UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 001-12929
CommScope, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-4135495
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1375 Lenoir-Rhyne Boulevard, Hickory, North Carolina
(Address of principal executive offices)
28602
(Zip Code)
(828) 324-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
As of April 30, 2000 there were 51,040,023 shares of Common Stock outstanding.
CommScope, Inc.
Form 10-Q
March 31, 2000
Table of Contents
Page No.
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Part I - Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statement of Stockholders' Equity 6
Notes to Condensed Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Position 9 - 13
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
CommScope, Inc.
Condensed Consolidated Statements of Income
(Unaudited - in thousands, except net income per share amounts)
Three Months Ended
March 31,
------------------------
2000 1999
--------- ---------
Net sales $ 203,939 $ 148,071
Operating costs and expenses:
Cost of sales 151,586 111,236
Selling, general and administrative 18,397 14,569
Research and development 3,638 1,489
Amortization of goodwill 1,343 1,247
--------- ---------
Total operating costs and expenses 174,964 128,541
--------- ---------
Operating income 28,975 19,530
Other income (expense), net (15) 10
Interest expense (2,388) (2,798)
Interest income 392 139
--------- ---------
Income before income taxes 26,964 16,881
Provision for income taxes (10,237) (6,121)
--------- ---------
Net income $ 16,727 $ 10,760
========= =========
Net income per share:
Basic $ 0.33 $ 0.21
Assuming dilution $ 0.32 $ 0.21
Weighted average shares outstanding:
Basic 50,935 50,401
Assuming dilution 52,500 51,218
See notes to condensed consolidated financial statements.
3
CommScope, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
March 31, December 31,
2000 1999
---------- ------------
Assets
Cash and cash equivalents $ 2,278 $ 30,223
Accounts receivable, less allowance for doubtful
accounts of $5,266 and $4,838, respectively 162,974 127,018
Inventories (Note 2) 60,930 40,208
Prepaid expenses and other current assets 2,650 2,376
Deferred income taxes 16,409 15,354
--------- ---------
Total current assets 245,241 215,179
Property, plant and equipment, net 195,813 181,488
Goodwill, net of accumulated amortization of
$50,115 and $48,777, respectively 160,715 162,075
Other intangibles, net of accumulated amortization
of $32,740 and $32,055, respectively 16,025 16,710
Other assets 6,812 7,083
--------- ---------
Total Assets $ 624,606 $ 582,535
========= =========
Liabilities and Stockholders' Equity
Accounts payable $ 42,794 $ 29,179
Other accrued liabilities 47,898 39,048
--------- ---------
Total current liabilities 90,692 68,227
Long-term debt 197,642 198,402
Deferred income taxes 20,868 20,346
Other noncurrent liabilities 14,890 14,216
--------- ---------
Total Liabilities 324,092 301,191
Commitments and contingencies (Note 4) -- --
Stockholders' Equity:
Preferred stock, $.01 par value; Authorized
shares: 20,000,000; Issued and outstanding
shares: None at March 31, 2000 and
December 31, 1999 -- --
Common stock, $.01 par value; Authorized shares:
300,000,000; Issued and outstanding shares:
51,017,342 at March 31, 2000; 50,889,208 at
December 31, 1999 510 509
Additional paid-in capital 169,870 166,875
Retained earnings 132,642 115,915
Accumulated other comprehensive loss (2,508) (1,955)
--------- ---------
Total Stockholders' Equity 300,514 281,344
--------- ---------
Total Liabilities and Stockholders' Equity $ 624,606 $ 582,535
========= =========
See notes to condensed consolidated financial statements.
