ITEM 1. BUSINESS
Unless the context otherwise requires, references to "CommScope, Inc.," or "we," "us," or "our" are to CommScope, Inc. and its direct and indirect subsidiaries, including CommScope Inc. of North Carolina, on a consolidated basis.
GENERAL
We are a leading worldwide designer, manufacturer and marketer of a broad line of coaxial, fiber optic, and other high-performance electronic cable products for cable television, telephony, Internet access and wireless communications. We believe that we supplied over 50% of all coaxial cable purchased in the United States in 2000 for broadband cable networks using Hybrid Fiber Coax (HFC) architecture. We believe we are also the largest manufacturer and supplier of coaxial cable for HFC cable networks in the world. We are also a leading supplier of fiber optic cables primarily for HFC cable networks and have developed specialized, proprietary fiber optic products for telecommunications applications. We are a leading supplier of coaxial cable for telephone central office switching and transmission applications, as well as video distribution applications such as satellite television and security surveillance. In addition, we have developed an innovative line of coaxial cables for wireless communication infrastructure applications that have superior performance characteristics compared to traditional cables. We are also a leading provider of high-performance premise wiring for local area networks. We sell our products to approximately 2,200 customers in more than 95 countries.
For the year ended December 31, 2000 our revenues were $950 million and our net income was $85 million. During this period, approximately 77% of our revenues were for HFC cable networks and other video applications, 14% were for wireless, central office and other telecommunications applications and 9% were for local area network premise wiring applications. International sales were approximately 24% of our revenues during this period. For further discussion of current and prior year domestic and international revenues, see Items 7 and 8 of this Form 10-K.
We believe that we are the world's most technologically advanced, low-cost provider of coaxial cable. With our leading product offerings, cost-efficient manufacturing and economies of scale, we believe we will benefit from the convergence of video, voice and high-speed Internet access and the resulting demand for enhanced HFC broadband networks.
We believe that the following industry trends will continue to drive demand for our products:
o endorsement of the HFC architecture by major cable, telephone and technology companies;
o increasing use of the Internet;
o increasing need for additional bandwidth to accommodate new applications;
o increasing maintenance requirements for HFC cable networks as operators improve reliability for telephony, data and other two-way services;
o the continuing rapid deployment of wireless communications systems worldwide;
o increasing demand for higher speed and bandwidth for local area networks; and
o regional clustering of cable systems that will facilitate the delivery of advanced services such as telephony.
BUSINESS STRATEGY
We have adopted a growth strategy to expand and strengthen our current market position as the leading worldwide supplier of coaxial cable for broadband communications. The principal elements of our growth strategy are:
BENEFIT FROM WORLDWIDE HFC PARADIGM SHIFT. A vast majority of video networks worldwide, such as cable service providers, have adopted the HFC cable network architecture for video service delivery. Events over the past 12 months involving major telecommunications and cable service providers create the potential to expand the role
of HFC cable networks from a video-centric focus to a key platform for delivery of a variety of broadband services. These events include transactions such as the historic America Online and Time Warner merger, Microsoft's investment in TITUS Communications, which is the second largest broadband provider in Japan, and the recent Liberty Media/Klesch & Company announcement regarding its intended purchase of the majority interest in several regional operating companies from Deutsche Telecom in Germany.
We believe that the HFC cable network architecture provides the most cost-effective bandwidth for multi-channel video, voice and data into homes around the world. This architecture enables both cable and other telecommunications service providers to offer new services such as high-speed Internet access, video on demand, Internet protocol telephony, high-definition television and other interactive services. According to the Federal Communications Commission Annual Report on Competition in Video Markets, dated January 8, 2001, domestic cable operators continue to upgrade their broadband infrastructure at a rapid pace to increase channel capacity and to develop facilities for these advanced services.
DEVELOP PROPRIETARY PRODUCTS AND EXPAND MARKET OPPORTUNITIES. We maintain an active program to identify new market opportunities and develop and commercialize products that use our core technology and manufacturing competencies. We have developed new products and entered new markets, including coaxial cable for wireless applications, satellite cables, local area network cables, specialized coaxial based telecommunication cables, broadcast audio and video cables and coaxial cables in conduit. We have developed specialized coaxial (Power Feeder(R)) and fiber optic (Fiber Feeder(TM)) cables for distribution and telephony applications in HFC cable networks. We have also developed UltraPipe(TM), a high-end local area network cable product targeted for high-speed local area network applications.
We used our expertise in aluminum coaxial cable technology to help develop Cell Reach(R), a patented copper coaxial cable solution for the wireless antenna market. We believe Cell Reach(R) is a technologically superior product with a lower total lifetime cost of ownership than the current industry standard. Cell Reach(R) has been installed in thousands of cellular and personal communications services antenna sites with leading service providers such as Nextel Communications, Inc., Sprint Corporation and certain Sprint affiliates, and certain AT&T Corporation affiliates. We have also developed a number of broadband cables for other wireless applications.
CONTINUOUSLY IMPROVE OPERATING EFFICIENCIES. We invested approximately $230 million in the development and acquisition of state-of-the-art manufacturing facilities and new technologies during the past four fiscal years. These investments help to increase our capacity and operating efficiencies, improve management control and provide more consistent product quality. As a result, we believe we are one of the few manufacturers capable of satisfying volume production, time-to-market, and technology requirements of customers for coaxial cable in the communications industry. We believe that our breadth and scale permit us to cost-effectively invest in improving our operating efficiency through investments in engineering and cost-management programs. We intend to capture additional value in the supply chain through ongoing vertical integration projects.
EXPAND OUR GLOBAL PLATFORM. We believe that the worldwide demand for video and data services, the large number of television households outside the United States and relatively low penetration rates for cable television in most countries provide significant long-term opportunities. We have become a major supplier of coaxial cable for the cable television and broadband services industries in international markets, principally Europe, Latin America and the Pacific Rim. In 2000 we had approximately 275 international customers in more than 95 countries, representing approximately $232 million or approximately 24% of our 2000 revenue. We support our international sales efforts with sales representatives based in Europe, Latin America and the Pacific Rim. In addition, we are able to benefit from our domestic cable customer base because some of those customers are also equity investors in international cable service providers.
Although there is current uncertainty in international markets, we believe that we are well positioned to benefit over the long term from future international growth opportunities. As broadband HFC networks expand globally, CommScope intends to acquire and open facilities in countries that we believe have strategic value. We believe in-country manufacturing is important because it moves us closer to international customers, it can lower taxes and tariffs and provides the opportunity to improve customer service.
For example, in 1999 CommScope acquired the Alcatel Cable Benelux, S.A. coaxial cable business in Seneffe, Belgium. With this acquisition, we believe that we became the largest manufacturer and supplier of coaxial cable for HFC cable networks in Europe. This acquisition gave us access to established European distribution channels
and complementary coaxial cable technologies. We believe it has strengthened CommScope's position as a potential supplier for the expected telecommunications upgrade and rebuild activity in Germany, Spain and other European countries. During 2000, we increased the capability and efficiency of our Belgium facility for HFC related products. We also intend to begin establishing capabilities for the manufacture of products for wireless applications at our Belgium facility in late 2001.
In September, 2000, we purchased an existing facility in Jaguariuna, Brazil that we expect to provide approximately 289,000 square feet of manufacturing and office space when modifications are complete in the second half of 2001. This facility is expected to manufacture products for both HFC and wireless applications.
LEVERAGE SUPERIOR CUSTOMER SERVICE. We believe that our coaxial cable manufacturing capacity is greater than that of any other manufacturer. This enables us to provide our customers with a unique high-volume service capability. As a result of our 24-hour, seven days per week continuous manufacturing operations, we are able to offer faster order turnaround services. In addition, we believe that our ability to offer rapid delivery services, materials management and logistics services to customers through our private truck fleet is an important competitive advantage.
BUSINESS GROUPS
We manufacture and sell cable for three broad product groups, which are similar in nature and share similar production processes, customers, distribution channels and regulatory environments:
o cable television and other video applications;
o wireless and other telecommunications applications; and
o local area network applications.
DOMESTIC HFC CABLE TV MARKET. We design, manufacture and market primarily coaxial cable, most of which is used in the cable television industry. We manufacture two primary types of coaxial cable:
o semi-flexible, which has an aluminum or copper outer tubular shield or outer conductor; and
o flexible, which is typically smaller in diameter than semi-flexible coaxial cable and has a more flexible outer conductor typically made of metallic tapes and braided fine wires.
Semi-flexible coaxial cables are typically used in the trunk and feeder distribution portion of cable television systems, and flexible coaxial cables, also known as drop cables, are typically used for connecting the feeder cable to a residence or business or for some other communications applications. We also manufacture fiber optic cable for the cable television industry and others.
Cable television service traditionally has been provided primarily by cable television system operators that have been awarded franchises from the municipalities they serve. In response to increasing competitive pressures and expanding revenue opportunities, cable television system operators have been expanding the variety of their service offerings not only for video, but for Internet access and telephony, which generally requires increasing amounts of cable and system bandwidth. Cable television system operators have generally adopted, and we believe that for the foreseeable future will continue to adopt, HFC cable system designs when seeking to increase system bandwidth. These systems combine the advantages of fiber optic cable in transmitting clear signals over a long distance without amplification, and the advantages of high-bandwidth coaxial cable in ease of installation, low cost and compatibility with the receiving components of the customer's communications devices. We believe that:
o cable television system operators are likely to increase their use of fiber optic cable for the trunk and feeder portions of their cable systems;
o there will be an ongoing need for high-capacity coaxial cable for the local distribution and street-to-the-home portions of the cable system; and
o coaxial cable will remain the most cost effective means for the transmission of broadband signals to the home or business over shorter distances in cable networks.
For local distribution purposes, coaxial cable has the necessary signal carrying capacity or bandwidth to handle upstream and downstream signal transmission.
The construction, expansion and upgrade of cable systems require significant capital investment by cable operators. Cable television system operators have been significant borrowers from the credit and capital markets. Therefore, capital spending within the domestic cable television industry has historically been cyclical, depending to a significant degree on the availability of credit and capital. The cable television industry has also been subject to varying degrees of both national and local government regulation, most recently the Telecom Act and the 1992 Cable Act, and their implementing regulations adopted in 1993 and 1994. The regional Bell operating companies and other telephone service providers have generally been subject to regulatory restrictions which prevented them from offering cable television service within their franchise telephone areas. However, the Telecom Act removes or phases out many of the regulatory and sale restrictions affecting cable television system operators and telephone operating companies in the offering of video and telephone services. We believe that the Telecom Act will encourage competition among cable television system operators, telephone operating companies and other communications companies in offering video, telephone and data services such as Internet access to consumers, and that providers of such services will upgrade their present communications delivery systems. We have provided coaxial cables to most major U.S. telephone operating companies.
INTERNATIONAL MARKETS. Cable system designs using HFC technology are increasingly being used in international markets with low cable television penetration. As of December 31, 2000, based upon industry trade publications and reports from telecommunications industry analysts, we estimate that there are more than 800 million television households worldwide, including roughly 450 million in the Asia/Pacific Rim region, roughly 240 million in Europe and nearly 100 million in the Latin America/Caribbean region, among others. This compares to approximately 100 million television households in the United States. We estimate that roughly 45% of the television households in Europe subscribe to some form of multichannel television service compared to subscription rates of nearly 80% in the United States. Based upon such sources, we estimate that subscription rates in the Asia/Pacific Rim and Latin America/Caribbean markets are even lower at roughly 25% and 15%, respectively.
As of December 31, 2000 we had sales in more than 95 countries. We have penetrated the international marketplace through a field sales organization and through a network of distributors and agents located in major countries where we do business. In addition to new customers developed by our network of distributors and sales representatives, many large U.S. cable television operators, with whom we have had long established business relationships, are active investors in cable television systems outside the United States.
OTHER VIDEO MARKETS (NON-CABLE TELEVISION). Many specialized markets or applications are served by multiple cable media such as coaxial, twisted pair, fiber optic or combinations of each. We are a leading producer of composite cables made of flexible coaxial and twisted copper pairs for full service communications providers worldwide. In the satellite direct-to-home cable market, where specialized cables transmit satellite-delivered video signals and antenna positioning/control signals, we have developed a leading market position. We market an array of premium metallic and optical cable products directed at the broadcasting and video production studio market.
WIRELESS COMMUNICATIONS MARKET. We believe that the rapid deployment of wireless communications systems throughout the United States and the rest of the world presents a growth opportunity for us. Semi-flexible coaxial cables are used to connect the antennae located at the top of wireless antenna towers to the radios and power sources located adjacent to or near the antenna site. Over the past few years, we developed Cell Reach(R) products, a line of copper shielded semi-flexible coaxial cable and related connectors and accessories to address this market. Cell Reach has been installed in thousands of wireless base stations with leading service providers such as Nextel Communications, Inc., Sprint Corporation and certain Sprint affiliates and certain AT&T affiliates.
We have expanded manufacturing capacity for this product line and are in the process of establishing international sales and manufacturing capabilities. We intend to begin establishing Cell Reach manufacturing capabilities in our Jaguariuna, Brazil facility in the second half of 2001 and in our Seneffe, Belgium facility in late 2001.
