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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
/ / 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 1-12261
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SUPERIOR TELECOM INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2248978
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1790 BROADWAY 10019-1412
NEW YORK, NEW YORK (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code 212-757-3333
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 Days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT FEBRUARY 23, 1999
--------------------------- -----------------------------
Common Stock, $.01 Par Value 20,087,794
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Superior TeleCom Inc. ("Superior TeleCom" or "the Company"), through its two
subsidiaries, Superior Telecommunications Inc. ("Superior") and DNE Systems,
Inc. ("DNE"), is engaged in the manufacture and sale of (i) wire and cable
products principally for the local loop segment of the telecommunications
network and (ii) data communication and other electronic equipment, including
multiplexers, for defense, governmental and commercial applications. The results
of operations of Superior for the three and six months ended October 31, 1998
include the operations of Cables of Zion United Works Ltd. ("Cables of Zion"), a
51% interest of which was acquired by Superior on May 5, 1998 (see Note 4 to the
accompanying unaudited Condensed Consolidated Financial Statements). Cables of
Zion is an Israeli-based manufacturer of cable and wire products including fiber
optic cable and high, medium and low voltage copper cable for electrical and
power transmission.
RESULTS OF OPERATIONS
PRESENTATION OF RESULTS OF OPERATIONS
The following provides financial information about each business segment for
the three and six months ended October 31, 1997 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1997 1998 1997 1998
---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales:
Telecommunications wire and cable.............................. $ 131,394 $ 141,603 $ 258,114 $ 293,438
Data communications and electronics............................ 7,818 4,494 12,331 9,533
---------- ---------- ---------- ----------
Consolidated............................................... 139,212 146,097 270,445 302,971
Gross profit:
Telecommunications wire and cable.............................. $ 22,976 $ 31,520 $ 46,011 $ 64,097
Data communications and electronics............................ 2,366 1,952 3,673 3,671
---------- ---------- ---------- ----------
Consolidated............................................... 25,342 33,472 49,684 67,768
Gross profit percentage:
Telecommunications wire and cable.............................. 17.5% 22.3% 17.8% 21.8%
Data communications and electronics............................ 30.3 43.4 29.8 38.5
Consolidated............................................... 18.2 22.9 18.4 22.4
Selling, general and administrative expenses:
Telecommunications wire and cable.............................. $ 3,250 $ 5,638 $ 6,401 $ 11,358
Data communications and electronics............................ 1,482 1,374 2,853 2,853
Corporate...................................................... 751 899 1,600 2,157
---------- ---------- ---------- ----------
Consolidated............................................... 5,483 7,911 10,854 16,368
Amortization of goodwill:
Telecommunications wire and cable.............................. $ 430 $ 438 $ 860 $ 884
---------- ---------- ---------- ----------
Operating income:
Telecommunications wire and cable.............................. $ 19,296 $ 25,444 $ 38,750 $ 51,855
Data communications and electronics............................ 884 578 820 818
Corporate...................................................... (751) (899) (1,600) (2,157)
---------- ---------- ---------- ----------
Consolidated............................................... $ 19,429 $ 25,123 $ 37,970 $ 50,516
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
2
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SUPPLEMENTAL DATA FOR THE TELECOMMUNICATIONS WIRE AND CABLE SEGMENT:
Copper is a significant raw material component of Superior's finished
products. Fluctuations in the price of copper affect per unit product pricing
and related revenues. However, the cost of copper has not had a material impact
on Superior's profitability due to contractually mandated copper-based price
adjustments contained in Superior's customer sales contracts. The Company
believes that the following supplemental comparative data, which are based upon
a constant copper cost of $1.00 per pound for the indicated periods, provide
additional meaningful information concerning Superior's sales and its gross
profit percentage.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
-------------------- --------------------
1997 1998 1997 1998
--------- --------- --------- ---------
(DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C>
Net sales........................................... $ 126,467 $ 151,886 $ 249,809 $ 312,287
Gross profit........................................ 22,976 31,520 46,011 64,097
Gross profit percentage............................. 18.2% 20.8% 18.4% 20.5%
</TABLE>
SUPERIOR--RESULTS OF OPERATIONS
Superior's net sales for the quarter ended October 1998 were $141.6 million,
representing an increase of $10.2 million, or 7.8%, as compared to the same
period in the prior fiscal year. For the six months ended October 1998,
Superior's net sales were $293.4 million, representing an increase of $35.3
million, or 13.7%, as compared to the same period in the prior fiscal year.