4
CommScope, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited - in thousands)
Three Months Ended
March 31,
--------------------
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net income $ 16,727 $ 10,760
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,176 6,932
Deferred income taxes (827) (1,118)
Changes in assets and liabilities:
Accounts receivable (36,343) (14,100)
Inventories (21,031) (1,854)
Prepaid expenses and other current assets (295) 2,222
Accounts payable and other accrued liabilities 24,134 18,516
Other noncurrent liabilities 674 431
Other (84) (116)
-------- --------
Net cash provided by (used in) operating activities (8,869) 21,673
INVESTING ACTIVITIES:
Additions to property, plant and equipment (20,858) (9,005)
Acquisition of business in Seneffe, Belgium -- (17,023)
Other 228 --
-------- --------
Net cash used in investing activities (20,630) (26,028)
FINANCING ACTIVITIES:
Net repayments under revolving credit facility -- (10,000)
Proceeds from term loan facility for acquisition
of business in Seneffe, Belgium -- 16,353
Proceeds from exercise of stock options 1,653 3,417
-------- --------
Net cash provided by financing activities 1,653 9,770
Effect of exchange rate changes on cash (99) (68)
-------- --------
Change in cash and cash equivalents (27,945) 5,347
Cash and cash equivalents, beginning of period 30,223 4,129
-------- --------
Cash and cash equivalents, end of period $ 2,278 $ 9,476
======== ========
See notes to condensed consolidated financial statements.
5
CommScope, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited - in thousands, except share amounts)
Three Months Ended March 31, 2000
Accumulated
Number of Additional Other Total
Common Shares Common Paid-In Retained Comprehensive Stockholder's
Outstanding Stock Capital Earnings Loss Equity
------------- ------ ---------- -------- ------------- -------------
Balance December 31, 1999 50,889,208 $509 $166,875 $115,915 $(1,955) $ 281,344
Issuance of shares for stock
option exercises 128,134 1 1,652 -- -- 1,653
Tax benefit from stock option
exercises -- -- 1,343 -- -- 1,343
Comprehensive income:
Net income -- -- -- 16,727 -- 16,727
Other comprehensive loss -- -- -- -- (553) (553)
------------- ------ ---------- -------- ------------- -------------
Total comprehensive income -- -- -- 16,727 (553) 16,174
------------- ------ ---------- -------- ------------- -------------
Balance March 31, 2000 51,017,342 $510 $169,870 $132,642 $(2,508) $ 300,514
============= ====== ========== ======== ============= =============
See notes to condensed consolidated financial statements.
6
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited - In Thousands, Unless Otherwise Noted)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
CommScope, Inc. ("CommScope" or the "Company"), through its wholly owned
subsidiaries, operates in the cable manufacturing business. CommScope is a
leading worldwide designer, manufacturer and marketer of a wide array of
broadband coaxial cables and other high-performance electronic and fiber optic
cable products for cable television, telephony, Internet access and wireless
communications. Management believes CommScope is the world's largest
manufacturer of coaxial cable for hybrid fiber coaxial (HFC) cable television
systems. CommScope is also a leading supplier of coaxial, twisted pair, and
fiber optic cables for premise wiring (local area networks), wireless and other
communication applications.
Basis of Presentation
The condensed consolidated balance sheet as of March 31, 2000, the condensed
consolidated statements of income for the three months ended March 31, 2000 and
1999, the condensed consolidated statements of cash flows for the three months
ended March 31, 2000 and 1999, and the condensed consolidated statement of
stockholders' equity for the three months ended March 31, 2000 are unaudited and
reflect all adjustments of a normal recurring nature which are, in the opinion
of management, necessary for a fair presentation of the interim period financial
statements. There were no adjustments of a nonrecurring nature recorded during
the three months ended March 31, 2000 or 1999. The results of operations for the
interim period are not necessarily indicative of the results of operations to be
expected for the full year.
The unaudited interim condensed consolidated financial statements of
CommScope have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These interim condensed consolidated financial statements should be
read in conjunction with the Company's December 31, 1999 audited consolidated
financial statements and notes thereto included in the Company's 1999 Annual
Report on Form 10-K.
