================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q --------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 COMMISSION FILE NO. 001-12561 --------------- BELDEN CDT INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- 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 --------------- 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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] 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 NOVEMBER 1, 2005 ----- ------------------------------- Common Stock, $0.01 Par Value 43,335,863 ================================================================================ Exhibit Index on Page 59 Page 1 of 59 -1- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BELDEN CDT INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ (IN THOUSANDS) UNAUDITED ASSETS Current assets Cash and cash equivalents $ 177,915 $ 188,798 Receivables 218,511 174,554 Inventories 241,908 227,034 Deferred income taxes 16,190 15,911 Other current assets 5,209 8,883 Current assets of discontinued operations 12,972 34,138 ------------- ------------ Total current assets 672,705 649,318 Property, plant and equipment, less accumulated depreciation 319,141 338,247 Goodwill, less accumulated amortization 275,573 286,163 Other intangibles, less accumulated amortization 73,530 78,266 Other long-lived assets 5,863 6,460 Long-lived assets of discontinued operations 12,692 36,984 ------------- ------------ $ 1,359,504 $ 1,395,438 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities $ 213,047 $ 185,035 Accrued income taxes 6,467 -- Current maturities of long-term debt 59,052 15,702 Current liabilities of discontinued operations 8,955 17,534 ------------- ------------ Total current liabilities 287,521 218,271 Long-term debt 172,052 232,823 Postretirement benefits other than pensions 32,671 30,089 Deferred income taxes 73,710 68,158 Other long-term liabilities 15,234 25,340 Long-term liabilities of discontinued operations 1,715 1,516 Minority interest 8,384 9,241 Stockholders' equity Common stock 503 502 Additional paid-in capital 535,981 531,984 Retained earnings 283,322 252,114 Accumulated other comprehensive income 1,266 27,862 Unearned deferred compensation (613) (2,462) Treasury stock (52,242) -- ------------- ------------ Total stockholders' equity 768,217 810,000 ------------- ------------ $ 1,359,504 $ 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 Nine Months Ended September 30, September 30, ------------------------- ------------------------- (in thousands, except per share data) 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Revenues $ 342,389 $ 281,454 $ 989,201 $ 635,864 Cost of sales (266,044) (228,243) (772,511) (514,450) ---------- ---------- ---------- ---------- Gross profit 76,345 53,211 216,690 121,414 Selling, general and administrative expenses (48,722) (47,527) (154,132) (96,985) Asset impairment (12,849) (8,871) (12,849) (8,871) ---------- ---------- ---------- ---------- Operating income (loss) 14,774 (3,187) 49,709 15,558 Interest expense, net (2,198) (3,537) (7,682) (9,870) Minority interest (215) (225) (551) (225) Other nonoperating income -- -- -- 1,732 ---------- ---------- ---------- ---------- Income (loss) from continuing operations before taxes 12,361 (6,949) 41,476 7,195 Income tax benefit (expense) (6,283) 3,748 (16,328) (438) ---------- ---------- ---------- ---------- Income (loss) from continuing operations 6,078 (3,201) 25,148 6,757 Loss from discontinued operations, net of tax benefit of $49, $1,489, $1,330 and $5,606, respectively (13) (2,809) (2,438) (10,128) Gain (loss) on disposal of discontinued operations, net of tax benefit (expense) of $860, $(8,529) and $(839), respectively -- (1,529) 15,163 1,491 ---------- ---------- ---------- ---------- Net income (loss) $ 6,065 $ (7,539) $ 37,873 $ (1,880) ========== ========== ========== ========== Weighted average number of common shares and equivalents: Basic 45,540 42,517 46,518 31,266 Diluted 52,213 42,517 53,167 31,643 ========== ========== ========== ========== Basic income (loss) per share: Continuing operations $ .13 $ (.08) $ .54 $ .21 Discontinued operations -- (.07) (.05) (.32) Disposal of discontinued operations -- (.03) .32 .05 Net income (loss) .13 (.18) .81 (.06) ========== ========== ========== ========== Diluted income (loss) per share: Continuing operations $ .13 $ (.08) $ .51 $ .21 Discontinued operations -- (.07) (.05) (.32) Disposal of discontinued operations -- (.03) .29 .05 Net income (loss) .13 (.18) .75 (.06) ========== ========== ========== ========== Dividends declared per share $ .05 $ .05 $ .15 $ .15 ========== ========== ========== ========== The accompanying notes are an integral part of these Consolidated Financial Statements -3- BELDEN CDT INC. AND SUBSIDIARIES CONSOLIDATED CASH FLOW STATEMENTS (UNAUDITED) Nine Months Ended September 30, (in thousands) 2005 2004 --------- ---------- Cash flows from operating activities: Net income (loss) $ 37,873 $ (1,880) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 27,742 21,663 Asset impairment charges 12,849 8,871 Deferred income tax expense 5,273 6,294 Stock-based compensation 2,535 2,319 Retirement savings plan contributions -- 2,279 Gain on disposal of tangible assets (23,692) (4,363) Changes in operating assets and liabilities, net of the effects of foreign currency exchange rate changes and acquired businesses: Receivables (39,442) (1,430) Inventories (16,326) (8,355) Accounts payable and accrued liabilities 9,954 (2,316) Current income taxes, net 16,095 (27,972) Other assets and liabilities, net 7,709 1,194 --------- ---------- Net cash provided by (used for) operating activities 40,570 (3,696) Cash flows from investing activities: Proceeds from disposal of tangible assets 42,548 82,638 Capital expenditures (19,270) (5,289) --------- ---------- Net cash provided by investing activities 23,278 77,349 Cash flows from financing activities: Share repurchase program payments (51,658) -- Payments on borrowing arrangements (17,230) (64,211) Cash dividends paid (6,979) (4,931) Proceeds from exercise of stock options 2,926 1,982 --------- ---------- Net cash used for financing activities (72,941) (67,160) Effect of foreign currency exchange rate changes on cash and cash equivalents (1,790) 94 --------- ---------- Increase (decrease) in cash and cash equivalents (10,883) 6,587 Cash received from merger -- 50,906 Cash and cash equivalents, beginning of period 188,798 94,955 --------- ---------- Cash and cash equivalents, end of period $ 177,915 $ 152,488 ========= ========== Supplemental cash flow information: Income tax refunds received $ 6,836 $ 1,068 Income taxes paid (6,241) (3,030) Interest paid, net of amount capitalized (14,738) (15,147) ========= ========== The accompanying notes are an integral part of these Consolidated Financial Statements -4- BELDEN CDT INC. AND SUBSIDIARIES CONSOLIDATED STOCKHOLDERS' EQUITY STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) Accumulated Additional Unearned Other Common Paid-In Retained Treasury Deferred Comprehensive (in thousands) Stock Capital Earnings Stock Compensation Income Total ------ ---------- -------- -------- ------------ ------------- --------- Balance at December 31, 2003 $ 262 $ 39,022 $244,217 $ (7,722) $ (1,700) $ 7,461 $ 281,540 Net loss (1,880) (1,880) Foreign currency translation 9,478 9,478 Minimum pension liability 12 12 ------ ---------- -------- -------- ------------ ------------- --------- Comprehensive income 7,610 Exercise of stock options 1 1,860 121 1,982 Stock compensation 1,811 1,437 (3,881) (633) Retirement savings plan contributions 477 1,802 2,279 Stock purchase plans settlements 184 54 238 Forfeiture of stock by Incentive Plans participants in lieu of cash payment of individual tax liabilities related to share-based compensation (277) (277) Amortization of unearned 2,991 2,991 deferred compensation Cash dividends ($.15 per share) (4,931) (4,931) Merger between Belden and CDT 234 439,987 4,585 (526) 444,280 ------ ---------- -------- -------- ------------ ------------- --------- Balance at September 30, 2004 $ 497 $ 483,341 $237,406 $ -- $ (3,116) $ 16,951 $ 735,079 ====== ========== ======== ======== ============ ============= ========= Balance at December 31, 2004 $ 502 $ 531,984 $252,114 $ -- $ (2,462) $ 27,862 $ 810,000 Net income 37,873 37,873 Foreign currency translation (26,835) (26,835) Minimum pension liability 239 239 ------ ---------- -------- -------- ------------ ------------- --------- Comprehensive income 11,277 Exercise of stock options 1 2,925 (87) 2,839 Stock compensation 686 686 Forfeiture of stock by Incentive Plans participants in lieu of cash payment of individual tax liabilities related to share-based compensation (497) (497) Share repurchase program (51,658) (51,658) Amortization of unearned deferred compensation 1,849 1,849 Cash dividends ($.15 per share) (6,979) (6,979) Merger between Belden and CDT 386 314 700 ====== ========== ======== ======== ============ ============= ========= Balance at September 30, 2005 $ 503 $ 535,981 $283,322 $(52,242) $ (613) $ 1,266 $ 768,217 ====== ========== ======== ======== ============ ============= ========= 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 monthly exchange rates. Resulting translation adjustments, as well as gains and losses from certain affiliate transactions, are reported in accumulated other comprehensive income, 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 nine-month periods ended September 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 nine-month periods ended September 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 nine-month periods ended September 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. 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 Nine Months Ended September 30, September 30, ---------------------- ----------------------- (in thousands, except per share amounts) 2005 2004 2005 2004 ------- -------- -------- -------- AS REPORTED Stock-based employee compensation cost, net of tax $ (650) $ (2,189) $ (1,560) $ (2,627) Net income (loss) 6,065 (7,539) 37,873 (1,880) Basic net income (loss) per share .13 (.18) .81 (.06) Diluted net income (loss) per share .13 (.18) .75 (.06) PRO FORMA Stock-based employee compensation cost, net of tax $ (448) $ (4,170) $ (1,528) $ (5,013) Net income (loss) 6,267 (9,520) 37,905 (4,266) Basic net income (loss) per share .14 (.22) .81 (.14) Diluted net income (loss) per share .13 (.22) .75 (.14) ======= ======== ======== ======== 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. The Company did not grant options during the three months ended September 30, 2005. For the nine months ended September 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 are presented in the following table. For the three- and nine-month periods ended September 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 are also presented in the following table. Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2005 2004 2005 2004 ------ ------- ------- ------ Fair value of options granted, per share -- $ 5.42 $ 4.78 $ 4.74 ------ ------- ------- ------ Dividend yield -- 5.85% 6.45% 6.31% Expected volatility -- 39.46% 38.41% 39.53% Expected life (in years) -- 6.00 7.00 6.31 Risk free interest rate -- 3.90% 4.29% 3.79% ====== ======= ======= ====== 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 third quarter of 2005, the Company recognized stock option compensation expense of approximately $0.5 million. 