Adjusted to a constant copper value of $1.00 per pound, Superior's comparative
percentage increase in net sales for the quarter and six months ended October
1998 was 20.1% and 25.0%, respectively (see "Superior Supplemental Data"
included in the industry segment operating statement data). The increase in net
sales on a constant copper value basis for the quarter and six months ended
October 1998 included $16.6 million and $39.5 million, respectively, in net
sales contributed by Cables of Zion. Additionally, Superior's North American
operations experienced a comparative increase in net sales for the quarter and
six months ended October 1998 of $8.8 million and $23.0 million, respectively,
(representing an increase of 6.9% and 9.2% respectively). The comparative
increase in Superior's North American net sales for both the three month and six
month periods ended October 1998 is due to continued increased demand for copper
wire and cable products resulting from the growth in copper-based telephone
access lines and increased maintenance spending by several of Superior's major
telephone company customers.
Superior's gross profit increased by $8.5 million, or 37.2%, to $31.5
million for the quarter ended October 1998 as compared to the same period in the
prior fiscal year. For the six months ended October 1998, Superior's gross
profit increased by $18.1 million, or 39.3%, to $64.1 million as compared to the
same period in the prior fiscal year. The comparative increase in gross profit
for the quarter and six months ended October 1998 included $2.5 million and $6.3
million, respectively, in incremental gross profit contribution by Cables of
Zion, as well as an increase of $6.1 million and $11.8 million, respectively, in
the comparative gross profit generated by Superior's North American operations.
Superior's gross margin, based on actual sales, was 22.3% for the quarter ended
October 1998 and 21.8% for the six months ended October 1998, as compared to
17.5% and 17.8%, respectively, for the quarter and six months ended October
1997. Adjusted to a constant copper sales value of $1.00 per pound, Superior's
gross margin increased to 20.8% and 20.5%, respectively, for the quarter and six
months ended October 1998, as compared to 18.2% and 18.4%, respectively, for the
quarter and six months ended October 1997. The increase in gross margin was
attributable to manufacturing cost reductions resulting from production
efficiencies, lower raw material prices, product and customer mix and improved
cost absorption resulting from increased production volumes. The increase in
gross margin was partially offset by lower margin product sales at Cables of
Zion.
3
<PAGE>
Superior's SG&A expense for the quarter ended October 1998 was $5.6 million,
representing an increase of $2.4 million, or 73.5%, as compared to the same
period in the prior fiscal year. For the six months ended October 1998,
Superior's SG&A expense was $11.4 million, representing an increase of $5.0
million, or 77.4%, as compared to the same period in the prior fiscal year. The
increase for the quarter and six months ended October 1998 was due primarily to
the inclusion of $1.5 million and $3.3 million, respectively, in SG&A expense
from Cables of Zion and an increase of $0.9 million and $1.6 million,
respectively, in Superior's North American SG&A expense. The increase in
Superior's North American SG&A expense resulted from the expansion of product
development activities and incremental staff required to support the increased
level of activity.
Superior's operating income for the quarter ended October 1998 was $25.4
million, representing an increase of $6.1 million, or 31.9%, as compared to the
same period in the prior fiscal year. For the six months ended October 1998,
Superior's operating income was $51.9 million, representing an increase of $13.1
million, or 33.8%, as compared to the same period in the prior fiscal year. The
substantial comparative increase in operating income resulted from higher net
sales, improved margins, and the inclusion of the results of operations of
Cables of Zion beginning in the first quarter of fiscal 1999, partially offset
by higher Superior North American SG&A expenses.
