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 June 30, 1998
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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
1375 Lenoir Rhyne Boulevard, Hickory, North Carolina 28601
(Address of principal executive offices)
(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 August 3, 1998 there were 49,193,434 shares of Common Stock outstanding.
<PAGE>
CommScope, Inc.
Form 10-Q
June 30, 1998
Table of Contents
Page No.
------------
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 Statements of Stockholders' Equity 6
Notes to Condensed Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Position 11 - 15
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Statements of Income
(Unaudited--in thousands, except per share data)
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
-------------- ------------- -------------- -------------
Net Sales $ 141,886 $ 159,291 $ 275,488 $ 307,165
-------------- ------------- -------------- -------------
Operating Costs and Expenses:
Cost of sales 109,189 119,920 215,223 228,554
Selling, general and administrative 12,935 13,369 25,468 24,680
Research and development 1,449 1,558 3,202 2,828
Amortization of goodwill 1,297 1,306 2,600 2,612
-------------- ------------- -------------- -------------
Total operating costs & expenses 124,870 136,153 246,493 258,674
-------------- ------------- -------------- -------------
Operating Income 17,016 23,138 28,995 48,491
Other income, net 7 275 2,134 485
Interest expense (4,099) (2,578) (8,296) (5,336)
Interest income 182 45 340 70
-------------- ------------- -------------- -------------
Income before Income Taxes 13,106 20,880 23,173 43,710
Provision for income taxes (4,607) (7,930) (8,342) (16,605)
-------------- ------------- -------------- -------------
Net Income $ 8,499 $ 12,950 $ 14,831 $ 27,105
============== ============= ============== =============
Net income per common share $ 0.17 (1) $ 0.30 (1)
Net income per common share -
assuming dilution $ 0.17 (1) $ 0.30 (1)
(1) Historical per share data is not considered relevant for the reasons
discussed in Note 1. Pro forma per share data is presented in Note 3.
See notes to condensed consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<S> <C> <C>
(unaudited)
June 30, December 31,
1998 1997
-------------- ---------------
Assets
Cash $ 7,922 $ 3,330
Accounts receivable, less allowance for doubtful accounts of
$4,541 and $3,985, respectively 102,516 95,741
Inventories 31,963 42,223
Prepaid expenses and other current assets 940 2,439
Deferred income taxes 14,355 12,102
-------------- ---------------
Total current assets 157,696 155,835
Property, plant and equipment, net 131,074 133,235
Goodwill, net of accumulated amortization of
$40,801 and $38,263, respectively 166,619 170,345
Intangibles, net of accumulated amortization of
$27,944 and $26,573, respectively 20,821 22,192
Investments and other assets 1,750 1,932
-------------- ---------------
Total Assets $ 477,960 $ 483,539
============== ===============
Liabilities and Stockholders' Equity
Accounts payable $ 32,696 $ 18,533
Other accrued liabilities 35,081 24,516
-------------- ---------------
Total current liabilities 67,777 43,049
Long-term debt 218,800 265,800
Deferred income taxes 15,157 14,932
Other non-current liabilities 10,463 9,726
-------------- ---------------
Total Liabilities 312,197 333,507
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value; Authorized shares: 20,000,000;
Issued and outstanding shares: None at June 30, 1998 and
December 31, 1997 -- --
Common stock, $.01 par value; Authorized shares: 300,000,000;
Issued and outstanding shares: 49,184,732 at June 30, 1998;
49,108,874 at December 31, 1997 492 491
Additional paid-in capital 141,833 140,934
Retained earnings 23,438 8,607
-------------- ---------------
Total Stockholders' Equity 165,763 150,032
-------------- ---------------
Total Liabilities and Stockholder's Equity $ 477,960 $ 483,539
============== ===============
See notes to condensed consolidated financial statements.
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited - in thousands)
<S> <C> <C>
Six Months Ended
June 30,
-------------------------------------
1998 1997
----------------- -----------------
Operating Activities:
Net income $ 14,831 $ 27,105
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 12,184 10,229
Gain on sale of assets of the high temperature aerospace and industrial cable business (1,873) --
Changes in assets and liabilities:
Accounts receivable (3,775) (8,481)
Inventories 4,341 (11,482)
Prepaid expenses and other current assets 1,259 (622)
Deferred income taxes (2,028) 623
Accounts payable and other accrued liabilities 25,014 5,174
Other non-current liabilities 737 688
Other 67 (395)
----------------- -----------------
Net cash provided by operating activities 50,757 22,839
Investing Activities:
Additions to property, plant and equipment (9,865) (19,362)
Sale of assets of the high temperature aerospace and industrial cable business 9,654 --
Other 146 --
----------------- -----------------
Net cash used in investing activities (65) (19,362)
Financing Activities:
Net repayments under revolving credit facility (47,000) --
Exercise of stock options 900 --
Transfers to former sole stockholder -- (3,477)
----------------- -----------------
Net cash used in financing activities (46,100) (3,477)
Change in cash and cash equivalents 4,592 --
Cash and cash equivalents, beginning of period 3,330 --
----------------- -----------------
Cash and cash equivalents, end of period $ 7,922 $--
================= =================
See notes to condensed consolidated financial statements.
