions
within the Networking segment in Australia as SG&A expense. Five employees were
notified, prior to December 31, 2004, of the pending terminations as well as the
amount of severance and other related benefits they each should expect to
receive.
The Company anticipates making substantially all severance payments against
these accruals within one year of each accrual date.
The following table sets forth termination activity that occurred during the
three- and six-month periods ended June 30, 2005:
Total Number
Total of Employees
Accrued Eligible for
Severance and Severance and
Other Related Other Related
2003 Plans 2004 Plans Benefits Benefits
---------- ---------- ------------- -------------
(in thousands, except number of employees)
Balance at December 31, 2004 $ 542 $ 19,898 $ 20,440 722
Merger-related activities:
Cash payments/terminations -- (3,269) (3,269) (192)
Foreign currency translation -- (89) (89) --
Other adjustments -- (62) (62) 7
Other activities:
Cash payments/terminations (137) (2,656) (2,793) (97)
New charges (1) 1 587 588 --
Foreign currency translation (17) (437) (454) --
Other adjustments -- (72) (72) (3)
---------- ---------- ------------- -------------
Balance at March 31, 2005 (2) 389 13,900 14,289 437
Merger-related activities:
Cash payments/terminations -- (2,307) (2,307) (139)
New charges (3) -- 2,625 2,625 19
Foreign currency translation -- (18) (18) --
Other adjustments -- (951) (951) (63)
Other activities:
Cash payments/terminations (147) (1,874) (2,021) (86)
New charges -- 250 250 3
Foreign currency translation (8) (368) (376) --
Other adjustments -- (44) (44) --
---------- ---------- ------------- -------------
Balance at June 30, 2005 (4) $ 234 $ 11,213 $ 11,447 171
========== ========== ============= =============
(1) Includes charges totaling $0.1 million related to discontinued operations
(2) Includes severance and other related benefits totaling $2.8 million and
174 applicable employees related to discontinued operations
(3) Includes charges totaling $0.2 million related to discontinued operations
(4) Includes accrued severance and other related benefits totaling $0.9
million and 28 applicable employees related to discontinued operations
The Company continues to review its business strategies and evaluate further
restructuring actions. This could result in additional severance and other
related benefits charges in future periods.
-21-
Executive Succession Costs
In May 2005, the Company's President and Chief Executive Officer (CEO) announced
his intention to retire as soon as a replacement could be hired and a mutually
agreed-upon period of transition had elapsed. At the time of this announcement,
the Company and its CEO also executed amendments to the Change of Control
Employment Agreement dated July 31, 2001 between the Company and the CEO and the
Retention Award Letter Agreement dated June 28, 2004 between the Company and the
CEO. Under these amendments, the CEO would, upon retirement, receive a certain
amount of compensation and benefits and all nonvested restricted stock and
nonvested stock options previously granted to the CEO would immediately vest.
The Company recognized SG&A expense of $5.1 million in the second quarter of
2005 related to the CEO's anticipated retirement and associated outside
executive succession consulting services.
NOTE 12: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Credit Agreement
There were no outstanding borrowings at June 30, 2005 under the Company's credit
agreement dated October 9, 2003. The Company had $27.9 million in borrowing
capacity available at June 30, 2005.
Short-Term Borrowings
At June 30, 2005, the Company had unsecured, uncommitted arrangements with ten
banks under which it could borrow up to $8.7 million at prevailing interest
rates. There were no outstanding borrowings under these arrangements at June 30,
2005.
Convertible Subordinated Debentures
At June 30, 2005, the Company had outstanding $110.0 million of unsecured
subordinated debentures. The debentures are convertible into approximately 6.1
million shares of common stock, at a conversion price of $18.069 per share, upon
the occurrence of certain events. Holders may surrender their debentures for
conversion into shares of common stock upon satisfaction of any of the
conditions listed in Note 13, Long-Term Debt and Other Borrowing Arrangements,
to the Consolidated Financial Statements in the Company's Annual Report on Form
10-K for the year ended December 31, 2004. At June 30, 2005, one of these
conditions--the closing sale price of the Company's common stock must be at
least 110% of the conversion price for a minimum of 20 days in the 30
trading-day period prior to surrender--had been satisfied. As of August 1,
2005, no holders of the debentures have surrendered their debentures for
conversion into shares of the Company's common stock.
The 6.1 million shares of common stock that would be issued if the debentures
were converted are included in the Company's calculation of diluted income/loss
per share for the three- and six-month periods ended June 30, 2005.
-22-
NOTE 13: INCOME TAXES
Income tax expense of $10.0 million for the six months ended June 30, 2005
resulted from income from continuing operations before taxes of $29.1 million.
The Company considers earnings from foreign subsidiaries to be indefinitely
reinvested and, accordingly, no provision for United States federal and state
income taxes has been made for these earnings. Upon distribution of foreign
subsidiary earnings, the Company may be subject to United States income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the various foreign countries.
The difference between the effective rate reflected in the provision for income
taxes on income from continuing operations before taxes and the amounts
determined by applying the applicable statutory United States tax rate for the
six months ended June 30, 2005 are analyzed below:
Six Months Ended June 30, 2005 Amount Rate
- ------------------------------------------ ---------- --------
(in thousands, except rate data)
Provision at statutory rate $ 10,190 35.0%
State income taxes 998 3.4%
Change in deferred tax valuation allowance 33 0.1%
Lower foreign tax rates and other, net (1,176) (4.0)%
---------- --------
Total tax expense $ 10,045 34.5%
========== ========
In October 2004, the American Jobs Creation Act (the AJCA) was signed into law.
The AJCA includes a deduction of 85% of certain foreign earnings that are
repatriated, as defined in the AJCA. Taxpayers may elect to apply this provision
to qualifying earnings repatriations in either 2004 or 2005. In December 2004,
the FASB issued FASB Staff Position (FSP) No. 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004. FSP No. 109-2 allows companies additional time to
evaluate the effect of the law on whether unrepatriated foreign earnings
continue to qualify for an exception to recognizing deferred tax liabilities in
accordance with SFAS No. 109, Accounting for Income Taxes, and would require
explanatory disclosures from those who need additional time to complete such an
evaluation. The Company is in the process of evaluating the repatriation
provisions, but has not completed its analysis. An estimate of the impact
of this provision (if any) cannot be determined at this point.
NOTE 14: PENSION AND OTHER POSTRETIREMENT OBLIGATIONS
The Company sponsors defined benefit pension plans for certain employees in the
United States, the United Kingdom, the Netherlands, Canada and Germany. Annual
contributions to these pension plans equal or exceed the minimum funding
requirements of applicable local regulations. The assets of the pension plans
are maintained in various trusts and invested primarily in equity and fixed
income securities and money market funds.
The Company also sponsors unfunded postretirement (medical and life insurance)
benefit plans in the United States and Canada. The medical benefit portion of
the United States plan is only for employees who retired prior to 1989 as well
as certain other employees who were near retirement and elected to receive
certain benefits.
-23-
The following table provides the components of net periodic benefit costs for
the plans:
Other Postretirement
Pension Obligations Obligations
-------------------------- --------------------------
Three Months Ended June 30, 2005 2004 2005 2004
- ------------------------------------- ---------- ---------- ---------- ----------
(in thousands)
Service cost $ 1,977 $ 1,635 $ 129 $ 8
Interest cost 3,191 2,699 577 223
Expected return on plan assets (3,533) (2,794) -- --
Amortization of prior service cost (10) 4 (27) (26)
Net (gain) loss recognition 843 578 155 149
---------- ---------- ---------- ----------
Net periodic benefit cost $ 2,468 $ 2,122 $ 834 $ 354
========== ========== ========== ==========
Other Postretirement
Pension Obligations Obligations
-------------------------- --------------------------
Six Months Ended June 30, 2005 2004 2005 2004
- ------------------------------------- ---------- ---------- ---------- ----------
(in thousands)
Service cost $ 4,709 $ 3,582 $ 241 $ 15
Interest cost 6,631 5,494 1,173 465
Expected return on plan assets (7,436) (6,026) -- --
Amortization of prior service cost (20) (6) (54) (52)
Net (gain) loss recognition 1,742 1,064 310 215
---------- ---------- ---------- ----------
Net periodic benefit cost $ 5,626 $ 4,108 $ 1,670 $ 643
========== ========== ========== ==========
The following table provides actual and anticipated contributions to the
Company's pension plans and other postretirement plans:
Other
Pension Postretirement
Obligations Obligations
--------------- --------------
(in thousands)
Actual contributions for the three months ended June 30, 2005 $ 5,859 $ 599
Actual contributions for the six months ended June 30, 2005 10,756 1,133
Anticipated contributions for the year ended December 31, 2005 23,100 2,400
NOTE 15: CONTINGENT LIABILITIES
General
Various claims are asserted against the Company in the ordinary course of
business including those pertaining to income tax examinations and product
liability, customer, employment, vendor and patent matters. Based on facts
currently available, management believes that the disposition of the claims that
are pending or asserted will not have a materially adverse effect on the
financial position, results of operations or cash flow of the Company.
Letters of Credit, Guarantees and Bonds
At June 30, 2005, the Company was party to unused standby letters of credit and
unused bank guarantees totaling $10.3 million and $4.8 million, respectively.
The Company also maintains surety bonds totaling $4.6 million in connection with
workers compensation self-insurance programs in several states, taxation in
Canada, retirement benefits in Germany and the importation of product into the
United States and Canada.
-24-
Severance and Other Related Benefits
The Company completed the sale of part of its business in Germany to a
management-led buyout group in October 2003. The Company will retain liability
for severance and other related benefits, estimated at $1.5 million on June 30,
2005, in the event the buyout group terminates transferred employees within
three years of the buyout date. The severance and other related benefits amounts
are reduced based upon the transferred employees' duration of employment with
the buyout group. The Company will be relieved of any remaining contingent
liability related to the transferred employees on the third anniversary of the
buyout date.
Affiliate Guarantees
An affiliate guarantee is a contingent commitment issued by either Belden CDT
Inc. or one of its subsidiaries to guarantee the performance of either Belden
CDT Inc. or one of its subsidiaries to a third party in a borrowing arrangement
or similar transaction. The terms of these affiliate guarantees are equal to the
terms of the related borrowing arrangements or similar transactions and range
from contractual terms of 1 year to 12 years (unexpired terms of 1 year to 5
years). The only affiliate guarantees outstanding at June 30, 2005 are the
guarantees executed by Belden Wire & Cable Company related to the $136.0 million
indebtedness of Belden Inc. under various medium-term note purchase agreements
and the guaranty executed by Belden Inc. related to $3.7 million of potential
indebtedness under an overdraft line of credit between Belden Wire & Cable B.V.
and its local cash management bank. The maximum potential amount of future
payments Belden CDT Inc. or its subsidiaries could be required to make under
these affiliate guarantees at June 30, 2005 is $139.7 million. The Company has
not measured and recorded the carrying values of these guarantees in its
Consolidated Financial Statements. The Company also does not hold collateral to
support these guarantees.
