7701 Forsyth Boulevard PHONE: 314.854.8000
(BELDEN LOGO) Suite 800 Fax: 314.854.8003
SENDING ALL THE RIGHT SIGNALS St. Louis, Missouri 63105
www.Belden.com
August 4, 2006
Via EDGAR
Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549-7010
Attention: Ms. Meagan Caldwell
Mr. Nudrat Salik
RE: BELDEN CDT INC.
FILE NO. 001-12561
FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2005,
FILED MARCH 16, 2006
FORM 10-Q FOR FISCAL QUARTER ENDED MARCH 26, 2006,
FILED APRIL 5, 2006
FORM 8-K
FILED FEBRUARY 9, 2006
Dear Ms. Caldwell and Mr. Salik:
We have included in this letter Belden CDT's responses to the comment letter of
the Staff of the Division of Corporation Finance (the "Staff") of the Securities
and Exchange Commission (the "Commission") dated July 7, 2006.
Set forth below are the Staff's comments, indicated in bold, together with the
responses of Belden CDT. All references to page numbers in the document
correspond to pagination in the filings referenced above.
Form 10-K for the Fiscal Year Ended December 31, 2005
Comment applicable to your overall filing
1. WHERE A COMMENT BELOW REQUESTS ADDITIONAL DISCLOSURES AND OTHER REVISIONS
TO BE MADE, PLEASE SHOW US IN YOUR SUPPLEMENTAL RESPONSE WHAT THE REVISIONS
WILL LOOK LIKE. THESE REVISIONS SHOULD BE INCLUDED IN YOUR FUTURE FILINGS.
We have shown in our supplemental response what the revisions prompted by
your comments will look like. We will also include these revisions in
future filings when applicable.
Securities and Exchange Commission
August 4, 2006
Page 2
Item 6. Selected Financial Data, page 19
2. PLEASE EXPAND YOUR DISCLOSURE TO ALSO INCLUDE BASIC INCOME (LOSS) PER SHARE
FROM CONTINUING OPERATIONS. REFER TO ITEM 301 OF REGULATION S-K.
We will expand our disclosure in future filings to also include basic
income per share from continuing operations as shown below:
Item 6. Selected Financial Data
Years Ended December 31, 2005 2004 2003 2002 2001
- ------------------------ ----- ----- ----- ---- -----
(in thousands, except per share
amounts)
Basic income per share from continuing
operations $0.72 $0.43 $0.40 -- $1.24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, page 19
Operating Results--2005 Compared With 2004, page 24
Continuing Operations, page 24
3. YOUR PRESENTATION OF REVENUES EXCLUDING CERTAIN COSTS, INCLUDING COSTS
RELATED TO THE MERGER AND FOREIGN CURRENCY TRANSLATION, APPEARS TO
CONSTITUTE NON-GAAP FINANCIAL MEASURES. PLEASE EXPAND YOUR DISCLOSURES TO
INCLUDE THE FOLLOWING:
- A STATEMENT WHICH IDENTIFIES THESE AS NON-GAAP FINANCIAL
MEASURES,
- A DISCUSSION WHICH DETAILS WHY THE PRESENTATION OF THESE NON-GAAP
FINANCIAL MEASURES PROVIDES USEFUL INFORMATION TO INVESTORS
REGARDING YOUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AND
- A RECONCILIATION AND DISCUSSION REGARDING THESE NON-GAAP
FINANCIAL MEASURES TO THE MOST DIRECTLY COMPARABLE FINANCIAL
MEASURE CALCULATED AND PRESENTED IN ACCORDANCE WITH GAAP.
PLEASE REFER TO ITEM 10(E)(1)(I) OF REGULATION S-K.
Securities and Exchange Commission
August 4, 2006
Page 3
We have already revised our presentation of this information in the
Quarterly Report on Form 10-Q for the period ended March 26, 2006. We will
revise future Annual Report on Form 10-K disclosures, using paragraph 6 on
page 24 of our 2005 Annual Report on Form 10-K as an example, as follows:
Revenues generated on sales of product to customers in the United
States, representing 51.1% of total revenues generated during 2005,
increased by 39.7% compared with revenues generated during 2004.
Included in revenues generated on the sales of product to customers in
the United States during 2005 were revenues generated by operations
acquired in the merger totaling $142.2 million. The increase in
revenues resulted primarily from the merger, the impact of sales price
increases implemented during 2004 and 2005, increased volume sales of
networking products, increased demand from Gulf Coast region
distributors in anticipation of repairs to the damage resulting from
Hurricanes Katrina and Rita, 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.
See also our response to comment number 16.
Outlook, page 46
4. YOUR DISCUSSION REGARDING YOUR OUTLOOK FOR 2006 INCLUDES FINANCIAL
GUIDANCE, WHICH EXCLUDES COMPENSATION COSTS RELATED TO SFAS 123(R). THESE
AMOUNTS APPEAR TO CONSTITUTE NON-GAAP FINANCIAL MEASURES. PLEASE EXPAND
YOUR DISCLOSURE TO INCLUDE THE FOLLOWING:
- A STATEMENT WHICH IDENTIFIES THESE AS NON-GAAP FINANCIAL
MEASURES,
- A DISCUSSION WHICH DETAILS WHY THE PRESENTATION OF THESE NON-GAAP
FINANCIAL MEASURES PROVIDES USEFUL INFORMATION TO INVESTORS
REGARDING YOUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AND
- A RECONCILIATION AND DISCUSSION REGARDING THESE NON-GAAP
FINANCIAL MEASURES TO THE MOST DIRECTLY COMPARABLE FINANCIAL
MEASURE CALCULATED AND PRESENTED IN ACCORDANCE WITH GAAP.