2. SUPPLEMENTAL BALANCE SHEET INFORMATION
Inventories consist of:
March 31, December 31,
2000 1999
------------ ------------
Raw materials $ 22,114 $ 16,597
Work in process 12,173 9,942
Finished goods 26,643 13,669
------------ ------------
$ 60,930 $ 40,208
============ ============
7
3. NET INCOME PER SHARE
Below is a reconciliation of weighted average common shares outstanding for
basic net income per share to weighted average common and potential common
shares outstanding for diluted net income per share:
Three Three
Months Months
Ended Ended
March 31, March 31,
2000 (A) 1999
--------- ---------
Weighted average number of common shares outstanding 50,935 50,401
Dilutive effect of employee stock options 1,565 817
--------- ---------
Weighted average number of common and potential
common shares outstanding 52,500 51,218
========= =========
(A) On December 15, 1999, the Company issued $172.5 million in convertible
notes, which are convertible into shares of common stock at a conversion
rate of 20.7512 shares per $1,000 principal amount. The effect of the
assumed conversion of these notes was excluded from the computation of net
income per share (assuming dilution) for the three months ended March 31,
2000 because its inclusion would have been antidilutive.
4. COMMITMENTS AND CONTINGENCIES
At March 31, 2000, the Company had commitments outstanding for capital
expenditures under purchase orders and contracts of approximately $8.9 million.
These commitments relate to capacity expansion projects, the majority of which
are expected to be completed in 2000.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the unaudited
condensed consolidated financial statements and accompanying notes included in
this document as well as the audited consolidated financial statements, related
notes thereto and management's discussion and analysis of financial condition
and results of operations for the year ended December 31, 1999 included in our
Annual Report on Form 10-K. Unless otherwise specified, capitalized terms used
herein are used as defined in our audited consolidated financial statements for
the year ended December 31, 1999 or in the unaudited condensed consolidated
financial statements included in this document.
HIGHLIGHTS
We reported net income of $17 million, or $0.33 per basic share and $0.32 per
diluted share, for the quarter ended March 31, 2000. These results reflect an
increase of $6 million, or 55%, from the quarter ended March 31, 1999 net income
of $11 million, or $0.21 per basic and diluted share.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31,
2000 WITH THE THREE MONTH PERIOD ENDED MARCH 31, 1999
Net Sales
Net sales for the first quarter ended March 31, 2000 increased $56 million or
38% to $204 million, compared to the same period in 1999. This increase
primarily resulted from higher sales volume, as the price increases implemented
in mid-February 2000 had little impact on first quarter results. The increase in
sales volume was primarily driven by strong broadband cable sales to domestic
telecommunications companies. Domestic sales rose 46% to nearly $154 million in
the first quarter of 2000, compared to the same period in 1999.
For the first quarter ended March 31, 2000, international sales increased 18%
to $50 million compared to the same period in 1999, due mainly to improving
sales in Latin America and the Asia/Pacific Rim region.
Net sales to cable television and other video distribution markets
("CATV/Video Products") for the first quarter ended March 31, 2000 increased $31
million or 26% to nearly $150 million, compared to the same period in 1999. The
increase in sales of CATV/Video Products was led by strong sales of broadband
cable to Multiple System Operators. First quarter domestic CATV/Video sales grew
approximately 30%, year-over-year. This performance reflects more than a
doubling of year-over-year sales of fiber optic cable. Sales in our portfolio of
broadband Hybrid Fiber Coaxial (HFC) products for last-mile communications
continue to accelerate and interest continues to grow in the area of residential
cabling solutions for in-home video, voice and high-speed Internet access.
Net sales for local area network and other data applications ("LAN Products")
for the first quarter ended March 31, 2000 increased $10 million or 66% to $25
million, compared to the same period in 1999. We are optimistic about growth in
sales of our LAN Products, due primarily to the strength of the underlying
market, increased demand for gigabit network infrastructure systems, and the
continued acceptance of our patent-pending IsoliteTM foamed insulation for
unshielded twisted pair cables.
9
Net sales for wireless and other telecommunications products for the first
quarter ended March 31, 2000 more than doubled to $29.3 million from $14.6
million for the first quarter of 1999. This substantial year-over-year increase
reflects strong growth in both sales of Cell Reach(R) for wireless applications
and sales of other telecommunications products. Other telecommunications
products primarily represent cables designed for switching and transmission
applications for enhanced telecommunications services. First quarter sales of
Cell Reach products more than tripled year-over-year. We believe that our
patented Cell Reach products are now recognized as the new standard for
performance and value in the wireless industry due to their superior performance
and compelling value proposition for the growing wireless industry. With
significant capacity scheduled to come on line in midyear 2000, we believe that
Cell Reach will be a substantial contributor to our long-term growth goals.