NOTE 16: BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company conducts its operations through two business segments--Electronics
and Networking. The Electronics segment designs, manufactures and markets
metallic and fiber optic cable products primarily with industrial,
video/sound/security and transportation/defense applications. These products are
sold principally through distributors or directly to systems integrators and
original equipment manufacturers (OEMS). The Networking segment designs,
manufactures and markets metallic cable, fiber optic cable, connectivity and
certain other non-cable products primarily with networking/communications
applications. These products are sold principally through distributors or
directly to systems integrators, OEMs and large telecommunications companies.
The Company evaluates business segment performance and allocates resources based
on operating income before interest and income taxes. Operating income of the
two principal business segments include all the ongoing costs of operations.
Allocations to or from these business segments are not significant. Transactions
between the business segments are conducted on an arms-length basis. With the
exception of certain unallocated tax assets, substantially all the business
assets are utilized by the business segments.
-25-
Effective January 1, 2005, the Company began accounting for all internal
sourcing of product between its business segments as affiliate sales and
directed any business segment that sold product it had sourced from an affiliate
to recognize profit applicable to both the manufacturing and selling efforts. In
prior years, a business segment that sold product it had sourced from an
affiliate only recognized profit margin applicable to the selling effort. The
Company made this change as a result of increased transactions between its
business segments largely resulting from the Merger. The Company believes this
change provides more useful information for purposes of making decisions about
allocating resources to the business segments and assessing their performance.
The Company has reclassified the business segment information presented for the
three- and six-month periods ended June 30, 2004 to reflect business segment
performance as if the Company had implemented this new accounting procedure
effective January 1, 2004.
Business Segment Information
Amounts reflected in the column entitled F&A in the tables below represent
corporate headquarters operating, treasury and income tax expenses. Amounts
reflected in the column entitled Eliminations in the tables below represent the
eliminations of affiliate revenues and cost of sales.
THREE MONTHS ENDED JUNE 30, 2005 ELECTRONICS NETWORKING F&A ELIMINATIONS TOTAL
- -------------------------------- ----------- ---------- ------- ------------ ---------
(IN THOUSANDS)
EXTERNAL CUSTOMER REVENUES $ 197,618 $ 140,083 $ -- $ -- $ 337,701
AFFILIATE REVENUES 23,917 4,123 -- (28,040) --
SEGMENT OPERATING INCOME (LOSS) 27,007 8,667 (11,942) (4,998) 18,734
SEGMENT IDENTIFIABLE ASSETS (1) 689,635 341,989 512,230 (167,013) 1,376,841
Three Months Ended June 30, 2004 Electronics Networking F&A Eliminations Total
- -------------------------------- ----------- ---------- ------- ------------ ---------
(in thousands)
External customer revenues $ 123,416 $ 60,891 $ -- $ -- $ 184,307
Affiliate revenues 24,043 208 -- (24,251) --
Segment operating income (loss) 14,179 4,031 (4,058) (4,276) 9,876
Segment identifiable assets (1) 347,997 108,625 342,080 (96,386) 702,316
(1) Excludes assets of discontinued operations
SIX MONTHS ENDED JUNE 30, 2005 ELECTRONICS NETWORKING F&A ELIMINATIONS TOTAL
- ------------------------------- ----------- ---------- ------- ------------ ---------
(IN THOUSANDS)
EXTERNAL CUSTOMER REVENUES $ 382,478 $ 264,334 $ -- $ -- $ 646,812
AFFILIATE REVENUES 50,152 5,805 -- (55,957) --
SEGMENT OPERATING INCOME (LOSS) 47,582 15,556 (17,912) (10,291) 34,935
Six Months Ended June 30, 2004 Electronics Networking F&A Eliminations Total
- ------------------------------- ----------- ---------- ------- ------------ ---------
(in thousands)
External customer revenues $ 236,366 $ 118,044 $ -- $ -- $ 354,410
Affiliate revenues 49,017 646 -- (49,663) --
Segment operating income (loss) 26,637 8,213 (8,266) (7,839) 18,745
-26-
Total segment operating income differs from net income reported in the
Consolidated Statements of Operations as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(in thousands)
Total segment operating income $ 18,734 $ 9,876 $ 34,935 $ 18,745
Interest expense, net (2,564) (3,167) (5,484) (6,333)
Minority interest (169) -- (336) --
Other nonoperating income -- 1,732 -- 1,732
Income tax expense (5,455) (2,246) (10,045) (4,186)
---------- ---------- ---------- ----------
Income from continuing operations 10,546 6,195 19,070 9,958
Loss from discontinued operations (1) (544) (5,823) (2,425) (7,319)
Gain on disposal of discontinued operations (2) 8,763 3,020 15,163 3,020
---------- ---------- ---------- ----------
Net income $ 18,765 $ 3,392 $ 31,808 $ 5,659
========== ========== ========== ==========
(1) Net of tax benefit of $324, $3,276, $1,281, and $4,117, respectively
(2) Net of tax expense of $4,929, $1,699, $8,529 and $1,699, respectively
Geographic Information
The following table identifies revenues by geographic region based on the
location of the customer.
2005 2004
-------------------------- --------------------------
PERCENT OF Percent of
Three Months Ended June 30, REVENUES REVENUES Revenues Revenues
- --------------------------------- ------------ ---------- ------------ ----------
(in thousands, except % data)
United States $ 169,899 50.3% $ 97,056 52.7%
Canada 33,265 9.9% 11,859 6.4%
United Kingdom 42,078 12.5% 29,136 15.8%
Continental Europe 63,310 18.7% 27,405 14.9%
Rest of World 29,149 8.6% 18,851 10.2%
------------ ---------- ------------ ----------
Total $ 337,701 100.0% $ 184,307 100.0%
============ ========== ============ ==========
2005 2004
-------------------------- --------------------------
PERCENT OF Percent of
Six Months Ended June 30, REVENUES REVENUES Revenues Revenues
- ---------------------------------- ------------ ---------- ------------ ----------
(in thousands, except % data)
United States $ 325,340 50.3% $ 188,549 53.2%
Canada 64,264 9.9% 24,424 6.9%
United Kingdom 78,347 12.1% 53,958 15.2%
Continental Europe 125,153 19.4% 51,900 14.7%
Rest of World 53,708 8.3% 35,579 10.0%
------------ ---------- ------------ ----------
Total $ 646,812 100.0% $ 354,410 100.0%
============ ========== ============ ==========
-27-
NOTE 17: MINIMUM REQUIREMENTS CONTRACT
The Company has a contractual agreement with a Networking segment customer that
requires the customer to pay the Company compensation or purchase quantities of
product from the Company generating at a minimum $3.0 million in gross profit
per annum according to contractual terms through 2005.
During 2004, the customer did not make the minimum required purchases and the
Company was entitled to receive compensation according to the terms of the
agreement. As a result, the Company recorded $3.0 million in other operating
income during the quarter ended December 31, 2004. The Company received the $3.0
million payment from the customer in June 2005.
-28-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis, as well as the accompanying Consolidated
Financial Statements and related notes, will aid in the understanding of the
operating results as well as the financial position, cash flows, indebtedness
and other key financial information of the Company. Certain reclassifications
have been made to prior year amounts to make them comparable to current year
presentation. Preparation of this Quarterly Report on Form 10-Q requires the
Company to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of its financial statements and the reported amounts of revenue and
expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed 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 derived from other sources. There can be no assurance that actual
amounts will not differ from those estimates. The following discussion will also
contain forward-looking statements. In connection therewith, please see the
cautionary statements contained herein under the caption "Forward-Looking
Statements", which identify important factors that could cause actual results to
differ materially from those in the forward-looking statements.
OVERVIEW
The Company designs, manufactures and markets high-speed electronic cables and
connectivity products for the specialty electronics and data networking markets.
The Company focuses on segments of the worldwide cable and connectivity market
that require highly differentiated, high-performance products and adds value
through design, engineering, manufacturing excellence, product quality, and
customer service. The Company has manufacturing facilities in North America and
Europe.
The Company believes that revenue growth, operating margins and working capital
management are its key performance indicators.
BUSINESS COMBINATION
Belden Inc. (BELDEN) and Cable Design Technologies Corporation (CDT) entered
into an Agreement and Plan of Merger, dated February 4, 2004 (the MERGER
AGREEMENT) pursuant to which Belden merged with and became a wholly owned
subsidiary of CDT (the MERGER). On July 15, 2004, after both parties received
the appropriate stockholder approvals, after CDT effected a one-for-two reverse
split of its common stock, and pursuant to the Merger Agreement, Belden and CDT
completed the Merger. Pursuant to the Merger Agreement, 25.6 million shares of
Belden common stock, par value $.01 per share, were exchanged for 25.6 million
shares of CDT common stock, par value $.01 per share, and CDT changed its name
to Belden CDT Inc.
The Merger was treated as a reverse acquisition under the purchase method of
accounting. Belden was considered the acquiring enterprise for financial
reporting purposes because Belden's owners as a group retained or received the
larger portion of the voting rights in the Company and Belden's senior
management represented a majority of the senior management of the Company. For
financial reporting purposes, the results of operations of CDT are included in
the Company's Consolidated Statements of Operations from July 16, 2004.
-29-
The following information is included in Note 3, Business Combination, to the
Consolidated Financial Statements in this Quarterly Report on Form 10-Q:
- The number of shares of the Company's common stock outstanding after
consummation of the Merger,
- The relative ownership percentages of former CDT stockholders and former
Belden stockholders in the Company,
- The cost of the Merger,
- The amount of goodwill recorded by the Company related to the Merger, and
- Unaudited pro forma summary results presenting selected operating
information for the Company as if the Merger and the one-for-two reverse
stock split had been completed as of January 1, 2004.
DISCONTINUED OPERATIONS
The Company currently reports four operations--the Belden Communications
Company (BCC) operation in Phoenix, Arizona; the Raydex/CDT Ltd. (RAYDEX)
operation in Skelmersdale, United Kingdom; the Montrose/CDT (MONTROSE) operation
in Auburn, Massachusetts; and the Admiral/CDT (ADMIRAL) operation in Wadsworth,
Ohio and Barberton, Ohio--as discontinued operations. Each of these operations
is reported as a discontinued operation in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. The Raydex,
Montrose and Admiral operations were acquired through the Merger. As of the
effective date of the Merger, management had formulated a plan to dispose of
these operations. In regard to all discontinued operations, the remaining assets
of these operations were held for sale during the three- and six-month periods
ended June 30, 2005.
Discussion regarding each operation, including (1) a listing of revenues and
income (loss) before income taxes generated by each operation during the three-
and six-month periods ended June 30, 2005 and 2004 and (2) a listing of the
major classes of assets and liabilities belonging to each operation at June 30,
2005 that remain as part of the disposal group, is included in Note 4,
Discontinued Operations, to the Consolidated Financial Statements in this
Quarterly Report on Form 10-Q.
CONSOLIDATED OPERATING RESULTS
The following table sets forth information comparing consolidated operating
results.