5
</TABLE>
<PAGE>
CommScope, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited - in thousands, except share data)
Six Months Ended June 30, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Additional Total
Number of Common Common Paid-In Retained Stockholders'
Shares Outstanding Stock Capital Earnings Equity
Balance December 31, 1997 49,108,874 $ 491 $ 140,934 $ 8,607 $ 150,032
Issuance of shares for stock option exercises 75,858 1 899 900
Net income 14,831 14,831
-------------------------------------------------------------------------
Balance June 30, 1998 49,184,732 $ 492 $ 141,833 $ 23,438 $ 165,763
=========================================================================
CommScope, Inc. has 20 million authorized shares of preferred stock at $0.01 par value.
No preferred stock is currently issued or outstanding.
See notes to condensed consolidated financial statements.
6
</TABLE>
<PAGE>
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") was incorporated in Delaware in
January 1997 and, through its wholly owned subsidiary CommScope, Inc. of North
Carolina ("CommScope NC"), operates in the cable manufacturing business. The
Company designs, manufactures, markets and sells coaxial, fiber optic and high
performance electronic cables primarily used in communications, local area
network and industrial applications. CommScope is a leading manufacturer and
supplier of coaxial cable for cable television applications and other
communications applications in the United States. CommScope is also a leading
supplier of coaxial cable to international communications markets, primarily the
cable television market.
CommScope NC formerly was a wholly owned indirect subsidiary of General
Instrument Corporation (the "Distributing Company"). Through a series of
transactions related to a spin-off of companies from the Distributing Company
(the "Distribution") that was consummated on July 28, 1997 (the "Distribution
Date"), CommScope NC became a wholly owned subsidiary of the Company. At the
Distribution Date, CommScope began operating as an independent entity with
publicly traded common stock.
BASIS OF PRESENTATION
The condensed consolidated balance sheet as of June 30, 1998, the condensed
consolidated statements of income for the three months and the six months ended
June 30, 1998 and 1997, the condensed consolidated statements of cash flows for
the six months ended June 30, 1998 and 1997, and the condensed consolidated
statement of stockholders' equity for the six months ended June 30, 1998 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 non-recurring nature
recorded during the three months and the six months ended June 30, 1998 and
1997. 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
condensed consolidated statements of income and condensed consolidated
statements of cash flows for the three months and the six months ended June 30,
1997 reflect the results of operations and cash flows of CommScope that were
transferred from the Distributing Company to CommScope in connection with the
Distribution.
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.
The condensed consolidated financial statements for 1997 include an allocation
of certain assets, liabilities and general corporate administrative expenses
from the Distributing Company prior to the Distribution, and accordingly reflect
the results of operations and changes in cash flows of CommScope as if it were a
separate entity prior to the Distribution. In the opinion of management, general
corporate administrative expenses were allocated to CommScope on a reasonable
and consistent basis using management's estimate of services provided to
CommScope by the Distributing Company. However, such allocations are not
necessarily indicative of the level of expenses which might have been incurred
had CommScope been operating as a separate, stand-alone entity during the
periods presented during 1997.
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
1. BACKGROUND AND BASIS OF PRESENTATION (Continued)
Prior to the Distribution, CommScope participated in the Distributing Company's
cash management program, and the accompanying condensed consolidated statements
of income for 1997 include an allocation of net interest expense from the
Distributing Company. Net interest expense was allocated based upon CommScope's
net assets as a percentage of the total net assets of the Distributing Company.
The allocations were made consistently in each period, and management believes
the allocations are reasonable. However, these interest costs would not
necessarily be indicative of what the actual costs would have been had CommScope
operated as a separate, stand-alone entity during the periods presented. At the
Distribution Date, CommScope implemented a separate cash management program and
assumed responsibility for the costs associated with operating a public company.
CommScope's financial results include the costs incurred by the Distributing
Company related to the postretirement benefit plan for employees and retirees of
CommScope prior to the Distribution. Also, the provision for income taxes for
the three months and the six months ended June 30, 1997 is based on CommScope's
expected annual effective tax rate, calculated assuming CommScope had filed
separate tax returns under its previously existing structure as a wholly owned
indirect subsidiary of the Distributing Company.
CommScope's earnings were part of the Distributing Company's results of
operations for the three months and the six months ended June 30, 1997.
Additionally, the capital structure of the Company changed significantly as a
result of borrowings under the Company's credit facility on the Distribution
Date, which were utilized primarily to make a dividend payment to the
Distributing Company in accordance with the terms of the Distribution (see Note
4). Accordingly, no historical earnings per share data has been presented for
the three months and the six months ended June 30, 1997. Alternatively, pro
forma earnings per share data is presented as described in Note 3.
The financial information included herein does not necessarily reflect the
consolidated results of operations, financial position, and cash flows of
CommScope in the future or on a historical basis had CommScope been a separate,
stand-alone entity for the periods presented. These interim condensed
consolidated financial statements should be read in conjunction with the
Company's December 31, 1997 audited consolidated financial statements and notes
thereto included in the Company's 1997 Annual Report on Form 10-K.