DNE--RESULTS OF OPERATIONS
For the quarter ended October 1998, DNE's net sales were $4.5 million,
representing a decrease of $3.3 million, or 42.5%, as compared to the same
period in the prior fiscal year. For the six months ended October 1998, DNE's
net sales were $9.5 million, representing a decrease of $2.8 million, or 22.7%,
as compared to the same period in the prior fiscal year. The comparative
decrease in net sales in the current fiscal year resulted from the completion of
a substantial commercial multiplexer contract during the comparable period in
the prior fiscal year, partially offset by an increase in shipments to various
government agencies of a new generation multiplexer during the current fiscal
year.
DNE's gross profit decreased by $0.4 million, or 17.5%, to $2.0 million for
the quarter ended October 1998 as compared to the same period in the prior
fiscal year. For the six months ended October 1998, DNE's gross profit was
unchanged compared to the same period in the prior fiscal year. DNE's gross
margin increased to 43.4% for the quarter ended October 1998 and to 38.5% for
the six months ended October 1998, as compared to 30.3% and 29.8%, respectively,
for the quarter and six months ended October 1997. The increase in gross margin
was attributable to favorable product mix resulting from the increase in
government related shipments, as well as the benefit of manufacturing cost
reductions.
DNE's SG&A expense for the quarter and six months ended October 1998 was
comparable to the same periods in the prior fiscal year.
DNE generated operating income of $0.6 million and $0.8 million,
respectively, during the quarter and six months ended October 1998, as compared
to $0.9 million and $0.8 million, respectively, for the same periods in the
prior fiscal year. The comparative decline in operating income in the current
year fiscal periods was attributable to reduced net sales, partially offset by
improving gross margins.
CONSOLIDATED RESULTS OF OPERATIONS
The acquisition of Cables of Zion and the growth in copper adjusted net
sales at Superior North America for the quarter and six months ended October
1998 resulted in comparative consolidated copper adjusted net sales increasing
by $22.1 million, or 16.5%, and by $59.7 million, or 22.8%, respectively, as
compared to the quarter and six months ended October 1997. The increase in net
sales, along with improving gross margin, gave rise to a consolidated
comparative increase in gross profit of $8.1 million, or 32.1%, for the quarter
ended October 1998 as compared to the quarter ended October 1997, and of $18.1
million, or 36.4%, for the six months ended October 1998 as compared to the six
months ended October 1997.
4
<PAGE>
Consolidated SG&A expense for the quarter ended October 1998 was $7.9
million, representing an increase of $2.4 million, or 44.3%, as compared to the
same period in the prior fiscal year. For the six months ended October 1998,
consolidated SG&A expense was $16.4 million, representing an increase of $5.5
million, or 50.8%, as compared to the same period in the prior fiscal year. The
increase in consolidated SG&A expense resulted primarily from the inclusion of
the operations of Cables of Zion, along with higher SG&A expense at Superior
North America and higher corporate expense, both of which were attributable to
the increased size and activity of the Company.
Consolidated operating income for the quarter ended October 1998 was $25.1
million, representing an increase of $5.7 million, or 29.3%, as compared to the
same period in the prior fiscal year. For the six months ended October 1998,
consolidated operating income was $50.5 million, representing an increase of
$12.5 million, or 33.0%, as compared to the same period in the prior fiscal
year. The increase in operating income was the result of the contribution from
Cables of Zion's operations and from the growth in net sales and gross profit in
Superior North America's operations, partially offset by the aforementioned
increase in consolidated SG&A expense.