Three Months Ended Six Month Ended
June 30, June 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(In thousands)
Revenues $ 337,701 $ 184,307 $ 646,812 $ 354,410
Gross profit 75,214 34,105 140,345 68,203
Operating income 18,734 9,876 34,935 18,745
Interest expense (2,564) (3,167) (5,484) (6,333)
Income from continuing operations before taxes 16,001 8,441 29,115 14,144
Income from continuing operations 10,546 6,195 19,070 9,958
Loss from discontinued operations (1) (544) (5,823) (2,425) (7,319)
Gain on disposal of discontinued operations (2) 8,763 3,020 15,163 3,020
Net income 18,765 3,392 31,808 5,659
(1) Net of tax benefit of $324, $3,276, $1,281 and $4,117, respectively
(2) Net of tax expense of $4,929, $1,699, $8,529 and $1,699, respectively
-30-
BUSINESS SEGMENTS
The Company conducts its operations through two business segments--Electronics
and Networking. The Electronics segment designs, manufactures and markets
metallic and fiber optic cable products primarily with industrial,
video/sound/security and transportation/defense applications. These products are
sold principally through distributors or directly to systems integrators and
original equipment manufacturers (OEMS). The Networking segment designs,
manufactures and markets metallic cable, fiber optic cable, connectivity and
certain other non-cable products primarily with networking/communications
applications. These products are sold principally through distributors or
directly to systems integrators, OEMs and large telecommunications companies.
Effective January 1, 2005, the Company began accounting for all internal
sourcing of product between its business segments as affiliate sales and
directed any business segment that sold product it had sourced from an affiliate
to recognize profit margin applicable to both the manufacturing and selling
efforts. In prior years, a business segment that sold product it had sourced
from an affiliate only recognized profit margin applicable to the selling
effort. The Company made this change as a result of increased transactions
between its business segments largely resulting from the Merger. The Company
believes this change provides more useful information for purposes of making
decisions about allocating resources to the business segments and assessing
their performance. The Company has reclassified the business segment information
presented for the three- and six-month periods ended June 30, 2004 to reflect
business segment performance as if the Company had implemented this new
accounting procedure effective January 1, 2004.
The following table sets forth information comparing the Electronics segment
operating results.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(In thousands, except % data)
External customer revenues $ 197,618 $ 123,416 $ 382,478 $ 236,366
Affiliate revenues 23,917 24,043 50,152 49,017
------------ ------------ ------------ ------------
Total revenues 221,535 147,459 432,630 285,383
Operating income 27,007 14,179 47,582 26,637
As a percent of total revenues 12.2% 9.6% 11.0% 9.3%
The following table sets forth information comparing the Networking segment
operating results.
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
(In thousands, except % data)
External customer revenues $ 140,083 $ 60,891 $ 264,334 $ 118,044
Affiliate revenues 4,123 208 5,805 646
------------ ------------ ------------ ------------
Total revenues 144,206 61,099 270,139 118,690
Operating income 8,667 4,031 15,556 8,213
As a percent of total revenues 6.0% 6.6% 5.8% 6.9%
-31-
RESULTS OF OPERATIONS--
THREE MONTHS ENDED JUNE 30, 2005 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2004
CONTINUING OPERATIONS CONSOLIDATED REVENUES
Revenues generated in the three months ended June 30, 2005 increased 83.2% to
$337.7 million from revenues generated in the three months ended June 30, 2004
of $184.3 million because of the impact of the Merger, increased selling prices,
and favorable currency translation on international revenues.
Revenues generated through the addition of the CDT operations during the second
quarter of 2005 totaled $141.7 million and contributed 76.9 percentage points of
revenue increase.
The impact of increased product pricing contributed 3.7 percentage points of
revenue increase during the second quarter of 2005. This price improvement
resulted primarily from the impact of sales price increases implemented by the
Company during 2004 and 2005 across most product lines in response to increases
in the costs of copper, Teflon(R) FEP, and commodities derived from petroleum
and natural gas.
Favorable foreign currency translation on international revenues contributed 2.4
percentage points of revenue increase.
The impact of increased unit sales generated during the three months ended June
30, 2005 contributed 0.2 percentage points of revenue increase. Higher unit
sales of products with video/sound/security and transportation/defense
applications were partially offset by volume decreases in sales of products with
industrial and networking/communications applications.
Revenues generated on sales of product to customers in the United States,
representing 50.3% of the Company's total revenues generated during the three
months ended June 30, 2005, increased by 75.0% compared with revenues generated
during the same period in 2004. Absent the impact of the Merger, sales of
product to customers in the United States decreased by 2.7%. This decrease
resulted primarily from a shift from the Company's traditional Belden-branded
networking products to the Company's Mohawk-branded networking products. This
decrease was partially offset by the impact of sales price increases implemented
during 2004 and 2005, increased project activity requiring products with
video/sound/security and transportation/defense applications, and increased
demand for multi-mode fiber optic cable products and structured wiring
components.
Revenues generated on sales of product to customers in Canada represented 9.9%
of the Company's total revenues for the quarter ended June 30, 2005. Canadian
revenues for the second quarter of 2005 increased by 180.5% compared with
revenues for the second quarter of 2004. Absent the impact of the Merger and
favorable currency translation on product sold by the Company's international
operations to customers in Canada, revenues generated for the second quarter of
2005 increased by 22.0% compared with revenues generated for the same period in
2004. This increase resulted primarily from the impact of sales price increases
implemented during 2004 and 2005 and increased project activity requiring
products with industrial applications.
-32-
Revenues generated on sales of product to customers in the United Kingdom,
representing 12.5% of the Company's total revenues generated during the second
quarter of 2005, increased by 44.4% compared with revenues generated during the
same period in 2004. Absent the impact of the Merger and favorable currency
translation on products sold by the Company's international operations to
customers in the United Kingdom, revenues generated for the second quarter of
2005 increased by 26.2% compared with revenues generated for the same period in
2004. This increase resulted primarily from the impact of sales price increases
implemented during 2004 and 2005 and the addition of Belden-branded products to
the portfolios of several United Kingdom distributors who have historically
carried only CDT-branded products.
Revenues generated on sales of product to customers in Continental Europe
represented 18.7% of the Company's total revenues for the quarter ended June 30,
2005. Continental European revenues generated during the second quarter of 2005
increased by 131.0% compared with revenues generated during the same period in
2004. Absent the impact of the Merger and favorable currency translation on
products sold by the Company's international operations to customers in
Continental Europe, revenues generated during the second quarter of 2005
decreased by 9.8% compared with revenues generated during the same period of
2004. This decrease resulted primarily from (1) nonrecurring sales of product
for the Athens Olympic Games in the second quarter of 2004 and (2) the Company's
decision to cease production of cord products and assemblies in Continental
Europe during the first quarter of 2005.
Revenues generated on sales of product to customers in the rest of the world,
representing 8.6% of the Company's total revenues generated during the three
months ended June 30, 2005, increased by 54.6% from the same period in 2004.
Absent the impact of the Merger and favorable currency translation of products
sold by the Company's international operations to customers in the Latin
America, Asia/Pacific and Africa/Middle East markets, revenues generated during
the second quarter of 2005 increased by 32.2% compared with revenues generated
during the same period in 2004. This increase represented the impact of sales
price increases implemented during 2004 and 2005 and higher demand in all three
markets.
CONTINUING OPERATIONS CONSOLIDATED COSTS, EXPENSES AND EARNINGS
The following table sets forth information comparing the components of earnings
for the three months ended June 30, 2005 and 2004.
Percent
Increase
2005 Compared
Three Months Ended June 30, 2005 2004 With 2004
- ---------------------------------------------- ------------ ------------ -------------
(in thousands, except % data)
Gross profit $ 75,214 $ 34,105 120.5%
As a percent of revenues 22.3% 18.5%
Operating income $ 18,734 $ 9,876 89.7%
As a percent of revenues 5.5% 5.4%
Income from continuing operations before taxes $ 16,001 $ 8,441 89.6%
As a percent of revenues 4.7% 4.6%
Income from continuing operations $ 10,546 $ 6,195 70.2%
As a percent of revenues 3.1% 3.4%
-33-
Gross profit increased 120.5% to $75.2 million in the three months ended June
30, 2005 from $34.1 million in the three months ended June 30, 2004 primarily
because of the addition of gross profit generated by CDT operations during the
quarter, the impact of sales price increases implemented during 2004 and 2005,
and the favorable impact of currency translation on the gross profit generated
by the Company's international operations. Also contributing to the favorable
gross profit comparison were the current-quarter impact of material, labor and
overhead cost reduction initiatives, the impact of production outsourcing in
Europe during the second quarter of 2004, and the impact of a 2003 production
capacity rationalization initiative in Europe that resulted in lower output,
higher scrap and increased maintenance costs during the second quarter of 2004.
These positive factors were partially offset by higher product costs resulting
from increased purchase prices for copper, Teflon(R) FEP and commodities derived
from both petroleum and natural gas and severance and other related benefits
costs totaling $0.2 million related to the closure of a manufacturing facility
in the United States.
Gross profit as a percent of revenues increased by 3.8 percentage points from
the prior year because of the previously mentioned items and increased
manufacturing utilization as a result of plant rationalization and
consolidation.
Operating income increased 89.7% to $18.7 million for the three months ended
June 30, 2005 from $9.9 million for the three months ended June 30, 2004
primarily because of higher gross profit largely attributable to the Merger.
Partially offsetting the positive operating income comparison was an increase in
selling, general and administrative (SG&A) expenses to $56.5 million in the
second quarter of 2005 from $24.2 million in the second quarter of 2004
primarily because of the addition of SG&A expenses related to the CDT
operations, nonrecurring merger integration costs of $1.2 million recognized in
the current quarter, nonrecurring executive succession costs totaling $5.1
million recognized in the current quarter, and the unfavorable impact of
currency translation on the SG&A expenses of the Company's international
operations. These negative factors were partially offset by severance and other
benefits costs of $0.1 million recognized in the second quarter of 2004 related
to personnel reductions within the Electronics segment. SG&A expenses as a
percentage of revenues increased to 16.7% in the second quarter of 2005 from
13.1% in the second quarter of 2004 primarily because of the nonrecurring merger
integration costs and executive succession costs. Operating income as a percent
of revenues increased to 5.5% in the second quarter of 2005 from 5.4% in the
second quarter of 2004 as a result of the previously mentioned items.
Income from continuing operations before taxes increased 89.6% to $16.0 million
in the three months ended June 30, 2005 from $8.4 million in the three months
ended June 30, 2004 because of higher operating income largely attributable to
the Merger and lower net interest expense. Net interest expense decreased 19.0%
to $2.6 million in the second quarter of 2005 from $3.2 million in the second
quarter of 2004 because of the repayment of 7.60% medium-term notes totaling
$64.0 million in the third quarter of 2004 and higher interest income earned on
cash equivalents partially offset by the assumption of 4.00% subordinated
convertible debentures totaling $110.0 million from the legacy CDT operations in
the third quarter of 2004. Interest income earned on cash equivalents was $1.4
million in the second quarter of 2005 compared to $0.2 million in the second
quarter of 2004. Average debt outstanding was $247.7 million and $200.0 million
during the second quarters of 2005 and 2004, respectively. The Company's average
interest rate was 6.02% in the second quarter of 2005 and 6.65% in the second
quarter of 2004.