PLEASE REFER TO ITEM 10(E)(1)(I) OF REGULATION S-K.
In future filings, we will present financial guidance that includes
compensation costs related to SFAS 123(R), using paragraph 3 on page 46 in
our 2005 Annual Report on Form 10-K as an example, as follows:
Management expects operating income as a percent of revenues will be
between 8.8% and 9.3% in 2006. Included in 2006 expected operating
earnings are incremental expenses related to the 2006 adoption of
Statement of Financial Accounting Standards No. 123(R), Share Based
Payment, estimated at $1.9 million.
Securities and Exchange Commission
August 4, 2006
Page 4
Notes to Financial Statements
5. YOU DISCLOSED ON PAGE 13 THAT YOU PROVIDE WARRANTIES FOR CERTAIN OF YOUR
PRODUCTS FOR 25 YEARS. PLEASE EXPAND YOUR DISCLOSURE TO INCLUDE YOUR POLICY
AND HOW YOU HAVE DETERMINED THE LIABILITY RELATING TO PRODUCT WARRANTIES.
PLEASE ALSO INCLUDE IN YOUR DISCLOSURE A RECONCILIATION FOR THE CHANGES IN
THE PRODUCT WARRANTIES FOR EACH PERIOD PRESENTED. REFER TO PARAGRAPH 14 OF
FIN 45.
We recognized warranty expense totaling $90 thousand and $205 thousand in
the fiscal years ended December 31, 2005 and 2004, respectively. Based on
the nature of our wire and cable products, the immaterial amounts of our
historical warranty expense, and our expectation that warranty expense will
not be material in the future, we will eliminate reference to warranties
from Item IA. Risk Factors in future filings.
Note 2: Summary of Significant Accounting Policies, page 55
Revenue Recognition, page 58
6. YOU DISCLOSED THAT YOU GRANT INCENTIVE ALLOWANCES TO SELECTED CUSTOMERS,
WHICH ARE DETERMINED BASED ON CERTAIN TARGETED SALES VOLUMES. IN CERTAIN
INSTANCES, YOU ALSO GRANT SELECTED PRODUCT PRICE PROTECTION ALLOWANCES.
CERTAIN DISTRIBUTION CUSTOMERS ARE ALSO ALLOWED TO RETURN CERTAIN
INVENTORY, IN AN AMOUNT NOT TO EXCEED THREE PERCENT OF THEIR PRIOR YEAR'S
PURCHASES, IN EXCHANGE FOR AN ORDER OF EQUAL OR GREATER VALUE. FOR EACH OF
THESE SALES INCENTIVES, TELL US THE GENERAL TERMS OF THE INCENTIVES. FOR
EXAMPLE, TELL US WHETHER THE INCENTIVE ALLOWANCES BASED ON CERTAIN TARGETED
SALES VOLUMES ARE GIVEN TO THE CUSTOMER IN THE FORM OF CASH OR SOME OTHER
MEANS. FOR EACH OF THESE SALES INCENTIVES, PLEASE ALSO TELL US HOW YOU ARE
ACCOUNTING FOR THE INCENTIVE. YOUR EXPLANATION SHOULD REFER TO THE
APPLICABLE ACCOUNTING LITERATURE, WHICH SHOULD INCLUDE EITF 00-22 AND EITF
01-9.
We offer rebates to certain customers that meet specified purchase volume
targets in many of our operations. General terms of the sales rebates vary
by operation and, in some cases, by customer within an operation. We settle
sales rebate allowances with both cash and receivables credits. At December
31, 2005, outstanding sales rebate allowances totaled $13.1 million. We
believe that approximately 90% of this balance will be settled in
receivables credits and approximately 10% of this balance will be settled
in cash during 2006.
We account for sales rebates in accordance with both EITF 00-22, Accounting
for "Points" and Certain Other Time-Based or Volume-Based Sales Incentive
Offers, and Offers for Free Products or Services to Be Delivered in the
Future, and EITF 01-9, Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products). Sales incentives
represent a reduction of our selling prices and are recognized as a
reduction of revenue. We receive no identifiable benefit in exchange for
the rebates. The total amount of the cash or refund obligation is based on
the estimated amount of rebates that will ultimately be earned. Recognition
of the obligations as a reduction of revenue is based on a systematic and
rational allocation of the cost of honoring rebates earned to each of the
underlying revenue transactions that result in progress by the customers
toward earning the rebates.
Securities and Exchange Commission
August 4, 2006
Page 5
We offer price protection allowances to certain of our customers whereby,
in times of falling sales prices, we may grant receivables credits based on
the difference between the sales price at the time of purchase and the
lower current list price on certain of our products which they have in
inventory. We had no product price protection allowances outstanding at
December 31, 2005 and did not grant product price protection allowances
during any of the periods presented in our 2005 Annual Report on Form 10-K.