CommScope also manufactures other broadband coaxial cables, fiber optic cables and twisted pair cables that are used for various wireless applications, including PCS, Cellular, Multichannel Multipoint Distribution Service (MMDS), Local Multipoint Distribution System (LMDS), land mobile radio, paging and in-building wireless applications. During 2000, we developed specialized coaxial cables for these applications, including Broadband Wireless Communication (BWCTM) cables, which are highly flexible low loss 50 ohm braided coaxial cables, and fire retardant CMR-rated riser cables, which are designed to meet the stringent requirements of many fire safety codes.
However, we expect ongoing aggressive competition from larger, well established companies with significant financial resources, brand recognition in the cellular market and established marketing channels for coaxial cable and accessories.
LOCAL AREA NETWORK MARKET. The proliferation of personal computers, and more broadly the practice of distributed computing, has created a need for products which enable users to share files, applications and peripheral equipment such as printers and data storage devices. Local area networks, typically consisting of at least one dedicated computer (a "server"), peripheral devices, network software and interconnecting cables, were developed in response to this demand. We manufacture a variety of twisted pair, coaxial and fiber optic cables to transmit data for local area network applications. The most widely used cable design for this application consists of four high-performance twisted pairs that are capable of transmitting data at rates in excess of 100 mbps. We focus our products and marketing on cables with enhanced electrical and physical performance such as our UltraPipe(TM) unshielded twisted pair. We believe that UltraPipe cable is among the highest performing unshielded twisted pair cables in the industry. Copper and fiber optic composite cables are frequently combined in a single cable to reduce installation costs and support multimedia applications.
OTHER MARKETS. We have developed a strategy for addressing additional cable consuming markets. By combining narrowly focused product and market management with our cable manufacturing and operational skills, we are entering new markets for broadcast, home automation, telephone central office switching and transmission, and other high-performance communications applications.
MANUFACTURING
We employ advanced cable manufacturing processes, the most important of which are:
o thermoplastic extrusion for insulating wires and cables;
o high-speed welding and swaging of metallic shields or outer conductors;
o braiding;
o cabling; and
o automated testing.
Many of these processes, some of which are proprietary and/or trade secret information, are performed on equipment that has been modified for our purposes or specifically built to our specifications, often internally in our own machine shop facilities. We do not fabricate all of the raw material components used in making most of our cables, such as certain wires, tapes, tubes and similar materials. We believe, however, that fabrication, to the extent economically feasible, could be done by us instead of being outsourced.
For example, we began the internal production of copper-clad aluminum wire and copper-clad steel wire that we use as center conductors for our cable. While the ramp up of production has progressed slower than anticipated, we made significant progress improving output during the second half of 2000. During 2000, we also began fine wire drawing to produce wires to be braided for flexible coaxial cables. The manufacturing processes of the three principal types of cable we manufacture are further described below.
COAXIAL CABLES. We employ a number of advanced plastic and metal forming processes in the manufacture of coaxial cable. Three fundamental process sequences are common to almost all coaxial cables:
o First, a plastic insulation material, called the dielectric, is melt extruded around a metallic wire or center conductor. Current state-of-the-art dielectrics consist of foamed plastics to enhance the electrical properties of the cable. Precise control of the foaming process is critical to achieve the mechanical and electrical performance required for broadband services and cellular communications applications. We believe that plastic foam extrusion, using proprietary materials, equipment and control systems, is one of our core competencies.
o The second step involves sheathing the dielectric material with a metallic shield or outer conductor. Three basic shield designs and processes are used. For semi-flexible coaxial cables, we apply solid aluminum or copper shields over the dielectric by either pulling the dielectric insulated wire into a long, hollow metallic tube or welding the metallic tube directly over the dielectric. Welding allows the use of thinner metal,
resulting in more flexible products. We use a proprietary welding process that achieves significantly higher process speeds than those achievable using other cable welding methods. The same welding process has led to extremely efficient manufacturing processes of copper shielded products for cellular communications. For both hollow and welded tubes, the cable is passed through tools that form the metallic shield tightly around the dielectric.
o Flexible coaxial cables, which are usually smaller in diameter than semi-flexible coaxial cables, generally are made with the third shield design. Flexible outer shield designs typically involve laminated metallic foils and braided fine wires which are used to enhance flexibility which is more desirable for indoor wiring or for connecting subscribers in drop cable applications.
o The third and usually final process sequence is the melt extrusion of thermoplastic jackets to protect the coaxial cable. A large number of variations are produced during this sequence including: incorporating an integral strength member; customer specified extruded stripes and printing for identification; abrasion and crush resistant jackets; and adding moisture blocking fillers.
TWISTED COPPER PAIRS. We insulate single copper wires using high-speed thermoplastic extrusion techniques. Two insulated copper singles are then twinned by twisting them into an electrically balanced pair unit in a separate process. They are then bunched or cabled by grouping two or more pair units into larger units for further processing in one or more further processes depending on the number of pairs desired within the completed cable. The cabled units are then shielded and jacketed or simply jacketed without applying a metallic shield in the jacketing process. The jacketing process involves extrusion of a plastic jacket over a shielded or unshielded cable core. The majority of sales of our twisted copper pairs come from plenum rated unshielded twisted pair cables for local area network applications. Plenum cables are cables rated under the National Electrical Code as safe for installation within the air plenum areas of office buildings due to their flame retarding and low smoke generating characteristics when heated. Plenum cables are made from more costly thermoplastic insulating materials, such as FEP. These materials have significantly higher extrusion temperature profiles that require more costly extrusion equipment than non-plenum rated cables. We believe that the processing of plenum rated materials is one of our core competencies.
FIBER OPTIC CABLES. We manufacture fiber optic cables by purchasing bulk uncabled optical fiber singles and buffering them before cabling them into unjacketed core units. We then apply protective outer jackets and, sometimes, shields and jackets in a final process before testing. The manufacturing and test equipment for fiber optic cables are different from those used to manufacture coaxial and copper twisted pair cables. Most of the fiber optic cables we produce are sold to the cable television and local area network industry. Some of these fiber optic cables are produced under licenses acquired from other fiber and fiber optic cable manufacturers.
COMPOSITE CABLES. We also produce cables that are combinations of some or all of coaxial cables, copper singles or twisted copper pairs and fiber optic cables within a single cable for a variety of applications. The most significant of the composite cables we manufacture are combination coaxial and copper twisted pairs within a common outer jacket which are being used by some telephone companies and cable operators to provide both cable television services and telephone services to the same households over HFC cable networks. Nearly all of our current markets have applications for composite cables which we can manufacture.
RESEARCH AND DEVELOPMENT
Our research, development and engineering expenditures for the creation and application of new and improved products and processes were $18 million, $8 million, and $6 million for the years ended December 31, 2000, 1999 and 1998, respectively. We focus our research and development efforts primarily on two areas:
o those product areas that we believe have the potential for broad market applications and significant sales within a one-to-three year period; and
o new manufacturing technologies to achieve cost reductions.
For example, during 2000 research and development expenditures reflect significant investment in ongoing strategic vertical integration projects. The widespread deployment of broadband services and HFC cable systems is expected to provide opportunities for us to enhance our coaxial cable product lines and to improve our manufacturing processes. Additionally, we expect that our participation in the local area network, wireless
communications and other new markets now identified may require higher rates of product development spending in relation to sales generated than has been the case in recent years.
SALES AND DISTRIBUTION
We market our products worldwide through a combination of more than 110 direct sales, territory managers and manufacturers' representative personnel. We support our sales organization with regional service centers in: Alabama; Nevada; North Carolina; Puerto Rico; Australia; Belgium; and England. In addition, we utilize local inventories, sales literature, internal sales service support, design engineering services and a group of product engineers who travel with sales personnel and territory managers and assist in product application issues, and conduct technical seminars at customer locations to support our sales organization. We have expanded our global presence through our acquisition of Europe's largest manufacturer of cable television coaxial cable.
A key aspect of our customer support and distribution chain is the use of our private truck fleet. We believe that the ability to offer rapid delivery services, materials management and logistics services to customers through our private truck fleet is an important competitive advantage.
Our products are sold and used in a wide variety of applications. Our products primarily are sold directly to cable system operators, telecommunications companies, original equipment manufacturers and indirectly through distributors. There has been a trend on the part of larger customers to consolidate their lists of qualified suppliers to companies that have a global presence, can meet quality and delivery standards, have a broad product portfolio and design capability, and have competitive prices. We have concentrated our efforts on service and productivity improvements including advanced computer aided design and manufacturing systems, statistical process controls and just-in-time inventory programs to increase product quality and shorten product delivery schedules. Our strategy is to provide a broad selection of products in the areas in which we compete. We have achieved a preferred supplier designation from many of our cable television, telephone and original equipment manufacturer customers. We have also strengthened our information technology infrastructure and implemented an integrated information management system, which we believe will help us improve business practices.
Cable television services in the United States are provided primarily by cable television system operators. It is estimated that the five largest cable television system operators account for more than 50% of the cable television subscribers in the United States. The major cable television system operators include such companies as AT&T, AOL Time Warner Cable, Cox Communications, Comcast and Charter Communications. Many of the major cable television system operators are our customers, including those listed above. During the years ended December 31, 2000 and 1998 no customer accounted for 10% or more of our net sales. During the year ended December 31, 1999, AT&T and its affiliates accounted for approximately 10% of our net sales. No other customer accounted for 10% or more of our net sales in 1999.
PATENTS
We pursue an active policy of seeking intellectual property protection, namely patents, for new products and designs. We hold 54 patents worldwide and have 100 pending applications. We consider our patents to be valuable assets, but no single patent is material to our operations as a whole. We intend to rely on our proprietary knowledge, trade secrets and continuing technological innovation to develop and maintain our competitive position.
BACKLOG
At December 31, 2000, 1999 and 1998, we had an order backlog of approximately $156 million, $104 million and $43 million, respectively. Orders typically fluctuate from quarter to quarter based on customer demand and general business conditions. Backlog includes only orders for products scheduled to be shipped within six months. In some cases, unfilled orders may be canceled prior to shipment of goods; but cancellations historically have not been material. However, our current order backlog may not be indicative of future demand.
COMPETITION
We encounter competition in substantially all areas of our business. We compete primarily on the basis of product specifications, quality, price, engineering, customer service and delivery time. Competitors include large, diversified companies, some of which have substantially greater assets and financial resources than we do, as well as medium to small companies. We also face competition from certain smaller companies that have concentrated
their efforts in one or more areas of the coaxial cable market. We believe that we enjoy a strong competitive position in the coaxial cable market due to our position as a low-cost, high-volume coaxial cable producer and reputation as a high-quality provider of state-of-the-art cables with a strong orientation toward customer service. We also believe that we enjoy a strong competitive position in the electronic cable market due to our large direct field sales organization within the local area network segment, the comprehensive nature of our product line and our long established reputation for quality.
RAW MATERIALS
In the manufacture of coaxial and twisted pair cables, we process metal tubes, tapes and wires including bimetallic center conductors (wires made of aluminum or steel with thin outer skins of copper) that are fabricated from high-grade aluminum, copper and steel. Most of these fabricated metal components are purchased under supply arrangements with some portion of the unit pricing indexed to commodity market prices for these metals. We have adopted a hedging policy pursuant to which we may, from time to time, attempt to match futures contracts or option contracts for a specific metal with some portion of the anticipated metal purchases for the same periods. Other major raw materials we use include polyethelenes, polyvinylchlorides, FEP and other plastic insulating materials, optical fibers, and wood and cardboard shipping and packaging materials (some of which are available only from limited sources).
In 2000, approximately 11% of our raw material purchases were for bimetallic center conductors for coaxial cables, nearly all of which were purchased from Copperweld Corporation. We have secured a supply arrangement with Copperweld for bimetallic center conductors for calendar year 2001 and are working toward a longer-term arrangement with them. If we are unable to continue to purchase the necessary quantities of bimetallic center conductors, namely copper clad aluminum wire and copper clad steel wire, from this supplier, we may be unable to obtain these raw materials on commercially acceptable terms from another source. There are few, and limited, alternative sources of supply for these raw materials. We have begun to produce a portion of our bimetallic center conductor requirements. Management believes that our current supply arrangement with Copperweld, together with our increasing internal production of bimetallic center conductors, addresses concerns regarding the continuing availability of these key materials and enhances our ability to support the demand for broadband cable. Although the parent of Copperweld has filed for Chapter 11 debtor-in-possession reorganization, management does not believe this will affect the Company's supply arrangement with Copperweld. However, the loss of Copperweld as a supplier of bimetallic center conductors, Copperweld's inability to supply, and/or our failure to adequately expand our internal production of these products, could have a material adverse effect on our business and financial condition.
In addition, we purchase fine aluminum wire from a limited number of suppliers. Fine aluminum wire is a smaller raw material purchase than bimetallic center conductors. 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 and we were unable to vertically integrate the production of these products. In such event, there could be a materially adverse impact on our financial results.
Additionally, FEP is the primary raw material used throughout the industry for producing flame retarding cables for local area network applications. There are few worldwide producers of FEP and market supplies have been periodically limited over the past several years. Availability of adequate supplies of FEP will be critical to future local area network cable sales growth.
Optical fiber is a primary material used for making fiber optic cables. There are few worldwide suppliers of optical fiber and market supplies have been tight over the past twelve months. Availability of adequate supplies of optical fiber will be critical to future fiber optic cable sales growth.
Alternative sources of supply or access to alternative materials are generally available for all other major raw materials we use. We believe supplies of all other major raw materials we use are generally adequate and we expect them to remain so for the foreseeable future.