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 Nine Months Ended September 30, September 30 ------------------------ -------------------------- (in thousands) 2005 2004 2005 2004 ------- -------- --------- --------- Handling costs $ 1,585 $ 1,726 $ 4,955 $ 5,266 ======= ======== ========= ========= Interest Expense The Company presents interest expense net of capitalized interest costs and interest income earned on cash equivalents. Three Months Ended Nine Months Ended September 30, September 30 ------------------------ -------------------------- (in thousands) 2005 2004 2005 2004 -------- -------- --------- --------- Gross interest expense $ (3,639) $ (4,143) $ (11,335) $ (10,904) Capitalized interest costs 29 8 54 22 Interest income earned on cash equivalents 1,412 598 3,599 1,012 -------- -------- --------- --------- Net interest expense $ (2,198) $ (3,537) $ (7,682) $ (9,870) ======== ======== ========= ========= -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) in 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 decreased 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 nine-month periods ended September 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 Nine Months Ended September 30, 2004 September 30, 2004 ------------------ ------------------ (in thousands, except per share data) Pro forma Pro forma Revenues $ 303,779 $ 910,919 Income (loss) from continuing operations (2,999) 11,114 Net income (loss) (7,540) 556 Diluted income (loss) per share: Continuing operations $ (.07) $ .25 Net income (loss) (.18) .05 =========== =========== 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 Three Months Ended September 30, 2005 Continuing Net Income (in thousands, except per share data) Operations Net Income per Share ----------- ---------- ---------- Business restructuring expense and severance charges $ (12,075) $ (12,075) $ (.23) Executive succession charges (625) (625) (.01) Merger-related retention awards and other compensation (267) (267) (.01) Merger-related plant closings and other restructuring actions (224) (224) -- Nonrecurring tax adjustments 861 861 .02 =========== ========== ========== Income from Diluted Continuing Net Income Nine Months Ended September 30, 2005 Operations Net Income per Share (in thousands, except per share data) ----------- ---------- ---------- Business restructuring expense and severance charges $ (12,692) $ (12,783) $ (.24) Executive succession charges (4,013) (4,013) (.08) Merger-related plant closings and other restructuring actions (1,039) (1,039) (.02) Merger-related retention awards and other compensation (997) (997) (.02) Impact of short-lived intangibles purchase adjustments (250) (250) -- Nonrecurring tax adjustments 861 861 .02 =========== ========== ========== 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 nine-month periods ended September 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 manufactured 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 recorded the disposition of the Skelmersdale facility and recognized the receipt of the $5.4 million cash during 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, manufactured and marketed coaxial and twisted-pair cable products principally for the telecommunications industry. Montrose had 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, recorded the disposition of the Auburn facility, and recognized the receipt of the $2.4 million cash during the second quarter of 2005. 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, recorded the disposition of the Barberton facility, and recognized the receipt of the $1.5 million cash during the first quarter of 2005. Admiral, which was an unincorporated operating division of the Company, manufactured precision tire castings and was not considered a core business of the Company. -13- 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. Results from discontinued operations include the following revenues and income (loss) before taxes: Three Months Ended Nine Months Ended September 30, September 30, REVENUES ----------------------- ------------------------- (in thousands) 2005 2004 2005 2004 ------- -------- -------- --------- BCC -- Phoenix $ -- $ 419 $ -- $ 93,557 Raydex -- Skelmersdale -- 5,716 137 5,716 ------- -------- -------- --------- Networking Segment -- 6,135 137 99,273 ------- -------- -------- --------- Montrose 7 3,702 2,196 3,702 Admiral -- 662 -- 662 ------- -------- -------- --------- Electronics Segment 7 4,364 2,196 4,364 ------- -------- -------- --------- Total $ 7 $ 10,499 $ 2,333 $ 103,637 ======= ======== ======== ========= Three Months Ended Nine Months Ended September 30, September 30, INCOME (LOSS) BEFORE TAXES ----------------------- ------------------------- (in thousands) 2005 2004 2005 2004 ------- -------- -------- --------- BCC -- Phoenix $ (67) $ (3,390) $ (1,505) $ (14,826) Raydex -- Skelmersdale -- (966) (1,438) (966) ------- -------- -------- --------- Networking Segment (67) (4,356) (2,943) (15,792) ------- -------- -------- --------- Montrose 5 168 (793) 168 Admiral -- (109) (32) (109) ------- -------- -------- --------- Electronics Segment 5 59 (825) 59 ------- -------- -------- --------- Total $ (62) $ (4,297) $ (3,768) $ (15,733) ======= ======== ======== ========= Listed below are the major classes of assets and liabilities belonging to the discontinued operations of the Company at September 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 $ 8,393 $ -- $ -- $ -- $ 8,393 Other current assets 2,419 133 2,014 13 4,579 ------- ------------ -------- -------- -------- Total current assets $10,812 $ 133 $ 2,014 $ 13 $ 12,972 ------- ------------ -------- -------- -------- Total long-lived assets $11,272 $ -- $ 1,420 $ -- $ 12,692 ------- ------------ -------- -------- -------- Liabilities: Accounts payable and accrued liabilities $ 718 $ -- $ 245 $ -- $ 963 Other current liabilities 7,992 -- -- -- 7,992 ------- ------------ -------- -------- -------- Total current liabilities $ 8,710 $ -- $ 245 $ -- $ 8,955 ------- ------------ -------- -------- -------- Total long-term liabilities $ 1,715 $ -- $ -- $ -- $ 1,715 ======= ============ ======== ======== ======== -14- NOTE 5: SHARE INFORMATION Common Treasury (number of shares in thousands) Stock Stock ------ -------- Balance at December 31, 2003 26,204 (547) Merger between Belden and CDT 23,380 (3,414) Issuance of stock: Exercise of stock options 90 31 Stock compensation -- 519 Employee stock purchase plan settlement 12 4 Retirement savings plan contributions -- 118 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 September 30, 2004 49,686 (3,302) ====== ======== Balance at December 31, 2004 50,211 (3,009) ISSUANCE OF STOCK: EXERCISE OF STOCK OPTIONS 122 49 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 -- (24) SHARE REPURCHASE PROGRAM -- (2,473) ------ -------- BALANCE AT SEPTEMBER 30, 2005 50,333 (5,447) ====== ======== 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 September 30, 2005, the Company repurchased approximately 2.5 million shares of its common stock at an aggregate cost of $51.7 million. From October 1, 2005 through November 1, 2005, the Company repurchased an additional 1.4 million shares of its common stock at an aggregate cost of $26.6 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 Nine Months Ended September 30, September 30, --------------------- --------------------- (in thousands, except per share amounts) 2005 2004 2005 2004 ------- -------- ------- -------- Numerator for basic income (loss) per share: Income (loss) from continuing operations $ 6,078 $ (3,201) $25,148 $ 6,757 Loss from discontinued operations (13) (2,809) (2,438) (10,128) Gain (loss) on disposal of discontinued operations -- (1,529) 15,163 1,491 ------- -------- ------- -------- Net income (loss) $ 6,065 $ (7,539) $37,873 $ (1,880) ======= ======== ======= ======== Numerator for diluted income (loss) per share: Income (loss) from continuing operations $ 6,078 $ (3,201) $25,148 $ 6,757 Tax-effected interest expense on convertible subordinated debentures 678 -- 2,033 -- ------- -------- ------- -------- Adjusted income (loss) from continuing operations 6,756 (3,201) 27,181 6,757 Loss from discontinued operations (13) (2,809) (2,438) (10,128) Gain (loss) on disposal of discontinued operations -- (1,529) 15,163 1,491 ------- -------- ------- -------- Adjusted net income (loss) $ 6,743 $ (7,539) $39,906 $ (1,880) ======= ======== ======= ======== Denominator: Denominator for basic income (loss) per share -- weighted average shares 45,540 42,517 46,518 31,266 Effect of dilutive common stock equivalents 6,673 -- 6,649 377 ------- -------- ------- -------- Denominator for diluted income (loss) per share -- adjusted weighted average shares 52,213 42,517 53,167 31,643 ======= ======== ======= ======== Basic income (loss) per share: Continuing operations $ .13 $ (.08) $ .54 $ .21 Discontinued operations -- (.07) (.05) (.32) Disposal of discontinued operations -- (.03) .32 .05 Net income (loss) .13 (.18) .81 (.06) ======= ======== ======= ======== Diluted income (loss) per share: Continuing operations $ .13 $ (.08) $ .51 $ .21 Discontinued operations -- (.07) (.05) (.32) Disposal of discontinued operations -- (.03) .29 .05 Net income (loss) .13 (.18) .75 (.06) ======= ======== ======= ======== For the three months ended September 30, 2005 and the nine months ended September 30, 2005 and 2004, the Company did not include 2.5 million, 2.5 million and 3.3 million outstanding stock options, respectively, in the 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 three months ended September 30, 2004, the Company did not include any of its outstanding stock equivalents in the development of the denominator used in the dilutive loss per share computation because of the Company's loss from continuing operations for that period. The Company repurchased 1.4 million shares of its common stock in the open market between October 1, 2005 and November 1, 2005. Had the Company purchased these shares prior to September 30, 2005, the denominators used for the calculation of basic income per share and diluted income per share would have been approximately 45.1 million and 51.8 million, respectively, for the three months ended September 30, 2005 and 46.2 million and 52.9 million, respectively, for the nine months ended September 30, 2005. -16- On October 31, 2005, John S. Stroup joined the Company as President, Chief Executive Officer and Director. On that date, the Company granted to Mr. Stroup approximately 450 thousand stock options and 150 thousand restricted stock unit awards. Had the Company granted these options and awards prior to September 30, 2005, the denominators used for the calculation of diluted income (loss) per share would have increased by less than 0.1 million shares for both the three- and nine-month periods ended September 30, 2005. NOTE 7: COMPREHENSIVE INCOME Comprehensive income consists of two components -- net income (loss) and other comprehensive income. Other comprehensive income 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 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 were as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------------- -------------------- (in thousands) 2005 2004 2005 2004 ------- -------- ------- -------- Net income (loss) $ 6,065 $ (7,539) $37,873 $ (1,880) Adjustments to foreign currency translation component of equity 3,810 9,149 (26,835) 9,479 Adjustments to minimum pension liability 36 (5) 239 12 ------- -------- ------- -------- Comprehensive income $ 9,911 $ 1,605 $11,277 $ 7,611 ======= ======== ======= ======== The components of accumulated other comprehensive income were as follows: SEPTEMBER 30, December 31, (in thousands) 2005 2004 ------------- ------------ Foreign currency translation component of equity $ 18,931 $ 45,766 Minimum pension liability, net of deferred tax benefit of $10,366 at September 30, 2005 and $10,421 at December 31, 2004 (17,665) (17,904) ------------- ------------ Accumulated other comprehensive income $ 1,266 $ 27,862 ============= ============ -17- NOTE 8: INVENTORIES The major classes of inventories were as follows: SEPTEMBER 30, December 31, (in thousands) 2005 2004 ------------- ------------ Raw materials $ 61,405 $ 55,229 Work-in-process 46,187 38,921 Finished goods 147,672 151,753 Perishable tooling and supplies 3,775 3,822 ------------- ------------ Gross inventories 259,039 249,725 Obsolescence and other reserves (17,131) (22,691) ------------- ------------ Net inventories $ 241,908 $ 227,034 ============= ============ 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: SEPTEMBER 30, December 31, (in thousands) 2005 2004 ------------- ------------ Land and land improvements $ 29,378 $ 33,089 Buildings and leasehold improvements 136,408 139,990 Machinery and equipment 423,755 442,078 Construction in process 21,915 10,071 --------- --------- Gross property, plant and equipment 611,456 625,228 Accumulated depreciation (292,315) (286,981) --------- --------- Net property, plant and equipment $ 319,141 $ 338,247 ========= ========= Disposals In July 2005, the Company sold a parcel of its former Villingen, Germany manufacturing facility for $1.5 million cash. The parcel was sold at net book value. 