The Company's effective annual tax rate increased to 34.5% in the three months
ended June 30, 2005 from 27.5% in the three months ended June 30, 2004 primarily
attributable to the increase in pretax income, which reduces the relative
benefit of permanent deductions.
-34-
Income from continuing operations increased 70.2% to $10.5 million in the three
months ended June 30, 2005 from $6.2 million in the three months ended June 30,
2004 because of higher income from continuing operations before taxes resulting
largely from the Merger partially offset by higher income tax expense.
ELECTRONICS SEGMENT
Revenues generated from sales to external customers increased 60.1% to $197.6
million for the quarter ended June 30, 2005 from $123.4 million for the quarter
ended June 30, 2004 because of the impact of the Merger, increased selling
prices, and favorable currency translation on international revenues.
Revenues generated through the addition of the CDT operations during the second
quarter of 2005 totaled $67.7 million and contributed 54.9 percentage points of
revenue increase.
The impact of increased product pricing contributed 2.5 percentage points of
revenue increase during the second quarter of 2005. This price improvement
resulted primarily from the impact of sales price increases implemented by the
segment during 2004 and 2005 across most product lines in response to increases
in the costs of copper, Teflon(R) FEP, and commodities derived from petroleum
and natural gas.
Favorable foreign currency translation on international revenues contributed 1.9
percentage points of revenue increase.
Increased unit sales generated during the three months ended June 30, 2005
contributed 0.8 percentage points of revenue increase. Higher unit sales of
products with video/sound/security and transportation/defense applications were
partially offset by a decrease in unit sales of products with industrial and
networking/communications applications.
Operating income increased 90.5% to $27.0 million for the quarter ended June 30,
2005 from $14.2 million for the quarter ended June 30, 2004 mainly because of
the addition of operating income generated by the CDT operations, the impact of
sales price increases implemented during 2004 and 2005, the current-quarter
impact of manufacturing and SG&A cost reduction initiatives, favorable currency
translation on operating income generated by the Company's international
operations, the impact on second quarter 2004 operating income of the 2003
production capacity rationalization initiative in Europe discussed above, and
severance and other related benefits costs totaling $0.1 million related to
personnel reductions within the segment.
These positive factors were partially offset by higher product costs resulting
from increased purchase prices for copper, Teflon(R) FEP and commodities derived
from both petroleum and natural gas, nonrecurring merger integration costs
totaling $0.6 million recognized in the current quarter, and severance and other
benefits costs of $0.2 million recognized in the current quarter related to the
pending closure of a manufacturing facility in the United States.
As a percent of total revenues generated by the segment, operating income
increased to 12.2% in the second quarter of 2005 from 9.6% in the second quarter
of 2004 because of the previously mentioned items and increased manufacturing
utilization as a result of plant rationalization and consolidation.
NETWORKING SEGMENT
Revenues generated on sales to external customers increased 130.1% to $140.1
million for the quarter ended June 30, 2005 from $60.9 million for the quarter
ended June 30, 2004. The revenue increase resulted primarily from the Merger,
increased selling prices, and favorable currency translation on revenues
generated by the Company's international operations.
-35-
Revenues generated through the addition of the CDT operations during the second
quarter of 2005 totaled $74.0 million and contributed 121.5 percentage points of
revenue increase.
The impact of increased product pricing contributed 6.1 percentage points of
revenue increase during the second quarter of 2005. This price improvement
resulted primarily from the impact of sales price increases implemented by the
segment during 2004 and 2005 across most product lines in response to increases
in the costs in copper and commodities derived from petroleum and natural gas.
Favorable foreign currency translation on international revenues contributed 3.6
percentage points of revenue increase.
Decreased unit sales generated during the three months ended June 30, 2005
offset the positive impact that the Merger, increased sales prices and favorable
currency translation had on the revenue comparison by 1.1 percentage points.
Lower unit sales of products with networking/communications and
video/sound/security applications were partially offset by an increase in unit
sales of products with industrial and transportation/defense applications.
Operating income increased 115.0% to $8.7 million for the quarter ended June 30,
2005 from $4.0 million for the quarter ended June 30, 2004 mainly because of the
addition of operating income generated by the CDT operations, the impact of
sales price increases implemented during 2004 and 2005, the current-quarter
impact of manufacturing and SG&A cost reduction initiatives, favorable currency
translation on operating income generated by the Company's international
operations, and the impact of production outsourcing in Europe during the second
quarter of 2004.
These positive factors were partially offset by higher product costs resulting
from increased purchase prices for copper and commodities derived from both
petroleum and natural gas and nonrecurring merger integration costs totaling
$0.4 million recognized in the current quarter.
Operating income as a percent of total revenues generated by the segment
decreased to 6.0% in the quarter ended June 30, 2005 from 6.6% for the quarter
ended June 30, 2004 because of the previously mentioned items.
DISCONTINUED OPERATIONS
Loss from discontinued operations for the quarter ended June 30, 2005 includes:
- $0.3 million of revenues and $0.4 million of loss before income tax
benefits related to the discontinued operations of the Company's
Electronics segment; and
- $0.5 million of loss before income tax benefits related to the
discontinued operations of the Company's Networking segment.
The Company recognized a gain on the disposal of discontinued operations in the
amount of $13.7 million before tax ($8.8 million after tax) during the second
quarter of 2005.
Loss from discontinued operations for the quarter ended June 30, 2004 includes
$47.9 million of revenues and $4.4 million of loss before income tax benefits
related to the discontinued operations of the Company's Networking segment.
-36-
RESULTS OF OPERATIONS--
SIX MONTHS ENDED JUNE 30, 2005 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2004
CONTINUING OPERATIONS CONSOLIDATED REVENUES
Revenues generated in the six months ended June 30, 2005 increased 82.5% to
$646.8 million from revenues generated in the six months ended June 30, 2004 of
$354.4 million because of the impact of the Merger, increased selling prices,
and favorable currency translation on international revenues.
Revenues generated through the addition of the CDT operations during the first
half of 2005 totaled $278.5 million and contributed 78.6 percentage points of
revenue increase.
The impact of increased product pricing contributed 5.0 percentage points of
revenue increase during the first six months of 2005. This price improvement
resulted primarily from the impact of sales price increases implemented by the
Company during 2004 and 2005 across most product lines in response to increases
in the costs of copper, Teflon(R) FEP, and commodities derived from petroleum
and natural gas.
Favorable foreign currency translation on international revenues contributed 2.2
percentage points of revenue increase.
Decreased unit sales generated during the six months ended June 30, 2005 offset
the positive impact that the Merger, price increases and foreign currency
translation had on the revenue comparison by 3.3 percentage points. Lower unit
sales of products with networking/communications, and industrial applications
were partially offset by volume increases in sales of products with
video/sound/security and transportation/defense applications.
Revenues generated on sales of product to customers in the United States,
representing 50.3% of the Company's total revenues generated during the six
months ended June 30, 2005, increased by 72.5% compared with revenues generated
during the same period in 2004. Absent the impact of the Merger, sales of
product to customers in the United States decreased by 2.9%. This decrease
resulted primarily from a shift from the Company's traditional Belden-branded
networking products to the Company's Mohawk-branded networking products. This
decrease was partially offset by the impact of sales price increases implemented
during 2004 and 2005, increased project activity requiring products with
video/sound/security and transportation/defense applications, and increased
demand for multi-mode fiber optic cable products and structured wiring
components.
Revenues generated on sales of product to customers in Canada represented 9.9%
of the Company's total revenues for the six months ended June 30, 2005. Canadian
revenues for the first half of 2005 increased by 163.1% compared with revenues
for the first half of 2004. Absent the impact of the Merger and favorable
currency translation on product sold by the Company's international operations
to customers in Canada, revenues generated for the first six months of 2005
increased by 20.7% compared with revenues generated for the same period in 2004.
This increase resulted primarily from the impact of sales price increases
implemented during 2004 and 2005 and increased project activity requiring
products with industrial applications.
-37-
Revenues generated on sales of product to customers in the United Kingdom,
representing 12.1% of the Company's total revenues generated during the first
half of 2005, increased by 45.2% compared with revenues generated during the
same period in 2004. Absent the impact of the Merger and favorable currency
translation on products sold by the Company's international operations to
customers in the United Kingdom, revenues generated for the first six months of
2005 increased by 22.9% compared with revenues generated for the same period in
2004. This increase resulted primarily from the impact of sales price increases
implemented during 2004 and 2005 and the addition of Belden-branded products to
the portfolios of several United Kingdom distributors who have historically
carried only CDT-branded products. This increase was partially offset by
decreased unit purchasing of products with communications applications by a
large telecommunications customer in the United Kingdom during the final quarter
of its annual capital spending cycle.
Revenues generated on sales of product to customers in Continental Europe
represented 19.4% of the Company's total revenues for the six months ended June
30, 2005. Continental European revenues generated during the first half of 2005
increased by 141.1% compared with revenues generated during the same period in
2004. Absent the impact of the Merger and favorable currency translation on
products sold by the Company's international operations to customers in
Continental Europe, revenues generated during the first half of 2005 decreased
by 17.7% compared with revenues generated during the same period of 2004. This
decrease resulted primarily from (1) reduced demand for the Company's broadband
products because of extended poor winter weather in Northern Europe and, to a
lesser extent, in Spain and Italy, (2) nonrecurring sales of product for the
Athens Olympic Games in 2004, and (3) the Company's decision to cease production
of cord products and assemblies in Continental Europe during the first quarter
of 2005.
Revenues generated on sales of product to customers in the rest of the world,
representing 8.3% of the Company's total revenues generated during the six
months ended June 30, 2005, increased by 51.0% from the same period in 2004.
Absent the impact of the Merger and favorable currency translation of products
sold by the Company's international operations to customers in the Latin
America, Asia/Pacific and Africa/Middle East markets, revenues generated during
the first half of 2005 increased by 27.1% compared with revenues generated
during the same period in 2004. This increase represented the impact of sales
price increases implemented during 2004 and 2005 and higher demand in all three
markets.
CONTINUING OPERATIONS CONSOLIDATED COSTS, EXPENSES AND EARNINGS
The following table sets forth information comparing the components of earnings
for the six months ended June 30, 2005 and 2004.