We offer rights of return to all customers for defective products in
accordance with our warranty policies. We also allow certain customers to
return certain of our products they hold in inventory, in an amount not to
exceed three percent of their prior year's purchases, in exchange for an
order of equal or greater value. We estimate our returned material
allowances based largely on historical product return patterns. Returned
materials allowances represent reductions of our selling prices and are
recognized as a reduction of revenue. At December 31, 2005, outstanding
returned material allowances totaled $1.3 million.
Note 3: Belden CDT Merger, page 63
7. IT APPEARS THAT YOU AMORTIZE YOUR INTANGIBLE ASSETS RELATED TO CUSTOMER
RELATIONS OVER 25.6 YEARS. PLEASE TELL US HOW YOU DETERMINED THIS IS THE
APPROPRIATE AMORTIZATION PERIOD IN ACCORDANCE WITH PARAGRAPH 11 OF SFAS
142.
We first recognized customer relations intangible assets on July 15, 2004,
the date of the merger between Belden and CDT. We utilized a third party
valuation firm to provide input regarding valuations of and amortization
periods for the customer relations intangible assets. In the wire and cable
industry, a company is considered to hold a spec position for a particular
product for a particular application when system architects and designers
specify wire and cable with electrical, mechanical, and physical
characteristics identical to those of the particular company's wire and
cable products. Because system architects and designers are reluctant to
change specifications, companies that have spec positions may benefit from
a high volume of repeat business. Management determined that five of the
operations acquired in the merger--West Penn, Dearborn, Thermax, ITC, and
HEW--were well established businesses that held spec positions in the niche
markets they served and had strong relationships with their customers.
In accordance with paragraph 11 of SFAS 142, Goodwill and Other Intangible
Assets, we were unable to identify any legal, regulatory, or contractual
provisions that might either limit or lengthen the useful life of each
operation's customer relations intangible asset. We did determine that
demand, competition, and other economic factors would ultimately limit the
useful life of each operation's customer relations intangible asset.
West Penn derived approximately 80 percent of its annual sales from direct
sales to system integrators as opposed to wire and cable distributors.
System integrators generally dictate which products are to be used for a
particular project. In addition system integrators are constantly in the
market making buying decisions, whereas ultimate end users enter and leave
the market sporadically. We considered West Penn's high market share
percentages, the composition of its customer base, and the fact that West
Penn had been doing business with many of its customers for decades and
estimated that this customer business would contribute directly or
indirectly to the cash flow of West Penn for another 30 years.
Securities and Exchange Commission
August 4, 2006
Page 6
Dearborn was established in 1962 and was a leading manufacturer and
supplier of specialty electronics to the wireless, automotive, computer,
and marine markets. Dearborn held numerous spec positions, primarily in the
marine market. We estimated that Dearborn's customer base would contribute
directly or indirectly to the cash flow of that operation for another 20
years.
A pioneer in the development of temperature-resistant wire and cable
products, Thermax had been in business for more than 50 years and held
various spec positions in the aerospace and military markets. We estimated
that the Thermax customer base would contribute directly or indirectly to
the cash flow of that operation for another 20 years.
During the course of its 20-year history, ITC developed strong customer
relationships as a result of its strong position in the Italian cable
television market, particularly with its premise video system cables. We
estimated that ITC's customer base would contribute directly or indirectly
to the cash flow of that operation for another 15 years.
HEW was a special case in that a large share of its profits was derived
from relationships with two companies. In recent years, HEW has generated
approximately one-third of its income from these two customers. We
estimated that these two customers would contribute directly or indirectly
to the cash flow of HEW for approximately 15 years.
Based upon the above, we calculated the weighted average amortization
period for our customer relations intangible assets at 25.6 years as
follows:
Weighted
Average
Gross Amortization Amortization
Carrying Period Period
Value (Years) (Years)
-------- ------------ ------------
(in thousands, except
amortization periods)
West Penn $35,324 30.0 19.3
Dearborn 2,766 20.0 1.0
Thermax 9,254 20.0 3.3
ITC 5,745 15.0 1.5
HEW 1,818 15.0 0.5
------- ----
$54,907 25.6
======= ====
Securities and Exchange Commission
August 4, 2006
Page 7
8. YOU DISCLOSED THAT GOODWILL OF $55.5 MILLION WAS ASSIGNED TO THE
ELECTRONICS SEGMENT. YOU ALSO DISCLOSED THAT THE RESIDUAL GOODWILL OF
$148.1 MILLION WAS NOT ASSIGNED TO A SPECIFIC SEGMENT SINCE MANAGEMENT
BELIEVED IT BENEFITED THE ENTIRE COMPANY; THEREFORE IT WAS RECOGNIZED IN
FINANCE AND ADMINISTRATION (F&A) IN YOUR SEGMENT INFORMATION. PLEASE HELP
US UNDERSTAND HOW YOU DETERMINED YOUR REPORTING UNITS AND CORRESPONDINGLY
ASSIGNED GOODWILL TO REPORTING UNITS FOR PURPOSES OF TESTING GOODWILL IN
ACCORDANCE WITH SFAS 142. PLEASE ADDRESS THE FOLLOWING:
- DURING THE YEAR ENDED DECEMBER 31, 2005, TELL US WHEN THE ANNUAL
GOODWILL IMPAIRMENT TEST AS WELL AS ANY ADDITIONAL GOODWILL IMPAIRMENT
TESTS WERE PERFORMED.
