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, 1999
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 April 30, 1999 there were 50,592,433 shares of Common Stock outstanding.
<PAGE>
CommScope, Inc.
Form 10-Q
March 31, 1999
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 Statement of Stockholders' Equity 6
Notes to Condensed Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Position 10 - 15
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Statements of Income
(Unaudited--in thousands, except per share amounts)
Three Months Ended
March 31,
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Net Sales $ 148,071 $ 133,602
----------------- -----------------
Operating Costs and Expenses:
Cost of sales 111,236 106,034
Selling, general and administrative 14,569 12,533
Research and development 1,489 1,753
Amortization of goodwill 1,247 1,303
----------------- -----------------
Total operating costs & expenses 128,541 121,623
----------------- -----------------
Operating Income 19,530 11,979
Other income, net 10 2,127
Interest expense (2,798) (4,197)
Interest income 139 158
----------------- -----------------
Income before Income Taxes 16,881 10,067
Provision for income taxes (6,121) (3,735)
----------------- -----------------
Net Income $ 10,760 $ 6,332
================= =================
Net income per share:
Basic $ 0.21 $ 0.13
Assuming dilution $ 0.21 $ 0.13
Weighted-average shares outstanding:
Basic 50,401 49,120
Assuming dilution 51,218 49,301
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)
(unaudited)
March 31, December 31,
1999 1998
-------------- ---------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 9,476 $ 4,129
Accounts receivable, less allowance for doubtful
accounts of $4,313 and $4,126, respectively 104,206 93,627
Inventories 37,058 29,986
Prepaid expenses and other current assets 1,520 3,745
Deferred income taxes 13,500 12,925
-------------- ---------------
Total current assets 165,760 144,412
Property, plant and equipment, net 149,682 135,082
Goodwill, net of accumulated amortization of
$44,641 and $43,396, respectively 166,241 164,024
Other intangibles, net of accumulated amortization
of $29,999 and $29,314, respectively 18,766 19,451
Investments and other assets 2,386 2,358
-------------- ---------------
Total Assets $ 502,835 $ 465,327
============== ===============
Liabilities and Stockholders' Equity
Accounts payable $ 33,539 $ 23,717
Other accrued liabilities 35,491 26,713
-------------- ---------------
Total current liabilities 69,030 50,430
Long-term debt 187,951 181,800
Deferred income taxes 17,000 17,543
Other non-current liabilities 12,013 11,582
-------------- ---------------
Total Liabilities 285,994 261,355
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value; Authorized
shares: 20,000,000; Issued and outstanding
shares: None at March 31, 1999 and
December 31, 1998 -- --
Common Stock, $.01 par value; Authorized
shares: 300,000,000; Issued and outstanding
shares: 50,519,673 at March 31, 1999;
50,254,467 at December 31, 1998 505 503
Additional paid-in capital 159,065 155,631
Retained earnings 58,598 47,838
Accumulated other comprehensive income (1,327) --
-------------- ---------------
Total Stockholders' Equity 216,841 203,972
-------------- ---------------
Total Liabilities and Stockholders'Equity $ 502,835 $ 465,327
============== ===============
See notes to condensed consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited - in thousands)
Three Months Ended
March 31,
-------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Operating Activities:
Net income $ 10,760 $ 6,332
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,932 6,025
Gain on sale of Elm City assets -- (1,873)
Changes in assets and liabilities:
Accounts receivable (14,080) 553
Inventories (1,945) 999
Prepaid expenses and other current
assets 2,225 1,145
Deferred income taxes (1,118) (1,514)
Accounts payable & other accrued
liabilities 18,492 7,585
Other non-current liabilities 431 330
Other (98) 195
----------------- -----------------
Net cash provided by operating activities 21,599 19,777
Investing Activities:
Additions to property, plant and equipment (9,018) (3,144)
Acquisition of business in Seneffe, Belgium (17,023) --
Sale of assets of the high temperature
aerospace and industrial cable business -- 8,885
Other -- 13
----------------- -----------------
Net cash provided by (used in)
investing activities (26,041) 5,754
Financing Activities:
Net repayments under revolving credit
facility (10,000) (15,000)
Proceeds of term loan facility for
acquisition of business in Seneffe, Belgium 16,353 --
Exercise of stock options 3,417 393
Issuance of stock to outside director 19 --
----------------- -----------------
Net cash provided by (used in)
financing activities 9,789 (14,607)
Change in cash and cash equivalents 5,347 10,924
Cash and cash equivalents, beginning of period 4,129 3,330
----------------- -----------------
Cash and cash equivalents, end of period $ 9,476 $ 14,254
================= =================
See notes to condensed consolidated financial statements.
