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| CTV > SEC Filings for CTV > Form 10-Q on 9-Aug-2004 | All Recent SEC Filings |
9-Aug-2004
Quarterly Report
The following discussion and analysis of our financial condition and results of operations for the three and six month periods ended June 30, 2004 and 2003 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, including management's discussion and analysis about the application of critical accounting policies included in our 2003 Annual Report on Form 10-K/A.
Overview
We, through our wholly owned subsidiaries, are a leading worldwide designer, manufacturer and marketer of broadband coaxial cables and other high performance electronic and fiber optic cable products for cable television, telephony, Internet access, wireless communications and other broadband services. We seek to be a global leader in cable and connectivity solutions for the 'last mile' in telecommunications. We define the 'last mile' as the distribution access or final link from the network operator to the end user, which includes cable and connectivity solutions for the home, business enterprise or wireless provider.
In January 2004, we acquired the Connectivity Solutions business ("Connectivity Solutions," or as operated by the Company, the "Connectivity Solutions segment") from Avaya Inc. ("Avaya") primarily to expand our position in the 'last mile' of telecommunications, establish a leadership position in the global enterprise market and enhance our global growth opportunities.
Through the acquisition of the SYSTIMAX® Solutions products in the Connectivity Solutions segment we became a leading global designer, manufacturer and marketer of physical layer end-to-end structured cabling solutions supporting local area network applications for enterprises and telecommunications service providers. SYSTIMAX is widely recognized as a leading global brand in enterprise cable and connectivity solutions. It has established channels to international markets and has a worldwide network of independent distributors, system integrators and value added resellers. We believe that this acquisition strengthens our global competitive position in the enterprise market and provides new channels to market our products. The Connectivity Solutions acquisition also expands the markets in which we operate, which creates potential new growth opportunities.
During the three and six month periods ended June 30, 2004, management evaluated the results of operations in two reportable segments: the Cable segment, which is our legacy cable business, and the Connectivity Solutions segment, which is the acquisition that was completed as of January 31, 2004. As we continue to integrate the Connectivity Solutions segment into our global operations and financial reporting systems, management may reorganize its internal reporting, which may require reporting of our results in more or different reportable segments in future periods.
CRITICAL ACCOUNTING POLICIES
There have been no changes in our critical accounting policies or significant accounting estimates as disclosed in our 2003 Annual Report on Form 10-K/A, except for changes resulting from our acquisition of Connectivity Solutions as of January 31, 2004. As a result of this acquisition, the reserve for product warranty claims and the fair values of the assets acquired and liabilities assumed in the acquisition of Connectivity Solutions are new significant estimates.
Product warranties-We recognize a liability for the estimated claims that may be paid under our customer warranty agreements to remedy potential deficiencies of quality or performance of our products. We record a provision for estimated future warranty claims based upon the historical relationship of
warranty claims to sales and specifically-identified warranty issues. We base our estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revise our estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Although these estimates are based on management's knowledge of and experience with past and current events and on management's assumptions about future events, it is reasonably possible that they may ultimately differ materially from actual results.
Fair values of assets acquired and liabilities assumed in the acquisition of Connectivity Solutions-The acquisition of Connectivity Solutions as of January 31, 2004 was accounted for using the purchase method of accounting. The purchase method requires management to make significant estimates. First, management must estimate the cost of the acquired entity based on the fair value of the consideration paid or the fair value of the net assets acquired, whichever is more clearly evident. This cost must then be allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. In addition, management must identify and estimate the fair values of intangible assets that should be recognized as assets apart from goodwill. Management utilized third party appraisals to assist in estimating the fair value of tangible property, plant and equipment and intangible assets acquired.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED
JUNE 30, 2004 WITH THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2003
Three Months Ended June 30,
2004 2003
% of Net % of Net Dollar %
$ Sales $ Sales Change Change
(millions) (millions)
Net sales $ 312.9 100.0 % $ 141.4 100.0 % $ 171.5 121.3 %
Gross profit 72.2 23.1 28.8 20.4 43.4 150.7
SG&A expense 51.7 16.5 21.8 15.4 29.9 137.2
R&D expense 8.1 2.6 1.5 1.1 6.6 440.0
Impairment charges for fixed
assets - - 31.7 22.4 (31.7 ) (100.0 )
Acquisition-related
transition and startup costs 1.2 0.4 - - 1.2 -
Equity in losses of OFS
BrightWave, LLC, net of tax 0.6 0.2 33.9 24.0 (33.3 ) (98.2 )
Net gain on OFS BrightWave,
LLC transaction, net of tax 76.4 24.4 - - 76.4 -
Net income (loss) 84.1 26.9 (51.4 ) (36.4 ) 135.5 (263.6 )
Net income (loss) per
diluted share $ 1.37 $ (0.87 ) $ 2.24
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Six Months Ended June 30,
2004 2003
% of Net % of Net Dollar %
$ Sales $ Sales Change Change
(millions) (millions)
Net sales $ 548.0 100.0 % $ 270.8 100.0 % $ 277.2 102.4 %
Gross profit 109.6 20.0 52.9 19.5 56.7 107.2
SG&A expense 87.7 16.0 41.9 15.5 45.8 109.3
R&D expense 13.0 2.4 3.0 1.1 10.0 333.3
Impairment charges for fixed
assets - - 31.7 11.7 (31.7 ) (100.0 )
In-process research and
development charges 3.9 0.7 - - 3.9 -
Acquisition-related
transition and startup costs 8.0 1.5 - - 8.0 -
Equity in losses of OFS
BrightWave, LLC, net of tax 1.4 0.3 37.7 13.9 (36.3 ) (96.3 )
Net gain on OFS BrightWave,
LLC transaction, net of tax 76.4 13.9 - - 76.4 -
Net income (loss) 67.7 12.4 (54.4 ) (20.1 ) 122.1 (224.4 )
Net income (loss) per
diluted share $ 1.10 $ (0.92 ) $ 2.02
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Effective January 31, 2004, we completed the acquisition of substantially all of the assets and assumed certain liabilities of Connectivity Solutions from Avaya and the Connectivity Solutions segment's operating results have been included in our consolidated financial statements since the date of acquisition. Accordingly, the consolidated results for the three and six month periods ended June 30, 2004 include the operating results of the Connectivity Solutions segment for the three months ended June 30, 2004 and the five-month period from February 1, 2004 through June 30, 2004, respectively. However, the consolidated results reflected above for the three and six month periods ended June 30, 2003 do not include any actual or pro forma results for the Connectivity Solutions segment. This information should be considered when comparing to financial results of 2004 and 2003. See Note 2 in the Notes to the Condensed Consolidated Financial Statements included in this document.
Net sales
Below is a summary that reflects our actual net sales for the three and six month periods ended June 30, 2004, which incorporate the Connectivity Solutions segment net sales for the three month period ended June 30, 2004 and the five month period from February 1, 2004 through June 30, 2004. This summary also reflects pro forma net sales for the three and six month periods ended June 30, 2004 and 2003, as if Connectivity Solutions had been acquired on January 1, 2004 and 2003, respectively. The pro forma net sales of the Connectivity Solutions segment for the one-month period ended January 31, 2004, which is included in the pro forma net sales for the six months ended June 30, 2004, and the pro forma net sales of the Connectivity Solutions segment for the three and six month periods ended June 30, 2003 are based on the historical results of the Connectivity Solutions business as operated by Avaya during the periods presented and therefore may not be indicative of the actual results of the Connectivity Solutions segment as operated by CommScope. Actual inter-segment sales eliminations for the three months ended June 30, 2004 and the five month period ended June 30, 2004 and pro forma inter-segment sales eliminations for the pro forma periods are included below.
Actual Pro forma
Three months Three months
ended ended
June 30, 2004 June 30, 2003
% of % of
Net Net Net Net Dollar %
Sales Sales Sales Sales Change Change
(dollars in millions)
Net sales by segment:
Cable segment $ 169.5 54.2 % $ 141.4 50.7 % $ 28.1 19.9 %
Connectivity Solutions segment 150.7 48.1 142.7 51.2 8.0 5.6
Inter-segment eliminations (7.3 ) (2.3 ) (5.3 ) (1.9 ) (2.0 ) 37.7
Consolidated net sales $ 312.9 100.0 % $ 278.8 100.0 % $ 34.1 12.2 %
Total domestic sales $ 216.6 69.2 % $ 195.7 70.2 % $ 20.9 10.7 %
Total international sales 96.3 30.8 83.1 29.8 13.2 15.9
Total worldwide sales $ 312.9 100.0 % $ 278.8 100.0 % $ 34.1 12.2 %
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Overall, consolidated net sales, on a pro forma basis, increased year over year for the second quarter, primarily due to higher domestic and international sales of Broadband/Video Products within the Cable segment. Our Cable segment sales increased in all major product categories and in all regions. The year-over-year improvement in Connectivity Solutions segment sales for the second quarter was primarily due to higher domestic sales of Integrated Cabinet Solutions Products.