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, recorded the disposition of the Fort Lauderdale facility, and recognized the receipt of the $1.4 million cash during the first quarter of 2005. -18- 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. Impairment In the second quarter of 2005, a major communications customer in the United Kingdom, sales to which generated 2004 revenues of $94.6 million, requested bids from both the Company and several other suppliers on a supply agreement currently awarded to the Company. This business provided reasonably satisfactory profit contribution in the past, but the Company viewed the communications cable market as extremely mature, with falling demand, excess capacity, and continuing price pressure. For this reason, on September 29, 2005, the Company announced its decision to exit the United Kingdom communications cable business. The Company viewed this decision as an indicator the aggregate carrying amount of the long-lived assets at certain European manufacturing facilities might no longer be recoverable. The Company estimated the future undiscounted cash flows expected in connection with certain assets recognized in the financial records of these facilities and compared such future cash flows to the aggregate carrying amount of these assets. The Company determined that the carrying amount of these assets was not recoverable. The Company reduced the carrying amount of these assets by $3.3 million to their estimated fair value as determined by discounting their estimated future cash flows. The factors used to determine estimated fair value included, but were not limited to, operating cash flows anticipated during the remaining useful lives of these assets, estimated market values for certain assets, and a discount rate commensurate with the risk-free interest rate reflective of the useful life remaining for these assets. This $3.3 million impairment loss was reflected in operating expense during the third quarter of 2005. On September 29, 2005, the Company announced its decision to restructure its European operations in an effort to reduce manufacturing floor space and overhead. The Company viewed this decision as an indicator the aggregate carrying amount of the long-lived assets at certain European manufacturing facilities to be affected by the restructuring might no longer be recoverable. The Company estimated the future undiscounted cash flows expected in connection with certain assets recognized in the financial records of these facilities and compared such future cash flows to the aggregate carrying amount of these assets. The Company determined that the carrying amount of these assets and liabilities was recoverable and, accordingly, no impairment loss was recognized in the third quarter of 2005. Losses may be incurred in the future as individual assets are disposed of during both the Company's exit from the United Kingdom communications cable business and the European restructuring. -19- NOTE 10: INTANGIBLE ASSETS The carrying values of intangible assets were as follows: SEPTEMBER 30, December 31, 2005 2004 ------------ ------------ (in thousands) Customer relations $ 54,774 $ 55,702 Developed technologies 6,241 6,558 Favorable contracts 1,094 1,094 Backlog 1,997 2,357 ---------- ---------- Gross amortizable intangible assets 64,106 65,711 Accumulated amortization (5,610) (3,093) ---------- ---------- Net amortizable intangible assets 58,496 62,618 Trademarks, net of accumulated amortization of $315 at September 30, 2005 and $341 at December 31, 2004 15,034 15,648 Goodwill, net of accumulated amortization of $12,143 at September 30, 2005 and $12,640 at December 31, 2004 275,573 286,163 ---------- ---------- Net intangible assets $ 349,103 $ 364,429 ========== ========== Impairment On September 29, 2005, the Company announced its decision to exit the United Kingdom communications cable business and to restructure its European operations in an effort to reduce manufacturing floor space and overhead and streamline administrative processes. The Company viewed this decision as an indicator the carrying amounts of its two European reporting units might no longer be recoverable. The Company estimated the future discounted cash flows of the Europe Specialty/Electronics reporting unit and compared such future cash flows to the carrying amount of the Europe Specialty/Electronics reporting unit. The Company determined that the carrying amount of the Europe Specialty/Electronics reporting unit was fully recoverable. The Company also estimated the future discounted cash flows of the Europe Communications/Networks reporting unit and compared such future cash flows to the carrying amount of the Europe Communications/Networks reporting unit. The Company determined that the carrying amount of the Europe Communications/Networks reporting unit was not recoverable. The Company reduced the carrying amount of goodwill recognized in the financial records of the Europe Communications/Networks reporting unit by $7.1 million and reduced the carrying amount of goodwill recognized in the Finance & Administration (F&A) financial records (which the Company allocated to the Europe Communications/Networks reporting unit for the purpose of impairment testing) by $2.4 million to their respective implied fair values. The factors used to determine the implied fair values included, but were not limited to, operating cash flows anticipated during the remaining life of the Europe Communications/Networks reporting unit and a discount rate commensurate with the Company's weighted average cost of capital reflective of the remaining life for the Europe Communications/Networks reporting unit. These impairment losses were reflected in operating expense during the third quarter of 2005. -20- Segment Allocation The Electronics segment reported goodwill, net of accumulated amortization, at September 30, 2005 in the amount of $128.5 million. There was no goodwill reported by the Networking segment at September 30, 2005. Goodwill allocated to the Electronics segment and the Networking segment decreased by $0.4 million and $7.8 million, respectively, from December 31, 2004 primarily because of goodwill impairment in the Networking segment resulting from the Company's decision to exit the United Kingdom communications cable business and the impact of translation on goodwill denominated in currencies other than the United States dollar in both segments. Goodwill of $147.1 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 F&A financial records decreased by $2.4 million from December 31, 2004 because of the impairment of goodwill associated with the Company's decision to exit the United Kingdom communications cable business. NOTE 11: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The carrying values of accounts payable and accrued liabilities were as follows: SEPTEMBER 30, December 31, 2005 2004 ------------- ------------ (in thousands) Trade accounts payable $ 105,129 $ 77,591 Wages, severance and related taxes 37,722 39,876 Employee benefits 39,107 37,351 Interest 2,067 5,804 Other (individual items less than 5% of total current liabilities) 29,022 24,413 --------- -------- Total accounts payable and accrued liabilities $ 213,047 $185,035 ========= ======== 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 in 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 in cost of sales during the second and fourth quarters of 2004. -21- 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 in SG&A expenses. 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. 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 in SG&A expenses. 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. Accrued Severance and Other Related Benefits Under 2005 Restructuring Plans The Company recorded severance and other related benefits costs in the amount of $1.2 million in the third quarter of 2005 related to personnel reductions within the Networking segment in Australia and the United Kingdom ($0.9 million in cost of sales and $0.3 million in SG&A expenses). The Company notified 25 employees, prior to September 30, 2005, of the pending terminations as well as the amount of severance and other related benefits they each should expect to receive. -22- The Company also recorded severance and other related benefits costs in the amount of $0.4 million in the third quarter of 2005 related to personnel reductions within the Electronics segment in the United States and Canada in cost of sales. Three employees were notified, prior to September 30, 2005, 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 2005: Total Number of Total Accrued Employees Eligible Severance and for Severance and Other Related Other Related 2003 Plans 2004 Plans 2005 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 Merger-related activities: Cash payments/terminations --- (1,302) -- (1,302) (24) New charges --- --- -- --- -- Foreign currency translation --- 22 -- 22 -- Other adjustments --- --- -- --- -- Other activities: Cash payments/terminations (41) (1,003) (162) (1,206) (25) New charges --- ---- 1,662 1,662 32 Foreign currency translation (4) (183) (6) (193) -- Other adjustments --- (1) -- (1) (1) ------ ------- ------- ------- ------ Balance at September 30, 2005 (5) $ 189 $ 8,746 $ 1,494 $10,429 153 ====== ======= ======= ======= ====== (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 (5) Includes accrued severance and other related benefits totaling $0.1 million and 8 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. -23- Executive Succession Costs The Company's former President and Chief Executive Officer, C. Baker Cunningham, has entered into a separation of employment agreement with the Company. The separation agreement confirms Mr. Cunningham's entitlement and obligations under his change of control employment agreement with Belden Inc., dated as of July 31, 2001, as a result of his separation of employment. The Company recognized SG&A expense of $5.1 million and $0.9 million, respectively, in the second and third quarters of 2005 related to Mr. Cunningham's separation of employment and associated executive succession planning services. The terms of Mr. Cunningham's stock options were modified by the separation agreement to extend the exercise period to three years from the date of separation, not to exceed the original term of the option grant. The modification resulted in additional compensation expense of approximately $0.5 million, which is included in the SG&A expense discussed above. In September 2005, the Company announced the appointment of John S. Stroup as President, Chief Executive Officer and Director effective October 31, 2005. In accordance with the Executive Employment Agreement dated September 23, 2005 between the Company and Mr. Stroup (the AGREEMENT), he was awarded a combination of approximately 450 thousand stock options and approximately 150 thousand restricted stock unit awards on October 31, 2005 to compensate him for the "in the money" value of the nonvested options and nonvested restricted stock that he forfeited upon leaving his previous employer and as a further inducement to join the Company. The options have an exercise price of $19.93 per option, vest in equal installments over three years, and expire in ten years. The restricted stock units cliff vest in five years and will be paid in the Company's stock upon vesting. Additional provisions will apply in the event of employment termination or a change of control in the Company. The Agreement also guarantees Mr. Stroup a 2005 bonus of not less than $280,000. The Company will recognize compensation expense related to the restricted stock units and the annual bonus beginning in the fourth quarter of 2005 and will recognize compensation expense related to the stock options beginning in the first quarter of 2006 (upon the Company's adoption of SFAS No. 123(R)). NOTE 12: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS Medium-Term Notes 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. The Company repaid the first $15.0 million annual increment of the 1997 placement in August 2005. Credit Agreement There were no outstanding borrowings at September 30, 2005 under the Company's credit agreement dated October 9, 2003. The Company had $26.7 million in borrowing capacity available at September 30, 2005. Short-Term Borrowings At September 30, 2005, the Company had unsecured, uncommitted arrangements with nine banks under which it could borrow up to $5.2 million at prevailing interest rates. There were no outstanding borrowings under these arrangements at September 30, 2005. -24- Convertible Subordinated Debentures At September 30, 2005, the Company had outstanding $110.0 million of unsecured subordinated debentures. The debentures are convertible into approximately 6.2 million shares of common stock, at a conversion price of $17.859 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 September 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. At November 1, 2005, none of these conditions had been satisfied. As of November 1, 2005, no holders of the debentures have surrendered their debentures for conversion into shares of the Company's common stock. The 6.2 million shares of common stock that would be issued if the debentures were converted are included in the Company's calculation of diluted income per share for the three- and nine-month periods ended September 30, 2005. NOTE 13: INCOME TAXES Income tax expense of $16.3 million for the nine months ended September 30, 2005 resulted from income from continuing operations before taxes of $41.5 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 are analyzed below: Nine Months Ended September 30, 2005 Amount Rate - ----------------------------------- ------- ------- (in thousands, except rate data) Provision at statutory rate $14,517 35.0 % State and local income taxes 1,201 2.9 % Nondeductible goodwill impairment 1,723 4.2 % Change in deferred tax valuation allowance (156) (0.4)% Resolution of prior-period tax contingency (1,167) (2.8)% Foreign income tax rate differences and other, net 210 0.5 % ------- ----- Total tax expense $16,328 39.4 % ======= ===== -25- 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. The following table provides the components of net periodic benefit costs for the plans: Other Postretirement Pension Obligations Obligations ---------------------- -------------------- Three Months Ended September 30, 2005 2004 2005 2004 - -------------------------------------------- ------- ------- ----- ----- (in thousands) Service cost $ 2,223 $ 1,956 $ 141 $ 86 Interest cost 3,136 3,132 610 500 Expected return on plan assets (3,526) (3,409) -- -- Amortization of prior service cost (10) 2 (27) (27) Net (gain) loss recognition 827 535 155 108 ------- ------- ----- ----- Net periodic benefit cost $ 2,650 $ 2,216 $ 879 $ 667 ======= ======= ===== ===== Other Postretirement Pension Obligations Obligations --------------------- --------------------- Nine Months Ended September 30, 2005 2004 2005 2004 - -------------------------------------------- ------- ------- ------ ----- (in thousands) Service cost $ 6,932 $ 5,538 $ 382 $ 101 Interest cost 9,767 8,626 1,783 965 Expected return on plan assets (10,962) (9,435) -- -- Amortization of prior service cost (30) (4) (81) (79) Net (gain) loss recognition 2,569 1,599 465 323 ------- ------- ------ ------ Net periodic benefit cost $ 8,276 $ 6,324 $2,549 $1,310 ======= ======= ====== ====== -26- 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 September 30, 2005 $ 6,292 $ 533 Actual contributions for the nine months ended September 30, 2005 17,048 1,824 Anticipated contributions for the year ended December 31, 2005 23,200 2,500 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 September 30, 2005, the Company was party to unused standby letters of credit and unused bank guarantees totaling $10.2 million and $5.4 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. Severance and Other Related Benefits The Company completed the sale of part of a 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 September 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 At September 30, 2005, Belden CDT Inc. and its subsidiaries had affiliate guarantees outstanding totaling $124.6 million. The maximum potential amount of future payments Belden CDT Inc. or its subsidiaries could be required to make under these affiliate guarantees at September 30, 2005 is $124.6 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. -27- 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. 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 nine-month periods ended September 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, corporate assets, and corporate investment in certain affiliates. Amounts reflected in the column entitled Eliminations in the tables below represent the eliminations of affiliate revenues, affiliate cost of sales, and certain intersegment investments in affiliates. THREE MONTHS ENDED SEPTEMBER 30, 2005 ELECTRONICS NETWORKING F&A ELIMINATIONS TOTAL - -------------------------------- ----------- ---------- ------- ------------ --------- (IN THOUSANDS) EXTERNAL CUSTOMER REVENUES $199,529 $142,860 $ -- $ -- $342,389 AFFILIATE REVENUES 20,256 4,016 -- (24,272) -- SEGMENT OPERATING INCOME (LOSS) 28,857 (961) (7,826) (5,296) 14,774 SEGMENT IDENTIFIABLE ASSETS (1) 689,189 337,804 467,858 (161,011) 1,333,840 ======== ======== ======= ======== ========= -28- Three Months Ended September 30, 2004 Electronics Networking F&A Eliminations Total - -------------------------------- ----------- ---------- ------- ------------ --------- (in thousands) External customer revenues $171,972 $109,482 $ -- $ -- $281,454 Affiliate revenues 15,208 -- -- (15,208) -- Segment operating income (loss) 1,902 7,087 (9,774) (2,402) (3,187) Segment identifiable assets (1) 646,903 367,085 687,502 (430,841) 1,270,649 ======== ======== ======= ======== ========= (1) Excludes assets of discontinued operations NINE MONTHS ENDED SEPTEMBER 30, 2005 ELECTRONICS NETWORKING F&A ELIMINATIONS TOTAL - ------------------------------------ ----------- ---------- ------- ------------ --------- (IN THOUSANDS) EXTERNAL CUSTOMER REVENUES $582,007 $407,194 $ -- $ -- $989,201 AFFILIATE REVENUES 71,257 9,821 -- (81,078) -- SEGMENT OPERATING INCOME (LOSS) 76,439 14,595 (25,738) (15,587) 49,709 ======== ======== ======= ======== ========= Nine Months Ended September 30, 2004 Electronics Networking F&A Eliminations Total - -------------------------------- ----------- ---------- ------- ------------ --------- (in thousands) External customer revenues $408,338 $ 227,526 $ -- $ -- $635,864 Affiliate revenues 64,225 646 -- (64,871) -- Segment operating income (loss) 28,539 15,300 (18,140) (10,141) 15,558 ======== ========== ======= ======== ========= Total segment operating income differs from net income reported in the Consolidated Statements of Operations as follows: Three Months Ended Nine Months Ended September 30, September 30, 2005 2004 2005 2004 ------- -------- ------- --------- (in thousands) Total segment operating income (loss) $ 14,774 $ (3,187) $ 49,709 $ 15,558 Interest expense, net (2,198) (3,537) (7,682) (9,870) Minority interest (215) (225) (551) (225) Other nonoperating income -- -- -- 1,732 Income tax benefit (expense) (6,283) 3,748 (16,328) (438) -------- -------- -------- --------- Income (loss) from continuing operations 6,078 (3,201) 25,148 6,757 Loss from discontinued operations (1) (13) (2,809) (2,438) (10,128) Gain (loss) on disposal of discontinued operations (2) -- (1,529) 15,163 1,491 -------- -------- -------- --------- Net income (loss) $ 6,065 $ (7,539) $ 37,873 $ (1,880) ======== ======== ======== ========= (1) Net of tax benefit of $49, $1,489, $1,330, and $5,606, respectively (2) Net of tax benefit (expense) of $860, $(8,529) and $(839), respectively -29- Geographic Information The following table identifies revenues by geographic region based on the location of the customer. Three Months Ended September 30, 2005 2004 ---------- ---------- PERCENT OF Percent of REVENUES REVENUES Revenues Revenues --------- ---------- --------- ---------- (in thousands, except % data) United States $ 177,966 52.0% $ 143,540 51.0% Canada 34,664 10.1% 23,698 8.4% United Kingdom 38,490 11.2% 36,712 13.0% Continental Europe 62,987 18.4% 52,245 18.6% Rest of World 28,282 8.3% 25,259 9.0% --------- ----- --------- ----- Total $ 342,389 100.0% $ 281,454 100.0% ========= ===== ========= ===== Nine Months Ended September 30, 2005 2004 PERCENT OF Percent of REVENUES REVENUES Revenues Revenues --------- ---------- --------- ---------- (in thousands, except % data) United States $ 503,306 50.9% $ 332,027 52.2% Canada 98,928 10.0% 48,122 7.6% United Kingdom 116,837 11.8% 90,670 14.3% Continental Europe 188,140 19.0% 104,208 16.4% Rest of World 81,990 8.3% 60,837 9.5% --------- ----- --------- ----- Total $ 989,201 100.0% $ 635,864 100.0% ========= ===== ========= ===== -30- 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. -31- 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 nine-month periods ended September 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 nine-month periods ended September 30, 2005 and 2004 and (2) a listing of the major classes of assets and liabilities belonging to each operation at September 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 Nine Months Ended September 30, September 30, ---------------------- ----------------- 2005 2004 2005 2004 --------- --------- --------- --------- (In thousands) Revenues $ 342,389 $ 281,454 $ 989,201 $ 635,864 Gross profit 76,345 53,211 216,690 121,414 Operating income (loss) 14,774 (3,187) 49,709 15,558 Interest expense (2,198) (3,537) (7,682) (9,870) Income (loss) from continuing operations before taxes 12,361 (6,949) 41,476 7,195 Income (loss) from continuing operations 6,078 (3,201) 25,148 6,757 Loss from discontinued operations (1) (13) (2,809) (2,438) (10,128) Gain (loss) on disposal of discontinued operations (2) -- (1,529) 15,163 1,491 Net income (loss) 6,065 (7,539) 37,873 (1,880) ========= ========= ========= ========= (1) Net of tax benefit of $49, $1,489, $1,330 and $5,606, respectively (2) Net of tax benefit (expense) of $860, $(8,529) and $(839), respectively -32- 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 nine-month periods ended September 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 Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2005 2004 2005 2004 --------- --------- --------- --------- (In thousands, except % data) External customer revenues $ 199,529 $ 171,972 $ 582,007 $ 408,338 Affiliate revenues 20,256 15,208 71,257 64,225 --------- --------- --------- --------- Total revenues 219,785 187,180 653,264 472,563 Operating income 28,857 1,902 76,439 28,539 As a percent of total revenues 13.1% 1.0% 11.7% 6.0% ========= ========= ========= ========= The following table sets forth information comparing the Networking segment operating results. Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2005 2004 2005 2004 --------- --------- --------- --------- (In thousands, except % data) External customer revenues $ 142,860 $ 109,482 $ 407,194 $ 227,526 Affiliate revenues 4,016 -- 9,821 646 --------- --------- --------- --------- Total revenues 146,876 109,482 417,015 228,172 Operating income (loss) (961) 7,087 14,595 15,300 As a percent of total revenues (0.7)% 6.5% 3.5% 6.7% ========= ========= ========= ========= -33- RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2004 CONTINUING OPERATIONS CONSOLIDATED REVENUES Revenues generated in the three months ended September 30, 2005 increased 21.7% to $342.4 million from revenues generated in the three months ended September 30, 2004 of $281.5 million because of increased sales volume, the impact of the Merger, increased selling prices, and favorable currency translation on international revenues. The impact of increased unit sales generated during the three months ended September 30, 2005 contributed 8.8 percentage points of revenue increase. The Company experienced higher unit sales of products with networking/communications, industrial, video/sound/security, and transportation/defense applications. Revenues generated through the addition of the CDT operations during the third quarter of 2005 totaled approximately $23.8 million and contributed 8.4 percentage points of revenue increase. The impact of increased product pricing contributed 3.5 percentage points of revenue increase during the third 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 1.0 percentage point of revenue increase. Revenues generated on sales of product to customers in the United States, representing 52.0% of total revenues generated during the three months ended September 30, 2005, increased by 24.0% 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 increased by 14.7%. This increase resulted primarily from the impact of sales price increases implemented during 2004 and 2005, increased demand for networking products, increased demand from the Gulf Coast region distributors in anticipation of repairs to the damage resulting from Hurricanes Katrina and Rita, some customer pre-buying ahead of the announced October 2005 sales price increases, and increased project activity requiring instrumentation/control cable products, in-flight entertainment cable products, central office communications