- TELL US WHAT YOUR REPORTING UNITS WERE AND HOW YOU DETERMINED THEM IN
ACCORDANCE WITH PARAGRAPH 30 OF SFAS 142, AND
- TELL US THE AMOUNT OF GOODWILL ASSIGNED TO EACH REPORTING UNIT AS WELL
AS HOW YOU DETERMINED THE AMOUNT TO BE ASSIGNED IN ACCORDANCE WITH
PARAGRAPHS 34 AND 35 OF SFAS 142.
During the year ended December 31, 2005, we performed our annual goodwill
impairment test in December using carrying amounts recorded as of the end
of fiscal November. We performed additional impairment tests on goodwill
assigned to our Europe Networking reporting unit and our Europe Electronics
reporting unit based on our belief that, more likely than not, the carrying
amounts of goodwill assigned to these units was potentially no longer fully
recoverable because of restructuring actions underway in both units, which
resulted in an impairment charge of $9.5 million in the third quarter of
2005 for the Europe Networking reporting unit. We performed these
additional tests in October using carrying amounts recorded as of the end
of fiscal August.
During the year ended December 31, 2005, we determined that we had six
reporting units for the purpose of testing the carrying value of goodwill
for impairment: Electronic Products, Specialty Products, Networking
Products, Europe Electronics, Europe Networking, and West Penn. In
accordance with paragraph 30 of SFAS 142, each of the units represented a
component (one level below) of one of our operating segments. Each
component constituted a business for which discrete financial information
was available and management regularly reviewed the operating results of
each component.
During the year ended December 31, 2005, we assigned the $146.8 million of
goodwill recognized in Finance and Administration as of November fiscal
month-end to the following reporting units for the purpose of testing the
carrying value of goodwill for impairment:
(In thousands)
- --------------
Electronic Products $ 24,500
Specialty Products 24,173
Networking Products 44,264
Europe Electronics 40,486
Europe Networking --
West Penn 13,415
--------
$146,838
========
In accordance with paragraphs 34 and 35 of SFAS 142, we assigned the
goodwill recognized in Finance and Administration to these reporting units
for the purpose of testing the carrying value of goodwill for impairment
based on a ratio of the excess fair value of each reporting unit
(determined by using a discounted cash flow method) over the carrying
amount of that reporting unit's net assets to the cumulative excess fair
value of all the reporting units over the cumulative carrying amount of all
the reporting units' net assets.
Securities and Exchange Commission
August 4, 2006
Page 8
Note 12: Intangible Assets, page 74
9. PLEASE EXPAND YOUR DISCLOSURE TO INCLUDE THE WEIGHTED-AVERAGE AMORTIZATION
PERIOD IN TOTAL AND FOR EACH CLASS OF INTANGIBLE ASSETS PRESENTED AND THE
ACCUMULATED AMORTIZATION FOR EACH CLASS OF INTANGIBLE ASSETS PRESENTED.
PLEASE ALSO INCLUDE THE ESTIMATED AGGREGATE AMORTIZATION EXPENSE FOR EACH
OF THE NEXT FIVE YEARS. REFER TO PARAGRAPHS 44(A)(3), 45(A)(1), AND
45(A)(3) OF SFAS 142.
In accordance with paragraph 44(a)(3) of SFAS 142, we disclosed the
weighted-average amortization period in total and for each class of
intangible assets in our discussion of acquired intangible assets in Note
3, Belden CDT Merger, on page 65 of the 2005 Annual Report on Form 10-K.
We will expand our disclosure in future filings to include the accumulated
amortization for each class of intangible assets presented in accordance
with paragraph 45 (a) (1) of SFAS 142. We will also include the estimated
aggregate amortization expense for each of the next five years in
accordance with paragraph 45 (a) (3) of SFAS 142. Such disclosure will
appear as follows:
December 31, December 31,
2005 2004
------------ ------------
(In thousands)
Intangible assets subject to amortization:
Gross carrying amount:
Customer relations $ 54,608 $ 55,702
Developed technologies 6,179 6,558
Favorable contracts 1,094 1,094
Backlog 1,976 2,357
-------- --------
Total gross carrying amount 63,857 65,711
Accumulated amortization:
Customer relations (3,548) (1,879)
Developed technologies (654) (376)
Favorable contracts (456) (143)
Backlog (1,976) (1,036)
-------- --------
Total accumulated amortization (6,634) (3,434)
-------- --------
Net intangible assets subject to amortization 57,223 62,277
Intangible assets not subject to amortization:
Goodwill 272,290 286,163
Trademarks 15,236 15,989
-------- --------
Total intangible assets not subject to amortization 287,526 302,152
-------- --------
Net intangible assets $344,749 $364,429
======== ========
The Company expects to recognize annual amortization expense of $2.9
million in both 2006 and 2007, and approximately $2.6 million in 2008, 2009
and 2010.