Actual Pro forma
Six months
ended Six months ended
June 30, June 30,
2004 2004 2003
% of % of % of
Net Net Net Net Net Net Dollar %
Sales Sales Sales Sales Sales Sales Change Change
(dollars in millions)
Net sales by
segment:
Cable segment $ 305.3 55.7 % $ 305.3 53.2 % $ 270.8 50.6 % $ 34.5 12.7 %
Connectivity
Solutions segment 253.4 46.2 280.6 48.9 273.7 51.1 6.9 2.5
Inter-segment
eliminations (10.7 ) (1.9 ) (12.2 ) (2.1 ) (9.0 ) (1.7 ) (3.2 ) 35.6
Consolidated net
sales $ 548.0 100.0 % $ 573.7 100.0 % $ 535.5 100.0 % $ 38.2 7.1 %
Total domestic sales $ 378.0 69.0 % $ 392.4 68.4 % $ 367.1 68.6 % $ 25.3 6.9 %
Total international
sales 170.0 31.0 181.3 31.6 168.4 31.4 12.9 7.7
Total worldwide
sales $ 548.0 100.0 % $ 573.7 100.0 % $ 535.5 100.0 % $ 38.2 7.1 %
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Overall, consolidated net sales, on a pro forma basis, increased year over year for the first six months primarily due to higher domestic and international sales of Broadband/Video Products within the Cable segment. Our Cable segment sales increased in all major product categories and in all regions. The year-over-year improvement in Connectivity Solutions segment sales, on a pro forma basis, for the first six months was primarily due to higher domestic sales of Integrated Cabinet Solutions Products, which was somewhat offset by lower domestic sales of SYSTIMAX Products.
Cable Segment
Three Months Ended June 30,
2004 2003
Net % of Net Net % of Net Dollar %
Sales Sales Sales Sales Change Change
(dollars in millions)
Broadband/Video Products $ 127.6 75.3 % $ 108.5 76.7 % $ 19.1 17.6 %
LAN Products 31.6 18.6 24.6 17.4 7.0 28.5
Wireless & Other Telecom
Products 10.3 6.1 8.3 5.9 2.0 24.1
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Six Months Ended June 30,
2004 2003
Net % of Net Net % of Net Dollar %
Sales Sales Sales Sales Change Change
(dollars in millions)
Broadband/Video Products $ 230.1 75.4 % $ 209.8 77.5 % $ 20.3 9.7 %
LAN Products 56.9 18.6 47.6 17.6 9.3 19.5
Wireless & Other Telecom
Products 18.3 6.0 13.4 4.9 4.9 36.6
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The increase in net sales of Broadband/Video Products for the three and six month periods ended June 30, 2004 primarily resulted from strong international sales volumes. Despite lower sales of fiber optic cable and lower sales to our largest domestic Cable segment customer, domestic sales of Broadband/Video Products increased moderately. Sales to essentially all other major domestic broadband customers increased year over year for the three and six month periods ended June 30, 2004. However, based on
information from our domestic customers, we expect lower sales of Broadband/Video products in the second half of 2004.
As a result of rising raw material prices, we announced a price increase in April 2004 for essentially all broadband coaxial cable products that became effective beginning in late May. However, we expect ongoing pricing pressure and weak demand industry wide for fiber optic cable products for broadband applications through 2004. These price increases did not materially impact second quarter or first six months sales.
The increase in net sales of LAN Products for the three and six month periods ended June 30, 2004 was primarily driven by improved project business and the positive impact of previously announced price increases for our products. In addition, the launch of our new UnipriseTM brand contributed to the increase in net sales of LAN Products. We believe the business environment for our LAN products is improving based primarily on the improvement in information technology spending, which has led to increased spending by our customers. We announced two price increases for our LAN Products in the first quarter of 2004 as a result of significant increases in the cost of certain raw materials.
The increase in net sales of Wireless and Other Telecom Products for the three and six month periods ended June 30, 2004 was mainly due to a higher volume of sales combined with improved product mix. The improvement in general economic conditions has led to increased spending by certain major wireless carriers. In addition, we have developed relationships with new customers, who are generally purchasing larger diameter products, which have comparatively higher prices. We believe we continue to make steady progress communicating the Cell Reach® value proposition to new and existing customers, both domestically and internationally. While we expect sales of wireless products to be somewhat volatile since customer spending is mainly project-driven, we remain optimistic about our long-term global wireless opportunities primarily as a result of improving global economic conditions.