Gross Profit (Net Sales Less Cost of Sales)
Gross profit for the first quarter ended March 31, 2000 was approximately $52
million, compared to almost $37 million for the same period in 1999. Gross
profit margins improved to 25.7% for the first quarter ended March 31, 2000,
compared to gross profit margins of 24.9% for the same period in 1999. The
primary drivers of the improvement in gross profit and gross profit margins are:
o increased sales volumes;
o improving Cell Reach profitability; and
o aggressive cost reduction efforts, primarily through engineered
manufacturing efficiencies including vertical integration projects.
We anticipate continued sequential improvement in gross profit margins
despite rising raw material costs and the impact of certain one-time costs that
affected production and shipping in the first quarter of 2000. Our recently
implemented price increases for HFC products and vertical integration
activities, which should begin yielding benefits late in the second quarter of
2000, are expected to more than offset the rising cost and tightening supply of
some raw materials.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense for the first quarter
ended March 31, 2000 was $18 million, compared to $15 million for the same
period in 1999. As a percentage of net sales, SG&A expense was 9% for the first
quarter ended March 31, 2000, down slightly from 10% for the same period in
1999, mainly due to the fact that general and administrative expenses did not
grow at the same rate as net sales and the associated selling expenses. SG&A
expense is expected to continue to increase in absolute amount and be in the
range of 9.5% to 10% of net sales over the longer term due primarily to the
expansion of our sales and marketing efforts to support developing products and
sales growth targets.
Research and Development
Research and development expense as a percentage of net sales increased to
nearly 2% for the first quarter ended March 31, 2000 compared to 1% for the same
period in 1999. This increase is due primarily to our vertical integration
projects for bimetal wire fabrication and fine wire drawing. We have ongoing
programs to develop new products and market opportunities for our products and
core capabilities and new manufacturing technologies to achieve cost reductions.
10
Net Interest Expense
Net interest expense for the first quarter ended March 31, 2000 was $2.0
million, compared to $2.7 million for the same period in 1999. The decrease in
net interest expense is primarily due to the favorable impact of the 4%
convertible subordinated notes we issued in December 1999. All outstanding
borrowings under our revolving credit agreement were repaid in December 1999
with proceeds from the issuance of our convertible notes, which carry a lower
effective interest rate.
Income Taxes
Our effective tax rate was 38% for the first quarter ended March 31, 2000 and
36% for the same period in 1999. This fluctuation in our effective tax rate is
mainly due to the strength in domestic versus international sales, which diluted
the impact of our foreign sales corporation tax benefit during the first quarter
ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was approximately $9 million for the first
quarter ended March 31, 2000, compared to cash provided by operating activities
of $22 million for the same period in 1999. This decrease in operating cash flow
is primarily due to increased accounts receivable and inventories, which were
somewhat offset by increased accounts payable. The increase in accounts
receivable is due primarily to the increase in sales, which was heavily
concentrated in the last half of the quarter ended March 31, 2000. The increase
in inventory, which was offset by an increase in accounts payable, was primarily
related to an intentional buildup of raw materials and Cell Reach products in
anticipation of increased seasonal demand.
Working capital was $155 million at March 31, 2000, compared to $147 million
at December 31, 1999. We believe that working capital levels are appropriate to
support current levels of orders and backlog.
During the first quarter ended March 31, 2000, we invested $21 million in
property, plant and equipment compared to $9 million during the same period in
1999. As planned, we accelerated capital spending during the first quarter of
2000 to support vertical integration projects, capacity expansion, and equipment
upgrades to meet increased current and anticipated future business demands. As
of March 31, 2000, we had committed funds of approximately $8.9 million under
purchase orders and contracts related to these projects, the majority of which
are expected to be completed in 2000.
We utilized an additional $17 million during the first quarter ended March
31, 1999 to acquire Alcatel's coaxial cable business in Seneffe, Belgium.