ENVIRONMENT
We use some hazardous substances and generate some solid and hazardous waste in the ordinary course of our business. As a result, we are subject to various federal, state, local and foreign laws and regulations governing the use, discharge and disposal of hazardous materials. Because of the nature of our business, we have incurred,
and will continue to incur, costs relating to compliance with these environmental laws. Although we believe that we are in substantial compliance with such environmental requirements, and we have not in the past been required to incur material costs in connection with this compliance, there can be no assurance that our cost to comply with these requirements will not increase in the future. Although we are unable to predict what legislation or regulations may be adopted in the future with respect to environmental protection and waste disposal, compliance with existing legislation and regulations has not had and is not expected to have a materially adverse effect on our operations or financial condition.
EMPLOYEES
At December 31, 2000, we employed approximately 4,000 people. Substantially all employees are located in the United States. We also have employees in foreign countries, including those located in Belgium and Brazil. We believe that our relations with our employees are satisfactory.
ITEM 2.
ITEM 2. PROPERTIES
Our principal administrative, production and research and development facilities are located in the following locations:
The Hickory, North Carolina facility occupies approximately 40,000 square feet under a lease expiring in December 2001. Our executive offices, sales office and customer service department are located at this facility. The Company intends to consolidate certain corporate and administrative functions in a different leased facility of approximately 80,000 square feet in Hickory, North Carolina in late 2001.
The Catawba, North Carolina facility occupies approximately 1,000,000 square feet and is owned by us. The Catawba facility manufactures coaxial cables, is the major distribution facility for our products and houses certain administrative and engineering activities.
The Claremont, North Carolina facility occupies approximately 587,500 square feet and is owned by us. The Claremont facility manufactures coaxial, copper twisted pair and fiber optic cables and houses certain of our administrative, sales and engineering activities.
The Scottsboro, Alabama facility occupies approximately 150,000 square feet and is owned by us. The Scottsboro facility manufactures coaxial cables.
The Statesville, North Carolina facility occupies approximately 315,000 square feet and is owned by us. The Statesville facility houses certain cable-in-conduit manufacturing, wire fabrication, recycling, research and development, and engineering activities.
The Seneffe, Belgium, facility occupies approximately 120,000 square feet and is owned by us. The Seneffe facility houses certain coaxial cable manufacturing and sales activities.
The Newton, North Carolina facility occupies approximately 455,000 square feet of manufacturing, office and warehouse space and is owned by us. This facility houses some of our administrative, engineering, and research and development functions as well as manufacturing and sales activities for our wireless products group.
The Sparks, Nevada facility occupies approximately 225,500 square feet under a lease expiring in 2003. The Sparks facility manufactures cable-in-conduit products and houses regional service and distribution activities.
The Jaguariuna, Brazil facility occupies approximately 289,000 square feet of manufacturing space and is owned by us. Construction of the Jaguariuna facility is in progress and when it opens in the second half of 2001, it will house certain coaxial cable manufacturing and sales activities.
We are building a projected 238,000 square-foot facility in Kings Mountain, North Carolina. The facility will manufacture coaxial cable and is scheduled to be operational in late 2001.
We do not believe there is any material long-term excess capacity in our facilities, although utilization is subject to change based on customer demand. We believe that our facilities and equipment generally are well maintained, in good operating condition and suitable for our purposes and adequate for our present operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings other than various claims and lawsuits arising in the normal course of business. We do not believe that any such claims or lawsuits will have a materially adverse effect on our financial condition and results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the three months ended December 31, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange under the symbol "CTV." The following table sets forth the high and low sale prices as reported by the New York Stock Exchange for the periods indicated.
Common Stock Price Range ----------------- High Low ------- --------
First Quarter $21.56 $ 15.88 Second Quarter $31.19 $ 19.25 Third Quarter $40.00 $ 29.25 Fourth Quarter $46.38 $ 31.69
First Quarter $49.38 $ 30.75 Second Quarter $50.13 $ 32.63 Third Quarter $40.31 $ 22.63 Fourth Quarter $26.88 $ 15.25
As of March 20, 2001 the approximate number of registered stockholders of record of our common stock was 706.
We have never declared or paid any cash dividends on our common stock. We do not currently intend to pay cash dividends in the foreseeable future, but intend to reinvest earnings in our business. Our debt agreements contain limits on our ability to pay cash dividends on our common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary of Selected Financial Data (In thousands, except ratios and per share amounts)
Year Ended December 31, ------------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- RESULTS OF OPERATIONS: Net sales $950,026 $748,914 $571,733 $599,216 $572,212 Gross profit 251,054 200,106 134,593 141,000 155,089 Operating income 146,051 117,517 72,843 79,182 100,254 Net income 84,887 68,077 39,231 37,458 57,122 Pro forma net income (1) -- -- -- 34,604 51,908
NET INCOME PER SHARE INFORMATION (1): Weighted average number of shares outstanding: Basic 51,142 50,669 49,221 49,107 49,105 Assuming dilution 56,047 52,050 49,521 49,238 49,200 Net income per share: Basic $ 1.66 $ 1.34 $ 0.80 $ 0.70 $ 1.06 Assuming dilution $ 1.60 $ 1.31 $ 0.79 $ 0.70 $ 1.06
BALANCE SHEET DATA: Cash and cash equivalents $ 7,704 $ 30,223 $ 4,129 $ 3,330 $ -- Property, plant and equipment, net 251,356 181,488 135,082 133,235 117,022 Total assets 721,182 582,535 465,327 483,539 479,885 Working capital 209,104 146,952 93,982 112,786 107,220 Long-term debt, including current maturities (2) 227,436 198,402 181,800 265,800 10,800 Stockholders' equity (2) 374,520 281,344 203,972 150,032 393,560
OTHER INFORMATION: Earnings before net interest, taxes, depreciation, and amortization ("EBITDA")(3) $181,474 $147,360 $ 99,616 $ 96,606 $121,045 Depreciation and amortization 35,799 29,295 24,662 21,677 18,952 Capital expenditures 98,640 57,149 22,784 29,871 33,218 Ratio of earnings to fixed charges 14.16 11.62 4.90 5.49 10.13
(1) We, through our wholly owned subsidiary CommScope, Inc. of North Carolina ("CommScope NC"), were formerly a wholly owned indirect subsidiary of General Instrument Corporation with no separately issued or outstanding equity securities prior to the spin-off on July 28, 1997. On the date of the spin-off, through a series of transactions and stockholder dividends initiated by General Instrument, CommScope NC became our wholly owned subsidiary. The unaudited pro forma information for 1996 and 1997 has been prepared utilizing the historical consolidated statements of income of CommScope NC adjusted to reflect a net debt level of $275 million at the beginning of each year presented at an assumed weighted average borrowing rate of 6.35% plus the amortization of debt issuance costs associated with the new borrowings and a total of 49.1 million common shares outstanding and 49.2 million common and potential common shares outstanding for basic and diluted earnings per share, respectively.
(2) Giving effect to transactions related to the spin-off as if they had occurred on December 31, 1996, on a pro forma basis, long-term debt would have been $276,800 and stockholders' equity would have been $128,348 on that date.
(3) EBITDA is presented not as an alternative measure of operating results or cash flow (as determined in accordance with generally accepted accounting principles), but rather to provide additional information related to our ability to service debt. The EBITDA measure included herein may not be comparable to similarly titled measures reported by other companies.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPANY BACKGROUND
CommScope, Inc., through its wholly owned subsidiaries, operates in the cable manufacturing business. We are a leading worldwide designer, manufacturer and marketer of a wide array of broadband coaxial cables and other high-performance electronic and fiber optic cable products for cable television, telephony, Internet access and wireless communications. We believe we are the world's largest manufacturer of coaxial cable for hybrid fiber coax (HFC) cable television systems. We are also a leading supplier of coaxial, twisted pair and fiber optic cables for premise wiring (local area networks), wireless and other communication applications.
CommScope, Inc. was incorporated in Delaware in January 1997. On July 28, 1997, through a series of transactions and stockholder dividends initiated by General Instrument Corporation ("General Instrument"): (i) CommScope, Inc. of North Carolina ("CommScope NC"), formerly a wholly owned indirect subsidiary of General Instrument, became a wholly owned subsidiary of CommScope, Inc. and (ii) CommScope, Inc. was spun off to the stockholders of General Instrument. General Instrument retained no ownership interest in CommScope, Inc. or CommScope NC. CommScope, Inc. commenced operations as an independent entity with publicly traded common stock on July 28, 1997.
FINANCIAL HIGHLIGHTS
For the three-year period 1998-2000, we reported the following results (in thousands, except per share amounts):
Year Ended December 31, -------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Net income $ 84,887 $ 68,077 $ 39,231 Net income per share - assuming dilution 1.60 1.31 0.79
Our consolidated financial statements and related notes, included in Item 8, should be read as an integral part of the financial highlights and the following financial review.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 WITH THE YEAR ENDED DECEMBER 31, 1999
NET SALES
Net sales for the year ended December 31, 2000 increased $201.1 million or 27% to $950.0 million, from 1999. The increase in net sales was primarily driven by strong sales of broadband and fiber optic cable for HFC applications. Higher sales volume, combined with price increases on certain HFC products, accounted for the majority of the year-over-year sales increase.
The following table presents (in millions) our revenues by product line as well as domestic versus international sales for the years ended December 31, 2000 and 1999:
2000 % of 2000 1999 % of Net Net Net 1999 Net Sales Sales Sales Sales ------------------------------------------
CATV/Video Products $733.1 77.2% $557.4 74.4% Wireless & Other Telecom Products 131.6 13.8 104.2 13.9 LAN Products 85.3 9.0 87.3 11.7 ------------------------------------------ Total worldwide sales $950.0 100.0% $748.9 100.0% ==========================================
Domestic sales $717.6 75.5% $571.2 76.3% International sales 232.4 24.5 177.7 23.7 ------------------------------------------ Total worldwide sales $950.0 100.0% $748.9 100.0% ==========================================
For the year ended December 31, 2000, international sales increased 31% compared to 1999, due mainly to robust demand for HFC products around the world, with particular strength in the Latin American region. We purchased a manufacturing facility in Brazil during 2000 where we expect to begin production in the second half of 2001 to help us meet the expected demand for HFC and wireless products in Latin America.
Net sales to cable television and other video distribution markets ("CATV/Video Products") for the year ended December 31, 2000 increased $175.7 million or 32% to an all-time record of $733.1 million, from 1999. The increase in sales of CATV/Video Products resulted primarily from strong sales of broadband cable to telecommunications companies and cable television system operators. Domestic CATV/Video sales grew approximately 32% year over year, led by strong sales of fiber optic cable. We believe that our ability to offer both coaxial and fiber optic cable continues to be an important competitive advantage.
Net sales for wireless and other telecommunications products ("Wireless and Other Telecom Products") for the year ended December 31, 2000 increased $27.4 million or 26% to $131.6 million, from 1999. This increase was primarily due to growth in sales of both telephone central office products and our newest-generation wireless cables. While we expect our Cell Reach(R) product for wireless applications to be a substantial contributor to our long-term growth, we continue to experience pricing pressure and aggressive competition in the wireless market. In response to these pressures, we have improved performance in certain existing products, broadened our product portfolio, begun establishing international sales and manufacturing capabilities, and substantially completed capacity additions at our Newton, North Carolina facility which have enhanced our manufacturing efficiencies. We also expect increasing competitive pressures for our other telecommunications products, which primarily represent coaxial cables designed for switching and transmission applications for enhanced telecommunications services.
Net sales for local area network and other data applications ("LAN Products") for the year ended December 31, 2000 decreased $2.0 million or 2% to $85.3 million, from 1999. This decrease was due primarily to a buildup of distribution channel inventory in the first half of 2000, which slowed sales in the second half of the year, and lower prices for LAN Products. We began implementing a comprehensive performance improvement plan for our LAN Products group during the fourth quarter of 2000. This plan included reorganizing LAN sales and operational management as well as ongoing efforts to reduce distribution channel inventory, improve efficiency, and increase the velocity of the manufacturing and distribution cycle.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the year ended December 31, 2000 was $251.1 million, compared to $200.1 million for 1999, an increase of 25%. Gross profit margins decreased slightly to 26.4% for the year ended December 31, 2000, compared to gross profit margins of 26.7% for 1999.
While price increases for HFC products had a positive effect on gross profit margins during 2000, they were more than offset by the combination of lower prices for LAN Products, the rising cost of key materials, and reduced
manufacturing efficiency resulting from capacity expansions. In addition, we are continuing to make improvements in the gross profit margins at our Belgium facility.
During 2000, supplies of key materials, such as bimetallic center conductors and optical fiber were tight. A major focus for us continues to be the acceleration of internal production of bimetallic center conductors for coaxial cables. While the ramp up of production has progressed slower than anticipated, we made significant progress improving output in this project in the second half of 2000. In addition, we have secured a supply arrangement with our current supplier for bimetallic center conductors for calendar year 2001 and are working toward a longer-term arrangement with them.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense for the year ended December 31, 2000 was $81.2 million, compared to $68.9 million for 1999. As a percentage of net sales, SG&A expense was 8.5% for the year ended December 31, 2000 compared to 9.2% for the year ended December 31, 1999. The absolute amount of SG&A expense increased over the prior period as a result of the expansion of sales and marketing efforts to support developing products and sales growth targets. However, as a percentage of sales, SG&A expense decreased in 2000, compared to 1999, as a result of effective cost management efforts.