</TABLE>
5
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<TABLE>
<CAPTION>
CommScope, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited - in thousands, except share data)
Three Months Ended March 31, 1999
Number of Additional Other Total
Common Shares Common Paid-In Retained Comprehensive Stockholders'
Outstanding Stock Capital Earnings Income Equity
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 50,254,467 $ 503 $ 155,631 $ 47,838 $-- $ 203,972
Issuance of shares for stock option
exercises 264,206 2 3,415 -- -- 3,417
Issuance of shares to outside director 1,000 -- 19 -- -- 19
Comprehensive income - currency
translation adjustment -- -- -- -- (1,327) (1,327)
Net income -- -- -- 10,760 -- 10,760
-------------------------------------------------------------------------------
Balance March 31, 1999 50,519,673 $ 505 $ 159,065 $ 58,598 $ (1,327) $ 216,841
===============================================================================
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.
</TABLE>
6
<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.
BASIS OF PRESENTATION
The condensed consolidated balance sheet as of March 31, 1999, the condensed
consolidated statements of income for the three months ended March 31, 1999 and
1998, the condensed consolidated statements of cash flows for the three months
ended March 31, 1999 and 1998, and the condensed consolidated statement of
stockholders' equity for the three months ended March 31, 1999 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 ended March 31, 1999 and 1998. 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, 1998 audited consolidated financial statements and
notes thereto included in the Company's 1998 Annual Report on Form 10-K.
2. SUPPLEMENTAL BALANCE SHEET INFORMATION
Inventories consist of:
March 31, December 31,
1999 1998
1999
----------- ------------
Raw materials $ 13,735 $ 12,379
Work in process 9,185 5,811
Finished goods 14,138 11,796
------------ ------------
$ 37,058 $ 29,986
=============== ==============
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
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 common equivalent
shares outstanding for diluted net income per share:
Three Months Three Months
Ended March 31, Ended March 31,
1999 1998
-----------------------------------
Average number of common shares outstanding
- for basic net income per share 50,401 49,120
Dilutive effect of employee stock options 817 181
===================================
Average number of common and common
equivalent shares outstanding
- for diluted net income per share 51,218 49,301
===================================
4. LONG-TERM DEBT
Long-term debt consisted of the following:
March 31, December 31,
1999 1998
------------------ -----------------
Credit Agreement (as defined below) $ 161,000 $ 171,000
Eurodollar Credit Agreement (as defined below) 16,151 --
Alabama State Industrial
Development Authority Notes 10,800 10,800
------------------ -----------------
$ 187,951 $ 181,800
================== =================
In July 1997, the Company entered into a $350 million revolving credit agreement
with a group of banks (the "Credit Agreement"). The Company utilizes the Credit
Agreement for, among other things, general working capital needs, financing
strategic acquisitions, and other general corporate purposes.
In February 1999, the Company entered into a term loan agreement for 15 million
Euros (the "Eurodollar Credit Agreement"). The Company utilized the proceeds of
the loan to fund the acquisition costs and working capital needs of a new
manufacturing facility in Seneffe, Belgium.
5. BUSINESS ACQUISITIONS AND DIVESTITURES
In February 1998, the Company sold certain real and personal property and
inventories of its high-temperature aerospace and industrial cables business to
Alcatel 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).
Effective January 1, 1999, the Company acquired certain assets and assumed
certain liabilities of Alcatel's coaxial cable business in Seneffe, Belgium. The
acquisition provides the Company with a European base of operations, access to
established distribution channels and complementary coaxial cable technologies.
The operation in Seneffe is the largest CATV coaxial cable manufacturer in
Europe with annual sales by Alcatel of approximately $35 million in 1998.
<PAGE>
CommScope, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(In Thousands, Unless Otherwise Noted)
5. BUSINESS ACQUISITIONS AND DIVESTITURES (continued)
The Seneffe acquisition has been accounted for as a purchase business
combination and, accordingly, the acquired assets and assumed liabilities have
been recorded at their estimated fair value at the date of the acquisition of
approximately $20 million. Payment for the acquired business was not required
until March 1999 and was financed primarily by borrowings under the new
Eurodollar Credit Agreement.
6. NEWLY ISSUED ACCOUNTING STANDARDS
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 an entity to 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, 1998 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, 1998 or in the unaudited condensed
consolidated financial statements included in this document.