2. SUPPLEMENTAL BALANCE SHEET INFORMATION
Inventories consist of:
June 30, December 31,
1998 1997
------------- ------------
Raw materials $ 11,133 $ 16,376
Work in process 5,620 8,860
Finished goods 15,210 16,987
-------------- -------------
$ 31,963 $ 42,223
=============== =============
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
3. PRO FORMA FINANCIAL INFORMATION AND EARNINGS PER SHARE
The accompanying unaudited pro forma financial information was prepared to
present the 1997 net income of CommScope as if the Distribution had occurred on
January 1, 1997. The unaudited pro forma disclosures set forth below do not
purport to represent what CommScope's operations actually would have been or to
project CommScope's operating results for any future period.
The unaudited pro forma information has been prepared utilizing the historical
consolidated statements of income of CommScope which were adjusted to reflect a
net debt level of $275 million at the beginning of each period presented at an
assumed weighted average borrowing rate of 6.35% plus the amortization of debt
issuance costs associated with the new borrowings (see Note 4). Pro forma
earnings per share was calculated by dividing the pro forma net income for each
period presented by the pro forma common and common equivalent shares
outstanding for each period, and assumes that a total of 49.1 million common
shares outstanding for basic earnings per share and 49.2 million common and
common equivalent shares outstanding for diluted earnings per share at the
Distribution Date were outstanding since January 1, 1997.
Giving effect to the Distribution as of January 1, 1997, pro forma net income
for the Company for the three months and the six months ended June 30, 1997
would have been $11,664 ($0.24 per basic and diluted share) and $24,661 ($0.50
per basic and diluted share), respectively.
Below is a reconciliation of weighted average common shares outstanding for
basic earnings per share to weighted average common and common equivalent shares
outstanding for diluted earnings per share:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Six Three Six
Months Months Months Months
Ended Ended Ended June Ended
June 30, June 30, June 30 June 30,
1998 1998 1997 1997
----------- ----------- ------------ -----------
Average number of common shares outstanding - for
basic earnings per share 49,177 49,155 49,105 49,105
Dilutive effect of employee stock options 411 301 95 95
=========== =========== ============ ===========
Average number of common and common equivalent
shares outstanding - for diluted earnings per share
49,588 49,456 49,200 49,200
=========== =========== ============ ===========
</TABLE>
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
4. LONG-TERM DEBT
Long-term debt consisted of the following:
June 30, December 31,
1998 1997
------------------ -----------------
Credit Agreement (as defined below) $ 208,000 $ 255,000
Alabama State Industrial
Development Authority Notes 10,800 10,800
------------------ -----------------
218,800 265,800
================== =================
On July 23, 1997 the Company entered into a $350 million revolving credit
agreement with a group of banks (the "Credit Agreement"). On the Distribution
Date, CommScope initially borrowed $266 million under the Credit Agreement which
was utilized to make a dividend payment to the Distributing Company in
accordance with the terms of the Distribution and to fund fees and expenses in
connection with the Credit Agreement. The Company intends to utilize the Credit
Agreement in the future for, among other things, general working capital needs,
financing strategic acquisitions, and other general corporate purposes.
5. BUSINESS DIVESTITURES
In February 1998, the Company sold certain real and personal property and
inventories of its high-temperature aerospace and industrial cables business for
an adjusted price of $13 million. The Company recognized a pre-tax gain from the
sale of $2 million ($0.03 per share, net of tax effect).
6. NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130,
"Reporting Comprehensive Income", was issued. SFAS No. 130 will require
disclosure of comprehensive income (which is defined as "the change in equity
during a period excluding changes resulting from investments by shareholders and
distributions to shareholders") and its components. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997, with reclassification of
comparative years required. The Company plans to provide appropriate financial
statement disclosures under SFAS No. 130 in its Form 10-K for the fiscal year
ended December 31, 1998. Had the new standard been applied for the three months
and six months ended June 30, 1998, comprehensive income would not differ from
net income for all periods presented in the condensed consolidated statements of
income.
Also in June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", was issued. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company plans to provide appropriate
financial statement disclosures under SFAS No. 131 in its Form 10-K for the
fiscal year ended December 31, 1998. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. Management is
currently evaluating the effect of SFAS No. 131 on the Company's current
disclosures.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. The new standard requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for the Company beginning with the year ending December 31, 2000. Management is
currently evaluating the effects of SFAS No. 133 on the Company's financial
statements and current disclosures.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Position
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, 1997 included in the Company's Annual
Report on Form 10-K. Unless otherwise specified, capitalized terms used herein
are used as defined in the audited consolidated financial statements of
CommScope for the year ended December 31, 1997 or in the unaudited condensed
consolidated financial statements included in this document.
HIGHLIGHTS
CommScope reported net income of $8 million ($0.17 per basic and diluted share)
for the quarter ended June 30, 1998, a decrease of $5 million (34%) from the
quarter ended June 30, 1997 net income of $13 million. On a pro forma basis, net
income for the quarter ended June 30, 1997 was $12 million ($0.24 per basic and
diluted share).
For the six months ended June 30, 1998, CommScope reported net income of $15
million ($0.30 per basic and diluted share), a decrease of $12 million (45%)
from the six months ended June 30, 1997 net income of $27 million. On a pro
forma basis, net income for the six months ended June 30, 1997 was $25 million
($0.50 per basic and diluted share).