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales increased to 1.9% for the year ended December 31, 2000, compared to 1.1% for the year ended December 31, 1999. This increase was primarily due to our vertical integration projects for bimetallic wire fabrication and fine wire drawing. We have ongoing programs to develop new products and market opportunities for our products and core capabilities and new manufacturing technologies to achieve cost reductions.
OTHER INCOME, NET
Other income, net for the year ended December 31, 2000 includes a pretax gain of $517 thousand related to the final liquidation of a closed Australian joint venture. This joint venture was completely dissolved as of December 29, 2000, when the deregistration period required by the Australian legal authorities expired.
NET INTEREST EXPENSE
Net interest expense for the year ended December 31, 2000 was $9.7 million, compared to $9.6 million for 1999. Our weighted average effective rate on outstanding borrowings, including amortization of associated loan fees, was 5.14% as of December 31, 2000, compared to 4.82% as of December 31, 1999.
INCOME TAXES
Our effective tax rate was 38% for the year ended December 31, 2000 and 37% for 1999. This slight increase was due primarily to the dilution of our foreign sales corporation tax benefit, a result of strong domestic sales and increasing sales from our Belgium facility, and higher tax rates in foreign jurisdictions, particularly Belgium. We expect the effective tax rate for 2001 to decrease to approximately 37% as a result of certain tax savings strategies.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 WITH THE YEAR ENDED DECEMBER 31, 1998
NET SALES
Net sales for the year ended December 31, 1999 increased $177.2 million or 31% to $748.9 million, from 1998. The increase in net sales was primarily driven by strong broadband cable sales to domestic telecommunications companies and solid growth in all key product categories. The following table presents (in millions) our revenues by product line as well as domestic versus international sales for the years ended December 31, 1999 and 1998:
1999 % of 1999 1998 % of Net Net Net 1998 Net Sales Sales Sales Sales ------------------------------------------
CATV/Video Products $557.4 74.4% $457.2 80.0% Wireless & Other Telecom Products 104.2 13.9 39.7 6.9 LAN Products 87.3 11.7 74.8 13.1 ------------------------------------------ Total worldwide sales $748.9 100.0% $571.7 100.0% ==========================================
Domestic sales $571.2 76.3% $431.9 75.6% International sales 177.7 23.7 139.8 24.4 ------------------------------------------ Total worldwide sales $748.9 100.0% $571.7 100.0% ==========================================
For the year ended December 31, 1999, international sales increased 27% compared to 1998, due mainly to the acquisition of our coaxial cable business in Belgium and improving sales in the Asia/Pacific Rim region.
Net sales of CATV/Video Products for the year ended December 31, 1999 increased $100.2 million or 22% to $557.4 million, from 1998. The increase in sales of CATV/Video Products resulted primarily from strong sales of broadband cable to domestic telecommunications companies and cable television system operators. Domestic CATV/Video sales grew approximately 20% year over year. This performance reflects increased activity during 1999 in the upgrade of broadband networks for multi-channel video, voice and high-speed Internet access.
Net sales of Wireless and Other Telecom Products for the year ended December 31, 1999 were $104.2 million as compared to $39.7 million in 1998. This substantial year-over-year increase reflects strong growth in both sales of Cell Reach(R) for wireless applications and sales of other telecommunications products. Sales of Cell Reach products more than quadrupled year over year. Sales of other telecommunications products more than doubled year over year.
Net sales of LAN Products for the year ended December 31, 1999 increased $12.5 million or 17% to $87.3 million, from 1998. During 1999, capacity constraints limited growth in sales of certain LAN Products. During the second half of 1999, we expanded our production capacity for enhanced bandwidth cables and began a 137,500-square-foot expansion of our Claremont, North Carolina facility, in part to support sales growth in LAN Products.
GROSS PROFIT (NET SALES LESS COST OF SALES)
Gross profit for the year ended December 31, 1999 was $200.1 million, compared to $134.6 million for 1998, an increase of 49%. Gross profit margins improved to 26.7% for the year ended December 31, 1999, compared to gross profit margins of 23.5% for 1998. The primary drivers of the improvement in gross profit and gross profit margins were:
o increased sales volumes and favorable product mix;
o improving Cell Reach profitability; and
o aggressive cost reduction efforts, primarily through engineered manufacturing efficiencies including vertical integration projects.
These improvements were somewhat offset by lower prices for certain LAN Products and the acquisition of our Belgium facility. This facility, while profitable and improving, had lower than our average margins in 1999.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A expense for the year ended December 31, 1999 was $68.9 million, compared to $52.8 million for 1998. As a percentage of net sales, SG&A expense was 9% for the years ended December 31, 1999 and 1998. The absolute amount of SG&A expense increased over the prior period as a result of the expansion of sales and marketing efforts to support developing products and sales growth targets.
RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales remained steady at 1% for the years ended December 31, 1999 and 1998.
GAIN ON SALE OF ASSETS
In February 1998, we sold certain real and personal property and inventories of our high temperature aerospace and industrial cable business to Alcatel NA Cable Systems, Inc. for an adjusted price of $13 million. We recognized a pretax gain from the sale of $1.9 million or $0.02 per basic and diluted share, net of tax effect.
OTHER INCOME, NET
In December 1998, we recorded a pretax benefit of $2.0 million, or $0.04 per basic and diluted share, net of tax effect, related to the partial reversal of 1997 after-tax charges associated with our closed Australian joint venture.
NET INTEREST EXPENSE
Net interest expense for the year ended December 31, 1999 was $9.6 million, compared to $14.9 million for 1998. The decrease in net interest costs was primarily due to the lower amount of weighted average outstanding borrowings under our revolving credit agreement during 1999. In addition, all outstanding borrowings under our revolving credit agreement were repaid in December 1999 with proceeds from the issuance of our convertible notes, which carry a lower effective interest rate. This reduction in interest expense was partially offset during the year ended December 31, 1999 by interest expense on new borrowings of 15 million euros (equivalent to $16.4 million at the date of borrowing).
INCOME TAXES
Our effective tax rate was 37% for the year ended December 31, 1999 and 35% for 1998. This fluctuation in our effective tax rate was partly due to the strength in 1999 domestic versus international sales, which diluted the impact of our foreign sales corporation tax benefit. In addition, the 1998 rate included a benefit of 1% from the reversal of a valuation allowance established in 1997 for charges associated with the closing of our Australian joint venture.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was $44.9 million for the year ended December 31, 2000, compared to $79.4 million for 1999, a decrease of $34.5 million, or 43%. This decrease in operating cash flow was primarily due to an increase in accounts receivable and inventories.
Working capital was $209.1 million at December 31, 2000, compared to $147.0 million at December 31, 1999. The increase in working capital was primarily due to increased accounts receivable, which resulted from higher sales volume and was also impacted by an increase in our days sales outstanding. In addition, working capital was impacted by increased inventories, due in part to our vertical integration activities and efforts to build up supplies of key raw materials.
During the year ended December 31, 2000, we invested $98.6 million in equipment and facilities compared to $57.1 million in 1999. We increased capital spending during 2000 to support vertical integration projects, capacity expansion, and equipment upgrades to meet increased current and anticipated future business demands. As of December 31, 2000, we had committed funds of approximately $22.5 million under purchase orders and contracts related to these projects. We expect capital expenditures for equipment and facilities in 2001 to be approximately $90-100 million, with the majority of funds expected to be invested in global capacity expansion projects.
During 2000, we made an investment of approximately $3.8 million in a wireless infrastructure project management company. We utilized an additional $17.0 million during the year ended December 31, 1999 to acquire Alcatel's coaxial cable business in Belgium. During the year ended December 31, 1998, we received initial cash proceeds of $9.7 million related to the sale of our high temperature aerospace and industrial cable business.
Our principal sources of liquidity both on a short-term and long-term basis are cash flows provided by operations and funds available under long-term credit facilities. As of December 31, 2000, we had $320 million of available borrowing capacity under our revolving credit agreement which expires in December 2002. We owed total long-term debt of $227.4 million, or 38% of our book capital structure, defined as long-term debt and total stockholders' equity, as of December 31, 2000, compared to $198.4 million, or 41% of our book capital structure, as of December 31, 1999. The increase in long-term debt during 2000 was due to additional borrowings under our revolving credit agreement to finance working capital needs and increased capital expenditures necessary to support vertical integration projects, expand capacity, and upgrade equipment, among other things.
Based upon analysis of our consolidated financial position and the expected results of our operations in the future, we believe that we will have sufficient cash flows from future operations and the financial flexibility to attract both short-term and long-term capital on acceptable terms as may be needed to fund operations, capital expenditures and other growth objectives and to support principal and interest payment requirements on our outstanding long-term indebtedness. There can be no assurance, however, that future industry-specific developments, general economic trends or other situations will not adversely affect our operations or ability to meet cash requirements.
MARKET RISK
We have established a risk management strategy that includes the reasonable use of derivative financial instruments primarily to manage our exposure to market risks resulting from adverse fluctuations in commodity prices, interest rates and foreign currency exchange rates. Derivative financial instruments which may be utilized by us, include commodity pricing contracts, foreign currency exchange contracts, and contracts hedging exposure to interest rates. Our policy is to designate all derivatives as hedges and to account for the derivatives in the same manner as the item being hedged. Through December 31, 2000, such derivatives were not recognized as assets or liabilities in the consolidated balance sheets. We do not utilize derivative financial instruments for trading purposes, nor do we engage in speculation.
Materials, in their finished form, account for a large portion of our cost of sales. These materials are fabricated from commodity products that are openly traded on exchange markets and are subject to significant potential changes in market prices. Increases in the prices of certain commodity products could result in higher overall production costs.
We primarily bill customers in foreign countries in US dollars. However, a significant decline in the value of currencies used in certain regions of the world as compared to the US dollar can adversely affect product sales in those regions because our products may become more expensive for those customers to pay for in their local currency. The 1999 acquisition of our Belgian subsidiary created a specific market risk that a decline in the value of the Belgian franc (or the euro) compared to the US dollar could adversely affect our net investment in that subsidiary. Our Eurodollar Credit Agreement, which is denominated in euros, serves as a partial hedge of our net investment in the Belgian subsidiary. Our investment in Brazil during 2000 created a new foreign subsidiary and a specific market risk that a decline in the value of the Brazilian real compared to the US dollar could adversely affect our net investment in that subsidiary. We are evaluating alternatives to help us reasonably manage the market risk of our net investment in the Brazilian operation.
As of December 31, 2000, the only derivative financial instrument outstanding was an interest rate swap agreement that serves as a fixed-rate hedge of the variable-rate borrowings under our Eurodollar Credit Agreement, as required under the covenants of this term loan. The fair value of the interest rate swap agreement outstanding at December 31, 2000 was not material to our financial position. At December 31, 2000, we were in the process of evaluating hedging alternatives related to foreign currency exchange exposures. In addition, we evaluated our commodity pricing exposures and concluded that it was not currently beneficial to use derivative financial instruments to hedge our current commodity price risks.
Our nonderivative financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, and debt instruments. At December 31, 2000 and 1999, the book values of each of the financial
instruments recorded on our balance sheet were considered representative of their respective fair values due to their variable interest rates and / or short terms to maturity, with the exception of our convertible debt, which was recorded in the financial statements at $172.5 million, but had a fair value of $122.5 million at December 31, 2000. Fair value of our debt is estimated using discounted cash flow analysis, based on our current incremental borrowing rates for similar types of arrangements, or quoted market prices whenever available.
The following tables summarize our market risks associated with long-term debt and foreign currency exposure as of December 31, 2000 and 1999. The tables present principal cash outflows and related interest rates by year of maturity.
EFFECTS OF INFLATION
We continually attempt to minimize any effect of inflation on earnings by controlling our operating costs and selling prices. During the past few years, the rate of inflation has been low and has not had a material impact on our results of operations.
The principal raw materials purchased by us (fabricated aluminum, plastics, bimetals, copper and optical fiber) are subject to changes in market price as these materials are linked to the commodity markets. To the extent that we are unable to pass on cost increases to customers, the cost increases could have a significant impact on the results of our operations.
OTHER
We are either a plaintiff or a defendant in pending legal matters in the normal course of business; however, we believe none of these legal matters will have a materially adverse effect on our financial statements upon final disposition. In addition, we are subject to various federal, state, local and foreign laws and regulations governing the use, discharge and disposal of hazardous materials. Our 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 materially adverse effect on our financial statements.
NEWLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE FOR FASB STATEMENT NO. 133 and SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative financial instruments, including certain derivative instruments embedded in other contracts (collectively referred to as embedded derivatives) and for hedging activities. The new standards require an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of SFAS No. 133, as amended, did not have a material impact on CommScope's consolidated results of operations, financial position, and cash flows as of January 1, 2001.
EUROPEAN MONETARY UNION -- EURO
On January 1, 1999, several member countries of the European Monetary 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. We conduct business in member countries.
During the transition period, cashless 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.
We are addressing the issues involved with the introduction of the euro. Among the issues facing us are the assessment and conversion of information technology 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, we are reviewing certain existing contracts for potential modification and assessing our pricing/marketing strategies in the affected European markets.
Based on current information, we do not expect that the euro conversion will have a materially adverse effect on our business, results of operations, cash flows or financial condition.