HIGHLIGHTS
CommScope reported net income of $11 million ($0.21 per basic and diluted share)
for the quarter ended March 31, 1999, an increase of $4 million (70%) from the
quarter ended March 31, 1998 net income of $6 million ($0.13 per basic and
diluted share pro forma).
Net income for the quarter ended March 31, 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, first quarter 1998 net
income was $5 million ($0.10 per share).
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH
PERIOD ENDED MARCH 31, 1999 WITH THE THREE MONTH
PERIOD ENDED MARCH 31, 1998
NET SALES
Net sales for the first quarter ended March 31, 1999 increased $14 million (11%)
to $148 from the comparable prior year's first quarter net sales of $134
million. The increase in net sales is due to strengthening worldwide coaxial
cable sales that were partially offset by decreased domestic networking cable
sales.
International sales increased 41% to $43 million for the first quarter 1999
compared to $30 million for the first quarter 1998, due in part to the
acquisition of the Company's new coaxial cable business in Seneffe, Belgium.
Net sales to cable television and other video distribution markets ("CATV
Products") for the first quarter 1999 increased $14 million (14%) to $119
million from the first quarter 1998. The increase in sales resulted primarily
from improving international coaxial cable sales and from stronger sales to
domestic cable television system operators (MSOs).
Net sales for local area network and other data applications ("LAN Products")
for the first quarter 1999 decreased $8 million (34%) from the first quarter
1998. The sales decrease for LAN Products is due primarily to pricing pressure
in the LAN market.
Sales of other cable products for the first quarter 1999 were $15 million
compared to $7 million for the first quarter 1998, due to a significant increase
in sales of coaxial cable for both wireless and for central office
telecommunications applications.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the first quarter 1999 was $37 million compared to $28 million
for the first quarter 1998, an increase of 34%. Gross profit margins improved to
24.9% for the first quarter 1999 compared to 20.6% for the first quarter 1998.
The primary drivers of the improvement in gross profit and gross profit margins
are the increased sales, engineered manufacturing efficiencies including "value
capture" vertical integration, material and commodity cost improvements, and
improving Cell Reach profitability. These improvements were somewhat offset by
lower prices for LAN Products and sales from the Seneffe facility, which has
lower than Company-average margins.
The Company anticipates continued improvement in gross profit margins due to
ongoing cost reduction initiatives and relatively stable market prices for the
Company's coaxial cable products. However, these improvements may be moderated
by the difficult pricing environment for LAN Products, the implementation of a
new enterprise information management system and increasing commodity prices.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense for the first quarter 1999
was $15 million compared to $13 million for the first quarter 1998. As a
percentage of net sales, SG&A expense was 10% and 9%, respectively. SG&A expense
increased primarily due to the expansion of sales and marketing efforts for
developing products.
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales remained steady at
1% during all periods presented. 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 to
Alcatel 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).
INTEREST EXPENSE
Interest expense for the first quarter 1999 was $3 million compared to $4
million for the first quarter 1998. The reduction in interest costs is due to
the reduction in borrowings under the Company's credit facility from $251
million at the end of the first quarter 1998 to $188 million at the end of the
first quarter 1999.
INCOME TAXES
The effective tax rate was 36% for the first quarter 1999 compared to 37% for
the first quarter 1998. The effective tax rate for the entire fiscal year 1998
was 36%.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $22 million for the first quarter 1999 compared
to $20 million for the first quarter 1998, an increase of $2 million or 9%. The
increase in cash flow provided by operations is primarily due to increased net
income offset by slightly higher working capital.
Working capital was $97 million at March 31, 1999 compared to $94 million at
December 31, 1998. 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 first quarter 1999 the Company invested $9 million in equipment and
facilities compared to $3 million for the comparable period in 1998. The capital
spending in each period was primarily attributable to capacity expansion,
equipment upgrades and vertical integration projects to meet increased current
and anticipated future business demands. During the first quarter 1999 the
Company also utilized $17 million to acquire the coaxial cable business in
Seneffe, Belgium.
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 first quarter 1999 the Company repaid $10 million
under its revolving credit facility. Additionally, the Company borrowed 15
million Euros (equivalent to $16.4 million on the date of borrowing) under a new
variable rate term loan agreement (the "Eurodollar Credit Agreement") to fund
the acquisition of the coaxial cable business in Seneffe, Belgium. Based upon
its analysis of the Company's consolidated financial position and the expected
results of its operations in the future, management believes that the Company
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 the Company's operations or its ability to meet its cash requirements.