Pro forma net income and earnings per share for 1997 reflect the impact of
CommScope's new capital structure immediately following the Distribution from
the Distributing Company which was consummated on the Distribution Date,
assuming that all common stock issued and long term debt borrowings as of the
Distribution Date were outstanding since January 1, 1997.
Net income for the six months ended June 30, 1998 includes a one-time pre-tax
gain of $2 million related to the sale of the Company's high-temperature
aerospace and industrial cables business. Excluding the gain, net income for the
six months ended June 30, 1998 was $13 million ($0.27 per share).
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH
PERIODS ENDED JUNE 30, 1998 WITH THE THREE AND SIX MONTH
PERIODS ENDED JUNE 30, 1997
NET SALES
Net sales for the second quarter and six months ended June 30, 1998 decreased
$17 million (11%) to $142 million and $32 million (10%) to $275 million,
respectively, from the comparable prior year periods. The decrease in net sales
is due primarily to a significant reduction in international sales due to the
economic turmoil in key overseas markets.
For the second quarter and six months ended June 30, 1998 international sales
decreased by 38% and 41%, respectively, compared to the corresponding periods in
1997, driven by reduced sales in the Asian markets and in Latin America.
International sales for the six months ended June 30, 1998 represented 24% of
the Company's net sales compared to 36% for the comparable period of 1997.
However, international sales for the second quarter 1998 increased by 17% over
the first quarter 1998, including increases in sales to the Asian markets.
<PAGE>
Net sales to cable television and other video distribution markets ("CATV
Products") for the second quarter and six months ended June 30, 1998 decreased
$23 million (17%) to $112 million and $40 million (16%) to $216 million,
respectively, from the comparable prior year periods. These decreases primarily
reflect the lower international sales in 1998 as compared to 1997. Domestically,
excluding sales to telephone companies, sales of CATV Products increased by 6%
for the second quarter 1998 compared to the second quarter of 1997.
Net sales for local area network and other data applications ("LAN Products")
for the second quarter and six months ended June 30, 1998 increased $3 million
(18%) to $21 million and $7 million (18%) to $43 million, respectively, over the
comparable prior year periods. The sales increases for LAN Products are due to
sales of Category 5 premise wiring and continued development and marketing of
high-performance cable, such as the UltraMedia (TM) cable, which supports
gigabit transmission and exceeds the highest industry standards.
Sales of other cable products for the second quarter and six months ended June
30, 1998 were $9 million and $16 million, respectively, as compared to $7
million and $14 million for the comparable periods in 1997.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the second quarter and six months ended June 30, 1998 was $33
million and $60 million, respectively, compared to $39 million and $79 million
for the comparable prior year periods, a decrease of 17% and 23%, respectively.
The lower gross profit is primarily the result of the lower sales and slightly
lower selling prices for CATV Products due to a competitive pricing environment.
Lower overhead costs in the six months ended June 30, 1997, driven primarily by
reduced warranty-related provisions due to lower expectations of claims,
contributed partially to the higher 1997 gross profit.
As a percentage of sales, gross profit declined from 26% for the six months
ended June 30, 1997 to 22% for the comparable period of 1998. For the second
quarter 1998, gross profit as a percentage of sales was 23% compared to 25% for
the second quarter 1997.
The gross profit percentage of 23% for the second quarter 1998 was an
approximate 250 basis point increase from the first quarter 1998 gross profit
percentage of less than 21%. This improvement reflects the impact of the
Company's focus on engineered cost savings and manufacturing efficiencies as
well as improving sales volumes. The Company expects modest improvement in gross
profit percentages during the remainder of 1998, assuming selling prices remain
stable.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense for the second quarter and
six months ended June 30, 1998 was $13 million and $25 million, respectively,
unchanged from the comparable prior year periods. As a percentage of net sales,
SG&A expense was 9% for the second quarter and six months ended June 30, 1998
and 8% for the comparable periods of 1997.
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales was 1% during all
periods. The Company has ongoing programs to develop new products and market
opportunities for its products and core capabilities and new manufacturing
technologies to achieve cost reductions.
OTHER INCOME, NET
In February 1998, the Company sold certain real and personal property and
inventories of its high-temperature aerospace and industrial cables business for
an adjusted price of $13 million. The Company recognized a pre-tax gain from the
sale of $2 million ($0.03 per share, net of tax effect).
<PAGE>
INTEREST EXPENSE
Interest expense for the second quarter and six months ended June 30, 1998,
totaling $4.1 million and $8.3 million, respectively, represents actual interest
incurred on outstanding borrowings under the Company's credit facilities.
Interest expense for the second quarter and six months ended June 30, 1997
represents an allocation of net interest expense from the Distributing Company,
which was based upon CommScope's net assets as a percentage of the total net
assets of the Distributing Company.
Pro forma net interest expense for the second quarter and six months ended June
30, 1997, totaling $4.6 million and $9.3 million, respectively, reflects the
historical interest expense of the Company adjusted to reflect a net debt level
of $275 million at the beginning of 1997 presented at an assumed weighted
average borrowing rate of 6.35% plus the amortization of debt issuance costs
associated with the new borrowings incurred at the Distribution. These pro forma
net interest costs are not necessarily indicative of what the actual interest
costs would have been had CommScope operated as a separate, stand-alone entity.