cable products, and products with video/sound/security applications. Revenues generated on sales of product to customers in Canada represented 10.1% of total revenues for the quarter ended September 30, 2005. Canadian revenues for the third quarter of 2005 increased by 46.3% compared with revenues for the third 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 third quarter of 2005 increased by 21.4% 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, increased demand for networking products and increased capital project activity within the industrial sector resulting from high oil prices and increased demand from utilities companies. -34- Revenues generated on sales of product to customers in the United Kingdom, representing 11.2% of total revenues generated during the third quarter of 2005, increased by 4.8% 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 third quarter of 2005 increased by 2.2% 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. Revenues generated on sales of product to customers in Continental Europe represented 18.4% of total revenues for the quarter ended September 30, 2005. Continental European revenues generated during the third quarter of 2005 increased by 20.6% 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 third quarter of 2005 increased by 6.6% compared with revenues generated during the same period of 2004. This increase resulted primarily from the impact of sales price increases implemented during 2004 and 2005 and improved demand from communications customers in Continental Europe partially offset by weak demand from the German automotive industry, increased competition from Chinese exporters on sales of wireless communications cable products in the Nordic region, and 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 three months ended September 30, 2005, increased by 12.0% 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 third quarter of 2005 increased by 8.1% 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 the Asia/Pacific and Africa/Middle East markets. CONTINUING OPERATIONS CONSOLIDATED COSTS, EXPENSES AND EARNINGS The following table sets forth information comparing the components of earnings. Percent Increase 2005 Compared Three Months Ended September 30, 2005 2004 With 2004 - ------------------------------- --------- -------- ------------- (in thousands, except % data) Gross profit $ 76,345 $ 53,211 43.5% As a percent of revenues 22.3% 18.9% Operating income (loss) $ 14,774 $ (3,187) 563.6% As a percent of revenues 4.3% (1.1)% Income (loss) from continuing operations before taxes $ 12,361 $ (6,949) 277.9% As a percent of revenues 3.6% (2.5)% Income (loss) from continuing operations $ 6,078 $ (3,201) 289.9% As a percent of revenues 1.8% (1.1)% ========= ======== ===== -35- Gross profit increased 43.5% to $76.3 million in the three months ended September 30, 2005 from $53.2 million in the three months ended September 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, severance and other benefits costs of $9.4 million recognized during the third quarter of 2004 related to personnel reductions in both North America and Europe, severance and other related benefits costs totaling $0.4 million recognized during the third quarter of 2004 related to the planned closure of a manufacturing facility in the United States, the impact of production outsourcing in Europe during the third 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 third 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 $1.4 million recognized during the current quarter related to personnel reductions in Europe and North America. Gross profit as a percent of revenues increased by 3.4 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 (loss) improved 563.6% to income of $14.8 million for the three months ended September 30, 2005 from a loss of $3.2 million for the three months ended September 30, 2004 primarily because of higher gross profit largely attributable to the Merger and asset impairment charges totaling $8.9 million recognized during the third quarter of 2004 related to product line exits in Europe and the technological obsolescence of assets in the United States. Partially offsetting the positive operating income comparison was an increase in selling, general and administrative (SG&A) expenses to $48.7 million in the third quarter of 2005 from $47.5 million in the third quarter of 2004 primarily because of the addition of SG&A expenses related to the CDT operations, merger integration costs of $0.7 million recognized in the current quarter, severance and other related benefits costs totaling $0.3 million recognized during the current quarter related to personnel reductions in Europe and the Asia/Pacific region, executive succession costs totaling $0.9 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 $0.7 million recognized in the third quarter of 2004 related to personnel reductions within the Company and both increased incentive compensation costs and increased professional services costs recognized during the third quarter of 2004 primarily because of the Merger. SG&A expenses as a percentage of revenues decreased to 14.2% in the third quarter of 2005 from 16.9% in the third quarter of 2004 primarily because of the increased revenues. Also partially offsetting the positive operating income comparison were tangible asset and goodwill impairment costs of $3.3 million and $9.5 million, respectively, recognized during the third quarter of 2005 because of the Company's decision to exit the communications cable business in the United Kingdom. Operating income (loss) as a percent of revenues improved to 4.3% in the third quarter of 2005 from (1.1)% in the third quarter of 2004 as a result of the previously mentioned items. -36- Income (loss) from continuing operations before taxes improved 277.9% to income of $12.4 million in the three months ended September 30, 2005 from a loss of $6.9 million in the three months ended September 30, 2004 because of higher operating income largely attributable to the Merger and lower net interest expense. Net interest expense decreased 37.9% to $2.2 million in the third quarter of 2005 from $3.5 million in the third quarter of 2004 because of the repayment of 7.60% medium-term notes totaling $64.0 million in the third quarter of 2004, repayment of 6.92% medium-term notes totaling $15.0 million in the third quarter of 2005, 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 third quarter of 2005 compared to $0.6 million in the third quarter of 2004. Average debt outstanding was $238.9 million and $271.9 million during the third quarters of 2005 and 2004, respectively. The Company's average interest rate was 5.91% in the third quarter of 2005 and 5.84% in the third quarter of 2004. The Company's effective tax rate decreased to 50.8% in the three months ended September 30, 2005 from 53.9% in the three months ended September 30, 2004. This decrease was primarily attributable to the increase in pretax income, which reduces the relative impact of permanent differences. Income (loss) from continuing operations improved 289.9% to income of $6.1 million in the three months ended September 30, 2005 from a loss of $3.2 million in the three months ended September 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 16.0% to $199.5 million for the quarter ended September 30, 2005 from $172.0 million for the quarter ended September 30, 2004 because of the impact of the Merger, increased selling prices, increased sales volume, and favorable currency translation on international revenues. Revenues generated through the addition of the CDT operations during the third quarter of 2005 totaled approximately $13.0 million and contributed 7.5 percentage points of revenue increase. The impact of increased product pricing contributed 3.9 percentage points of revenue increase during the third quarter of 2005. This price improvement resulted primarily from the impact of sales price increases implemented 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. The impact of increased unit sales generated during the three months ended September 30, 2005 contributed 3.8 percentage points of revenue increase. The segment experienced higher unit sales of products with industrial, video/sound/security, and transportation/defense applications partially offset by lower unit sales of products with networking/communications applications. Favorable foreign currency translation on international revenues contributed 0.8 percentage points of revenue increase. -37- Operating income increased to $28.9 million for the quarter ended September 30, 2005 from $1.9 million for the quarter ended September 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, severance and other benefits costs of $10.2 million recognized in the third quarter of 2004 related to personnel reductions, severance and other benefits costs of $0.4 million recognized in the third quarter of 2004 related to a planned manufacturing facility closure, asset impairment costs totaling $8.9 million recognized in the third quarter of 2004 related to product line exits in Europe and the technological obsolescence of assets in the United States, the impact on third quarter 2004 operating income of the 2003 production capacity rationalization initiative in Europe discussed above and increased incentive compensation costs recognized during the third quarter of 2004 because of the Merger. 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, severance and other related benefits costs of $0.5 million recognized during the current quarter related to personnel reductions, and merger integration costs totaling $0.4 million recognized in the current quarter. As a percent of total revenues generated by the segment, operating income increased to 13.1% in the third quarter of 2005 from 1.0% in the third 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 30.5% to $142.9 million for the quarter ended September 30, 2005 from $109.5 million for the quarter ended September 30, 2004. The revenue increase resulted primarily from increased sales volume, the impact of the Merger, increased selling prices, and favorable currency translation on revenues generated by the Company's international operations. The impact of increased unit sales generated during the three months ended September 30, 2005 contributed 16.6 percentage points of revenue increase. The segment experienced higher unit sales of products with networking/communications, industrial, video/sound/security, and transportation/defense applications. Revenues generated through the addition of the CDT operations during the third quarter of 2005 totaled approximately $10.8 million and contributed 9.8 percentage points of revenue increase. The impact of increased product pricing contributed 2.9 percentage points of revenue increase during the third quarter of 2005. This price improvement resulted primarily from the impact of sales price increases implemented 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 1.2 percentage points of revenue increase. -38- Operating income (loss) deteriorated to a loss of $1.0 million for the quarter ended September 30, 2005 from income of $7.1 million for the quarter ended September 30, 2004 mainly because of tangible asset and goodwill impairment charges totaling $3.3 million and $7.1 million, respectively, recognized during the current quarter because of the Company's decision to exit the communications cable business in the United Kingdom, severance and other related benefits costs of $1.2 million recognized during the current quarter resulting from personnel reductions, merger integration costs totaling $0.3 million recognized in the current quarter, and higher product costs resulting from increased purchase prices for copper and commodities derived from both petroleum and natural gas. These negative factors were partially offset by 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 of production outsourcing in Europe during the third quarter of 2004, and increased incentive compensation recognized during the third quarter of 2004 because of the Merger. Operating income (loss) as a percent of total revenues generated by the segment deteriorated to (0.7)% in the quarter ended September 30, 2005 from 6.5% for the quarter ended September 30, 2004 because of the previously mentioned items. DISCONTINUED OPERATIONS Loss from discontinued operations for the quarter ended September 30, 2005 includes $0.1 million of loss before income tax benefits related to the discontinued operations of the