Securities and Exchange Commission
August 4, 2006
Page 9
Note 13: Accounts Payable and Accrued Liabilities, page 75
10. YOU DISCLOSED IN ITEM 3 THAT YOU ARE A DEFENDANT IN CERTAIN CASES INVOLVING
ASBESTOS. PLEASE EXPAND YOU DISCLOSURES REGARDING THESE CASES, WHICH SHOULD
INCLUDE CLARIFICATION AS TO WHETHER YOU HAVE ACCRUED ANY AMOUNTS RELATED TO
ASBESTOS LITIGATION AND CLAIMS OR OTHER ASBESTOS LIABILITIES. REFER TO
PARAGRAPHS 3 AND 8-10 OF SFAS 5, SOP 96-1, AND SAB TOPIC 5:Y.
At December 31, 2005, the amount accrued related to asbestos litigation was
not material (less than $500,000) and, accordingly, we believe additional
disclosure is not necessary.
Contingently Convertible Notes, page 79
11. PLEASE PROVIDE US WITH A COMPREHENSIVE EXPLANATION OF YOUR ACCOUNTING FOR
THE CONTINGENTLY CONVERTIBLE NOTES, INCLUDING THE ACCOUNTING LITERATURE YOU
USED TO DETERMINE THE APPROPRIATE ACCOUNTING. YOUR EXPLANATION SHOULD
INCLUDE HOW YOU ACCOUNTED FOR THE CONVERSION FEATURE, INCLUDING WHAT
CONSIDERATION WAS GIVEN AS TO WHETHER THE CONVERSION FEATURE NEEDED TO BE
BIFURCATED IN ACCORDANCE WITH SFAS 133.
We assumed CDT's convertible subordinated notes with a face value of $110.0
million in conjunction with the 2004 merger between Belden and CDT. In
accordance with paragraph 5 of SFAS 141, Business Combinations, and
paragraph 4 of EITF 98-1, Valuation of Debt Assumed in a Purchase Business
Combination, we determined the fair value of the notes on the date of
merger was $149.0 million based on a quoted market price.
Based on paragraph 18 of APB 14, Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants, we determined that the $39.0 million
market premium of the notes at the merger date, which represented 35% of
the face value of the notes, represented a substantial premium. Therefore,
we recognized the $110.0 million face value of the notes as a liability and
the $39.0 million market premium as additional paid-in capital.
Paragraphs 11(a) and 12 of SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, note that conventional convertible debt contains an
embedded call option on the issuer's shares which generally is not
bifurcated and accounted for separately. However, bifurcation and separate
accounting are required if the embedded option meets the definition of a
derivative and fails either of the following tests:
1 The embedded option is indexed to the issuer's own stock, or
2 The embedded option, if freestanding, would be classified in
stockholders' equity.
Based on paragraph 6 of SFAS 133, we determined that the conversion feature
in our convertible subordinated notes was a derivative because it had one
or more underlyings (in our case, the Company's stock price) and one or
more payment provisions, it required no initial net investment separate
from the notes, and the terms of the conversion permitted delivery of stock
or cash at the Company's option.
The embedded call option within our subordinated convertible notes is
indexed to our stock and, therefore, met the test under 1 above.
Securities and Exchange Commission
August 4, 2006
Page 10
As the convertible subordinated notes are not considered conventional
convertible notes because of the dividend features, we performed an
analysis based on paragraphs 8 and 12--32 of EITF 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock. We determined that the embedded option in our
subordinated convertible notes would, if freestanding, be classified in
stockholders' equity because the conversion option gives us the choice of
cash settlement or settlement in stock and all of the following criteria
were met:
1 Contract permits the company to settle in unregistered shares, or
delivery must be within the control of the Company.
The option embedded in our convertible notes involves the
delivery of shares within our control. The shares that could be
delivered upon conversion of the notes were registered as of the
inception of the notes and there were no further timely filing or
registration requirements.
2 The Company has sufficient authorized and unissued shares
available to settle the contract after considering all other
commitments that may require the issuance of stock.
We had 150 million shares authorized and approximately 47 million
shares outstanding on the merger date. Assuming conversion of all
outstanding stock options and the convertible notes,
approximately 50 million shares (6 million shares related to the
notes) would be issued, leaving approximately 50 million shares
not under current obligation.
3 Contract contains an explicit limit on the number of shares to be
delivered in a share settlement, or net share settlement is
within the control of the Company.
The number of shares to be delivered upon conversion of our notes
is limited to the face value of the notes ($110.0 million)
divided by the conversion price ($18.06 per share) or 6,090,808
shares as of the merger date. The conversion price can change as
a result of us declaring a dividend to the common stockholders,
but this is within our control.
4 There are no required cash payments to the counterparty in the
event the company fails to make timely filings with the SEC.
Our note agreement does not include provisions requiring cash
payment to the noteholders as a result of non-timely filings with
the SEC.
5 There are no required cash payments to the counterparty if shares
initially delivered upon settlement are subsequently sold by the
counterparty and the proceeds are insufficient to provide the
counterparty with full return of the amount due.
Our note agreement does not include provisions of this nature.
6 The contract requires net cash settlement only if specific
circumstances in which holders of shares underlying the contract
also would receive cash in exchange for their shares.
Our note agreement does contain a change of control provision,
but the provision does not call for net cash settlement.