Consolidated interest expense for the quarter and six months ended October
1998 declined to $2.0 million and $4.3 million, respectively, as compared to
$2.2 million and $4.7 million, respectively, for the same periods in the prior
fiscal year. The reduction in comparative current fiscal year interest expense
was achieved despite an increase in acquisition debt related to the Cables of
Zion acquisition, and reflects the impact of lower interest rates as well as the
benefit of overall debt reduction achieved through strong operating cash flow
generated during the last twelve month period.
For the quarter and six months ended October 1998, the provision for income
taxes was $8.9 million and $18.0 million, respectively, as compared to a
provision for income taxes of $6.7 million and $13.1 million, respectively, for
the same periods in the prior fiscal year. The effective tax rate for the
quarter and six months ended October 1998 was 38.9% and 39.6%, respectively,
which compares to an effective tax rate of 39.0% and 39.4%, respectively, for
the quarter and six months ended October 1997.
For the quarter and six months ended October 1998, a minority interest
charge of $0.3 million and $0.6 million, respectively, was recorded; with such
charge representing minority stockholders' interest in net income of Cables of
Zion.
Consolidated net income for the quarter ended October 1998 was $13.7
million, or $0.83 per diluted share, representing an increase of $3.2 million,
or 30.9%, over consolidated net income of $10.5 million, or $0.63 per diluted
share, for the quarter ended October 1997. For the six months ended October
1998, consolidated net income was $26.9 million, or $1.62 per diluted share,
representing an increase of $6.7 million, or 33.0%, over consolidated net income
of $20.2 million, or $1.23 per diluted share, for the six months ended October
1997.
5
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended October 31, 1998, the Company generated $29.1
million in cash flows from operating activities consisting of $34.4 million in
income generated from operations (net income plus non-cash charges) less $5.3
million in cash flows used for net working capital changes. The major working
capital changes included a $2.8 million increase in inventories, a $1.4 million
increase in accounts receivable and a $1.5 million increase in other assets,
offset by a $0.7 million increase in accounts payable and accrued expenses. Cash
used for investing activities amounted to $33.2 million consisting principally
of $25.0 million in cash paid for the acquisition of Cables of Zion and $12.3
million in capital expenditures. Cash provided by financing activities amounted
to $7.0 million, consisting principally of $14.2 million in net borrowings under
the Company's $150.0 million revolving credit facility (the "Credit Facility"),
offset by a dividend payment of $2.0 million and $6.1 million used for the
purchase of treasury stock.
At October 31, 1998, the Company had $83.6 million outstanding under its
existing Credit Facility. On November 27, 1998, the Company, in conjunction with
the Essex acquisition (See Footnote 6 to the accompanying consolidated financial
statement), entered into a $1.15 billion amended and restated credit agreement
("Credit Agreement") and a $200 million senior subordinated credit agreement
("Senior Notes"). The Credit Agreement consists of a $500 million term loan A, a
$425 million term loan B, and a $225 million revolving credit facility. Proceeds
from the financing were used to (i) pay $769 million, representing the cash
portion of the Essex acquisition price, (ii) refinance approximately $84 million
under Superior's existing Credit Facility, (iii) refinance approximately $280
million of Essex's existing credit facilities, and (iv) pay related transaction
expenses. Subsequent to the acquisition and refinancing, the Company expects to
have approximately $150 million of undrawn availability under the revolving
credit facility. Obligations under the Credit Agreement and the Senior Notes are
secured by substantially all of the assets of the Company and its subsidiaries
and by the stock of the Company's subsidiaries. The Credit Agreement and Senior
Notes contain customary performance and financial covenants.
On completion of the Essex acquisition and related refinancing, the Company
expects to have total outstanding debt amounting to approximately $1.2 billion.
Management anticipates that over the next twelve months, the Company will
generate sufficient operating cash flows to service annual principal debt
service and expected capital expenditures. However, should any shortfall arise
due to working capital fluctuations and other factors, cash and funds
availability under the revolving credit facility should be sufficient to cover
such a shortfall.