INFORMATION MANAGEMENT SYSTEM
On January 2, 2000, we began the implementation of a new integrated information management system. Our goal for this new computer-based system is to help us improve business practices, allow faster access to information and ultimately enable us to service our customers better in the future, among other things.
However, during 2000 we experienced some transition issues in connection with this new information system, but they did not have a material impact on our results of operations, liquidity or financial condition for the full year 2000. We have made progress incorporating our new information system into our business model and expect to reap its full benefits over the longer term. However, we cannot assure you that we will incur no future issues with this system.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K that are other than historical facts are intended to be "forward-looking statements" within the meaning of the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and other related laws and include but are not limited to those statements relating to sales and earnings
expectations, expected demand, cost and availability of key raw materials, internal production capacity and expansion, competitive pricing, relative market position and outlook. While we believe such statements are reasonable, the actual results and effects could differ materially from those currently anticipated. These forward-looking statements are identified, including, without limitation, by their use of such terms and phrases as "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "project," "projects," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes," "think," "thinks" and "scheduled" and similar expressions. These statements are subject to various risks and uncertainties, many of which are outside our control, including, without limitation, expected demand from our customers, cost and availability of key raw materials (including without limitation bimetallic center conductors, optical fibers, fine aluminum wire and fluorinated-ethylene-propylene which are available only from limited sources), successful implementation of internal bimetal production and other vertical integration activities, pricing and acceptance of our products, successful expansion and related operation of our facilities, margin improvement, effective implementation of our integrated information management system, developments in technology, industry competition, achievement of sales, growth, and earnings goals, ability of our customers to secure adequate financing, regulatory changes affecting our business, worldwide economic conditions, foreign currency fluctuations, technological obsolescence, the ability to achieve reductions in costs and to continue to integrate acquisitions, international economic and political uncertainties and other factors discussed. Actual results may also differ due to changes in communications industry capital spending, which is affected by a variety of factors, including, without limitation, general economic conditions, acquisitions of communications companies by others, consolidation within the communications industry, the financial condition of communications companies and their access to financing, competition among communications companies, technological developments, and new legislation and regulation of communications companies. These and other factors are discussed in greater detail in Exhibit 99 to this Form 10-K. The information contained in this Form 10-K represents our best judgment at the date of this report based on information currently available. However, we do not intend to update this information to reflect developments or information obtained after the date of this report and are not undertaking any duty or obligation to do so.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE # ------------------------------------------- ------
Independent Auditors' Report.......................................24 Consolidated Statements of Income for the Years ended December 31, 2000, 1999 and 1998...................................25 Consolidated Balance Sheets as of December 31, 2000 and 1999.....26 Consolidated Statements of Cash Flows for the Years ended December 31, 2000, 1999 and 1998.................................27 Consolidated Statements of Stockholders' Equity for the Years ended December 31, 2000, 1999 and 1998...........................28 Notes to Consolidated Financial Statements.........................29-44 Schedule II - Valuation and Qualifying Accounts....................45
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of CommScope, Inc.
We have audited the accompanying consolidated balance sheets of CommScope, Inc. and subsidiaries ("the Company") as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of CommScope, Inc. and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
Hickory, North Carolina January 31, 2001
COMMSCOPE, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT NET INCOME PER SHARE AMOUNTS)
Year Ended December 31, ----------------------- 2000 1999 1998 --------- --------- ---------
Net sales (Notes 3, 4 and 15) $ 950,026 $ 748,914 $ 571,733 --------- --------- --------- Operating costs and expenses: Cost of sales 698,972 548,808 437,140 Selling, general and administrative 81,217 68,869 52,817 Research and development 18,419 8,332 5,612 Amortization of goodwill 5,367 5,388 5,194 Gain on sale of assets (Note 4) - - (1,873) --------- --------- --------- Total operating costs and expenses 803,975 631,397 498,890 --------- --------- --------- Operating income 146,051 117,517 72,843 Other income, net (Note 3) 484 736 2,261 Interest expense (10,214) (10,230) (15,448) Interest income 559 604 558 --------- --------- --------- Income before income taxes 136,880 108,627 60,214 Provision for income taxes (Note 10) (51,993) (40,550) (20,983) --------- --------- --------- Net income $ 84,887 $ 68,077 $ 39,231 ========= ========= =========
Net income per share (Note 2): Basic $ 1.66 $ 1.34 $ 0.80 Assuming dilution $ 1.60 $ 1.31 $ 0.79
Weighted average shares outstanding (Note 2): Basic 51,142 50,669 49,221 Assuming dilution 56,047 52,050 49,521
See notes to consolidated financial statements.
COMMSCOPE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
As of December 31, ----------------------- 2000 1999 --------- --------- ASSETS
Cash and cash equivalents $ 7,704 $ 30,223 Accounts receivable, less allowance for doubtful accounts of $9,187 and $4,838, respectively 197,536 127,018 Inventories (Note 5) 63,763 40,208 Prepaid expenses and other current assets 3,364 2,376 Deferred income taxes (Note 10) 17,296 15,354 --------- --------- Total current assets 289,663 215,179 Property, plant and equipment, net (Note 6) 251,356 181,488 Goodwill, net of accumulated amortization of $54,140 and $48,777, respectively 156,685 162,075 Other intangibles, net of accumu- lated amortization of $34,796 and $32,055, respectively 13,969 16,710 Other assets (Note 8) 9,509 7,083 --------- --------- Total Assets $ 721,182 $ 582,535 ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 39,958 $ 29,179 Other accrued liabilities (Note 7) 38,481 39,048 Current portion of long-term debt (Note 8) 2,120 - --------- --------- Total current liabilities 80,559 68,227 Long-term debt, less current portion (Note 8) 225,316 198,402 Deferred income taxes (Note 10) 24,006 20,346 Other noncurrent liabilities (Note 9) 16,781 14,216 --------- --------- Total Liabilities 346,662 301,191
Commitments and contingencies (Note 14)
Stockholders' Equity (Notes 11 and 12): Preferred stock, $.01 par value; Authorized shares: 20,000,000; Issued and outstanding shares: None at December 31, 2000 and 1999 - - Common stock, $.01 par value; Authorized shares: 300,000,000; Issued and outstanding shares: 51,263,703 at December 31, 2000; 50,889,208 at December 31, 1999 513 509 Additional paid-in capital 175,803 166,875 Retained earnings 200,802 115,915 Accumulated other comprehensive loss (Note 16) (2,598) (1,955) --------- --------- Total Stockholders' Equity 374,520 281,344 --------- --------- Total Liabilities and Stockholders' Equity $ 721,182 $ 582,535 ========= =========
See notes to consolidated financial statements.
COMMSCOPE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended December 31, ----------------------- 2000 1999 1998 --------- --------- --------- OPERATING ACTIVITIES: Net income $ 84,887 $ 68,077 $ 39,231 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 35,799 29,295 24,662 Deferred income taxes 1,350 (98) 1,788 Tax benefit from stock option exercises 4,195 3,201 94 Gain on sale of assets of the high temperature aerospace and industrial cable business - - (1,873) Changes in assets and liabilities: Accounts receivable (70,450) (37,367) 5,114 Inventories (23,912) (5,340) 6,318 Prepaid expenses and other current assets (971) 1,356 (1,546) Accounts payable and other accrued liabilities 10,428 18,167 7,573 Other noncurrent liabilities 2,565 2,633 1,856 Other 1,033 (505) (246) --------- --------- --------- Net cash provided by operating activities 44,924 79,419 82,971
INVESTING ACTIVITIES: Additions to property, plant and equipment (98,640) (57,149) (22,784) Acquisition of business in Belgium - (17,023) - Investment in unconsolidated affiliate (3,750) - - Proceeds from sale of assets of the high temperature aerospace and industrial cable business - - 9,654 Other 504 314 343 --------- --------- --------- Net cash used in investing activities (101,886) (73,858) (12,787)
FINANCING ACTIVITIES: Net borrowings (repayments) under revolving credit facility 30,000 (171,000) (84,000) Proceeds from term loan facility for acquisition of business in Belgium - 16,353 - Proceeds from issuance of convertible notes - 172,500 - Debt issuance costs - (5,084) - Proceeds from exercise of stock options 4,737 8,030 1,141 Proceeds from issuance of shares in secondary offering - - 13,474 --------- --------- --------- Net cash provided by (used in) financing activities 34,737 20,799 (69,385) Effect of exchange rate changes on cash (294) (266) - --------- --------- --------- Change in cash and cash equivalents (22,519) 26,094 799 Cash and cash equivalents, beginning of year 30,223 4,129 3,330 --------- --------- --------- Cash and cash equivalents, end of year $ 7,704 $ 30,223 $ 4,129 ========= ========= =========
See notes to consolidated financial statements.
See notes to consolidated financial statements.
COMMSCOPE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. BACKGROUND AND DESCRIPTION OF THE BUSINESS
CommScope, Inc. ("CommScope" or the "Company"), through its wholly owned subsidiaries, operates in the cable manufacturing business. CommScope, Inc. was incorporated in Delaware in January 1997. CommScope is a leading worldwide designer, manufacturer and marketer of a wide array of broadband coaxial cables and other high-performance electronic and fiber optic cable products for cable television, telephony, Internet access and wireless communications. Management believes CommScope is the world's largest manufacturer of coaxial cable for hybrid fiber coax (HFC) cable television systems. CommScope is also a leading supplier of coaxial, twisted pair, and fiber optic cables for premise wiring (local area networks), wireless and other communication applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include CommScope and its wholly owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent amounts on deposit in banks and cash invested temporarily in various instruments with a maturity of three months or less at the time of purchase.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in, first-out ("FIFO") basis, or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, including interest costs associated with qualifying capital additions. Provisions for depreciation are based on estimated useful lives of the assets using the straight-line and accelerated methods. Average useful lives are 10 to 35 years for buildings and improvements and three to 10 years for machinery and equipment. Expenditures for repairs and maintenance are charged to expense as incurred.
GOODWILL, OTHER INTANGIBLES AND OTHER LONG-LIVED ASSETS
Goodwill is being amortized on a straight-line basis over 30 to 40 years. Other intangibles consist primarily of patents and customer lists, which are being amortized on a straight-line basis over approximately 17 years.
Management continually reassesses the appropriateness of both the carrying value and remaining life of long-lived assets by assessing recoverability based on forecasted operating cash flows, on an undiscounted basis, and other factors. Management believes that, as of December 31, 2000, the carrying value and remaining life of recorded goodwill, other intangibles and other long-lived assets is appropriate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
INCOME TAXES
Deferred income taxes reflect the future tax consequences of differences between the financial reporting and tax bases of assets and liabilities. Investment tax credits are recorded using the flow-through method.
No provision is made for income taxes which may be payable if undistributed earnings of foreign subsidiaries were to be paid as dividends to CommScope. CommScope currently intends that such earnings will continue to be invested in those foreign subsidiaries.
STOCK OPTIONS
Compensation cost for stock options is measured using the intrinsic value based method of accounting. All stock options granted by the Company have an intrinsic value of zero at the date of grant, therefore no compensation cost is recorded in the financial statements.
REVENUE RECOGNITION
Revenue from sales of the Company's products is recognized at the time the goods are shipped and title passes, provided the earnings process is complete and revenue is measurable. Revenue is recorded at the net amount to be received after deductions for estimated discounts, allowances, returns, and rebates.
ADVERTISING COSTS
Advertising costs are expensed in the period in which they are incurred. Advertising expense was $1.4 million in 2000, $1.1 million in 1999, and $0.9 million in 1998.
DERIVATIVE FINANCIAL INSTRUMENTS
CommScope has a risk management strategy that includes the reasonable use of derivative financial instruments primarily to manage its exposure to risks resulting from adverse fluctuations in commodity prices, interest rates and foreign currency exchange rates. CommScope does not utilize derivative financial instruments for trading purposes, nor does it engage in speculation. Through December 31, 2000, derivative instruments were not recognized as assets or liabilities in the consolidated balance sheets. Interest rate swap agreements have been accounted for using the settlement basis of accounting in which no gains or losses on the fair value of a swap were recognized during the term of the swap. Gains or losses arising from hedges of anticipated transactions have been recognized in earnings or as an adjustment of carrying amounts when the hedged transaction occurred.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Revenues and expenses of these subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities of these subsidiaries have been translated at the rates of exchange as of the balance sheet date. Translation gains and losses are recorded to other comprehensive income or loss (see Note 16).
Aggregate foreign currency transaction gains and losses of the Company and its subsidiaries, such as those resulting from the settlement of foreign receivables or payables and short-term intercompany advances, are included in determining net income and were not material to the results of the Company's operations during 2000, 1999, or 1998. Foreign currency transaction
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
gains and losses related to long-term intercompany loans which are not expected to be settled in the foreseeable future are recorded to other comprehensive income or loss (see Note 16).
The Eurodollar Credit Agreement (see Note 8), which is designated and effective as a partial hedge of the Company's net investment in its Belgian subsidiary, is translated at the rate of exchange as of the balance sheet date. The transaction gains or losses on this loan are recorded, net of tax, to other comprehensive income or loss (see Note 16).