Securities and Exchange Commission
August 4, 2006
Page 11
7 There are no provisions in the contract that indicate that the
counterparty has rights that rank higher than those of a
shareholder of the stock underlying the contract.
Our note agreement does not include any such provisions.
8 There is no requirement to post collateral at any point for any
reason.
Our note agreement includes no such requirement.
Based on the results of these tests, we concluded that the embedded
conversion feature would be treated as equity, it was appropriate to
account for the embedded conversion feature and the subordinated
convertible notes as a single instrument, and bifurcation was not required.
Note 19: Operating Leases, page 89
12. PLEASE DISCLOSE HOW YOU ACCOUNT FOR (A) STEP RENT PROVISIONS AND ESCALATION
CLAUSES AND (B) CAPITAL IMPROVEMENT FUNDING AND OTHER LEASE CONCESSIONS,
WHICH MAY BE PRESENT IN YOUR LEASES. PARAGRAPH 5.N. OF SFAS 13, AS AMENDED
BY SFAS 29, DISCUSSES HOW LEASE PAYMENTS THAT DEPEND ON AN EXISTING INDEX
OR RATE, SUCH AS THE CONSUMER PRICE INDEX OR THE PRIME INTEREST RATE,
SHOULD ALSO BE INCLUDED IN YOUR MINIMUM LEASE PAYMENTS. IF, AS WE ASSUME,
THEY ARE TAKEN INTO ACCOUNT IN COMPUTING YOUR MINIMUM LEASE PAYMENTS AND
THE MINIMUM LEASE PAYMENTS ARE RECOGNIZED ON A STRAIGHT-LINE BASIS OVER THE
MINIMUM LEASE TERM, THE NOTE SHOULD SO STATE. IF OUR ASSUMPTION IS
INCORRECT, PLEASE TELL US HOW YOUR ACCOUNTING COMPLIES WITH SFAS 13 AND FTB
88-1.
At December 31, 2005, we were a party to only one significant lease
agreement for office space that included step rent provisions and an
escalation clause based on a percentage of the landlord's operating
expenses. We classified this agreement as an operating lease because it
failed to meet any of the criteria listed in paragraph 7 of SFAS 13,
Accounting for Leases, that must be met in order for an agreement to be
classified as a capital lease. We used the base rent, the step rent
provision, and rent escalation to develop the estimated minimum lease
payment obligation for this agreement. In accordance with paragraph 15 of
SFAS 13, we recognized rental expense related to this minimum lease payment
obligation on a straight-line basis over the minimum lease term. Minimum
lease payments for the next five years for this lease are as follows:
2006 2007 2008 2009 2010 Total
- ---- ---- ---- ---- ---- ------
(In thousands)
$278 $310 $325 $341 $174 $1,428
In future filings, we will include language in our disclosure that states
that such step rent provisions and rent escalations are included in our
minimum lease payments obligations and recognized as rental expense on a
straight-line basis over the minimum lease term.
Securities and Exchange Commission
August 4, 2006
Page 12
Form 10-Q for the Fiscal Quarter Ended March 26, 2006
Comments applicable to your overall filing
13. PLEASE ADDRESS THE COMMENTS ABOVE IN YOUR INTERIM FORMS 10-Q AS WELL.
We will address the comments above in our interim Forms 10-Q where
applicable.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations, page 23
14. YOU HAVE DISCLOSED VARIOUS COMPONENTS, WHICH HAVE CONTRIBUTED TO INCREASES
AND DECREASES WITHIN YOU INCOME STATEMENT LINE ITEMS, INCLUDING BUT NOT
LIMITED TO, GROSS PROFIT, OPERATING INCOME, AND YOUR SEGMENTS. SOME OF THE
COMPONENTS YOU HAVE CITED INCLUDE THE FOLLOWING:
- SALES PRICE INCREASES,
- COST REDUCTION INITIATIVES,
- SHARE-BASED COMPENSATION EXPENSE,
- RISING COSTS OF COPPER AND COMMODITIES DERIVED FROM PETROCHEMICAL
FEEDSTOCKS,
- FOREIGN CURRENCY TRANSLATION, AND
- ACCELERATED DEPRECIATION AND SEVERANCE COSTS RELATED TO
RESTRUCTURING ACTIONS.
YOUR DISCLOSURE SHOULD INCLUDE ADDITIONAL DETAILS THAT EXPLAIN THE BUSINESS
REASONS FOR EACH COMPONENT YOU CITE, WHICH ATTRIBUTED TO THE CHANGE AND
SHOULD ALSO QUANTIFY THE EFFECT EACH OF THESE COMPONENTS HAD ON THE
INCREASES AND DECREASES WITHIN THE INCOME STATEMENT LINE ITEMS, INCLUDING
THOSE COMPONENTS THAT OFFSET ONE ANOTHER. PLEASE SHOW US WHAT YOUR REVISED
MD&A DISCLOSURE WILL LOOK LIKE.
In future filings, we will include additional details that explain the
business reasons for each of the components within our control that have
contributed to increases and decreases within our operating results line
items. We will also quantify the effect each of the components had on the
increases and decreases within our operating results line items. An example
of what our revised MD&A disclosure will look like is included below.