Percent
Increase
2005 Compared
Six Months Ended June 30, 2005 2004 With 2004
- ---------------------------------------------- ------------ ------------ -------------
(in thousands, except % data)
Gross profit $ 140,345 $ 68,203 105.8%
As a percent of revenues 21.7% 19.2%
Operating income $ 34,935 $ 18,745 86.4%
As a percent of revenues 5.4% 5.3%
Income from continuing operations before taxes $ 29,115 $ 14,144 105.9%
As a percent of revenues 4.5% 4.0%
Income from continuing operations $ 19,070 $ 9,958 91.5%
As a percent of revenues 2.9% 2.8%
-38-
Gross profit increased 105.8% to $140.3 million in the six months ended June 30,
2005 from $68.2 million in the six months ended June 30, 2004 primarily because
of the addition of gross profit generated by CDT operations during the year, the
impact of sales price increases implemented during 2004 and 2005, and the
favorable impact of currency translation on the gross profit generated by the
Company's international operations. Also contributing to the favorable gross
profit comparison were the current-year impact of material, labor and overhead
cost reduction initiatives, the impact of production outsourcing in Europe
during the second quarter of 2004, and the impact of a 2003 production capacity
rationalization initiative in Europe that resulted in lower output, higher scrap
and increased maintenance costs during the first half of 2004.
These positive factors were partially offset by higher product costs resulting
from increased purchase prices for copper, Teflon(R) FEP and commodities derived
from both petroleum and natural gas and severance and other related benefits
costs totaling $0.7 million related to the pending closure of a manufacturing
facility in the United States.
Gross profit as a percent of revenues increased by 2.5 percentage points from
the prior year because of the previously mentioned items and increased
manufacturing utilization as a result of plant rationalization and
consolidation.
Operating income increased 86.4% to $34.9 million for the six months ended June
30, 2005 from $18.7 million for the six months ended June 30, 2004 primarily
because of higher gross profit largely attributable to the Merger. Partially
offsetting the positive operating income comparison was an increase in SG&A
expenses to $105.4 million in the first half of 2005 from $49.5 million in the
first half of 2004 primarily because of the addition of SG&A expenses related to
the CDT operations, nonrecurring merger integration costs of $2.8 million
recognized in the first half of the year, executive succession costs totaling
$5.1 million recognized in the first half of 2005, and the unfavorable impact of
currency translation on the SG&A expenses of the Company's international
operations. These negative factors were partially offset by severance and other
benefits costs of $0.7 million recognized in the first half of 2004 related to
personnel reductions within the Electronics segment. SG&A expenses as a
percentage of revenues increased to 16.3% in the first half of 2005 from 14.0%
in the first six months of 2004 primarily because of the nonrecurring merger
integration costs and executive succession costs. Operating income as a percent
of revenues increased to 5.4% in the first half of 2005 from 5.3% in the first
six months of 2004 as a result of the previously mentioned items.
Income from continuing operations before taxes increased 105.9% to $29.1 million
in the six months ended June 30, 2005 from $14.1 million in the six months ended
June 30, 2004 because of higher operating income largely attributable to the
Merger and lower net interest expense. Net interest expense decreased 13.4% to
$5.5 million in the first half of 2005 from $6.3 million in the first half of
2004 because of the repayment of 7.60% medium-term notes totaling $64.0 million
in the third quarter of 2004 and higher interest income earned on cash
equivalents partially offset by the assumption of 4.00% subordinated convertible
debentures totaling $110.0 million from the legacy CDT operations in the third
quarter of 2004. Interest income earned on cash equivalents was $2.2 million in
the first half of 2005 compared to $0.4 million in the first half of 2004.
Average debt outstanding was $247.8 million and $200.0 million during the first
six months of 2005 and 2004, respectively. The Company's average interest rate
was 6.08% in the first half of 2005 and 6.78% in the first half of 2004.
The Company's effective annual tax rate increased to 34.5% in the six months
ended June 30, 2005 from 27.5% in the six months ended June 30, 2004 primarily
attributable to the increase in pretax income, which reduces the relative
benefit of permanent deductions.
-39-
Income from continuing operations increased 91.5% to $19.1 million in the six
months ended June 30, 2005 from $10.0 million in the six months ended June 30,
2004 mainly because of higher income from continuing operations before taxes
resulting largely from the Merger partially offset by higher income tax expense.
ELECTRONICS SEGMENT
Revenues generated from sales to external customers increased 61.8% to $382.5
million for the six months ended June 30, 2005 from $236.4 million for the six
months ended June 30, 2004 because of the impact of the Merger, increased
selling prices, and favorable currency translation on international revenues.
Revenues generated through the addition of the CDT operations during the first
half of 2005 totaled $135.0 million and contributed 57.1 percentage points of
revenue increase.
The impact of increased product pricing contributed 4.6 percentage points of
revenue increase during the first six months of 2005. This price improvement
resulted primarily from the impact of sales price increases implemented by the
segment during 2004 and 2005 across most product lines in response to increases
in the costs in copper, Teflon(R) FEP, and commodities derived from petroleum
and natural gas.
Favorable foreign currency translation on international revenues contributed 1.9
percentage points of revenue increase.
Decreased unit sales generated during the six months ended June 30, 2005 offset
the positive impact that the Merger, increased sales prices and favorable
currency translation had on the revenue comparison by 1.8 percentage points.
Lower unit sales of products with industrial and networking/communications
applications were partially offset by an increase in unit sales of products with
video/sound/security and transportation/defense applications.
Operating income increased 78.6% to $47.6 million for the six months ended June
30, 2005 from $26.7 million for the six months ended June 30, 2004 mainly
because of the addition of operating income generated by the CDT operations, the
impact of sales price increases implemented during 2004 and 2005, the
current-year impact of manufacturing and SG&A cost reduction initiatives,
favorable currency translation on operating income generated by the Company's
international operations, the impact that the 2003 production capacity
rationalization initiative in Europe had on 2004 operating income, and severance
and other related benefits costs totaling $0.7 million related to personnel
reductions within the segment during the first half of 2004.
These positive factors were partially offset by higher product costs resulting
from increased purchase prices for copper, Teflon(R) FEP and commodities derived
from both petroleum and natural gas, nonrecurring merger integration costs
totaling $1.6 million recognized in the first half of 2005, and severance and
other benefits costs of $0.7 million recognized in the current year related to
the pending closure of a manufacturing facility in the United States.
As a percent of total revenues generated by the segment, operating income
increased to 11.0% in the first half of 2005 from 9.6% in the first half of 2004
because of the previously mentioned items and increased manufacturing
utilization as a result of plant rationalization and consolidation.
-40-
NETWORKING SEGMENT
Revenues generated on sales to external customers increased 123.9% to $264.3
million for the six months ended June 30, 2005 from $118.0 million for the six
months ended June 30, 2004. The revenue increase resulted primarily from the
Merger, increased selling prices, and favorable currency translation on revenues
generated by the Company's international operations.
Revenues generated through the addition of the CDT operations during the first
six months of 2005 totaled $143.5 million and contributed 121.6 percentage
points of revenue increase.
The impact of increased product pricing contributed 5.9 percentage points of
revenue increase during the first half of 2005. This price improvement resulted
primarily from the impact of sales price increases implemented by the segment
during 2004 and 2005 across most product lines in response to increases in the
costs of copper and commodities derived from petroleum and natural gas.
Favorable foreign currency translation on international revenues contributed 2.6
percentage points of revenue increase.
Decreased unit sales generated during the six months ended June 30, 2005 offset
the positive impact that the Merger, increased sales prices and favorable
currency translation had on the revenue comparison by 6.2 percentage points.
Lower unit sales of products with networking/communications applications were
partially offset by an increase in unit sales of products with
transportation/defense and industrial applications.
Operating income increased 89.4% to $15.6 million for the six months ended June
30, 2005 from $8.2 million for the six months ended June 30, 2004 mainly because
of the addition of operating income generated by the CDT operations, the impact
of sales price increases implemented during 2004 and 2005, the current-quarter
impact of manufacturing and SG&A cost reduction initiatives, favorable currency
translation on operating income generated by the Company's international
operations, and the impact of production outsourcing in Europe during the second
quarter of 2004.
These positive factors were partially offset by higher product costs resulting
from increased purchase prices for copper and commodities derived from both
petroleum and natural gas and nonrecurring merger integration costs totaling
$0.7 million recognized in the first half of 2005.
Operating income as a percent of total revenues generated by the segment
decreased to 5.8% in the six months ended June 30, 2005 from 6.9% for the six
months ended June 30, 2004 because of the previously mentioned items.
DISCONTINUED OPERATIONS
Loss from discontinued operations for the six months ended June 30, 2005
includes:
- $2.2 million of revenues and $0.8 million of loss before income tax
benefits related to the discontinued operations of the Company's
Electronics segment; and
- $0.1 million of revenues and $2.9 million of loss before income tax
benefits related to the discontinued operations of the Company's
Networking segment.
The Company recognized a gain on the disposal of discontinued operations in the
amount of $23.7 million before tax ($15.2 million after tax) during the first
half of 2005.
-41-
Loss from discontinued operations for the six months ended June 30, 2004
includes $93.1 million of revenues and $6.7 million of loss before income tax
benefits related to the discontinued operations of the Company's Networking
segment.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash liquidity included cash and cash equivalents, cash
from operations and amounts available under credit facilities. Generally, the
Company's primary source of cash has been from business operations. Cash sourced
from credit facilities and other borrowing arrangements has historically been
used to fund business acquisitions. The Company believes that the sources listed
above are sufficient to fund the current requirements of working capital, to
make scheduled pension contributions for the Company's retirement plans, to fund
scheduled debt maturity payments, to fund quarterly dividend payments and to
support its short-term and long-term operating strategies.
The Company expects that its cash tax payments will be minimal in 2005 because
of net operating loss (NOL) carryforwards as of December 31, 2004 in Australia,
Germany, the Netherlands and the United States. These NOL carryforwards arise
from lowered operating income during the recent economic downturns in the United
States and Europe, costs associated with divestiture or closure of manufacturing
plants in the United States, Germany and Australia, and transaction and other
costs associated with the Merger.
Planned capital expenditures for 2005 are approximately $25.0 million to $30.0
million, of which approximately $12.0 million relates to capacity maintenance
and enhancement. The Company has the ability to revise and reschedule the
anticipated capital expenditure program should the Company's financial position
require it.
Any materially adverse reaction to customer demand, uncertainties related to the
effect of competitive products and pricing, customer acceptance of the Company's
product mix or economic conditions worldwide could affect the ability of the
Company to continue to fund its needs from business operations.
Net cash inflow during the six months ended June 20, 2005 totaled $31.7 million.
The disposal of discontinued operations provided $34.6 million of cash during
the first six months of 2005.
Net cash inflow during the six months ended June 30, 2004 totaled $73.9 million.
The disposal of discontinued operations provided $82.1 million of cash during
the first six months of 2004.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities in the first six months of 2005
totaled $30.2 million and included $3.4 million of net non-cash operating
expenses and a $5.0 million net increase in operating assets and liabilities.
Non-cash operating expenses consisted of depreciation, amortization, deferred
tax expense and stock-based compensation, net of a gain on the disposal of
tangible assets. The net increase in operating assets and liabilities resulted
primarily from increased receivables and inventories partially offset by
increased accounts payable and accrued liabilities, decreased net current income
taxes and decreased other net operating assets and liabilities.