The reduction in actual interest costs during 1998 as compared to the pro forma
interest costs for the comparable periods of 1997 is due to the reduction in
borrowings under the Company's credit facility since the Distribution.
INCOME TAXES
The effective tax rate was 36% for the six months ended June 30, 1998 and 38%
for the comparable period of 1997. The provision for income taxes for the six
months ended June 30, 1997 has been determined as if the Company had filed
separate tax returns under its previously existing structure as an indirect
wholly owned subsidiary of the Distributing Company.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $51 million for the six months ended June 30,
1998 compared to $23 million for the comparable prior year period, an increase
of $28 million or 122%. This increase primarily results from lower levels of
working capital at June 30, 1998 as compared to December 31, 1997.
Working capital was $90 million at June 30, 1998 compared to $113 million at
December 31, 1997, a decrease of $23 million, or 20%. The decrease in working
capital is due to lower inventory levels and an increase in accounts payable and
accrued liabilities. Based on current levels of orders and backlog, management
of the Company believes that working capital levels are appropriate to support
future operations.
During the six months ended June 30, 1998 the Company invested $10 million in
equipment and facilities compared to $19 million for the comparable period in
1997. The capital spending in each period was primarily attributable to capacity
expansion, particularly for LAN Products, equipment upgrades and vertical
integration projects to meet increased current and anticipated future business
demands. During the six months ended June 30, 1998 the Company received initial
cash proceeds of $10 million related to the sale of its high temperature
aerospace and industrial cables business.
The Company's 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. During the six months ended June 30, 1998 the Company repaid
$47 million under its revolving credit facility. Management believes that, based
upon its analysis of the Company's consolidated financial position and the
expected results of its operations in the future, the Company will have
sufficient cash flows from future operations and the financial flexibility to
attract both short- 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 the Company's
operations or its ability to meet its cash requirements.
<PAGE>
In the normal course of business, CommScope uses various financial instruments,
including derivative financial instruments, for purposes other than trading.
Non-derivative financial instruments include letters of credit and commitments
to extend credit (accounts receivable). The Company controls its exposure to
credit risk associated with its financial instruments through credit approvals,
credit limits and monitoring procedures. At June 30, 1998, in management's
opinion, CommScope did not have any significant exposure to any individual
customer or counter-party, nor did CommScope have any significant concentration
of credit risk related to any financial instrument.
Derivative financial instruments utilized by CommScope, which are not entered
into for speculative purposes, include commodity pricing contracts, foreign
currency exchange contracts, and contracts hedging exposure to interest rates.
At June 30, 1998, the Company evaluated its commodity pricing and foreign
currency exchange exposures and concluded that it was not currently beneficial
to use financial instruments to hedge its current positions with respect to
those exposures. As of June 30, 1998, the Company had entered into interest rate
swap agreements to effectively convert an aggregate amount of $100 million of
outstanding variable-rate borrowings to a fixed-rate basis. Contracts for
notional amounts of $50 million each expire in February and April 1999,
respectively. The contract expiring in April 1999 may be terminated at the
option of the counter-party to the swap agreement in October 1998. Under the
agreements, interest settlement payments will be made quarterly based upon the
spread between the three month LIBOR, as adjusted quarterly, and fixed rates of
5.92% and 5.79%, respectively. Net payments or receipts resulting from the swap
agreements are recorded as adjustments to interest expense in each quarter.
At June 30, 1998, the weighted average effective interest rate on outstanding
borrowings and associated credit fees under the Credit Agreement and the Alabama
State Industrial Development Authority Notes was 6.9%.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130,
"Reporting Comprehensive Income", was issued. SFAS No. 130 will require
disclosure of comprehensive income (which is defined as "the change in equity
during a period excluding changes resulting from investments by shareholders and
distributions to shareholders") and its components. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997, with reclassification of
comparative years required. The Company plans to provide appropriate financial
statement disclosures under SFAS No. 130 in its Form 10-K for the fiscal year
ended December 31, 1998. Had the new standard been applied for the three months
and six months ended June 30, 1998, comprehensive income would not differ from
net income for all periods presented in the condensed consolidated statements of
income.
Also in June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", was issued. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company plans to provide appropriate
financial statement disclosures under SFAS No. 131 in its Form 10-K for the
fiscal year ended December 31, 1998. SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. Management is
currently evaluating the effect of SFAS No. 131 on the Company's current
disclosures.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. The new standard requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for the Company beginning with the year ending December 31, 2000. Management is
currently evaluating the effects of SFAS No. 133 on the Company's financial
statements and current disclosures.
<PAGE>
YEAR 2000
CommScope recognizes the issues associated with Year 2000 date processing and
has appointed a corporate-wide project team to address these issues. The Year
2000 team is coordinating the identification, evaluation, and implementation of
changes to computer systems and applications necessary to achieve a Year 2000
date conversion. CommScope's products themselves - high performance, high
bandwidth cables for the telecommunications industry - are not affected by this
problem. The Company is, however, dependent upon internal computer systems as
well as those of its vendors who provide essential materials and services. The
multifunctional task force has been set up to address each of these areas.
Furthermore, all hardware and software specified for future purchase are
required to be Year 2000 compliant.