Continuing Operations
Revenues generated in the three months ended March 26, 2006 increased
12.4% to $321.9 million from revenues generated in the three months
ended March 27, 2005 of $286.3 million because of increased selling
prices and increased sales volume partially offset by unfavorable
foreign currency translation on international revenues. Price
improvement resulted primarily from the impact of sales price
increases implemented by the Company during 2005 and 2006 across most
product lines in response to increases in the costs of copper and
commodities derived from petrochemical feedstocks and improved pricing
practices at certain of our operations. Price improvement contributed
approximately 10.5 percentage points of the revenue increase. Higher
unit sales of products with industrial and video/sound/security (VSS)
applications were partially offset by a volume decrease in sales of
products with communications/networking (CN) applications and
contributed approximately 3.2 percentage points of the revenue
increase. Unit sales of products with industrial and VSS applications
have improved because facilities manufacturing these products have
improved their order fill rates and reduced their backlog. Unit sales
of products with CN applications
Securities and Exchange Commission
August 4, 2006
Page 13
have deteriorated as customers purchased less costly alternatives
following our implementation of increased sales prices in the quarter.
Unfavorable currency translation on international revenues offset the
positive effect that price and volume had on our revenue comparison by
1.2 percentage points.
Gross profit increased 16.9% to $73.4 million in the three months
ended March 26, 2006 from $62.8 million in the three months ended
March 27, 2005 primarily because of improved pricing practices in
certain of our operations, higher sales volumes, and the
current-quarter impact of our manufacturing cost reduction
initiatives. These positive factors were partially offset by higher
product costs resulting from increased purchase prices for copper and
commodities derived from petrochemical feedstocks totaling
approximately $13.7 million and accelerated depreciation of certain
European assets because of our restructuring efforts initiated to
improve our profitability totaling $1.3 million. Gross profit as a
percent of revenues increased from 21.9% in the first quarter of 2005
to 22.8% in the current quarter because of the previously mentioned
items and increased manufacturing utilization as a result of plant
rationalization and consolidation.
Operating income increased 84.0% to $27.0 million for the three months
ended March 26, 2006 from $14.7 million for the three months ended
March 27, 2005 because of higher gross profit and a decrease in
selling, general and administrative expenses. These expenses decreased
to $46.5 million in the first quarter of 2006 from $48.1 million for
the first quarter of 2005 primarily because of the $2.8 million impact
of cost reduction initiatives (including 2005 personnel reductions)
implemented to improve our profitability, partially offset by a $0.5
million increase in share-based compensation expense resulting from
the 2006 adoption of Statement of Financial Accounting Standards No.
123(R) and a $0.7 million increase in severance expense resulting from
the European restructuring and other 2006 personnel reductions
initiated to improve our profitability. Operating income as a percent
of revenues improved from 5.1% in the first quarter of 2005 to 8.4% in
the current quarter because of the previously mentioned items.
Financial Condition, page 27
Cash Flows from Operating Activities, page 27
15. PLEASE REVISE YOUR ANALYSIS RELATED TO YOUR CASH FLOWS FROM OPERATING
ACTIVITIES TO EXPLAIN THE UNDERLYING FACTORS WHICH CONTRIBUTED TO THE
CHANGES IN YOUR BALANCE SHEET ACCOUNTS, RATHER THAN MERELY RECITING THE
INCREASES AND DECREASES FROM THE FACE OF YOUR STATEMENTS OF CASH FLOWS. IN
THIS REGARD, YOU SHOULD EXPLAIN WHY BALANCES SIGNIFICANTLY INCREASED OR
DECREASED. SPECIFICALLY DISCLOSE AND DISCUSS TRENDS, SUCH AS DAYS
OUTSTANDING FOR RECEIVABLES AND INVENTORY. PLEASE REFER TO SECTION IV.B. OF
SEC RELEASE 33-8350.
Securities and Exchange Commission
August 4, 2006
Page 14
In future filings, we will revise our analysis related to cash flows from
operating activities to more thoroughly explain underlying factors which
contributed to the changes in our balance sheet accounts, using paragraph 3
on page 27 in our Quarterly Report on Form 10-Q for the fiscal quarter
ended March 26, 2006 as an example, as follows:
Cash Flows from Operating Activities
Net cash used for operating activities in the first three months of
2006 totaled $11.0 million and included $12.4 million of other
non-cash operating expenses and a $32.7 million net increase in
operating assets and liabilities. Other non-cash operating expenses
consisted of depreciation, amortization, deferred tax expense,
share-based compensation, and a loss on the disposal of tangible
assets partially offset by excess tax benefits recognized on
share-based compensation. The net increase in operating assets and
liabilities resulted primarily from increased receivables, increased
inventories, decreased current income taxes and decreased accounts
payable and accrued liabilities partially offset by decreased other
net operating assets and liabilities.
Receivables and inventories increased from December 31, 2005 to March
26, 2006 mainly because of higher sales levels and increased costs for
copper and commodities derived from petrochemical feedstocks. Days
sales outstanding in receivables increased from December 31, 2005 to
March 26, 2006 primarily because of the seasonality of our collections
process (December is historically our strongest collections month).