-42-
Net cash used for operating activities in the first six months of 2004 totaled
$4.9 million and included $8.2 million of net non-cash operating expenses and an
$18.8 million net increase in operating assets and liabilities. Non-cash
operating expenses consisted of depreciation, amortization, deferred tax
expense, certain retirement savings plan contributions funded with common stock
held in treasury rather than with cash, and stock-based compensation, net of a
gain on the disposal of tangible assets. The net increase in operating assets
and liabilities resulted from growth in both receivables and inventories
necessary to support the Company's increased level of revenues.
CASH FLOW FROM INVESTING ACTIVITIES
Net cash provided by investing activities totaled $23.2 million in the first six
months of 2005 primarily as the result of $30.7 million in proceeds received
from the sales of tangible assets belonging to BCC's discontinued Phoenix
operation and $5.3 million in proceeds received from the sale of other
facilities held for sale. These proceeds were partially offset by $13.7 million
of cash used for the purchase of capital equipment. Net cash provided by
investing activities in the first six months of 2004 totaled $81.5 million
primarily because of $84.6 million in proceeds received from the sale of
tangible assets belonging to BCC's discontinued Phoenix operation and $0.4
million in proceeds received from the sale of equipment and technology used for
the production of deflection coils. These proceeds were partially offset by $3.5
million of cash used for the purchase of capital equipment.
CAPITAL EXPENDITURES
Six Months Ended June 30, 2005 2004
- ------------------------------------------ ------------ ------------
(in thousands)
Continuing operations:
Capacity modernization and enhancement $ 5,946 $ 2,208
Capacity expansion 3,810 106
Other 3,934 761
------------ ------------
Total continuing operations 13,690 3,075
Discontinued operations -- 461
------------ ------------
$ 13,690 $ 3,536
============ ============
Capital expenditures for the continuing operations during the six months ended
June 30, 2005 and 2004 represented 2.1% and 0.9%, respectively, of revenues for
the same periods. Investment during both the first six months of 2005 and 2004
was utilized principally for maintaining and enhancing existing production
capabilities.
CASH FLOW FROM FINANCING ACTIVITIES
Net cash used for financing activities during the first six months of 2005 and
2004 totaled $18.8 million and $2.5 million, respectively.
On May 23, 2005, the Board of Directors authorized the Company to repurchase up
to $125.0 million of common stock in the open market. From that date through
June 30, 2005, the Company repurchased approximately 0.7 million shares of its
common stock at an aggregate cost of $14.7 million.
-43-
During the six-month periods ended June 30, 2005 and 2004, dividends of $.10 per
share were paid to stockholders, resulting in cash outflows of $4.7 million and
$2.6 million, respectively.
During the six months ended June 30, 2005, the Company received proceeds from
the exercise of stock options totaling $2.6 million.
During the six months ended June 30, 2005, the Company repaid outstanding
balances under its European mortgage borrowing arrangements in the amount of
$2.0 million.
During the six months ended June 30, 2005, there were no material changes
outside the ordinary course of business to the Company's contractual obligations
presented in Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, of the Annual Report on Form 10-K for the period
ended December 31, 2004.
WORKING CAPITAL
Current assets less cash and cash equivalents increased $24.2 million, or 5.3%,
from $460.5 million at December 31, 2004 to $484.8 million at June 30, 2005.
Receivables increased 17.8% from $174.6 million at December 31, 2004 to $205.6
million at June 30, 2005 primarily because of higher sales and issuance of
approximately $8.0 million in sales incentive rebates, accrued in 2004, to
participating customers during the first quarter of 2005. Inventories increased
5.2% from $227.0 million at December 31, 2004 to $238.8 million at June 30, 2005
mainly because of increased production necessary to support higher sales levels
and in anticipation of decreased production in the third quarter due to summer
vacations. Other current assets decreased 11.3% from $24.8 million at December
31, 2004 to $22.0 million at June 30, 2005 because of a $1.7 million decrease in
deferred income tax assets and a $1.1 million decrease in other current assets
resulting primarily from amortization. Current assets of discontinued operations
decreased by 46.3% from $34.1 million at December 31, 2004 to $18.3 million at
June 30, 2005 mainly as a result of the liquidation of Raydex and Montrose
receivables and inventories after those facilities ceased production early in
the first quarter of 2005 partially offset by the reclassification of
Raydex-Skelmersdale land and buildings held for sale from long-lived assets of
discontinued operations to current assets of discontinued operations.
Current liabilities increased $30.6 million, or 14.0%, from $218.3 million at
December 31, 2004 to $248.9 million at June 30, 2005. Accounts payable and
accrued liabilities increased 20.8% from $185.0 million at December 31, 2004 to
$223.5 million at June 30, 2005 mainly because of increased production and
higher costs for copper, Teflon(R) FEP and commodities derived from petroleum
and natural gas, executive succession costs totaling $5.1 million accrued in the
second quarter of 2005, and severance and other related benefits costs totaling
$3.5 million accrued in the second quarter of 2005. These increases to accounts
payable and accrued liabilities were partially offset by severance payments
totaling $10.4 million and executive succession payments totaling $0.3 million
during the first half of 2005. In regard to the severance payments, please refer
to Note 11, Accounts Payable and Accrued Liabilities, to the Consolidated
Financial Statements in this Quarterly Report on Form 10-Q. Current liabilities
of discontinued operations decreased 42.5% from $17.5 million at December 31,
2004 to $10.1 million at June 30, 2005 primarily as a result of severance
payments of $5.0 million applied against the severance reserves for BCC's
Phoenix operation ($0.6 million), Montrose ($1.0 million), and Raydex ($3.4
million) during the current year.
-44-
LONG-LIVED ASSETS
Long-lived assets decreased $43.4 million, or 5.8%, from $746.1 million at
December 31, 2004 to $702.7 million at June 30, 2005.
Property, plant and equipment includes the acquisition cost less accumulated
depreciation of the Company's land and land improvements, buildings and
leasehold improvements and machinery and equipment. Property, plant and
equipment decreased $13.4 million during the first six months of 2005 mainly
because of depreciation and the unfavorable impact of foreign currency
translation on the property, plant and equipment of the Company's international
operations.
Goodwill and other intangibles includes goodwill, patents, trademarks, backlog,
favorable contracts and customer relations. Goodwill is defined as the
unamortized difference between the aggregate purchase price of acquired
businesses taken as a whole and the fair market value of the identifiable net
assets of those acquired businesses. The carrying amounts of these assets
decreased by $5.1 million during the first six months of 2005 primarily as a
result of the amortization of other intangibles.
Long-lived assets of discontinued operations decreased $24.2 million during the
first six months of 2005 due to the disposition of BCC-Phoenix, Montrose and
Admiral land and buildings and the reclassification of Raydex-Skelmersdale land
and buildings held for sale from long-lived assets of discontinued operations to
current assets of discontinued operations.
CAPITAL STRUCTURE
JUNE 30, 2005 December 31, 2004
------------------------- -------------------------
AMOUNT PERCENT Amount Percent
------------ ------- ------------ -------
(in thousands, except % data)
Current maturities of long-term debt $ 15,327 1.5% $ 15,702 1.5%
Long-term debt 231,052 22.1% 232,823 22.0%
------------ ------- ------------ -------
Total debt 246,379 23.6% 248,525 23.5%
Stockholders' equity 796,610 76.4% 810,000 76.5%
------------ ------- ------------ -------
$ 1,042,989 100.0% $ 1,058,525 100.0%
============ ======= ============ =======
The Company's capital structure consists primarily of current maturities of
long-term debt, long-term debt and stockholders' equity. The capital structure
decreased $15.5 million during the first half of 2005 because of a $2.1 million
decrease in total debt resulting primarily from principal payments on mortgage
borrowings in Europe and a $13.4 million decrease in stockholders' equity
primarily because of unfavorable foreign currency translation and the Company's
common stock repurchases.
In 1997, the Company completed a private placement of $75.0 million of unsecured
medium-term notes. The notes bear interest at 6.92% and mature in $15.0 million
annual increments in August 2005 through August 2009. In 1999, the Company
completed a private placement of $44.0 and $17.0 million in unsecured debt. The
notes bear interest at the contractual rates of 7.74% and 7.95%, respectively,
and mature in September 2006 and September 2009, respectively. The agreements
for these notes contain various customary affirmative and negative covenants and
other provisions, including restrictions on the incurrence of debt, maintenance
of maximum leverage ratio and minimum net worth. The Company was in compliance
with these covenants at both June 30, 2005 and the filing date of this Quarterly
Report on Form 10-Q.
-45-
At June 30, 2005, the Company had outstanding $110.0 million of unsecured
subordinated debentures. The debentures are convertible into shares of common
stock, at a conversion price of $18.069 per share, upon the occurrence of
certain events. The conversion price is subject to adjustment in certain
circumstances. Holders may surrender their debentures for conversion into shares
of common stock upon satisfaction of any of the conditions listed in Note 13,
Long-Term Debt and Other Borrowing Arrangements, to the Consolidated Financial
Statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004. At June 30, 2005, one of these conditions--the closing sale
price of the Company's common stock must be at least 110% of the conversion
price for a minimum of 20 days in the 30 trading-day period prior to surrender
- --had been satisfied. As of August 1, 2005, no holders of the debentures have
surrendered their debentures for conversion into shares of the Company's common
stock. Interest of 4.0% is payable semiannually in arrears, on January 15 and
July 15. The debentures mature on July 15, 2023, if not previously redeemed. The
Company may redeem some or all of the debentures on or after July 21, 2008, at a
price equal to 100% of the principal amount of the debentures plus accrued and
unpaid interest up to the redemption date. Holders may require the Company to
purchase all or part of their debentures on July 15, 2008, July 15, 2013, or
July 15, 2018, at a price equal to 100% of the principal amount of the
debentures plus accrued and unpaid interest up to the redemption date, in which
case the purchase price may be paid in cash, shares of the Company's common
stock or a combination of cash and the Company's common stock, at the Company's
option.
The Company entered into a credit agreement with a group of six banks on October
9, 2003 (the CREDIT AGREEMENT). The Credit Agreement provides for a secured,
variable-rate and revolving credit facility not to exceed $75.0 million expiring
in June 2006. In general, a portion of the Company's assets in the United
States, other than real property, secures any borrowing under the Credit
Agreement. The amount of any such borrowing is subject to a borrowing base
comprised of a portion of the Company's receivables and inventories located in
the United States. A fixed charge coverage ratio covenant becomes applicable if
the sum of the Company's excess borrowing availability and unrestricted cash
falls below $25.0 million. There were no outstanding borrowings at June 30, 2005
under the Credit Agreement. The Company had $27.9 million in borrowing capacity
available at June 30, 2005.
At June 30, 2005, the Company had unsecured, uncommitted arrangements with ten
banks under which it could borrow up to $8.7 million at prevailing interest
rates. There were no outstanding borrowings under these arrangements at June 30,
2005.
Borrowings have the following scheduled maturities.