Connectivity Solutions Segment
Actual Pro forma
Three months Three months
ended ended
June 30, June 30,
2004 2003
% of % of
Net Net Net Net Dollar %
Sales Sales Sales Sales Change Change
(dollars in millions)
SYSTIMAX Products $ 116.7 77.4 % $ 118.5 83.0 % $ (1.8 ) (1.5 )%
ExchangeMAX Products 15.8 10.5 13.8 9.7 2.0 14.5
Integrated Cabinet Systems Products 18.2 12.1 10.4 7.3 7.8 75.0
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Actual Pro forma
Five-month
period ended Six months ended
June 30, June 30,
2004 2004 2003
% of % of % of
Net Net Net Net Net Net Dollar %
Sales Sales Sales Sales Sales Sales Change Change
(dollars in millions)
SYSTIMAX Products $ 194.6 75.8 % $ 210.4 75.0 % $ 225.8 82.5 % $ (15.4 ) (6.8 )%
ExchangeMAX Products 23.5 7.5 27.1 9.6 27.1 9.9 0.0 0.0
Integrated Cabinet
Systems Products 35.3 16.7 43.1 15.4 20.8 7.6 22.3 107.2
Total Connectivity
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The pro forma net sales in the table above for the three months ended June 30, 2003 reflect sales recognized by the Connectivity Solutions business during that period as operated by Avaya. The pro forma net sales in the table above for the six months ended June 30, 2004 reflect the actual sales of the Connectivity Solutions segment for the five-month period ended June 30, 2004 in addition to sales recognized by the Connectivity Solutions business in January 2004 as operated by Avaya prior to our acquisition of this business on January 31, 2004. The pro forma net sales in the table above for the six months ended June 30, 2003 reflect sales recognized by the Connectivity Solutions business during that period as operated by Avaya.
The discussion below focuses on the changes in net sales for the three months ended June 30, 2004 as compared to the pro forma net sales for the three months ended June 30, 2003. The discussion below also compares the pro forma net sales for the six months ended June 30, 2004 to the pro forma net sales for the six months ended June 31, 2003 since the actual net sales for the five-month period ended June 30, 2004 would not be comparable. However, these pro forma results may not be indicative of the actual results of the Connectivity Solutions segment as operated by CommScope.
The net sales of SYSTIMAX Products, on a pro forma basis, were relatively flat year over year for the second quarter primarily due to unusually strong sales volumes in the second quarter of 2003. Second quarter 2004 sales performance was somewhat impacted by previously announced price increases for our products. During the quarter ended March 31, 2004, we announced two price increases for new projects primarily due to the rising cost of copper and certain polymers. The year-over-year decrease in net sales of SYSTIMAX Products, on a pro forma basis, for the first six months was primarily the result of our effort to reduce external inventory balances held by distributors to a more appropriate level. We expect demand for SYSTIMAX products to be driven by the ongoing need for bandwidth and high-performance structured cabling in the enterprise market and affected by global information technology spending, among other things.
The increase in net sales of ExchangeMAX Products, on a pro forma basis, for the second quarter was primarily related to higher sales volumes from our netSet® remote provisioning systems, among other things. However, competitive pricing pressure continues to affect sales of ExchangeMAX Products. Net sales of ExchangeMAX Products, on a pro forma basis, for the first six months were flat.
The increase in net sales of Integrated Cabinet Solutions ("ICS") Products, on a pro forma basis, for the second quarter and first six months was primarily due to increased sales volumes resulting from increasing service provider deployments of Digital Subscriber Lines. However, second quarter 2004 sales of ICS products declined from the first quarter levels as a large customer neared completion of current planned projects.
Gross profit (net sales less cost of sales)
The year-over year increases in gross profit for the three and six month periods ended June 30, 2004 were primarily due to the acquisition of the Connectivity Solutions business as of January 31, 2004. Second quarter 2004 gross profit margin increased to 23.1% from 20.4% in the second quarter of 2003, primarily as a result of the acquisition. Gross profit margin for the first six months was flat year over year. Gross profit margins for the three and six month periods ended June 30, 2004 were affected by charges totaling $1.3 million and $14.6 million, respectively, related to the impact of purchase accounting adjustments on the Connectivity Solutions segment inventory. These purchase accounting adjustments resulted from the write-up above replacement manufacturing cost of a portion of Connectivity Solutions' finished goods and work in process inventory to reflect its acquired fair value as of the acquisition date under purchase accounting guidance. This write-up to fair value results in an increase in cost of sales and lower margins following the acquisition as the acquired inventory is sold.
Over the last 12 months, the costs of copper, plastics and polymers have increased substantially. As a result of these higher costs, we have announced price increases for certain products. While we expect improved gross margins as a result of the selected price increases, the inability to achieve continued market acceptance of the price increases could result in lower gross profit and gross profit margin.
Selling, general and administrative expense
The increases in selling, general and administrative ("SG&A") expense for the three and six month periods ended June 30, 2004 as compared to the same periods in 2003 were primarily due to the acquisition of Connectivity Solutions as of January 31, 2004. SG&A expense as a percentage of net sales was also slightly higher year over year in both the second quarter and first six months, primarily as a result of the acquisition.
Research and development
Research and development ("R&D") expense increased for the three and six month periods ended June 30, 2004 as compared to the same periods in 2003 primarily due to the acquisition of Connectivity Solutions as of January 31, 2004, which has extensive research and development activities. R&D expense as a percentage of net sales was also slightly higher year over year in both the second quarter and first six months, primarily as a result of the acquisition.
In-process research and development charges
We recognized a $3.9 million pretax charge during the first quarter of 2004 for . . .
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