Inventory turns at March 26, 2006 were largely unchanged from December
31, 2005.. Current income tax liability decreased from December 31,
2005 to March 26, 2006 as the result of payments we made against our
2005 liability in the first quarter of 2006. Accounts payable and
accrued liabilities decreased from December 31, 2005 to March 26, 2006
primarily because of payments disbursed in the first quarter of 2006
related to (1) the 2005 incentive compensation liability, (2) interest
accrued since the third quarter of 2005 on our medium term notes, and
(3) certain participant balances in our nonqualified retirement
benefits plans in the first quarter of 2006. Days payables in costs of
sales at March 26, 2006 was largely unchanged from December 31, 2005.
Form 8-K filed on February 9, 2006
16. YOUR DISCUSSION REGARDING FOURTH QUARTER RESULTS INCLUDES OPERATING INCOME
FOR WHICH YOU HAVE EXCLUDED CERTAIN CHARGES, ADJUSTED INCOME FROM
CONTINUING OPERATIONS, EARNINGS PER DILUTED SHARE FROM ADJUSTED INCOME FROM
CONTINUING OPERATIONS, AND ADJUSTED OPERATING MARGIN; THESE AMOUNTS APPEAR
TO BE NON-GAAP FINANCIAL MEASURES. YOUR FORECAST REGARDING YOUR RESULTS OF
OPERATIONS FOR THE FIRST QUARTER OF FISCAL 2006 PROVIDES GUIDANCE FOR YOUR
EARNINGS PER SHARE AND EARNING PER DILUTED SHARE, EXCLUDING RESTRUCTURING
CHARGES; THESE AMOUNTS ALSO APPEAR TO BE NON-GAAP FINANCIAL MEASURES. YOU
DISCLOSED A TABLE WHICH INCLUDED YOUR RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED AND FISCAL YEAR ENDED DECEMBER 31, 2005 ADJUSTED TO EXCLUDE
SEVERANCE CHARGES, ACCELERATED DEPRECIATION, EXPENSES FOR EXECUTIVE
SUCCESSION, AND A ONE-TIME TAX BENEFIT; THESE AMOUNTS ALSO APPEAR TO BE
NON-GAAP FINANCIAL MEASURES. PLEASE EXPAND YOUR DISCLOSURE TO INCLUDE THE
FOLLOWING:
Securities and Exchange Commission
August 4, 2006
Page 15
- A STATEMENT WHICH IDENTIFIES EACH OF THESE AS NON-GAAP FINANCIAL
MEASURES AND
- A RECONCILIATION AND DISCUSSION REGARDING THESE NON-GAAP
FINANCIAL MEASURES TO THE MOST DIRECTLY COMPARABLE FINANCIAL
MEASURES CALCULATED AND PRESENTED IN ACCORDANCE WITH GAAP.
PLEASE REFER TO REGULATION G.
We revised our presentation of this information in our Current Report on
Form 8-K, filed April 28, 2006. In future filings, we will expand our
disclosure to include a statement which identifies such amounts as non-GAAP
financial measures and include a reconciliation and discussion regarding
these non-GAAP financial measures to the most directly-comparable financial
measure calculated and presented in accordance with GAAP, as follows:
ADJUSTED OPERATING RESULTS
In addition to reporting financial results in accordance with
accounting principles generally accepted in the United States, we
provide operating results adjusted for severance charges, accelerated
depreciation, and merger-related costs. We utilize the adjusted
results to review our ongoing operations without the effect of
restructuring and related charges and for comparison to budgeted
operating results. We believe these adjusted results are useful to
investors because they help them compare the Company's results to
previous periods and provide insights into underlying trends in the
business. Adjusted results should be considered only in conjunction
with results reported according to generally accepted accounting
principles.
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
--------------------------------- ---------------------------------
AS AS
REPORTED ADJUSTMENTS ADJUSTED REPORTED ADJUSTMENTS ADJUSTED
-------- ----------- -------- -------- ----------- --------
(In thousands, except percentages and per share amounts)
Revenues $362,930 $ -- $362,930 $330,310 $ -- $330,310
Operating income $ 18,442 $12,417 $ 30,859 $ 27,206 $ 3,525 $ 30,731
as a percent of revenues 5.1% 8.5% 8.2% 9.3%
Income from continuing operations $ 7,494 $ 7,444 $ 14,938 $ 8,596 $11,536 $ 20,132
Income from continuing operations
per diluted share $ 0.16 $ 0.15 $ 0.31 $ 0.17 $ 0.23 $ 0.40
Adjustments for the three months ended December 31, 2005 included
pretax severance charges of $7.7 million, accelerated depreciation of
$3.5 million, expenses for executive succession of $1.0 million,
merger-related costs of $0.2 million, and a one-time tax benefit of
$3.3 million.
Adjustments for the three months ended December 31, 2004 included
pretax merger-related costs of $3.5 million and a tax valuation
allowance charge of $9.4 million.
Securities and Exchange Commission
August 4, 2006
Page 16
If you have any questions relating to any of the foregoing, please feel free to
contact me at 314-854-8017 or my colleague, John Norman, at 314-854-8015.
Sincerely,
/s/ Stephen H. Johnson
- ----------------------------------------------
Stephen H. Johnson
Treasurer and Interim Chief Financial Officer