A portion of CommScope's internal financial and operating systems has been
developed in-house. Modifications to these systems have been in progress by
Company personnel since early 1997. It is expected that these changes will be
significantly completed by the end of 1998. Full Year 2000 compliance for
internal systems is expected to be achieved by June 1999. Management does not
believe that the costs of addressing the Year 2000 software issue will be
material to CommScope's results of operations, financial condition or cash
flows.
In addition to the PC and mainframe system and application vendors, CommScope is
working with its key suppliers of raw materials, equipment, facilities and
services. An inventory of affected equipment, products and services has been
developed to identify those areas critical to the operation of the Company. The
Company is evaluating the status of its key suppliers toward achieving Year 2000
compliance and their ability to provide an uninterrupted level of service at the
change of the Millenium. In addition to asking these suppliers to certify that
they are Year 2000 compliant, CommScope will also evaluate compliance through
internal testing, where feasible, to verify the modifications are effective.
However, the Company can give no assurance that the systems of other companies
on which the Company relies will be converted on time or that a failure to
convert by another company or a conversion that is incompatible with the
Company's systems would not have a material adverse effect on the Company.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q which 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 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 the control of the Company, such as the
level of market demand for the Company's products, competitive pressures, the
ability to achieve reductions in costs and to continue to integrate
acquisitions, price fluctuations of materials and the potential unavailability
thereof, foreign currency fluctuations, technological obsolescence, and other
specific factors discussed in Exhibit 99 to the Company's Form 10-Q for the six
months ended June 30, 1998. The information contained in this Form 10-Q
represents the Company's best judgment at the date of this report based on
information currently available. However, the Company does not intend to update
this information to reflect developments or information obtained after the date
of this report and disclaims any legal obligation to do so.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders (the "Meeting") on
May 1, 1998. Proxies for such meeting were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended. A
total of 49,154,751 shares of Common Stock with one vote ("Vote") each
were entitled to vote at the meeting and holders of 46,029,440 common
shares voted in person or by proxy, constituting a quorum.
At the Meeting, two of the Company's directors were elected for
3 year terms ending at the 2001 Annual Meeting of
Stockholders by the vote set forth below:
Name of Director Votes For Votes Withheld
George N. Hutton, Jr. 45,605,908 423,532
Boyd L. George 45,612,858 416,582
The Company's other four directors, whose term of office continues
after the 1998 Meeting, are Edward D. Breen, Frank M.
Drendel, Nicholas C. Forstmann, and James N. Whitson.
A proposal to approve the adoption of the CommScope, Inc. Amended and
Restated 1997 Long-Term Incentive Plan was approved by 39,299,901 Votes
cast in favor, 6,627,357 Votes cast against and 102,182 Votes
abstaining.
A proposal to approve the adoption of the CommScope, Inc. Annual
Incentive Plan was approved by 44,870,621 Votes cast in favor,
1,046,940 Votes cast against and 111,879 Votes abstaining.
A proposal to ratify the appointment by the board of directors of the
Company of Deloitte & Touche LLP as independent auditors for the
Company for the 1998 fiscal year was approved by 45,922,600 Votes cast
in favor, 52,347 Votes cast against and 54,493 Votes abstaining.
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 June 30,
1998:
None
<PAGE>
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.
August 7, 1998 /s/ Jearld L. Leonhardt
Date Jearld L. Leonhardt
Executive Vice President,
Finance and Administration
Signing both in his
capacity as Executive Vice
President on behalf of the
Registrant and as Chief
Financial Officer of the
Registrant
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<LEGEND>
This schedule contains summary financial information extracted from the
CommScope, Inc. condensed consolidated financial statements as of and for
the six months ended June 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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<NAME> CommScope, Inc.
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<FISCAL-YEAR-END> Dec-31-1998
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COMMSCOPE, INC.
EXHIBIT 99 - FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. The Company's Form 10-K, the Company's Annual
Report to Stockholders, any Form 10-Q or Form 8-K of the Company, or any other
oral or written statements made by or on behalf of the Company, may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are identified 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. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date the statement was made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
The actual results of the Company may differ significantly from the results
discussed in forward-looking statements. Factors that might cause such a
difference include, but are not limited to, (a) the general political, economic
and competitive conditions in the United States, Asia and other markets where
the Company operates; (b) changes in capital availability or costs, such as
changes in interest rates, market perceptions of the industry in which the
Company operates, or security ratings; (c) employee workforce factors; (d)
authoritative generally accepted accounting principles or policy changes from
such standard-setting bodies as the Financial Accounting Standards Board and the
Securities and Exchange Commission, and the factors set forth below.
Factors Relating to the Distribution
In a transaction that was consummated on July 28, 1997, General Instrument
Corporation (the "Distributing Company") (i) transferred all the assets and
liabilities relating to the manufacture and sale of broadband communications
products used in the cable television, satellite, and telecommunications
industries to its then wholly-owned subsidiary NextLevel Systems, Inc. and all
the assets and liabilities relating to the manufacture and sale of coaxial,
fiber optic and other electronic cable used in the cable television, satellite
and other industries to the Company (then a wholly-owned subsidiary of the
Distributing Company) and (ii) then distributed all of the outstanding shares of
capital stock of each of NextLevel Systems, Inc. and the Company to its
stockholders on a pro rata basis as a dividend (the "Distribution"). Immediately
following the Distribution, the Distributing Company changed its corporate name
to General Semiconductor, Inc. ("General Semiconductor"). Effective February 2,
1998, NextLevel Systems, Inc. changed its corporate name to General Instrument
Corporation ("General Instrument").