NET INCOME PER SHARE
Net income per share, basic, is computed by dividing net income by the weighted average number of common shares outstanding. Net income per share, assuming dilution, is computed by dividing net income, adjusted for the dilutive effect of convertible debt, by the weighted average number of common and potential common shares outstanding. The following table reconciles net income and shares outstanding for each computation of net income per share:
Year Ended December 31, --------------------------- 2000 1999 1998 ------- ------- ------- Numerator: Net income for basic net income per share $84,887 $68,077 $39,231 Convertible debt interest and amortization, net of tax (A) 4,714 -- -- ------- ------- ------- Net income available to common stockholders for diluted net income per share $89,601 $68,077 $39,231 ======= ======= =======
Denominator: Weighted average number of common shares outstanding for basic net income per share 51,142 50,669 49,221 Effect of dilutive securities: Convertible debt (A) 3,580 -- -- Employee stock options (B) 1,325 1,381 300 ------- ------- ------- Weighted average number of common and potential common shares outstanding for diluted net income per share 56,047 52,050 49,521 ======= ======= =======
(A) On December 15, 1999, the Company issued $172.5 million in convertible notes, which are convertible into shares of common stock at a conversion rate of 20.7512 shares per $1,000 principal amount. The effect of the assumed conversion of these notes is included in the calculation of net income per share, assuming dilution, for the year ended December 31, 2000 because it is dilutive. The effect of the assumed conversion of these notes was excluded from the computation of net income per share, assuming dilution, for the year ended December 31, 1999 because it would have been antidilutive. For the year ended December 31, 2000, the dilutive effect of convertible debt on net income represents after-tax interest expense and amortization of deferred financing fees associated with this convertible debt. The dilutive effect of convertible debt on weighted average shares reflects the number of shares issuable upon conversion, assuming 100% conversion of all convertible notes as of the beginning of the year. See Note 8 for further discussion of convertible notes.
(B) Options to purchase approximately 708 thousand common shares at prices ranging from $33.56 to $47.06 per share, were excluded from the computation of net income per share, assuming dilution, for the year ended December 31, 2000 because the options' exercise prices were greater than the average market price of the common shares. These options, which expire on various dates during 2009 and 2010, were still outstanding as of December 31, 2000. There were no common shares excluded from the computation of net income
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
per share, assuming dilution, for the years ended December, 31, 1999 and 1998. For additional information regarding employee stock options, see Note 11.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2000 presentation.
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE FOR FASB STATEMENT NO. 133 and SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative financial instruments, including certain derivative instruments embedded in other contracts (collectively referred to as embedded derivatives) and for hedging activities. The new standards require an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of SFAS No. 133, as amended, did not have a material impact on CommScope's consolidated results of operations, financial position, and cash flows as of January 1, 2001.
3. JOINT VENTURE
In 1995, CommScope entered into a joint venture agreement with Pacific Dunlop Ltd. to produce cable in Australia, acquiring a 49% ownership interest. The Company's share of income and losses from the joint venture was recorded as other income, net in the consolidated statements of income using the equity method of accounting. Due to certain governmental regulation changes and other events affecting the market for cable products in Australia in and around 1997, manufacturing operations of the joint venture were suspended and formally discontinued by decision of the joint venture's directors in 1997.
In 1998, a formal termination and dissolution agreement for the joint venture was completed. The partial liquidation of the joint venture's assets in 1998, which was affected by the terms of the formal termination and dissolution agreement between the partners, indicated that the financial position of the joint venture at final dissolution would be better than was anticipated at December 31, 1997. Accordingly, $2.0 million of the 1997 pretax charges related to the Company's financial investment in the joint venture were reversed into other income ($0.04 per basic and diluted share after taxes, including reversal of the capital loss valuation allowance established in 1997). Sales of cable products to the joint venture by CommScope totaled $0.9 million in 1998.
Final dissolution of this joint venture was completed in accordance with Australian legal requirements as of December 29, 2000. A pretax gain of $517 thousand related to the final liquidation of this joint venture was recognized in other income during the year ended December 31, 2000. We anticipate no third party claims and no additional gains or losses related to this closed joint venture.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
4. ACQUISITIONS AND DIVESTITURES
Effective January 1, 1999, in a transaction with Alcatel Cable Benelux, S.A. ("Alcatel"), the Company acquired certain assets and assumed certain liabilities of Alcatel's coaxial cable business in Belgium. The acquisition provides the Company with a European base of operations, access to established distribution channels and complementary coaxial cable technologies.
The Belgium 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, including $3.5 million of goodwill, which is being amortized over 30 years. Payment for the acquired business was financed primarily by borrowings under the Eurodollar Credit Agreement (see Note 8).
In 1998, the Company sold certain real and personal property and inventories of the High Temperature Aerospace and Industrial Cable Business to Alcatel NA Cable Systems, Inc. for an adjusted price of $13 million. The Company recognized a pretax gain from the sale of $1.9 million as a gain on sale of assets. Sales from the High Temperature Aerospace and Industrial Cable Business totaled $2.4 million in 1998 prior to the sale.
5. INVENTORIES
December 31, ------------------ 2000 1999 -------- -------
Raw materials $28,382 $16,597 Work in process 11,124 9,942 Finished goods 24,257 13,669 -------- ------- $63,763 $40,208 ======== =======
The principal raw materials purchased by CommScope (fabricated aluminum, plastics, bimetals, copper and optical fiber) are subject to changes in market price as these materials are linked to the commodity markets. To the extent that CommScope is unable to pass on cost increases to customers, the cost increases could have a significant impact on the results of operations of CommScope.
6. PROPERTY, PLANT AND EQUIPMENT
December 31, -------------------- 2000 1999 --------- --------
Land and land improvements $ 9,701 5,284 Buildings and improvements 63,429 52,347 Machinery and equipment 275,406 196,367 Construction in progress 27,546 26,651 --------- -------- 376,082 280,649 Accumulated depreciation (124,726) (99,161) --------- -------- $251,356 $181,488 ========= ========
Depreciation expense was $26,631, $20,778, and $16,377 for the years ended December 31, 2000, 1999, and 1998, respectively. For the year ended December 31, 2000, the Company capitalized interest of $176. No interest was capitalized for the years ended December 31, 1999 and 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
7. OTHER ACCRUED LIABILITIES
December 31, -------------------- 2000 1999 --------- --------
Salaries and compensation liabilities $ 18,775 $ 19,225 Postretirement benefit liabilities (see Note 9) 11,308 9,143 Product reserves 1,672 2,196 Interest 463 530 Other 6,263 7,954 --------- -------- $ 38,481 $ 39,048 ========= ========
8. LONG-TERM DEBT
December 31, -------------------- 2000 1999 --------- --------
Credit Agreement $ 30,000 $ -- Convertible Notes 172,500 172,500 Eurodollar Credit Agreement 14,136 15,102 IDA Notes 10,800 10,800 --------- -------- 227,436 198,402 Less current portion (2,120) -- --------- -------- $ 225,316 $198,402 ========= ========
CREDIT AGREEMENT
In July 1997 the Company entered into an unsecured $350 million revolving credit agreement with a group of banks (as amended, the "Credit Agreement"). The Company utilizes the Credit Agreement for, among other things, general working capital needs, financing capital expenditures and other general corporate purposes.
The Credit Agreement provides a total of $350 million in available revolving credit commitments through (i) loans available at various interest rates and interest maturity periods (collectively, the Revolving Credit Loans) and (ii) the issuance of standby or commercial letters of credit (Letters of Credit) of up to $50 million. The Credit Agreement expires on December 31, 2002.
At the Company's option, advances under the Revolving Credit Loans are available by choosing from one of the following types of loans, which primarily are differentiated by the interest rates available: (i) an ABR Loan (as defined in the Credit Agreement), with interest based on the highest of the prime rate of The Chase Manhattan Bank, the Base CD Rate (as defined in the Credit Agreement) plus 1%, or the Federal Funds Effective Rate (as defined in the Credit Agreement) plus 0.5%; (ii) a Eurodollar Loan (as defined in the Credit Agreement), with interest based on the Eurodollar Rate (LIBOR) plus a margin that will vary based on the Company's performance with respect to certain calculated financial ratios as defined in the Credit Agreement; (iii) an Absolute Rate Bid Loan (as defined in the Credit Agreement), with interest determined through competitive bid procedures among qualified lenders under the Credit Agreement; and (iv) a Swing Line Loan (as defined in the Credit Agreement) for up to an aggregate amount of $30 million, with interest based on a money market rate, the ABR Loan rate, or a combination thereof.
Interest on the Revolving Credit Loans generally is payable quarterly in arrears or, for a Eurodollar Loan, at the end of an interest period date that is specified at the time funds are
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
advanced to the Company, not to exceed three months. A facility fee based on the total commitment under the Credit Agreement and a fee for outstanding letters of credit are payable quarterly.
During 1999, the Company was party to several interest rate swap agreements to effectively convert an aggregate amount of $150 million of variable-rate borrowings under the Credit Agreement to a fixed-rate basis. One agreement for a notional amount of $50 million expired in April 1999. The other agreements were terminated in December 1999, when the underlying borrowings were repaid.
The Credit Agreement contains certain financial and operating covenants, including restrictions on incurring indebtedness and liens, entering into transactions to acquire or merge with any entity, making certain other fundamental changes, selling assets, paying dividends, and maintaining certain levels of consolidated net worth, leverage ratio and interest coverage ratio. The Company was in compliance with these covenants at December 31, 2000.
CONVERTIBLE NOTES
In December 1999, the Company issued $172.5 million of 4% convertible subordinated notes due December 15, 2006. These notes are convertible at any time into shares of CommScope common stock at a conversion price of $48.19 per share, which is subject to adjustment, as provided in the Indenture. The Company may redeem some or all of these notes at any time on or after December 15, 2002 at redemption prices specified in the Indenture. In connection with the issuance of the convertible notes, the Company incurred costs of approximately $4.9 million, which have been capitalized as other assets and are being amortized over the term of the notes. The net proceeds of $167.6 million from this convertible debt offering were used primarily to repay outstanding indebtedness under the Credit Agreement in addition to funding capital expenditures and other general corporate activities.
EURODOLLAR CREDIT AGREEMENT
In February 1999, the Company entered into an unsecured term loan agreement for 15 million euros ($16.4 million at the date of borrowing) that matures on March 1, 2006 (as amended, the "Eurodollar Credit Agreement"). The proceeds of the Eurodollar Credit Agreement were used to fund a portion of the acquisition costs and initial working capital needs of the Company's manufacturing facility in Belgium. Borrowings under this loan agreement bear interest at a variable rate equal to the Euro LIBOR Market Rate plus an applicable margin, payable quarterly. Principal payments on this loan are due in 20 equal quarterly installments of 750 thousand euros beginning June 1, 2001.
As of December 31, 2000, the Company was party to an interest rate swap agreement, as required by the terms of the Eurodollar Credit Agreement, to effectively convert the variable-rate loan to a fixed-rate basis. The notional amount is equal to the outstanding principal balance of the Eurodollar Credit Agreement and will decrease in tandem with principal repayments, which begin June 1, 2001. Under the agreement, interest settlement payments will be made quarterly based upon the spread between the Euro LIBOR Market Rate, as adjusted quarterly, and a fixed rate of 4.53%.
IDA NOTES
In January 1995, CommScope entered into a $10.8 million unsecured loan agreement in connection with the issuance of notes by the Alabama State Industrial Development Authority (the "IDA Notes"). Borrowings under the IDA Notes bear interest at variable rates based upon current market conditions for short-term financing. All outstanding borrowings under the IDA Notes are due on January 1, 2015.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
OTHER MATTERS
Maturities of long-term debt for the next five years are as follows: $2,120 in 2001; $32,827 in 2002; $2,827 in 2003, $2,827 in 2004, and $2,827 in 2005.
The weighted average effective interest rate on outstanding borrowings, including amortization of associated loan fees, under the above debt instruments was 5.14% at December 31, 2000, and 4.82% at December 31, 1999.
9. EMPLOYEE BENEFIT PLANS
The Company sponsors the CommScope, Inc. of North Carolina Employees Retirement Savings Plan (the "Employees Retirement Savings Plan"). The majority of the Company's contributions to the Employees Retirement Savings Plan are made at the discretion of the Company's Board of Directors. In addition, eligible employees may elect to contribute up to 10% of their salaries, limited to the maximum contribution amount allowed by the Internal Revenue Service. CommScope contributes an amount equal to 50% of the first 4% of the employee's salary that the employee contributes. CommScope contributed $8.3 million in 2000, $6.5 million in 1999, and $6.8 million in 1998 to the Employees Retirement Savings Plan, of which $6.4 million, $5.0 million and $5.4 million each year was discretionary.
The Company also sponsors an unfunded postretirement group medical and dental plan (the "Postretirement Health Plan") that provides benefits to full-time employees who retire from the Company at age 65 or greater with a minimum of 10 years of active service. The Postretirement Health Plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance, with Medicare as the primary provider of health care benefits for eligible retirees. The accounting for the Postretirement Health Plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's expressed intent to maintain a consistent level of cost sharing with retirees. The Company recognizes the cost of providing and maintaining postretirement benefits during employees' active service periods.