Company's Networking segment. Loss from discontinued operations for the quarter ended September 30, 2004 includes: - $4.4 million of revenues and $0.1 million of income before income tax expense related to the discontinued operations of the Company's Electronics segment; and - $6.1 million of revenues and $4.4 million of loss before income tax benefits related to the discontinued operations of the Company's Networking segment. RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2004 CONTINUING OPERATIONS CONSOLIDATED REVENUES Revenues generated in the nine months ended September 30, 2005 increased 55.6% to $989.2 million from revenues generated in the nine months ended September 30, 2004 of $635.9 million because of the impact of the Merger, increased selling prices, increased sales volume, and favorable currency translation on international revenues. Revenues generated through the addition of the CDT operations during the first nine months of 2005 totaled approximately $302.3 million and contributed 47.5 percentage points of revenue increase. The impact of increased product pricing contributed 4.4 percentage points of revenue increase during the first nine 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. -39- The impact of increased unit sales generated during the nine months ended September 30, 2005 contributed 2.1 percentage points of revenue increase. The Company experienced higher unit sales of products with networking/communications, industrial, video/sound/security, and transportation/defense applications. Favorable foreign currency translation on international revenues contributed 1.6 percentage points of revenue increase. Revenues generated on sales of product to customers in the United States, representing 50.9% of total revenues generated during the nine months ended September 30, 2005, increased by 51.6% 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 increased by 5.1%. This increase resulted primarily from the impact of sales price increases implemented during 2004 and 2005, increased volume sales of networking products, increased demand from the Gulf Coast region distributors in anticipation of repairs to the damage resulting from Hurricanes Katrina and Rita, some customer pre-buying ahead of the announced October 2005 sales price increases, and increased project activity requiring instrumentation/control cable products, in-flight entertainment cable products, fiber optic cable products, central office communications cable products, and products with video/sound/security applications. Revenues generated on sales of product to customers in Canada represented 10.0% of total revenues for the nine months ended September 30, 2005. Canadian revenues for the first nine months of 2005 increased by 105.6% compared with revenues for the first nine months 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 nine months of 2005 increased by 20.6% 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, increased demand for networking products and increased capital project activity within the industrial sector resulting from high oil prices and increased demand from utilities companies. Revenues generated on sales of product to customers in the United Kingdom, representing 11.8% of total revenues generated during the first nine months of 2005, increased by 28.9% 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 nine months of 2005 increased by 13.1% 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 19.0% of total revenues for the nine months ended September 30, 2005. Continental European revenues generated during the first nine months of 2005 increased by 80.5% 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 nine months of 2005 decreased by 6.5% 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 2004, (2) weak demand from the German automotive industry, (3) increased competition from Chinese exporters on sales of wireless communications cable products in the Nordic region and (4) the Company's decision to cease production of cord products and assemblies in Continental Europe during the first quarter of 2005. -40- 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 nine months ended September 30, 2005, increased by 34.8% 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 nine months of 2005 increased by 18.5% 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. Percent Increase 2005 Compared Nine Months Ended September 30, 2005 2004 With 2004 - ---------------------------------------------- --------- --------- ------------- (in thousands, except % data) Gross profit $ 216,690 $ 121,414 78.5% As a percent of revenues 21.9% 19.1% Operating income $ 49,709 $ 15,558 219.5% As a percent of revenues 5.0% 2.4% Income from continuing operations before taxes $ 41,476 $ 7,195 476.5% As a percent of revenues 4.2% 1.1% Income from continuing operations $ 25,148 $ 6,757 272.2% As a percent of revenues 2.5% 1.1% Gross profit increased 78.5% to $216.7 million in the nine months ended September 30, 2005 from $121.4 million in the nine months ended September 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 and third quarters 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 nine months of 2004, severance and other benefits costs of $9.4 million recognized during 2004 related to personnel reductions in both North America and Europe, and severance and other related benefits costs totaling $0.4 million recognized during 2004 related to the closure of a manufacturing facility in the United States. 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, severance and other related benefits costs totaling $1.4 million recognized during the current year related to personnel reductions within the Company, and severance and other related benefits costs totaling $0.7 million recognized during the current year related to the closure of a manufacturing facility in the United States. Gross profit as a percent of revenues increased by 2.8 percentage points from the prior year because of the previously mentioned items and increased manufacturing utilization as a result of plant rationalization and consolidation. -41- Operating income increased 219.5% to $49.7 million for the nine months ended September 30, 2005 from $15.6 million for the nine months ended September 30, 2004 primarily because of higher gross profit largely attributable to the Merger and asset impairment costs of $8.9 million recognized during 2004 related to product line exits in Europe and the disposal of certain assets in the United States due to excess capacity (particularly as a result of the combined capacity after the Merger). Partially offsetting the positive operating income comparison was an increase in SG&A expenses to $154.1 million in the first nine months of 2005 from $97.0 million in the first nine months of 2004 primarily because of the addition of SG&A expenses related to the CDT operations, merger integration costs of $3.5 million recognized during the current year, executive succession costs totaling $6.0 million recognized during the current year, severance and other related benefits costs totaling $0.3 million recognized during the current year related to personnel reductions in Europe and the Asia/Pacific region, 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 $1.4 million recognized during 2004 related to personnel reductions and both increased incentive compensation costs and increased professional services costs recognized during 2004 because of the Merger. SG&A expenses as a percentage of revenues increased to 15.6% in the first nine months of 2005 from 15.3% in the first nine months of 2004 primarily because of the merger integration costs and executive succession costs. Also partially offsetting the positive operating income comparison were tangible asset and goodwill impairment costs of $3.3 million and $9.5 million, respectively, recognized during the current year because of the Company's decision to exit the United Kingdom communications cable business. Operating income as a percent of revenues increased to 5.0% in the first nine months of 2005 from 2.4% in the first nine months of 2004 as a result of the previously mentioned items. Income from continuing operations before taxes increased 476.5% to $41.5 million in the nine months ended September 30, 2005 from $7.2 million in the nine months ended September 30, 2004 because of higher operating income largely attributable to the Merger and lower net interest expense. Net interest expense decreased 22.2% to $7.7 million in the first nine months of 2005 from $9.9 million in the first nine months of 2004 because of the repayment of 7.60% medium-term notes totaling $64.0 million in the third quarter of 2004, the repayment of 6.92% medium-term notes totaling $15.0 million in the third quarter of 2005, 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 $3.6 million in the first nine months of 2005 compared to $1.0 million in the first nine months of 2004. Average debt outstanding was $244.8 million and $224.3 million during the first nine months of 2005 and 2004, respectively. The Company's average interest rate was 6.04% in the first nine months of 2005 and 6.40% in the first nine months of 2004. The Company's effective tax rate increased to 39.4% in the nine months ended September 30, 2005 from 6.1% in the nine months ended September 30, 2004. This increase was primarily attributable to (1) the increase in pretax income, which reduces the relative impact of permanent differences, and (2) certain charges recognized during the current year that were not deductible for tax purposes. Income from continuing operations increased 272.2% to $25.1 million in the nine months ended September 30, 2005 from $6.8 million in the nine months ended September 30, 2004 mainly because of higher income from continuing operations before taxes resulting largely from the Merger partially offset by higher income tax expense. -42- ELECTRONICS SEGMENT Revenues generated from sales to external customers increased 42.5% to $582.0 million for the nine months ended September 30, 2005 from $408.3 million for the nine months ended September 30, 2004 because of the impact of the Merger, increased selling prices, favorable currency translation on international revenues, and increased sales volume. Revenues generated through the addition of the CDT operations during the first nine months of 2005 totaled approximately $148.0 million and contributed 36.2 percentage points of revenue increase. The impact of increased product pricing contributed 4.3 percentage points of revenue increase during the first nine 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 1.5 percentage points of revenue increase. The impact of increased unit sales generated during the nine months ended September 30, 2005 contributed 0.5 percentage points of revenue increase. The segment experienced higher unit sales of products with video/sound/security, transportation/defense, and industrial applications partially offset by lower unit sales of products with networking/communications applications. Operating income increased to $76.4 million for the nine months ended September 30, 2005 from $28.5 million for the nine months ended September 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, severance and other related benefits costs totaling $10.9 million recognized during 2004 related to personnel reductions, severance and other related benefits costs totaling $0.4 million recognized during 2004 related to the closure of a manufacturing facility in the United States, and increased incentive compensation costs recognized by the segment during 2004 because of the Merger. 