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 exposures to
credit risk associated with its financial instruments through credit approvals,
credit limits and monitoring procedures. At March 31, 1999, 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 March 31, 1999, the Company evaluated its commodity pricing and foreign
currency exchange exposures and concluded that it was not currently beneficial
to use derivative financial instruments to hedge its current positions with
respect to those exposures. However, the Company's Eurodollar Credit Agreement
(which is not a derivative financial instrument) serves as a hedge against
currency exchange exposures related to the Company's net investment in its
coaxial cable business in Seneffe, Belgium.
As of March 31, 1999, 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 April 1999 and October 2001, respectively. 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 5.79% and 4.81%, respectively.
Also as of March 31, 1999, the variable rate borrowing under the Eurodollar
Credit Agreement was effectively converted into a fixed rate of 4.53% through an
interest rate swap agreement with terms that are identical to the Eurodollar
Credit Agreement. Net payments or receipts resulting from the various interest
rate swap agreements are recorded as adjustments to interest expense in each
quarter.
At March 31, 1999, the weighted-average effective interest rate on outstanding
borrowings and associated credit fees under the Credit Agreement, the Eurodollar
Credit Agreement and the Alabama State Industrial Development Authority Notes
was 6.1%.
NEWLY ISSUED ACCOUNTING STANDARDS
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 an entity to 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.
EUROPEAN MONETARY UNION - EURO
On January 1, 1999, several member countries of the European Union established
fixed conversion rates between their existing sovereign currencies, and adopted
the Euro as their new common legal currency. As of that date, the Euro began
trading on currency exchanges. The legacy currencies of the participating
countries will remain legal tender for a transition period between January 1,
1999 and January 1, 2002. The Company conducts business in member countries.
During the transition period, cash-less payments (for example, wire transfers)
can be made in the Euro, and parties to individual transactions can elect to pay
for goods and services using either the Euro or the legacy currency. Between
January 1, 2002 and July 1, 2002, the participating countries will introduce
Euro notes and coins and eventually withdraw all legacy currencies so that they
will no longer be available.
The Company is addressing the issues involved with the introduction of the Euro.
Among the issues facing the company are the assessment and conversion of
information technology ("IT") systems to allow for transactions to take place in
both the legacy currencies and the Euro and the eventual elimination of legacy
currencies. In addition, the Company is reviewing certain existing contracts for
potential modification and assessing its pricing / marketing strategies in the
affected European markets.
Based on current information, CommScope does not expect that the Euro conversion
will have a material adverse effect on its business, results of operations, cash
flows or financial condition.
YEAR 2000
CommScope is currently addressing an issue common to most companies - ensuring
that its existing IT systems and applications and other non-IT control devices
are suitable for continued use into and beyond the Year 2000. Many IT systems
and applications and non-IT control devices utilized by the Company use only two
digits to identify a year in the date field - and accordingly may recognize a
date using "00" as the Year 1900 or some other date rather than the Year 2000.
Failure to make appropriate modifications or upgrades to critical IT systems and
applications and non-IT control devices could result in a system failure or
miscalculations causing significant disruptions to operations. Third parties
with whom the Company interacts also employ various computer systems with
similar Year 2000 compliance issues. Failure by third parties to adequately
address their own Year 2000 compliance issues exposes the Company to business
risks such as a reduced demand for the Company's products or the lack of
availability of critical raw materials or services required for manufacturing
the Company's products. The Company's products themselves - high performance,
high bandwidth cables for the telecommunications industry - are not affected by
the Year 2000 problem. The Year 2000 compliance discussion below is based on
information currently available to the Company. Readers are cautioned that
forward-looking statements contained in the Year 2000 section should be read in
conjunction with the Company's disclosures under the heading "Forward-Looking
Statements".
To address the Year 2000 compliance issue, the Company has appointed a
corporate-wide Year 2000 compliance project team which is responsible for
coordinating the identification, evaluation, and implementation of changes to IT
systems and applications and non-IT control devices necessary to achieve a Year
2000 date conversion. The Year 2000 compliance project team is also
investigating significant third parties to determine the effectiveness of their
efforts toward achieving Year 2000 compliance.
The Year 2000 compliance project team has designed a systematic methodology of
addressing the Year 2000 compliance issue, which includes: (1) identification
and evaluation of IT systems and applications and non-IT control devices with
Year 2000 compliance issues; (2) implementation of changes to IT systems and
applications and non-IT control devices to achieve Year 2000 compliance; (3)
testing of the corrective actions taken to ensure Year 2000 compliance for the
identified systems; and (4) development of contingency plans in the event of the
failure of third parties to become Year 2000 compliant.