Our principal sources of liquidity both on a short-term and long-term basis
are cash flows provided by operations and funds available under long-term credit
facilities. We currently have $350 million of available borrowing capacity under
our revolving credit agreement, which expires in December 2002. We owed
long-term debt of $197.6 million, or 39.7% of our book capital structure,
defined as long-term debt and total stockholders' equity, as of March 31, 2000,
compared to $198.4 million, or 41.4% of our book capital structure as of
December 31, 1999. The slight decrease in long-term debt is due solely to the
favorable impact of foreign exchange rate fluctuations on our 15 million
eurodollar term loan.
11
Based upon our analysis of our consolidated financial position and the
expected results of our operations in the future, we believe that we will have
sufficient cash flows from future operations and the financial flexibility to
attract both short-term and long-term capital on acceptable terms as may be
needed to fund operations, capital expenditures and other growth objectives.
There can be no assurance, however, that future industry-specific developments,
general economic trends or other situations will not adversely affect our
operations or ability to meet cash requirements.
MARKET RISK
As disclosed in our Annual Report on Form 10-K for the year ended December
31, 1999, our major market risk exposure relates to adverse fluctuations in
commodity prices, interest rates and foreign currency exchange rates. We have
established a risk management strategy that includes the use of derivative
financial instruments primarily to reduce our exposure to these market risks.
Our exposure associated with these market risks has not materially changed since
December 31, 1999. In addition, we have not acquired any new derivative
financial instruments since that date or terminated any derivative financial
instruments that existed at that date.
INFORMATION MANAGEMENT SYSTEM
On January 2, 2000, we began the implementation of a new integrated
information management system. Our goal for this new computer-based system is to
help us improve business practices, allow faster access to information and
ultimately enable us to service our customers better in the future, among other
things.
However, during January 2000 we experienced some delays in certain shipments
in connection with the transition to this new information system. During the
first quarter of 2000, we worked diligently to resolve these transition issues
and to increase shipping efforts to reduce the system-related backlogs. We do
not believe that these transition issues will have a material impact on our
results of operations, liquidity or financial condition for the full year 2000.
We have made progress incorporating our new information system into our business
model and expect to reap its full benefits over the longer term. However, we
cannot assure you that we will incur no future issues with this system.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q that are other than historical facts are
intended to be "forward-looking statements" within the meaning of the Securities
Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and
other related laws. These forward-looking statements are identified, including,
without limitation, by their use of such terms and phrases as "intends,"
"intend," "intended," "goal," "estimate," "estimates," "expects," "expect,"
"expected," "project," "projects," "projected," "projections," "plans,"
"anticipates," "anticipated," "should," "designed to," "foreseeable future,"
"believe," "believes" and "scheduled" and similar expressions. These statements
are subject to various risks and uncertainties, many of which are outside our
control, including, without limitation, effective implementation of the new
integrated information management system, developments in technology, pricing
and acceptance of our products, margin improvement, changes in cost and
availability of materials, achievement of sales, growth, and earnings goals,
industry competition, regulatory changes affecting our business, international
economic conditions, telecommunications industry capital spending, successful
expansion and related operation of our facilities, successful implementation of
the bimetals operation and other vertical integration activities, the ability to
achieve reductions in costs and to continue to integrate acquisitions, foreign
currency fluctuations, technological obsolescence, international economic and
12
political uncertainties and other specific factors discussed in Exhibit 99 to
this Form 10-Q. The information contained in this Form 10-Q represents our best
judgment at the date of this report based on information currently available.
However, we do not intend to update this information to reflect developments or
information obtained after the date of this report and disclaim any legal
obligation to do so.
13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO.
27. Financial Data Schedule
99. Forward-Looking Information
(b) Reports on Form 8-K filed during the three months ended
March 31, 2000:
On February 2, 2000 we filed a current report on Form
8-K announcing our financial results for the full-year 1999.
14
SIGNATURE
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.
COMMSCOPE, INC.
May 15, 2000 /s/ Jearld L. Leonhardt
- ---------------------- -----------------------
Date Jearld L. Leonhardt
Executive Vice President and Chief Financial Officer
Signing both in his capacity as Executive Vice
President on behalf of the Registrant and as
Chief Financial Officer of the Registrant
15