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, merger integration costs totaling $2.0 million recognized in the current year, severance and other benefits costs of $0.7 million recognized during the current year related to the closure of a manufacturing facility in the United States and severance and other related benefits costs of $0.5 million recognized during the current year related to personnel reductions. As a percent of total revenues generated by the segment, operating income increased to 11.7% in the first nine months of 2005 from 6.0% in the first nine months of 2004 because of the previously mentioned items and increased manufacturing utilization as a result of plant rationalization and consolidation. -43- NETWORKING SEGMENT Revenues generated on sales to external customers increased 79.0% to $407.2 million for the nine months ended September 30, 2005 from $227.5 million for the nine months ended September 30, 2004. The revenue increase resulted primarily from the impact of the Merger, increased sales volume, 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 nine months of 2005 totaled approximately $154.3 million and contributed 67.8 percentage points of revenue increase. The impact of increased unit sales generated during the nine months ended September 30, 2005 contributed 4.8 percentage points of revenue increase. The segment experienced higher unit sales of products with networking/communications, industrial, video/sound/security, and transportation/defense applications. The impact of increased product pricing contributed 4.5 percentage points of revenue increase during the first nine 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 of copper and commodities derived from petroleum and natural gas. Favorable foreign currency translation on international revenues contributed 1.9 percentage points of revenue increase. Operating income decreased to $14.6 million for the nine months ended September 30, 2005 from $15.3 million for the nine months ended September 30, 2004 mainly because of tangible assets and goodwill impairment charges totaling $3.3 million and $7.1 million, respectively, recognized during the current year because of the Company's decision to exit the United Kingdom communications cable business, higher product costs resulting from increased purchase prices for copper and commodities derived from both petroleum and natural gas, severance and other related benefits costs of $1.2 million related to personnel reductions in Europe and the Asia/Pacific region, and merger integration costs totaling $0.9 million recognized in the current year. These negative factors were partially offset by 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 of production outsourcing in Europe during the second and third quarters of 2004, increased incentive compensation costs recognized during 2004 because of the Merger, and severance and other related benefits costs of $0.3 million recognized during 2004 related to personnel reductions. Operating income as a percent of total revenues generated by the segment decreased to 3.5% in the nine months ended September 30, 2005 from 6.7% for the nine months ended September 30, 2004 because of the previously mentioned items. -44- DISCONTINUED OPERATIONS Loss from discontinued operations for the nine months ended September 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 nine months of 2005. Loss from discontinued operations for the nine months ended September 30, 2004 includes: - $4.4 million of revenues and $0.1 million of income before income tax expense related to the discontinued operations of the Company's Electronics segment; and - $99.3 million of revenues and $15.8 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. The Company expects capital expenditures for 2005 to be approximately $28.0 million. The Company has the ability to revise and reschedule the anticipated capital expenditure program should the Company's financial position require it. Any material reduction in 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 outflow during the nine months ended September 30, 2005 totaled $10.9 million. The disposal of discontinued operations provided $40.0 million of cash during the first nine months of 2005. -45- Net cash inflow during the nine months ended September 30, 2004 totaled $6.6 million. The disposal of discontinued operations provided $78.2 million of cash during the first nine months of 2004. CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities in the first nine months of 2005 totaled $40.6 million and included $24.7 million of net non-cash operating expenses and a $22.0 million net increase in operating assets and liabilities. Non-cash operating expenses consisted of depreciation, amortization, deferred tax expense, tangible asset and goodwill impairment charges, 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, increased accrued income taxes and increased other net operating assets and liabilities. Net cash used for operating activities in the first nine months of 2004 totaled $3.7 million and included $37.1 million of net non-cash operating expenses and a $38.9 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 $23.3 million in the first nine months of 2005 primarily as the result of $30.7 million in proceeds received from the sales of tangible assets belonging to the Company's discontinued BCC - Phoenix operation, $9.3 million in proceeds received from the sale of other facilities held for sale and $2.5 million in proceeds received from the sale of equipment by the Company's continuing operations. These proceeds were partially offset by $19.3 million of cash used for the purchase of capital equipment. Net cash provided by investing activities in the first nine months of 2004 totaled $77.3 million primarily because of $78.2 million in proceeds received from the sale of tangible assets belonging to the Company's discontinued BCC - Phoenix operation and $4.4 million in proceeds received from the sale of equipment by the Company's continuing operations. These proceeds were partially offset by $5.3 million of cash used for the purchase of capital equipment. CAPITAL EXPENDITURES Nine Months Ended September 30, 2005 2004 - ------------------------------------------ ------- ------- (in thousands) Continuing operations: Capacity modernization and enhancement $ 8,675 $ 3,238 Capacity expansion 4,596 217 Other 5,999 1,373 ------- ------- Total continuing operations 19,270 4,828 Discontinued operations -- 461 ------- ------- $19,270 $ 5,289 ======= ======= Capital expenditures for the continuing operations during the nine months ended September 30, 2005 and 2004 represented 1.9% and 0.8%, respectively, of revenues for the same periods. Investment during both the first nine months of 2005 and 2004 was utilized principally for maintaining and enhancing existing production capabilities. -46- CASH FLOW FROM FINANCING ACTIVITIES Net cash used for financing activities during the first nine months of 2005 and 2004 totaled $72.9 million and $67.2 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 September 30, 2005, the Company repurchased approximately 2.5 million shares of its common stock at an aggregate cost of $51.7 million. During the nine-month periods ended September 30, 2005 and 2004, dividends of $.15 per share were paid to stockholders, resulting in cash outflows of $7.0 million and $4.9 million, respectively. During the nine months ended September 30, 2005 and 2004, the Company received proceeds from the exercise of stock options totaling $2.9 million and $2.0 million, respectively. During the nine months ended September 30, 2005 and 2004, the Company repaid outstanding balances under its medium-term notes and European mortgage borrowing arrangements in the amount of $17.2 million and $64.2 million, respectively. During the nine months ended September 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 $34.3 million, or 7.4%, from $460.5 million at December 31, 2004 to $494.8 million at September 30, 2005. Receivables increased 25.2% from $174.6 million at December 31, 2004 to $218.5 million at September 30, 2005 primarily because of higher sales volumes, increased sales prices, and the issuance of approximately $8.0 million in sales incentive rebate credits, accrued in 2004, to participating customers during the first quarter of 2005. Inventories increased 6.6% from $227.0 million at December 31, 2004 to $241.9 million at September 30, 2005 mainly because of increased production necessary to support higher sales levels and higher costs for copper, Teflon(R) FEP and commodities derived from petroleum and natural gas. Other current assets decreased 13.7% from $24.8 million at December 31, 2004 to $21.4 million at September 30, 2005 because of a $3.7 million decrease in other current assets resulting primarily from amortization. Current assets of discontinued operations decreased by 62.0% from $34.1 million at December 31, 2004 to $13.0 million at September 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. -47- Current liabilities increased $69.2 million, or 31.7%, from $218.3 million at December 31, 2004 to $287.5 million at September 30, 2005. Accounts payable and accrued liabilities increased 15.1% from $185.0 million at December 31, 2004 to $213.0 million at September 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 $6.0 million accrued in the first nine months of 2005, and severance and other related benefits costs totaling $5.1 million accrued in the first nine months of 2005. These increases to accounts payable and accrued liabilities were partially offset by severance payments totaling $12.9 million, positive adjustments to accrued severance totaling $1.1 million resulting from the Company's decision to terminate its restructuring plans for certain legacy CDT operations in North America because of improved capacity utilization at those operations, and executive succession payments totaling $0.5 million during the first nine months 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. Accrued income taxes increased to $6.5 million at September 30, 2005 because of cash refunds received during the year. Current maturities of long-term debt increased from $15.7 million at December 31, 2004 to $59.1 million at September 30, 2005 primarily because of the reclassification of the 7.75% medium-term notes in the amount of $44.0 million and the second tranche of 6.92% medium-term notes in the amount of $15.0 that are both due and payable in the third quarter of 2006 from long-term debt. This reclassification was partially offset by payment of the first tranche of 6.92% medium-term notes in the amount of $15.0 million in the third quarter of 2005. Current liabilities of discontinued operations decreased 48.9% from $17.5 million at December 31, 2004 to $9.0 million at September 30, 2005 primarily as a result of severance payments of $5.9 million applied against the severance reserves for BCC's Phoenix operation ($0.7 million), Montrose ($1.4 million), and Raydex ($3.8 million) during the current year. LONG-LIVED ASSETS Long-lived assets decreased $59.3 million, or 8.0%, from $746.1 million at December 31, 2004 to $686.8 million at September 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 $19.1 million during the first nine months of 2005 mainly because of depreciation, the unfavorable impact of foreign currency translation on the property, plant and equipment of the Company's international operations and impairment charges totaling $3.3 million recognized during the third quarter of 2005 as a result of the Company's decision to exit the United Kingdom communications cable business and to restructure its European manufacturing operations partially offset by capital expenditures of $19.3 million during 2005. 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 $15.3 million during the first nine months of 2005 primarily as a result of the amortization of other intangibles and goodwill impairment charges totaling $9.5 million recognized during the third quarter of 2005 as a result of the Company's decision to exit the United Kingdom communications cable business. Long-lived assets of discontinued operations decreased $24.3 million during the first nine months of 2005 due to the disposition of BCC-Phoenix, Raydex-Skelmersdale, Montrose and Admiral land and buildings. -48- CAPITAL STRUCTURE SEPTEMBER 30, 2005 December 31, 2004 AMOUNT PERCENT Amount Percent -------- ------- ---------- ------- (in thousands, except % data) Current maturities of long-term debt $ 59,052 5.9% $ 15,702 1.5% Long-term debt 172,052 17.2% 232,823 22.0% -------- ----- ---------- ----- Total debt 231,104 23.1% 248,525 23.5% Stockholders' equity 768,217 76.9% 810,000 76.5% -------- ----- ---------- ----- $999,321 100.0% $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 $59.2 million during the first nine months of 2005 because of a $17.4 million decrease in total debt resulting primarily from the payment of 6.92% medium-term notes in the amount of $15.0 million in the third quarter of 2005 and principal payments on mortgage borrowings in Europe and a $41.8 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. The Company repaid the first $15.0 million annual increment of the 1997 placement in August 2005. 