Payments Due by Period
---------------------------------------------------------------------
Less than 1 1-3 3-5 After
June 30, 2005 Total year years years 5 years
- ----------------------------------- ----------- ----------- ------------ ------------- ----------
(in thousands)
Series 1997 medium-term notes $ 75,000 $ 15,000 $ 30,000 $ 30,000 $ --
Series 1999B medium-term notes 44,000 -- 44,000 -- --
Series 1999C medium-term notes 17,000 -- -- 17,000 --
Convertible subordinated debentures 110,000 -- -- -- 110,000
Other borrowings 379 327 52 -- --
----------- ----------- ------------ ------------- ----------
$ 246,379 $ 15,327 $ 74,052 $ 47,000 $ 110,000
=========== =========== ============ ============= ==========
-46-
The Company had the following commercial commitments outstanding at June 30,
2005:
Amount of Commitment Expiration Per Period
---------------------------------------------------------------------
Less than 1 1-3 3-5 After
June 30, 2005 Total year years years 5 years
- ----------------------------------- ----------- ----------- ------------ ------------- ----------
(in thousands)
Available lines of credit $ 27,927 $ -- $ 27,927 $ -- $ --
Standby letters of credit 10,308 10,308 -- -- --
Guarantees 4,806 4,806 -- -- --
Surety bonds 4,551 4,551 -- -- --
----------- ----------- ------------ ------------- ----------
Total commercial commitments $ 47,592 $ 19,665 $ 27,927 $ -- $ --
=========== =========== ============ ============= ==========
Accumulated other comprehensive income (loss) decreased by $30.5 million from
accumulated income of $27.9 million to accumulated loss of $2.6 million
primarily because of the negative effect of currency exchange rates on financial
statement translation. Treasury stock increased by $15.0 million because of
shares purchased in the second quarter of 2005 under the current share
repurchase program and the forfeiture of stock by Incentive Plans participants
in lieu of cash payment of individual tax liabilities related to share-based
compensation. Additional paid-in capital increased by $3.2 million primarily as
the result of the use of common stock held in treasury for the settlement of
stock option exercises. Retained earnings increased $27.4 million primarily
because of net income of $31.8 million and a $0.3 million increase related to
the Merger partially offset by dividends of $4.7 million. Unearned deferred
compensation decreased $1.5 million because of current year amortization.
OFF-BALANCE SHEET ARRANGEMENTS
The Company was not a party to any of the following types of off-balance sheet
arrangements at June 30, 2005:
- Guarantee contracts or indemnification agreements that contingently
require the Company to make payments to the guaranteed or indemnified
party based on changes in an underlying asset, liability or equity
security of the guaranteed or indemnified party;
- Guarantee contracts that contingently require the Company to make payments
to the guaranteed party based on another entity's failure to perform under
an obligating agreement;
- Indirect guarantees under agreements that contingently require the Company
to transfer funds to the guaranteed party upon the occurrence of specified
events under conditions whereby the funds become legally available to
creditors of the guaranteed party and those creditors may enforce the
guaranteed party's claims against the Company under the agreement;
- Retained or contingent interests in assets transferred to an
unconsolidated entity or similar arrangements that serve as credit,
liquidity or market risk support to that entity for such assets;
- Derivative instruments that are indexed to the Company's common or
preferred stock and classified as stockholders' equity under accounting
principles generally accepted in the United States; or
- Material variable interests held by the Company in unconsolidated entities
that provide financing, liquidity, market risk or credit risk support to
the Company, or engage in leasing, hedging or research and development
services with the Company.
-47-
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123(R), Share-Based Payments, which replaces SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 123(R) requires compensation costs relating
to share-based payment transactions be calculated using the fair value method
presented in SFAS No. 123 and recognized in the Consolidated Financial
Statements. The pro forma disclosure previously permitted under SFAS No. 123
will no longer be an acceptable alternative to recognition of expenses in the
Consolidated Financial Statements. The Company currently measures compensation
costs related to share-based payments using the intrinsic value method under APB
No. 25, as allowed by SFAS No. 123, and provides disclosure in the section
entitled "Share-Based Payments" of Note 2, Summary of Significant Accounting
Policies, to the Consolidated Financial Statements as to the effect on operating
results of calculating its stock compensation using the fair value method
presented in SFAS No. 123. The Company is required to adopt SFAS No. 123(R)
starting from the first fiscal quarter of 2006. The Company expects that the
adoption of SFAS No. 123(R) will have an adverse impact on its net income and
income per share. The Company is currently in the process of evaluating the
extent of such impact.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires the
Company to make judgments, assumptions and estimates that affect the amounts
reported in its Consolidated Financial Statements and accompanying notes. The
Company considers the accounting policies described in Critical Accounting
Policies within Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, of its Annual Report on Form 10-K for the
year ended December 31, 2004 to be its most critical accounting policies. An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that reasonably could have
been used, or changes in the accounting estimates that are reasonably likely to
occur periodically, could materially impact the Consolidated Financial
Statements. The Company bases its estimates on historical experience or various
assumptions that are believed to be reasonable under the circumstances, and the
results form the basis for making judgments about the reported values of assets,
liabilities, revenues and expenses. The Company believes these judgments have
been materially accurate in the past and the basis for these judgments should
not change significantly in the future. The Company's senior management has
discussed the development, selection and disclosure of these estimates with the
Audit Committee of the Company's Board of Directors. Actual results may differ
materially from these estimates under different assumptions or conditions.
During the six months ended June 30, 2005:
- The Company did not change any of its existing critical accounting
policies and did not adopt any new critical accounting policies;
- No existing accounting policies became critical accounting policies
because of an increase in the materiality of associated transactions or
changes in the circumstances to which associated judgments and estimates
relate; and
- There were no significant changes in the manner in which critical
accounting policies were applied or in which related judgments and
estimates were developed.
-48-
OUTLOOK
The Company anticipates further moderate improvement in the general economies of
both North America and Europe in 2005. The Company has announced price increases
taking effect during the third quarter of 2005 in most markets and regions and
for most products, and these price increases in aggregate are expected to offset
rising costs of copper and other materials. The Company estimates that its 2005
revenues will increase between 5% and 10% compared with Belden and CDT combined
pro forma revenues for 2004 of $1.24 billion, as presented in Note 3, Business
Combinations, to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004. Pro forma revenue is a financial measure that is not prepared
in accordance with accounting principles generally accepted in the United States
(GAAP). The Company provides information about pro forma revenues because
management believes it supplies meaningful additional information about the
Company's performance and its ability to service its long-term debt and other
fixed obligations and to fund continued growth. Pro forma revenues should be
considered in addition to, but not as a substitute for, actual revenues
recognized in accordance with GAAP.
The Company currently believes that company-wide cost-saving initiatives
launched in connection with the Merger in July 2004 will provide annual net
savings of approximately $35.0 million before tax, and that actions to achieve
such savings will be completed by the end of 2005. These initiatives include
purchase cost savings that were primarily implemented in the second half of
2004, plant closures that were announced in 2004 and have since been completed,
personnel reductions, and manufacturing realignments. Partially offsetting these
improvements will be higher information technology expenses, which are included
in the Company's estimate of net savings. Because of the impact of recently
executed plant closures, other cost savings and increased utilization of its
manufacturing capacity, the Company expects that operating margins will improve.
A major communications customer in Europe, sales to which generated 2004
revenues of $94.6 million, has requested bids from both the Company and several
other suppliers on a supply agreement currently awarded to the Company. While
the Company is aggressively bidding on the supply agreement, there can be no
assurance that it will be successful in retaining some or all of this business.
Should the Company lose some or all of this business, management believes the
Company's operating results and cash flows would be adversely effected. The
Company has not yet determined the impact that the potential loss of this
business might have on its operating results and cash flows. If the Company were
to retain some or all of the business, it would likely be at reduced prices. The
Company will seek opportunities to reduce costs in order to minimize any adverse
effect on operating results and cash flows, but there can be no assurance that
the Company will be successful in these efforts.
The Company anticipates recognizing increased expenses for its pension plans
during 2005. The Company's expenses for these plans during 2004 were $9.7
million. The Company anticipates expenses for these plans of $11.6 million
during 2005. The increase in expense results primarily from full-year inclusion
of the Canadian plans acquired in the Merger and the continuing impact of
investment losses incurred from 2001 through 2003 on the calculation of plan
expenses.
The Company anticipates funding $23.1 million in pension contributions and $2.4
million in contributions for other postretirement benefit plans in 2005. The
Company also anticipates paying off a tranche of its 1997 medium-term notes in
the amount of $15.0 million in August 2005. The Company anticipates it will have
sufficient funds to satisfy these cash requirements.
The Company anticipates that annual dividends in the aggregate of $.20 per
common share ($.05 per common share each quarter) will be paid to all common
stockholders.
-49-
The Company expects to recognize "sales incentive" compensation of up to $3.0
million in 2005 from a customer under a supply contract should the customer fail
to meet purchasing targets. With respect to the customer's obligation for 2005,
the Company received a $1.5 million prepayment in 2002 per the terms of the
contract, which is reflected in accrued liabilities. The 2005 compensation could
be reduced by the gross margin generated from the customer's purchases of
certain products from the Company during 2005.
Management expects that the Company's effective tax rate for continuing
operations in 2005 will be 34.5%. Because of NOL carryforwards, the Company
anticipates that it will not make cash payments of United States income taxes
during 2005. Cash payments of income taxes will occur for some state and local
jurisdictions in the United States and some national jurisdictions outside the
United States.
Management expects that the Company's discontinued operations will generate a
loss of $2.4 million to $3.0 million during 2005, net of tax benefit, and that
this loss will be concentrated mainly in the first half of the year, after which
time the affected plants will have ceased operations and the majority of the
assets will be disposed. The Company anticipates the liquidation of assets of
discontinued operations will generate cash that will largely offset cash
required for severance associated with the discontinuance of these operations.
The Company is engaged in an effort to liquidate its excess real estate in the
United States, Canada and Europe. The Company sold real estate during the first
six months of 2005 for cash proceeds of approximately $26.9 million. In July
2005, the Company sold real estate for cash proceeds of approximately $6.7
million. As of August 1, 2005, the Company has real estate, the sale of which it
estimates will generate cash proceeds of approximately $6.4 million, either
under contract or listed for sale.
Depreciation and amortization for the year 2005 are expected to be $38.0
million. Capital expenditures during 2005 are expected to be between $25.0
million and $30.0 million.
The Company has incurred severance charges having to do with the discontinuation
of certain operations and with other actions intended to reduce costs. The
amount of the charges recognized but not funded as of June 30, 2005 is $11.4
million. Management expects that that all of these charges will be funded by
mid-year 2006, which will have a negative effect on cash flow.
On May 23, 2005, the Board of Directors authorized the Company to repurchase up
to $125.0 million of common stock in the open market. From that date through
August 1, 2005, the Company repurchased approximately 1.2 million shares of its
common stock at an aggregate cost of $25.8 million. Management expects to make
additional purchases throughout the remainder of 2005. This will have a negative
effect on cash flow.