Additionally, the Company sponsors two defined benefit pension plans ("Defined Benefit Pension Plans"). The first is a nonqualified unfunded supplemental executive retirement plan that provides certain key executives with defined pension benefits. This plan is funded entirely by Company contributions. The second is a nonqualified pension plan, which provides pension benefits for certain international management-level employees. This plan is funded by Company and employee contributions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
Amounts accrued under the Postretirement Health Plan and the Defined Benefit Pension Plans are included in other noncurrent liabilities. The following table summarizes information for the Defined Benefit Pension Plans and the Postretirement Health Plan:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
For measurement purposes, a 10% annual rate of increase in health care costs was assumed for 2001 and is assumed to decrease gradually to 5.25% for 2006 and remain at that level thereafter. The increase in the postretirement benefit obligation in 2000 is primarily due to demographic changes.
Assumed health care cost trend rates have a significant effect on the amounts reported for the Postretirement Health Plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2000:
1-Percentage- 1-Percentage- Point Increase Point Decrease -------------- --------------
Effect on total of service and interest $ 634 $ (473) cost components of net periodic benefit cost Effect on postretirement benefit obligation 4,386 (3,347)
10. INCOME TAXES
The components of the provision for income taxes and the reconciliation of the statutory U.S. federal income tax rate to the Company's effective rate are as follows:
Year Ended December 31, --------------------------- 2000 1999 1998 ------- ------- ------- Current: Federal $46,723 $37,404 $17,464 State 3,920 3,244 1,731 ------- ------- ------- Current income tax provision 50,643 40,648 19,195 ------- ------- ------- Deferred: Federal 1,244 (90) 1,721 State 106 (8) 67 ------- ------- ------- Deferred income tax provision (benefit) 1,350 (98) 1,788 ------- ------- -------
Total provision for income taxes $51,993 $40,550 $20,983 ======= ======= =======
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 1.9 1.9 2.0 Foreign sales corporation benefit (1.1) (1.4) (3.8) Permanent items and other 2.2 1.8 2.7 Change in valuation allowance for capital loss carryforward -- -- (1.1) ------- ------- ------- Effective income tax rate 38.0% 37.3% 34.8% ======= ======= =======
The change in valuation allowance in 1998 related to a portion of a capital loss carryforward resulting from the Company's equity investment in an Australian joint venture. The actual capital losses incurred in 1998 from the equity investment were lower than anticipated when the valuation allowance was established at December 31, 1997 and, accordingly, the valuation allowance was reversed in 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
The components of deferred income tax assets and liabilities and the classification of deferred tax balances on the balance sheet are as follows:
December 31, ------------------- 2000 1999 -------- -------- Deferred tax assets: Accounts receivable and inventory reserves $ 11,276 $ 7,933 Product reserves 635 835 Employee benefits 3,709 4,165 Postretirement benefits 5,969 5,085 Other 1,861 2,421 -------- -------- Total deferred tax assets 23,450 20,439
Deferred tax liabilities: Property, plant and equipment (25,040) (20,743) Intangibles (5,120) (4,688) -------- -------- Total deferred tax liabilities (30,160) (25,431) -------- -------- Net deferred tax liability $ (6,710) $ (4,992) ======== ========
Deferred taxes as recorded on the balance sheet: Current deferred tax asset $ 17,296 $ 15,354 Noncurrent deferred tax liability (24,006) (20,346) -------- -------- Net deferred tax liability $ (6,710) $ (4,992) ======== ========
At December 31, 2000 the Company had approximately $4.3 million in state investment tax credits that can be utilized to reduce state income tax liabilities for future tax years through 2006.
The cumulative amount of undistributed earnings from foreign subsidiaries amounted to $1,376 at December 31, 2000. Foreign tax credits may be available as a reduction of United States income taxes in the event of such distributions.
11. STOCK COMPENSATION PLANS
In 1997, the Company adopted the Amended and Restated CommScope, Inc. 1997 Long-Term Incentive Plan (the "CommScope Incentive Plan"), which was formally approved by the Company's stockholders in 1998. The CommScope Incentive Plan provides for the granting of stock options, restricted stock grants, performance share units and phantom shares to employees of the Company and its subsidiaries and the granting of stock options to nonemployee directors of the Company. A total of 8.7 million shares have been authorized for issuance under the CommScope Incentive Plan through December 31, 2000. Stock options expire 10 years from the date they are granted. Options vest over service periods that range from two to five years. Upon initial election to the Company's board of directors, a non-employee director is granted 1,000 shares of stock, which are fully vested and transferable upon issuance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
The following tables summarize the Company's stock option activity and information about stock options outstanding at December 31, 2000:
Weighted Average Exercise Price Shares Per in thousands) Share ---------- ---------
Stock options outstanding at December 31, 1997 3,808 $12.53 Granted 1,178 15.16 Cancelled (359) 12.28 Exercised (95) 12.01 ---------- --------- Stock options outstanding at December 31, 1998 4,532 13.25
Granted 690 37.08 Cancelled (84) 14.29 Exercised (634) 12.72 ---------- ---------
Stock options outstanding at December 31, 1999 4,504 16.96
Granted 1,446 18.81 Cancelled (123) 21.67 Exercised (375) 12.57 ---------- ---------
Stock options outstanding at December 31, 2000 5,452 $17.64 ========== =========
Stock options exercisable at December 31, 1998 1,690 $12.70 Stock options exercisable at December 31, 1999 2,068 $12.99 Stock options exercisable at December 31, 2000 2,747 $15.04
Shares reserved for future issuance at December 31, 2000 2,194
Options Outstanding Options Exercisable --------------------------------- ----------------------- Weighted Average Remaining Weighted Weighted Contractual Average Average Range of Shares Life Exercise Shares Exercise Exercise (in (in Price (in Price Prices thousands) Years) Per Share thousands) Per Share - ---------- --------------------------------- -----------------------
$8 to $20 4,697 7.5 $14.49 2,543 $13.19 20 to 30 31 7.9 25.00 3 24.85 30 to 40 712 8.9 37.66 200 38.27 40 to 48 12 9.1 44.64 1 43.06 --------------------------------- ----------------------- $8 to $48 5,452 7.7 $17.64 2,747 $15.04 ================================= =======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
The Company has elected to account for stock options using the intrinsic value based method. The weighted average fair value per option has been estimated using the Black-Scholes option pricing model. Pro forma information presents net income and net income per share as if compensation expense had been recorded using the fair value based method. These disclosures are as follows:
Year Ended December 31, -------------------------------- 2000 1999 1998 --------- ---------- --------- Valuation assumptions: Expected option term (years) 3.5 3.5 4.5 Expected volatility 50.0% 50.0% 50.0% Expected dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 5.0% 6.0% 6.0% Weighted average fair value per option $ 7.76 $15.87 $ 7.35 Pro forma: Net income (in thousands) $78,734 $64,020 $37,803 Net income per share - basic 1.54 1.26 0.77 Net income per share - assuming dilution 1.49 1.23 0.76
12. STOCKHOLDER RIGHTS PLAN
On June 10, 1997, the Board of Directors adopted a stockholder rights plan designed to protect stockholders from various abusive takeover tactics, including attempts to acquire control of the Company at an inadequate price. Under the rights plan, each stockholder received a dividend of one right for each outstanding share of Common Stock, which was distributed on July 29, 1997. The rights are attached to, and presently only trade with, the Common Stock and currently are not exercisable. Except as specified below, upon becoming exercisable, all rights holders will be entitled to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock ("Participating Preferred Stock") at a price of $60.
The rights become exercisable and will begin to trade separately from the Common Stock upon the earlier of (i) the first date of public announcement that a person or group (other than pursuant to a Permitted Offer, as defined) has acquired beneficial ownership of 15% or more of the outstanding Common Stock; or (ii) 10 business days following a person's or group's commencement of, or announcement of and intention to commence, a tender or exchange offer, the consummation of which would result in beneficial ownership of 15% or more of the Common Stock. The rights will entitle holders (other than an Acquiring Person, as defined) to purchase Common Stock having a market value (immediately prior to such acquisition) of twice the exercise price of the right. If the Company is acquired through a merger or other business combination transaction (other than a Permitted Offer, as defined), each right will entitle the holder to purchase $120 worth of the surviving company's common stock for $60. The Company may redeem the rights for $0.01 each at any time prior to such acquisitions. The rights will expire on June 12, 2007.
In connection with the rights plan, the Board of Directors approved the creation of (out of the authorized but unissued shares of preferred stock of the Company) Participating Preferred Stock, consisting of 0.4 million shares with a par value of $0.01 per share. The holders of the Participating Preferred Stock are entitled to receive dividends, if declared by the Board of Directors, from funds legally available. Each share of Participating Preferred Stock is entitled to one thousand votes on all matters submitted to stockholder vote. The shares of Participating Preferred Stock are not redeemable by the Company nor convertible into Common Stock or any other security of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
13. CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses various financial instruments, including derivative financial instruments, for purposes other than trading. Nonderivative financial instruments include letters of credit and commitments to extend credit, primarily accounts receivable. These financial instruments involve risk, including the credit risk of nonperformance by the counterparties to those instruments, and the maximum potential loss may exceed the amount reserved in the Company's balance sheet. The Company manages its exposures to credit risk associated with financial instruments through credit approvals, credit limits and monitoring procedures. Concentrations of credit risk with respect to trade accounts receivable are limited due to the wide variety of customers and markets into which the Company's products are sold, as well as their dispersion across many different geographic areas. At December 31, 2000, no individual customer balance comprised 10% or more of the Company's total trade accounts receivable. In management's opinion, the Company did not have any other significant risk of credit loss due to the nonperformance of any customer or counterparty related to any financial instrument. In addition, management believes that the various counterparties with which the Company enters into derivative agreements consist of only financially sound institutions and, accordingly, believes that the credit risk for non-performance of these contracts is low.
The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, debt instruments and interest rate swap contracts. At December 31, 2000 and 1999, the book values of each of the financial instruments recorded on the Company's balance sheet are considered representative of their respective fair values due to their variable interest rates and / or short terms to maturity, with the exception of the Company's convertible debt, which was recorded in the financial statements at $172.5 million, but had a fair value of $122.5 million at December 31, 2000. Fair value of the Company's debt is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of arrangements, or quoted market prices whenever available.
At December 31, 2000 and 1999, the only derivative financial instrument outstanding was an interest rate swap agreement, which serves as a fixed-rate hedge to the variable-rate borrowings under the Eurodollar Credit Agreement (see Note 8). The fair value of this interest rate swap agreement was not material to the Company's financial position as of December 31, 2000 and 1999.
14. COMMITMENTS AND CONTINGENCIES
CommScope leases certain equipment under operating leases expiring at various dates through the year 2011. Rent expense was $7.8 million in 2000, $5.4 million in 1999, and $4.2 million in 1998. Future minimum rental payments required under operating leases with initial terms of one year or more as of December 31, 2000 are: $4.0 million in 2001; $3.2 million in 2002; $2.4 million in 2003; $2.1 million in 2004, $1.8 million in 2005 and $5.8 million thereafter.
As of December 31, 2000, the Company had committed funds of approximately $22.5 million under purchase orders and contracts related to vertical integration projects, capacity expansion, and equipment upgrades to meet current and anticipated future business demands.
CommScope is either a plaintiff or a defendant in pending legal matters in the normal course of business; however, management believes none of these legal matters will have a materially adverse effect on the Company's financial statements upon final disposition. In addition, CommScope 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 materially adverse effect on the Company's financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
15. INDUSTRY SEGMENTS, MAJOR CUSTOMERS, RELATED PARTY TRANSACTIONS AND GEOGRAPHIC INFORMATION
The Company's operations are conducted within one business segment that designs, manufactures and markets coaxial, fiber optic and high performance electronic cables primarily used in communications applications.
Sales of coaxial cable products to a major customer and its affiliates were approximately 10% of net sales in 1999, and less than 10% of net sales in 2000 and 1998. No other customer accounted for 10% or more of net sales during any of the three fiscal years in the period ended December 31, 2000.
Sales to related parties were less than 2% of net sales in 2000, less than 2.5% of net sales in 1999, and less than 2% of net sales in 1998. Trade accounts receivable from related parties were less than 2% of the Company's total trade accounts receivable balances as of December 31, 2000 and 1999. Purchases from related parties were less than 1% of cost of sales and operating expenses in 2000 and 1999.
Sales to customers located outside of the United States ("international sales") comprised approximately 24% of net sales in 2000, 1999 and 1998. International sales by geographic region and worldwide sales by product are as follows (in millions):
Year Ended December 31, --------------------------------- 2000 1999 1998 ---------------------------------
Latin America $67.5 $43.0 $43.0 Asia / Pacific Rim 58.9 47.6 40.1 Europe 77.4 65.4 39.2 Canada 23.1 18.3 14.9 Other 5.5 3.4 2.6 ---------------------------------
Total international sales $232.4 $177.7 $139.8 =================================
Year Ended December 31, --------------------------------- 2000 1999 1998 ---------------------------------
Cable television and other video application products $733.1 $557.4 $457.2 Wireless and other telecom products 131.6 104.2 39.7 Local area network products 85.3 87.3 74.8 ---------------------------------
Total worldwide sales by product $950.0 $748.9 $571.7 =================================
Net property, plant and equipment by geographic area is as follows (in millions):
December 31, ----------------------- 2000 1999 -----------------------
United States $231.7 $171.9 Europe 10.2 9.6 Brazil 9.5 -- -----------------------
Total net property, plant and equipment $251.4 $181.5 =======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, UNLESS OTHERWISE NOTED)
16. OTHER
SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31, -------------------------------- 2000 1999 1998 -------------------------------- Cash paid during the year for: Taxes $47,268 $37,112 $17,976 Interest 9,467 10,304 17,121
OTHER COMPREHENSIVE LOSS
Comprehensive income consists of net income plus other comprehensive income or loss, defined as all other changes in net assets from nonowner sources. The Company had no items of other comprehensive income or loss for the year ended December 31, 1998.