<PAGE>
The Distribution Agreement, dated as of June 12, 1997, among the Company,
General Instrument and the Distributing Company (the "Distribution Agreement")
and certain other agreements executed in connection with the Distribution
(collectively, the "Ancillary Agreements") allocate among the Company, the
Distributing Company, and General Instrument and their respective subsidiaries
responsibility for various indebtedness, liabilities and obligations. It is
possible that a court would disregard this contractual allocation of
indebtedness, liabilities and obligations among the parties and require the
Company or its subsidiaries to assume responsibility for obligations allocated
to another party, particularly if such other party were to refuse or was unable
to pay or perform any of its allocated obligations.
Pursuant to the Distribution Agreement and certain of the Ancillary Agreements,
the Company has agreed to indemnify the other parties (and certain related
persons) from and after consummation of the Distribution with respect to certain
indebtedness, liabilities and obligations, which indemnification obligations
could be significant.
Although the Distributing Company has received a favorable ruling from the
Internal Revenue Service, if the Distribution were not to qualify as a tax free
spin-off (either because of the nature of the Distribution or because of events
occurring after the Distribution) under Section 355 of the Internal Revenue Code
of 1986, as amended, then, in general, a corporate tax would be payable by the
consolidated group of which the Distributing Company was the common parent based
upon the difference between the fair market value of the stock distributed and
the Distributing Company's adjusted basis in such stock. The corporate level tax
would be payable by General Semiconductor and could substantially exceed the net
worth of General Semiconductor. However, under certain circumstances, the
Company and General Instrument have agreed to indemnify General Semiconductor
for such tax liability. In addition, under the consolidated return rules, each
member of the consolidated group (including the Company and General Instrument)
is severally liable for such tax liability.
Leverage; Certain Restrictions Under Credit Facilities
The Company is substantially leveraged. The degree to which the Company is
leveraged could have important consequences, including the following: (i) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, product development, acquisitions, general
corporate purposes or other purposes may be impaired; (ii) a portion of the
Company's and its subsidiaries' cash flow from operations must be dedicated to
the payment of the principal of and interest on its indebtedness; (iii) the
Credit Agreement, dated as of July 23, 1997, among CommScope, Inc. of North
Carolina, a wholly owned subsidiary of the Company, certain banks, and The Chase
Manhattan Bank, as Administrative Agent, contains certain restrictive financial
and operating covenants, including, among others, requirements that the Company
satisfy certain financial ratios; (iv) a significant portion of the Company's
borrowings will be at floating rates of interest, causing the Company to be
vulnerable to increases in interest rates; (v) the Company's degree of leverage
may make it more vulnerable to a downturn in general economic conditions; and
(vi) the Company's degree of leverage may limit its flexibility in responding to
changing business and economic conditions.
<PAGE>
In addition, in a lawsuit by an unpaid creditor or representative of creditors,
such as a trustee in bankruptcy, a court may be asked to void the Distribution
(in whole or in part) as a fraudulent conveyance and to require that the
stockholders return the special dividend (in whole or in part) to General
Semiconductor or require the Company to fund certain liabilities of General
Semiconductor and General Instrument for the benefit of creditors.
Dependence of the Company on the Cable Television Industry and Cable Television
Capital Spending
The majority of the Company's revenues come from sales to the cable television
industry. Demand for the Company's products depends primarily on capital
spending by cable television operators for constructing, rebuilding or upgrading
their systems. The amount of this capital spending, and, therefore, the
Company's sales and profitability will be affected by a variety of factors,
including general economic conditions, acquisitions of cable television
operators by non-cable television operators, cable system consolidation within
the industry, the financial condition of domestic cable television operators and
their access to financing, competition from satellite and wireless television
providers and telephone companies, technological developments and new
legislation and regulation of cable television operators. There can be no
assurance that cable television capital spending will increase from historical
levels or that existing levels of cable television capital spending will be
maintained.
In recent years, cable television capital spending has also been affected by new
legislation and regulation, on the federal, state and local level, and many
aspects of such regulation are currently the subject of judicial proceedings and
administrative or legislative proposals. During 1993 and 1994, the Federal
Communications Commission (the "FCC") adopted rules under the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"),
regulating rates that cable television operators may charge for lower tiers of
service and generally not regulating the rates for higher tiers of service. In
1996, the Telecommunications Act of 1996 (the "Telecom Act") was enacted to
eliminate certain governmental barriers to competition among local and long
distance telephone, cable television, broadcasting and wireless services. The
FCC is continuing its implementation of the Telecom Act which, when fully
implemented, may significantly impact the communications industry and alter
federal, state and local laws and regulations regarding the provision of cable
and telephony services. Among other things, the Telecom Act eliminates
substantially all restrictions on the entry of telephone companies and certain
public utilities into the cable television business. Telephone companies may now
enter the cable television business as traditional cable operators, as common
carrier conduits for programming supplied by others, as operators of wireless
distribution systems, or as hybrid common carrier/cable operator providers of
programming on so-called "open video systems." The economic impact of the 1992
Cable Act, the Telecom Act and the rules thereunder on the cable television
industry and the Company is still uncertain.