In connection with the Merger, the Company granted retention and integration
awards to certain employees. These awards consist of cash and restricted stock
and are payable in three installments. The first and second installments were
paid to the grantees in the third quarters of 2004 and 2005, respectively. The
third installment will be paid after the second anniversary date of the merger
(July 15, 2006) subject to certain conditions with respect to the grantees'
continued employment with the Company. The Company is accruing the expense for
the third installment monthly, having begun with August 2004 and expecting to
end with July 2006. Management anticipates that the amount of the expense will
be slightly less than $0.9 million annually. The cash expenditure in July 2005
was approximately $1.1 million. The cash expenditure in July 2006 is also
expected to be approximately $1.1 million.
-50-
The Company's outlook for the third and fourth quarters of 2005 is that revenues
will range from $340.0 million to $345.0 million each quarter and operating
margin for each quarter will range from 9.0% to 9.5% of revenues.
FORWARD-LOOKING STATEMENTS
The statements set forth in this report other than historical facts, including
those noted in the "Outlook" section, are forward-looking statements made in
reliance upon the safe harbor of the Private Securities Litigation Reform Act of
1995. As such, they are based on current expectations, estimates, forecasts and
projections about the industries in which the Company operates, general economic
conditions, and management's beliefs and assumptions. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions, which are difficult to predict. As a result, the Company's actual
results may differ materially from what is expected or forecasted in such
forward-looking statements. The Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise, and disclaims any obligation to do so.
The Company's actual results may differ materially from such forward-looking
statements for the following reasons:
- Changing economic conditions in the United States, Europe and parts of
Asia (and the impact such conditions may have on the Company's sales);
- The level of business spending in the United States, Canada, Europe, and
other markets on information technology and the building or reconfiguring
of network infrastructure;
- Increasing price, product and service competition from United States and
international competitors, including new entrants;
- The creditworthiness of the Company's customers;
- The Company's continued ability to introduce, manufacture and deploy
competitive new products and services on a timely, cost-effective basis;
- The ability to successfully restructure the Company's operations;
- The Company's ability to recruit a successor Chief Executive Officer;
- The ability to transfer production among the Company's facilities;
- The Company's abilities to integrate the operations of Belden and CDT and
to achieve the expected synergies and cost savings;
- Developments in technology;
- The threat of displacement from competing technologies (including wireless
and fiber optic technologies);
- Demand and acceptance of the Company's products by customers and end
users;
- Changes in raw material costs (specifically, costs for copper, Teflon
FEP(R) and commodities derived from petroleum and natural gas) and
availability;
- Changes in foreign currency exchange rates;
- The pricing of the Company's products (including the Company's ability to
adjust product pricing in a timely manner in response to raw material cost
volatility);
- The success of implementing cost-saving programs and initiatives;
- Reliance on large distributor customers and the reliance of the Networking
segment on sales to large telecommunications customers in Europe;
- The threat of war and terrorist activities;
- General industry and market conditions and growth rates; and
- Other factors noted in this report and other Securities Exchange Act of
1934 filings of the Company.
-51-
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risks relating to the Company's operations result primarily from interest
rates, foreign exchange rates, certain commodity prices and concentrations of
credit. The Company manages its exposure to these and other market risks through
regular operating and financing activities and, on a limited basis, through the
use of derivative financial instruments. The Company intends to use such
derivative financial instruments as risk management tools and not for
speculative investment purposes. Item 7A, Quantitative and Qualitative
Disclosures About Market Risks, of the Company's Annual Report on Form 10-K for
the year ended December 31, 2004 provides more information as to the types of
practices and instruments used to manage risk. There was no material change in
the Company's exposure to market risks since December 31, 2004.
ITEM 4: CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934). Based on this evaluation, the principal
executive officer and principal financial officer concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this report.
There was no change in the Company's internal control over financial reporting
during the Company's most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
As described in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004, the business operations of CDT acquired in 2004 were excluded
from the Company's evaluation of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004.
-52-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings and administrative actions
that are incidental to its operations. These proceedings include personal injury
cases (about 146 of which the Company was aware at August 1, 2005) in which the
Company is one of many defendants, 7 of which are scheduled for trial during
2005.
Electricians have filed a majority of these cases, primarily in New Jersey and
Pennsylvania. Plaintiffs in these cases generally seek compensatory, special and
punitive damages. As of August 1, 2005, in 21 of these cases, plaintiffs
generally allege only damages in excess of some dollar amount (i.e., in one
case, not less than $15 thousand, in another case, in excess of $50 thousand and
in the other cases, in excess of $50 thousand in compensatory damages and $50
thousand in punitive damages). In 120 of these cases, plaintiffs generally do
not allege a specific damage demand. As to the other five cases, the plaintiffs
generally allege monetary damages for a specified amount, the largest amount
claimed being $15 million compensatory and $10 million punitive damages (which
has been asserted in two of these cases). In none of these cases do plaintiffs
allege claims for specific dollar amounts as to any defendant. Based on the
Company's experience in such litigation, the amounts pleaded in the complaints
are not typically meaningful as an indicator of the Company's ultimate
liability.
Typically in these cases, the claimant alleges injury from alleged exposure to
heat-resistant asbestos fiber, which was usually encapsulated or embedded and
lacquer-coated or covered by another material. Exposure to the fiber would have
occurred, if at all, while stripping (cutting) the wire or cable that had such
fiber. It is alleged by claimants that exposure to the fiber may result in
respiratory illness. Generally, stripping was done to repair or to attach a
connector to the wire or cable. Alleged predecessors of the Company had a small
number of products that contained the fiber, but ceased production of such
products more than fifteen years ago.
Through August 1, 2005, the Company had been dismissed (or had reached agreement
to be dismissed) in approximately 142 similar cases without any going to trial
or any payment to the claimant. Some of these cases were dismissed without
prejudice primarily because the claimants could not show any injury, or could
not show that injury was caused from exposure to products of alleged
predecessors of the Company. Only two cases have involved a settlement, with
three of the Company's insurers paying most or all of the settlement amounts.
The Company has insurance that it believes should cover a significant portion of
any defense, settlement or judgment costs borne by the Company in these types of
cases.
The Company vigorously defends these cases. As a separate matter, liability for
any such injury generally should be allocated among all defendants in such cases
in accordance with applicable law. From 1996 through August 1, 2005, the total
amount of litigation costs paid by the Company for all cases of this nature was
approximately $154 thousand. In the opinion of the Company's management, the
proceedings and actions in which the Company is involved should not,
individually or in the aggregate, have a material adverse effect on the
Company's results of operations, cash flows or financial condition.
-53-
ITEM 2: ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Approximate Dollar
Shares Purchased as Value of Shares that
Part of Publicly May Yet Be Purchased
Total Number of Average Price Paid Announced Plans or Under the Plans or
Period Shares Purchased per Share Programs (1) Programs
- -------------- ---------------- ------------------ ------------------- --------------------
April 1, 2005
through
April 30, 2005 -- -- -- --
---------------- ------------------ ------------------- --------------------
May 1, 2005
through
May 31, 2005 -- -- -- --
---------------- ------------------ ------------------- --------------------
June 1, 2005
through
June 30, 2005 713,300 $ 20.54 713,300 $ 110,349,000
---------------- ------------------ ------------------- --------------------
Total 713,300 $ 20.54 713,300 $ 110,349,000
================ ================== =================== ====================
(1) On May 23, 2005, the Board of Directors authorized the Company to
repurchase up to $125.0 million of common stock in the open market. The
program was announced via news release on May 23, 2005.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 17, 2005, the Company held its regular Annual Meeting of Stockholders.
The stockholders considered two proposals. Each proposal was approved.
Proposal 1:
Election of ten directors for a one-year term:
Director Shares Voted For Shares Withheld
- --------------------- ---------------- ---------------
Lorne D. Bain 42,182,257 2,603,629
Lance C. Balk 24,503,592 20,282,294
Christopher I. Byrnes 42,758,044 2,027,842
Bryan C. Cressey 42,371,202 2,414,684
C. Baker Cunningham 42,372,207 2,413,679
Michael F.O. Harris 42,180,291 2,605,595
Glenn Kalnasy 42,130,022 2,655,864
Ferdinand C. Kuznik 42,363,587 2,422,299
John M. Monter 42,758,404 2,027,482
Bernard G. Rethore 41,551,703 3,234,183
Proposal 2:
Approve an additional 2,500,000 shares for the Company's 2001 Long-Term
Performance Incentive Plan
The voting on this proposal was as follows: for 35,208,849; against 6,618,209;
and abstentions of 839,813.
-54-
ITEM 5. OTHER INFORMATION
Our independent auditor, Ernst & Young LLP (E&Y), recently notified the
Securities and Exchange Commission (SEC), the Public Company Accounting
Oversight Board and the Audit Committee of our Board of Directors that certain
non-audit services E&Y performed in Canada for a large number of public
companies, including Belden CDT, were thought to have raised questions regarding
E&Y's independence in its performance of audit services.
With respect to Belden CDT, an affiliate law firm of E&Y in Canada provided
assistance to a Company employee for her to relinquish her United States
permanent resident status for personal reasons unrelated to her employment. Such
service is not permitted under SEC auditor independence rules. None of the E&Y
personnel in Canada who provided these services were involved with attest
services E&Y provided to the Company as part of its audit and the amount of fees
paid to E&Y ($900) were de minimis.
The Audit Committee and E&Y have considered the impact that these services may
have had on E&Y's independence with respect to the Company and have concluded
that there has been no impairment of E&Y's independence. In making this
determination, the Audit Committee considered the de minimis amount of funds
involved, the administrative nature of the actions, and that the E&Y affiliates
involved performed no audit services related to the Company.
-55-
ITEM 6: EXHIBITS
Exhibits
Exhibit 10.1 Belden CDT Inc. Terms and Conditions--Stock Option Grant
Exhibit 10.2 Amendment to Change of Control Employment Agreement dated as
of May 17, 2005 between Belden Inc. (assumed by Belden CDT
Inc.) and C. Baker Cunningham.
Exhibit 10.3 Amendment to Retention Award Letter Agreement dated May 17,
2005 between Belden Inc. (assumed by Belden CDT Inc.) and C.
Baker Cunningham.
Exhibit 10.4 Amendment to Letter Agreement dated May 17, 2005 between
Belden Inc. (assumed by Belden CDT Inc.) and Richard K. Reece.
Exhibit 10.5 Amendment to Retention Award Letter Agreement dated May 17,
2005 between Belden Inc. (assumed by Belden CDT Inc.) and
Richard K. Reece.
Exhibit 31.1 Certificate of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certificate of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certificate of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certificate of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-56-
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.
BELDEN CDT INC.
Date: August 8, 2005 By: /s/ C. Baker Cunningham
-----------------------------------
C. Baker Cunningham
President and Chief Executive Officer
Date: August 8, 2005 By: /s/ Richard K. Reece
-----------------------------------
Richard K. Reece
Vice President, Finance and
Chief Financial Officer
(Mr. Reece is also the Company's
Chief Accounting Officer)
-57-