Other comprehensive loss for the years ended December 31, 2000 and 1999 consists of the following:
Year Ended December 31, ---------------- 2000 1999 -------- ------- Foreign currency translation loss - foreign subsidiaries $ 458 $1,411 Foreign currency transaction loss on long-term intercompany loans - foreign subsidiaries 780 1,323 Foreign currency transaction gain - Eurodollar Credit Agreement (963) (1,251) Deferred tax liability for foreign currency transaction gain - Eurodollar Credit Agreement 368 472 -------- ------- Other comprehensive loss $ 643 $1,955 ======== =======
17. QUARTERLY FINANCIAL DATA (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE DATA)
First Second Third Fourth Quarter Quarter Quarter Quarter -------------------------------------------- Fiscal 2000: Net sales $203,939 $241,244 $256,873 $247,970 Gross profit 52,353 64,381 66,265 68,055 Operating income 28,975 38,004 39,661 39,411 Net income 16,727 22,293 22,988 22,879 Net income per share, basic 0.33 0.44 0.45 0.45 Net income per share, diluted 0.32 0.42 0.43 0.43
Fiscal 1999: Net sales $148,071 $186,882 $202,315 $211,646 Gross profit 36,835 49,860 54,533 58,878 Operating income 19,530 29,238 34,250 34,499 Net income 10,760 17,092 19,738 20,487 Net income per share, basic 0.21 0.34 0.39 0.40 Net income per share, diluted 0.21 0.33 0.38 0.39
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item is contained in the sections captioned "Management of the Company--Board of Directors of the Company", "Management of the Company--Committees of the Board of Directors--Board Meetings", and "Management of the Company--Section 16(a) Beneficial Ownership Reporting Compliance" included in our Proxy Statement for the 2001 Annual Meeting of Stockholders ("2001 Proxy Statement"), which sections are incorporated herein by reference.
EXECUTIVE OFFICERS
Set forth below is certain information with respect to the executive officers of the Company as of March 20, 2001.
Name and Title Age Business Experience - -------------- --- -------------------
Frank M. Drendel 56 Frank M. Drendel has been our Chairman and Chairman and Chief Chief Executive Officer since the Executive Officer spin-off. He has served as Chairman and President of CommScope NC, currently our wholly-owned subsidiary, from 1986 to the spin-off and has served as Chief Executive Officer of CommScope NC since 1976. Mr. Drendel is a director of Nextel Communications, Inc., Corvis Corporation, C-SPAN and the National Cable Television Association.
Brian D. Garrett 52 Brian D. Garrett has been President and President and Chief Chief Operating Officer of CommScope and Operating Officer CommScope NC since 1997. He was our Executive Vice President, Operations from the spin-off until 1997. From 1996 to 1997, he was Executive Vice President and General Manager of the Network Cable Division of CommScope NC and Vice President and General Manager of the Network Cable Division of CommScope NC from 1986 to 1996.
Jearld L. Leonhardt 52 Jearld L. Leonhardt has been our Executive Executive Vice President Vice President and Chief Financial Officer and Chief Financial since 1999. He has served as our Executive Officer Vice President, Finance and Administration from the spin-off until 1999. He was our Treasurer from the spin-off until 1997. He has served as Executive Vice President and Chief Financial Officer of CommScope NC since 1999. He has served as Executive Vice President, Finance and Administration of CommScope NC from 1983 until 1999 and Treasurer of CommScope NC from 1983 until 1997.
Randall W. Crenshaw 44 Randall W. Crenshaw has been Executive Executive Vice Vice President and General Manager, Network, President and General of CommScope and CommScope NC since Manager, Network 2000. From the spin-off until 2000, he was Executive Vice President, Procurement/Logistics of CommScope and CommScope NC. From 1994 to 1997, Mr. Crenshaw was Vice President Operations for the Network Cable Division of CommScope NC. Prior to that time, Mr. Crenshaw has held various positions with CommScope NC since 1985.
William R. Gooden 59 William R. Gooden has been our Senior Senior Vice President Vice President and Controller since the and Controller spin-off. He has served as Senior Vice President and Controller of CommScope NC since 1996 and was Vice President and Controller from 1991 to 1996.
Frank J. Logan 58 Frank J. Logan has been our Executive Vice Executive Vice President, International Sales, since the President, spin-off. He has served as Executive Vice International Sales President, International Sales, of CommScope NC since 1996. From 1989 to 1996, he was Vice President, International Sales, of CommScope NC.
Larry W. Nelson 58 Larry W. Nelson has been our Executive Vice Executive Vice President, Business Development, since the President, spin-off. He has served as Executive Vice Business Development President, Business Development, of CommScope NC since 1997. From 1988 to 1997, he was Executive Vice President and General Manager, CATV, of CommScope NC.
Christopher A. Story 41 Christopher A. Story has been Executive Executive Vice Vice President, CATV Operations, of President, CommScope and CommScope NC since 2000. CATV Operations From 1998 until 2000, he was Senior Vice President, CATV Operations, of CommScope NC. From 1996 to 1998, he was Vice President, CATV Operations, of CommScope NC. From 1989 until 1996, he held various positions with CommScope NC.
Gene W. Swithenbank 61 Gene W. Swithenbank has been our Executive Executive Vice Vice President, CATV Sales and Marketing, President, CATV Sales since the spin-off. He has served as and Marketing Executive Vice President, CATV Sales and Marketing, of CommScope NC since 1996. From 1992 to 1996, Mr. Swithenbank was Senior Vice President, CATV Sales and Marketing, of CommScope NC.
Frank B. Wyatt, II 38 Frank B. Wyatt, II has been Senior Vice Senior Vice President, President, General Counsel and Secretary of General Counsel and CommScope and CommScope NC since 2000. He Secretary was Vice President, General Counsel and Secretary of CommScope and CommScope NC from the spin-off until 2000. He was Vice President of CommScope NC from 1997 until 2000, and has served as General Counsel and Secretary of CommScope NC since 1996. From 1987 to 1996, he was an attorney with the law firm of Bell, Seltzer, Park & Gibson, P.A. (now Alston & Bird LLP).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is contained in the section captioned "Management of the Company" in our 2001 Proxy Statement and is incorporated by reference herein. The sections captioned "Management of the Company--Compensation Committee Report on Compensation of Executive Officers" and "Performance Graph" in our 2001 Proxy Statement are not incorporated by reference herein.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is contained in the sections captioned "Beneficial Ownership of Common Stock" and "Management of the Company--Stock Options" in our 2001 Proxy Statement, which sections are incorporated by reference herein.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is contained in the section captioned "Management of the Company--Certain Relationships and Related Transactions" in our 2001 Proxy Statement and is incorporated by reference herein.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. FINANCIAL STATEMENTS.
The following consolidated financial statements of CommScope, Inc. are included under Part II, Item 8:
Independent Auditors' Report. Consolidated Statements of Income for the Years ended December 31, 2000, 1999 and 1998. Consolidated Balance Sheets as of December 31, 2000 and 1999. Consolidated Statements of Cash Flows for the Years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Stockholders' Equity for the Years ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II - Valuation and Qualifying Accounts. Included under Part II, Item 8.
Certain schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. LIST OF EXHIBITS. See Index of Exhibits included on page E-1.
(b) Reports on Form 8-K:
On October 23, 2000 we filed a current report on Form 8-K announcing our financial results for the third quarter ended September 30, 2000 and our procedures for complying with Regulation FD.
On October 26, 2000 we filed a current report on Form 8-K announcing certain balance sheet information.
On November 27, 2000 we filed a current report on Form 8-K commenting on our financial outlook for the fourth quarter ended December 31, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CommScope, Inc.
Date: March 9, 2001 By: /s/ Frank M. Drendel ------------------------------------ Frank M. Drendel Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ Frank M. Drendel Chairman of the Board and March 9, 2001 - ----------------------------- Chief Executive Officer Frank M. Drendel
/s/ Jearld L. Leonhardt Executive Vice President and March 9, 2001 - ----------------------------- Chief Financial Officer Jearld L. Leonhardt (Principal financial officer)
/s/ William R. Gooden Senior Vice President and March 9, 2001 - ----------------------------- Controller (Principal William R. Gooden accounting officer)
/s/ Edward D. Breen Director March 9, 2001 - ----------------------------- Edward D. Breen
/s/ Duncan M. Faircloth Director March 9, 2001 - ----------------------------- Duncan M. Faircloth
/s/ Boyd L. George Director March 9, 2001 - ----------------------------- Boyd L. George
/s/ George N. Hutton, Jr. Director March 9, 2001 - ----------------------------- George N. Hutton, Jr.
/s/ James N. Whitson Director March 9, 2001 - ----------------------------- James N. Whitson
INDEX OF EXHIBITS -----------------
Exhibit No. Description - ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of CommScope, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)).
3.2 Amended and Restated By-Laws of CommScope, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)).
4.1 Rights Agreement, dated June 12, 1997, between CommScope, Inc. and ChaseMellon Shareholder Services, L.L.C. (Incorporated herein by reference from the Registration Statement on Form 8-A filed June 30, 1997 (File No. 1-12929)).
4.1.1 Amendment No. 1 to Rights Agreement, dated as of June 14, 1999, between CommScope, Inc. and ChaseMellon Shareholder Services. (Incorporated by reference from the Amendment to Registration Statement on Form 8-A/A filed June 14, 1999 (File No. 1-12929)).
10.1 Employee Benefits Allocation Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)).
10.2 Debt and Cash Allocation Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)).
10.3 Insurance Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)).
10.4 Tax Sharing Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)).
10.5 Trademark License Agreement, dated as of July 25, 1997, among NextLevel Systems, Inc., CommScope, Inc. and General Semiconductor, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)).
10.6 Transition Services Agreement, dated as of July 25, 1997, between NextLevel Systems, Inc. and CommScope, Inc. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)).
10.7 Credit Agreement, dated as of July 23, 1997, among CommScope, Inc. of North Carolina, Certain Banks, The Chase Manhattan Bank, as Administrative Agent and The Chase Manhattan Bank, Bank of America National Trust and Savings Association, BankBoston , N.A., Bank of Tokyo-Mitsubishi Trust Company, CIBC, Inc., Credit Lyonnais Atlanta Agency, First Union National Bank, The Fuji Bank, Limited, Atlanta Agency, NationsBank, N.A., Toronto Dominion (New York), Inc. and Wachovia Bank, N.A. as Co-Agents. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-12929)).
10.7.1 First Amendment to the Credit Agreement, dated as of December 7, 1999 to the Credit Agreement dated as of July 23, 1997, among CommScope, Inc. of North Carolina, The Chase Manhattan Bank, as Administrative Agent, and the Banks from time to time parties
E-1
thereto, and the financial institutions named therein as co-agents for the Banks. (Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 1-12929)).
10.7.2 Second Amendment to the Credit Agreement, dated as of April 27, 2000 to the Credit Agreement dated as of July 23, 1997, among CommScope, Inc. of North Carolina, The Chase Manhattan Bank, as Administrative Agent, and the Banks from time to time parties thereto, and the financial institutions named therein as co-agents for the Banks. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000 (File no. 1-12929)).
10.8+ Amended and Restated CommScope, Inc. 1997 Long-Term Incentive Plan, as amended through December 14, 2000.
10.9+ Form of Severance Protection Agreement between the Company and certain executive officers. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12929)).
10.9.1+ Form of Amendment to Severance Protection Agreement between the Company and certain Executive Officers. (Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1999 (File No. 1-12929)).
10.10+ Employment Agreement between Frank Drendel, General Instrument Corporation and CommScope, Inc. of North Carolina, the Letter Agreement related thereto dated May 20, 1993 and Amendment to Employment Agreement dated July 25, 1997. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-12929)).
10.11 Credit Agreement, dated February 26, 1999, between First Union National Bank and CommScope, Inc. of North Carolina. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 1-12929)).
10.11.1 First Amendment to the Credit Agreement, dated as of December 7, 1999 between First Union National Bank and CommScope Inc. of North Carolina. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (file No. 1-12929)).
10.11.2 Second Amendment to the Credit Agreement, dated as of June 28, 2000 to the Credit Agreement dated as of February 26, 1999, between the First Union National Bank and CommScope, Inc. of North Carolina. (Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000 (File no. 1-12929)).
10.12+ The CommScope, Inc. Annual Incentive Plan, as amended through June 9, 1999. (Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (file No. 1-12929)).
10.13 Indenture dated as of December 15, 1999 between CommScope, Inc. and First Union National Bank, as Trustee (Incorporated by reference from the Company's Registration Statement on form S-3 dated January 14, 2000 (File No. 333-94691)).
10.14 Registration Rights Agreement, dated December 15, 1999 between CommScope Inc. and the Initial Purchasers (Incorporated by reference from the Company's Registration Statement on form S-3 dated January 14, 2000 (File No. 333-94691)).
12. Statements re: Computation of Ratios.
21. Subsidiaries of the Registrant.
23. Consent of Deloitte & Touche LLP.
99. Forward-Looking Information.
- ------------------------------ + Management Compensation.
E-2