YEAR 2000 OVERVIEW
The Year 2000 issue arises because certain electronic data processing
systems have been written using two digits, rather than four, to define the
applicable year, and thus do not properly recognize dates after December 31,
1999.
During fiscal 1998 and 1997, the Company established project teams
responsible for identifying and resolving Year 2000 issues. These efforts
include identification and review of internal operating systems and
applications, and customer projects and services, as well as discussions with
information providers and other key suppliers to the business. At this time,
based upon the efforts taken to date and those yet to be taken, the Company does
not expect any serious disruptions in its business operations and, therefore,
does not anticipate any material negative effect upon its revenues or earnings
as a result of the Year 2000 issue. Remediation costs for problems identified
thus far are not expected to be material to the Company's consolidated financial
position, liquidity or results of operations. The Company has established a
timetable for resolving Year 2000 issues so as not to interrupt ongoing
operations.
6
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THE COMPANY'S STATE OF READINESS
The Year 2000 project plan, including assessment, improvement, testing and
implementation, has been established. The assessment phase is 75% complete and
should be completed in March 1999 upon receipt of all remaining vendor and
supplier Year 2000 readiness inquiries.
Assessment of the Year 2000 compliance of third parties with whom the
Company has material relationships is in process. The Company's material
third-party relationships include the following:
(a) Raw material vendors: The Company's raw material purchases are through
third-party raw material vendors. All mission critical raw material
vendors have responded to the Company's Year 2000 readiness inquiry;
(b) Equipment vendors: The response to the Year 2000 readiness inquiries
from equipment vendors, which include all embedded chip equipment, is at
75%;
(c) Service providers: The response to the Year 2000 readiness inquiries
from third-party service providers, which include utilities, phone
service and all facility related services, is at 90%; and
(d) Software vendors: The Company has upgraded all purchased mission
critical software to Year 2000 compliant version and is in the testing
phase.
Responses received, thus far, from the Company's third-party vendors and
suppliers indicate compliance on or before June 1999.
The preliminary assessment of internal IT and non-IT systems has been
completed. Internal non-compliant items have been identified and prioritization
of internal non-compliant items is in process. A system for tracking remediation
has been established and non-compliant items identified are expected to be
completed in March 1999. Based on the findings of the planning and assessment
phases completed to date, the Company does not believe independent verification
or validation processes will be necessary.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The current estimate of the cost of remediation and equipment and software
replacement ranges between $570,000 and $730,000, of which approximately 50% has
been incurred to date, and is summarized as follows:
<TABLE>
<S> <C>
Code modification and testing:.......................................... $480,000--$590,000
Personal computer, software and other upgrades:......................... $90,000--$140,000
</TABLE>
Approximately 12% of the IT budget for 1998 and 1999 has been allocated for
code modification. Such costs are funded through cash flows from operations and
are expenses as incurred. The personal computer and purchased software upgrades
are costs incurred in the ordinary course of business and are, therefore,
typically capitalized costs.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES AND THE COMPANY'S CONTINGENCY PLANS
A most reasonably likely worst case Year 2000 scenario is not known at this
time. This determination will be made after the receipt of the remaining
material third-party questionnaires. However, the shipment of product to
customers is expected to continue with minimal interruption and no material loss
of revenues is anticipated. The Year 2000 project has had minimal impact on the
schedule of other major IT projects.
The Company has not completed a contingency plan. However, it will do so by
March 31, 1999. Each manufacturing facility will incorporate Year 2000 into
their existing disaster contingency plan. The contingency plan will ensure that:
(i) adequate levels of inventory will be on hand to mitigate the impact of any
potential short-term disruptions in production; (ii) an adequate supply of raw
materials will be available from alternate sources; and (iii) the necessary
backup measures for computer processing are identified.
7
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUPERIOR TELECOM INC.
By: /s/ DAVID S. ALDRIDGE
--------------------------------------
David S. Aldridge
Chief Financial Officer
Date: February 24, 1999
8