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 a maximum leverage ratio and minimum net worth. The Company was in compliance with these covenants at both September 30, 2005 and the filing date of this Quarterly Report on Form 10-Q. At September 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 $17.859 per share (reduced from $18.069 per share in prior quarters due to the payment of dividends), 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 September 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. At November 1, 2005, none of these conditions had been satisfied. As of November 1, 2005, no holders of the debentures have surrendered their debentures for conversion into shares of the Company's common stock. -49- 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 September 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 September 30, 2005 under the Credit Agreement. The Company had $26.7 million in borrowing capacity available at September 30, 2005. At September 30, 2005, the Company had unsecured, uncommitted arrangements with nine banks under which it could borrow up to $5.2 million at prevailing interest rates. There were no outstanding borrowings under these arrangements at September 30, 2005. Borrowings have the following scheduled maturities. Payments Due by Period Less than 1 1-3 3-5 After September 30, 2005 Total year years years 5 years - ----------------------------------- -------- ----------- ------- -------- -------- (in thousands) Series 1997 medium-term notes $ 60,000 $15,000 $30,000 $ 15,000 $ -- 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 104 52 52 -- -- -------- ------- ------- - ------ -------- $231,104 $59,052 $30,052 $ 32,000 $110,000 ======== ======= ======= = ====== ======== The Company had the following commercial commitments outstanding at September 30, 2005: Amount of Commitment Expiration Per Period Less than 1 1-3 3-5 After September 30, 2005 Total year years years 5 years - ---------------------------- -------- ----------- ----- ----- ------- (in thousands) Available lines of credit $ 26,663 $ 26,663 $ -- $ -- $ -- Standby letters of credit 10,227 10,227 -- -- -- Guarantees 5,362 5,362 -- -- -- Surety bonds 4,553 4,553 -- -- -- -------- -------- ----- ----- ------ Total commercial commitments $ 46,805 $ 46,805 $ -- $ -- $ -- ======== ======== ===== ===== ====== -50- Accumulated other comprehensive income decreased by $26.6 million from $27.9 million at December 31, 2004 to $1.3 million at September 30, 2005 primarily because of the negative effect of currency exchange rates on financial statement translation. Treasury stock increased by $52.2 million because of shares purchased in the second and third quarters 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 $4.0 million primarily as the result of stock option exercises. Retained earnings increased $31.2 million primarily because of net income of $37.9 million and a $0.3 million increase related to the Merger partially offset by dividends of $7.0 million. Unearned deferred compensation decreased $1.8 million because of current year amortization of restricted stock grants. OFF-BALANCE SHEET ARRANGEMENTS The Company was not a party to any of the following types of off-balance sheet arrangements at September 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. -51- 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 in 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 nine months ended September 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. -52- OUTLOOK The Company anticipates further moderate improvement in the general economies of both North America and Europe in 2005. The Company has announced additional price increases taking effect during the fourth 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 6.0% and 9.0% 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 net savings of approximately $25.0 million before tax in 2005 and reaching $35.0 million before tax in 2006 compared with the level of cost incurred prior to the Merger, and that actions to achieve such savings have been completed. 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 the United Kingdom, sales to which generated 2004 revenues of $94.6 million, requested bids from both the Company and several other suppliers on a supply agreement currently awarded to the Company. The Company has elected to exit the communications cable business in the United Kingdom and is considering alternatives for its manufacturing operation in Manchester, United Kingdom. The Company currently anticipates that it will continue to manufacture product for sale to the customer no later than the expiration of the current supply agreement in September 2006. Alternatives for the Company include selling or closing the plant. Depreciation of assets related to the United Kingdom communications cable business will be accelerated, resulting in additional depreciation expense of approximately $2.0 million per quarter. If the operation were to become classified as a discontinued operation, the accelerated depreciation expense and other results of the operation would be reported among discontinued operations. The Company recognized tangible asset and goodwill impairment charges totaling $12.8 million and recognized severance and other related benefits charges totaling $1.0 million during the third quarter of 2005 as a result of this decision. The Company anticipates that it will recognize additional severance and other related benefits charges in the fourth quarter of 2005 and in 2006. Such charges would have a negative effect on operating results and cash flow. The amount of such charges will be significantly affected by the outcome of discussions with the customer. In September 2005, the Company announced a program to restructure its European manufacturing operations beginning in the fourth quarter of 2005. The Company anticipates it will recognize severance and other related benefits charges as a result of the program in the fourth quarter of 2005 and throughout 2006 of approximately $11.5 million to $13.5 million. Such charges would have a negative effect on operating results and cash flow. -53- 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 $23.2 million in pension contributions and $2.5 million in contributions for other postretirement benefit plans in 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. The Company expects to recognize "sales incentive" compensation of up to $3.0 million in the fourth quarter of 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; however, there have been no such purchases to date. The supply contract expires on December 31, 2005. Management expects that the Company's effective tax rate for continuing operations in 2005 will be 34.0%. 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. 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 nine months of 2005 for cash proceeds of approximately $33.6 million. In October 2005, the Company sold real estate for cash proceeds of approximately $2.1 million. As of November 1, 2005, the Company has real estate, the sale of which it estimates will generate cash proceeds of approximately $4.3 million, either under contract or listed for sale. Depreciation and amortization for the year 2005 are expected to be approximately $37.0 million. Capital expenditures during 2005 are expected to be approximately $28.0 million. The Company has incurred severance charges resulting from the discontinuation of certain operations and with other actions intended to reduce costs. The amount of the charges recognized but not funded as of September 30, 2005 is $10.4 million. Management expects that that all of these charges will be funded before the end of 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 November 1, 2005, the Company repurchased approximately 3.8 million shares of its common stock at an aggregate cost of $78.3 million. Management expects to make additional purchases throughout the remainder of 2005. This will have a negative effect on cash flow. -54- 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. The Company anticipates that revenues generated in the fourth quarter of 2005 will be consistent with those generated in the third quarter of 2005 and operating margin generated in the fourth quarter of 2005 will range from 8.0% to 9.0% of revenues. This range excludes any further restructuring or severance charges but includes the estimated $3.0 million of other operating income the Company expects to generate through its sales incentive agreement with a private-label customer in the fourth quarter of 2005. In 2006, the Company anticipates that revenue will rise because of both sales price increases designed to compensate for rising material costs and modest growth of market volume. The Company anticipates that operating earnings in 2006 will benefit from the full-year impact of merger-related cost reductions and will be helped further if there is a stabilization of raw material costs so that the lag between material cost increases and sales price increases can be narrowed. In addition to the improvements in operating margins that the Company might achieve in 2006, the Company anticipates that income per share will benefit from the impact of the share repurchase program. The Company also expects to recognize depreciation expense of approximately $37.0 million, purchase approximately $30.0 million of property, plant and equipment, and achieve an effective annual tax rate of 34.0% in 2006. 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. -55- 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 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. 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. -56- 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. During the third quarter of 2005, the Company implemented an integrated accounting and manufacturing system at certain business units as part of a continuing integration of Belden and CDT operations. The system implemented has been in use at certain legacy Belden business units for several years. The Company believes the utilization of this system at other business units will provide more timely and accurate financial reporting, reduce manual processes and improve operational effectiveness. 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. 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 145 of which the Company was aware at November 3, 2005) in which the Company is one of many defendants, 63 of which are scheduled for trial during 2005 and 2006. 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 November 1, 2005, in 20 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 119 of these cases, plaintiffs generally do not allege a specific damage demand. As to the other six cases, the plaintiffs generally allege monetary damages for a specified amount, the largest amount claimed being $15 million compensatory and $10 million punitive damages. 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. -57- Through November 3, 2005, the Company had been dismissed in approximately 148 similar cases without any going to trial, and with only two of these involving 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. Of the two cases involving a settlement, three of the Company's insurers have paid 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. 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. 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 Total Number of Average Price Paid Announced Plans or Purchased Under the Period Shares Purchased per Share Programs (1) Plans or Programs - ------------------ ---------------- ------------------ ------------------- -------------------- July 1, 2005 through July 31, 2005 525,900 $20.98 525,900 $99,316,000 August 1, 2005 through August 31, 2005 354,800 $21.40 354,800 $91,723,000 September 1, 2005 through September 30, 2005 879,600 $20.89 879,600 $73,348,000 --------- ------ --------- ----------- Total 1,760,300 $21.02 1,760,300 $73,348,000 ========= ====== ========= =========== - ---------- (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. -58- ITEM 6: EXHIBITS Exhibits Exhibit 10.1 Belden CDT Inc. Retirement Saving Plan Exhibit 10.2 Executive Employment Agreement dated September 26, 2005, between Belden CDT Inc. and John Stroup (incorporated by reference to Exhibit 10.01 to the Belden CDT Inc. Current Report on Form 8-K filed on September 27, 2005). 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. 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: November 9, 2005 By: /s/ John S. Stroup ----------------------------- John S. Stroup President and Chief Executive Officer Date: November 9, 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) -59-