Although the domestic cable television industry is comprised of approximately
11,200 cable systems, a small number of cable television operators own a
majority of cable television systems and account for a majority of the capital
expenditures made by cable television operators. The loss of some or all of the
Company's principal cable television customers could have a material adverse
effect on the business of the Company.
<PAGE>
Telecommunications Industry Competition and Technological Changes Affecting
the Company
Many of the markets that the Company serves are characterized by advances in
information processing and communications capabilities which require increased
transmission speeds and greater capacity ("bandwidth") for carrying information.
These advances require ongoing improvements in the capabilities of wire and
cable products. The Company believes that its future success will depend in part
upon its ability to enhance existing products and to develop and manufacture new
products that meet or anticipate such changes. The failure to introduce
successful new or enhanced products on a timely and cost- competitive basis
could have an adverse impact on the Company's operations and financial
condition.
Fiber optic technology presents a potential substitute for the products that
comprise the majority of the Company's sales. To date, fiber optic cables have
penetrated the cable television and LAN markets served by the Company in
high-bandwidth point-to-point and trunking applications. Fiber optic cables have
not, to date, significantly penetrated the local distribution and residential
application markets served by the Company because of the high relative cost of
electro-optic interfaces and the high cost of fiber termination and connection.
At the same time, advances in data transmission equipment and copper cable
technologies have increased the relative performance of copper-based cables
which are the Company's principal product offerings. However, a significant
decrease in the cost of fiber optic systems could make such systems superior on
a price/performance basis to copper systems. While the Company is a fiber optic
cable manufacturer and supplier to a small portion of the cable television
market and certain specialty markets, such a significant decrease in the cost of
fiber optic systems would likely have an adverse effect on the Company.
Competition
The Company's coaxial, fiber optic and electronic cable products compete with
those of a substantial number of foreign and domestic companies, some with
greater resources, financial or otherwise, than the Company, and the rapid
technological changes occurring in the telecommunications industry could lead to
the entry of new competitors. Existing competitors' actions and new entrants may
have an adverse impact on the Company's sales and profitability. The Company
believes that it enjoys a strong competitive position in the coaxial cable
market because of its position as a low-cost, high-volume coaxial cable producer
and its reputation as a high-quality provider of state-of-the-art cables, along
with its strong orientation toward customer service. However, there can be no
assurance that the Company will continue to compete successfully with its
existing competitors or that it will be able to compete successfully with new
competitors.
<PAGE>
Impact of Price Fluctuations of Raw Materials on the Company; Sources of
Raw Materials
Fabricated aluminum, copper and plastics are the principal raw materials
purchased by the Company, and the Company's profitability may be affected by
changes in the market price of these materials (which are linked to the
commodity markets). Historically the Company has generally been able to pass on
increases in the price of these materials to its customers but has had some
difficulty doing so in recent years, and there can be no assurance that the
Company will be able to do so in the future. Additionally, significant increases
in the price of the Company's products due to increases in the cost of raw
materials could have a negative effect on demand for the Company's products.
A significant portion of the Company's raw material purchases are bi-metallic
center conductors for coaxial cables, nearly all of which are purchased from
Copperweld Corporation under a long-term supply arrangement expiring in March
2000. In addition to bi-metallic wires, fine aluminum wire is purchased
primarily from a single source; neither of these major raw materials could be
readily replaced in sufficient quantities if all supplies from the respective
primary sources were disrupted for an extended period. Additionally,
fluoronated-ethylene-propylene ("FEP") is produced by two manufacturers and is
currently under allocation by these suppliers. Availability of adequate supplies
of FEP will be critical to future LAN cable sales growth. However, some industry
analysts suggest that additional supplies of FEP may be available as early as
the third quarter of 1998 and may affect LAN cable industry dynamics and
pricing."
International Operations
The Company's sales to international markets will continue to be an important
focus of the Company in the future. Although the Company believes that future
growth in international markets will be a significant contributor to the
Company's overall business over the long-term, the current environment in the
international markets is expected to have a negative impact on 1998
international sales. There can be no assurance that international markets will
expand in the future. The Asian economic crisis, the strong U.S. dollar and
consolidation and merger activity among cable television operators in the United
Kingdom and Brazilian markets has also recently had a detrimental affect on the
Company's international sales.
International operations are subject to the usual risks inherent in sales
abroad, including risks with respect to currency exchange rates, economic and
political destabilization, restrictive actions by foreign governments,
nationalizations, the laws and policies of the United States affecting trade,
foreign investment and loans, and foreign tax laws.
Environment
The Company is subject to various federal, state, local and foreign laws and
regulations governing the use, discharge and disposal of hazardous materials.
The Company's manufacturing facilities are believed to be in substantial
compliance with current laws and regulations. Compliance with current laws and
regulations has not had and is not expected to have a material adverse effect on
the Company's financial condition.
The Company's present and past facilities have been in operation for many years,
and over that time in the course of those operations, such facilities have used
substances which are or might be considered hazardous, and the Company has
generated and disposed of wastes which are or might be considered hazardous.
Therefore, it is possible that additional environmental issues may arise in the
future which the Company cannot now predict.