A database of internal IT systems and applications and non-IT control devices
which rely on date-sensitive computer logic has been developed to provide a
starting framework from which to address the significant issues related to Year
2000 compliance. Each of these systems, applications and devices is being
classified as a priority A, B, or C issue. Both A and B priority items are
deemed as critical systems which must be modified or upgraded into Year 2000
compliance. Priority C items are non-critical IT and non-IT systems which will
be upgraded into Year 2000 compliance upon completion of the modification of A
and B priority items.
The Year 2000 compliance project team has also accumulated a database of
significant third parties. Each of these third parties is being contacted and
asked to provide responses which will allow the Company to assess their ability
to achieve Year 2000 compliance. The Company will also evaluate third party
compliance through internal testing, where feasible, to verify that the
modifications are effective. Almost all of the Company's suppliers are still
engaged in executing their Year 2000 compliance efforts. As a result, the
Company at this time cannot fully evaluate the Year 2000 risks to its supply of
goods and services. The Company maintains a list of alternative suppliers as
part of its contingency plan in the event current suppliers do not timely
complete their compliance efforts. However, because there are limited sources of
certain materials used in manufacturing the Company's products, the Company may
not be able to develop an alternative source of supply if the operations of its
current suppliers are interrupted as a result of Year 2000 non-compliance.
CommScope will continue to monitor the Year 2000 status of its suppliers to
minimize this risk and will develop or modify, as appropriate, contingency plans
as the risks become more clear.
Modifications to most written programs for IT systems and applications (which
initially were developed in-house) have been in progress by Company personnel
since early 1997. In addition, certain non-compliant systems and applications
have been or are being replaced with Year 2000 compliant systems and products.
Substantially all IT systems and applications acquired from external sources are
being upgraded to Year 2000 compliant versions (if they are not already) through
system upgrades or through the purchase of new systems. The Company believes
that it has achieved 79% Year 2000 compliance for critical internal IT systems
and applications at March 31, 1999, with 100% Year 2000 compliance expected by
the third quarter of 1999. Virtually all the critical non-IT systems (including
a variety of equipment control devices) are currently being identified,
evaluated and modified, as appropriate, for Year 2000 compliance through
upgrades to Year 2000 compliant devices.
The Company plans to test the effectiveness of corrective actions taken to
achieve Year 2000 compliance during 1999, but to date it has not performed
compliance testing on systems or applications for which Year 2000 modifications
have been made. As compliance testing is completed and a full assessment of the
risks from potential Year 2000 systems failures can be made, the Company plans
to develop Year 2000 contingency plans for such risks. These contingency plans
will factor in business and operating decisions related to the potential failure
of significant third parties to become Year 2000 compliant.
The Company currently does not believe that the costs of addressing Year 2000
compliance issues will be material to the Company's results of operations,
financial condition or cash flows. The Company estimates that, through March 31,
1999, it has spent $500,000 to address Year 2000 compliance issues for IT
systems and applications and $100,000 for non-IT devices. Future expenditures to
address Year 2000 compliance issues are currently estimated at $400,000 for IT
systems and applications and $300,000 for non-IT devices. The Company expects to
finance expenditures for Year 2000 compliance modifications through cash flows
from future operations.
Due to the Company's dependence upon, and its current uncertainty with, the Year
2000 compliance of certain third-party suppliers and vendors, the Company is
unable to determine at this time its most reasonably likely worst case scenario.
The Company expects its Year 2000 compliance efforts to reduce significantly the
Company's current level of uncertainty regarding the impact of these Year 2000
issues.
The Company believes that the corrective actions implemented under the direction
of the Year 2000 compliance project team will be completed on a timely basis in
a cost-effective manner to ensure that the Company's internal systems will be
operational and suitable for continued use in the Year 2000 and beyond. In
addition, the Company believes that significant third parties will become Year
2000 compliant or that adequate contingency plans will be developed and
implemented to ensure minimal business interruption to the Company's operations.
However, there can be no guarantee that problems associated with system failure
or deficient system operation due to Year 2000 compliance issues will not result
in an interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition.
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,
international economic and political uncertainties and other specific factors
discussed in Exhibit 99 to the Form 10-K for the period ending December 31,
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the three months ended March 31,
1999:
None
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 10, 1999 /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
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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 three months ended March 31, 1999 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
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<FISCAL-YEAR-END> Dec-31-1999
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