Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the quarterly period ended June 30,
2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the transition period
from to
Commission file number
001-12929
CommScope, Inc.
(Exact name of registrant as specified in its charter)
Delaware
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36-4135495
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1100 CommScope Place, SE
P.O. Box 339
Hickory, North Carolina
(Address of principal executive offices)
28602
(Zip Code)
(828) 324-2200
(Registrants telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
x
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Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
reporting company
o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
As of July 31, 2008 there were 70,224,892 shares
of Common Stock outstanding.
Table of Contents
CommScope, Inc.
Condensed
Consolidated Statements of Operations
(Unaudited
In thousands, except per share amounts)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2008
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2007
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2008
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2007
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Net sales
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$
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1,087,377
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$
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519,144
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$
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2,092,471
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$
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954,596
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Operating costs and expenses:
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Cost of sales
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776,735
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356,550
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1,565,385
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660,058
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Selling, general and administrative
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131,615
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66,312
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259,633
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124,954
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Research and development
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34,269
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8,453
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70,234
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16,322
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Amortization of purchased intangibles
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24,552
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1,249
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49,104
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2,289
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Restructuring costs
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22,636
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169
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22,768
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898
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Total operating costs and expenses
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989,807
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432,733
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1,967,124
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804,521
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Operating income
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97,570
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86,411
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125,347
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150,075
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Other expense, net
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(9,237
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)
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(451
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)
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(15,994
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)
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(282
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Interest expense
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(35,629
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)
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(1,781
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)
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(75,208
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)
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(3,674
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)
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Interest income
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4,402
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5,790
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9,585
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10,286
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Income before income taxes
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57,106
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89,969
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43,730
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156,405
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Income tax expense
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(16,890
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)
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(28,840
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)
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(14,563
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)
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(49,421
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)
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Net income
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$
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40,216
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$
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61,129
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$
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29,167
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$
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106,984
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Earnings per share:
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Basic
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$
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0.57
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$
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1.00
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$
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0.42
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$
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1.76
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Diluted
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$
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0.50
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$
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0.83
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$
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0.38
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$
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1.46
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Weighted average shares outstanding:
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Basic
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69,974
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61,380
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68,694
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60,817
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Diluted
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80,922
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74,755
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80,676
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74,207
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See notes to unaudited condensed consolidated financial statements.
3
Table of Contents
CommScope, Inc.
Condensed Consolidated Balance Sheets
(Unaudited In thousands, except share amounts)
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June 30,
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December 31,
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2008
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2007
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Assets
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Cash and cash equivalents
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$
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499,573
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$
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649,451
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Accounts receivable, less allowance for
doubtful accounts of $19,686 at June 30, 2008 and $22,154 at
December 31, 2007
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884,306
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793,366
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Inventories, net
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506,607
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548,360
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Prepaid expenses and other current assets
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81,749
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133,737
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Deferred income taxes
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79,811
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106,476
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Total current assets
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2,052,046
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2,231,390
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Property, plant and equipment, net
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524,777
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525,305
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Goodwill
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1,280,251
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1,211,214
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Other intangibles, net
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979,526
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1,042,765
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Other assets
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71,600
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95,897
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Total Assets
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$
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4,908,200
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$
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5,106,571
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Liabilities
and Stockholders Equity
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Accounts payable
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$
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358,098
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$
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350,615
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Other accrued liabilities
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334,583
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399,944
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Current portion of long-term debt
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217,702
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247,662
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Total current liabilities
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910,383
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998,221
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Long-term debt
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2,084,432
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2,348,157
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Deferred income taxes
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276,816
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268,647
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Pension and postretirement benefit
liabilities
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103,714
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108,275
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Other noncurrent liabilities
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88,155
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103,263
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Total Liabilities
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3,463,500
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3,826,563
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Commitments and contingencies
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Stockholders Equity:
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Preferred stock, $.01 par value; Authorized
shares: 20,000,000; Issued and outstanding shares: None at June 30, 2008
and December 31, 2007
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Common stock, $.01 par value; Authorized
shares: 300,000,000; Issued shares, including treasury stock: 80,335,342 at June 30,
2008 and 77,070,029 at December 31, 2007; Issued and outstanding shares:
70,135,342 at June 30, 2008 and 66,870,029 at December 31, 2007
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803
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770
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Additional paid-in capital
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955,473
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856,452
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Retained earnings
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574,774
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545,607
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Accumulated other comprehensive income
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59,185
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22,714
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Treasury stock, at cost: 10,200,000 shares
at June 30, 2008 and December 31, 2007
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(145,535
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)
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(145,535
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)
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Total Stockholders Equity
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1,444,700
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1,280,008
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Total Liabilities and Stockholders Equity
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$
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4,908,200
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$
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5,106,571
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See notes to unaudited condensed consolidated financial statements.
4
Table of Contents
CommScope, Inc.
Condensed
Consolidated Statements of Cash Flows
(Unaudited In thousands)
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Six Months Ended
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June 30,
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2008
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2007
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Operating Activities:
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Net income
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$
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29,167
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$
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106,984
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Adjustments to reconcile net income to net
cash provided by operating activities:
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Depreciation and amortization
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109,298
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24,912
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Equity-based compensation
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9,892
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5,000
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Changes in assets and liabilities:
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Accounts receivable
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(69,817
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)
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(84,623
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)
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Inventories
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52,480
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(20,985
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)
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Other assets and liabilities
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(12,864
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)
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27,409
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Other
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3,748
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(838
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)
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Net cash provided by operating activities
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121,904
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57,859
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Investing Activities:
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Additions to property, plant and equipment
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(22,974
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)
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(11,248
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)
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Net purchases of short-term investments
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(90,130
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)
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Proceeds from disposal of property, plant
and equipment
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6,053
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97
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Proceeds from sale of product line
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8,513
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Cash paid for acquisitions
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(60,686
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)
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(16,392
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)
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Other
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(5,012
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)
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Net cash used in investing activities
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(74,106
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)
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(117,673
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)
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Financing Activities:
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Principal payments on long-term debt
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(224,926
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)
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(17,300
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)
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Proceeds from the issuance of shares under
equity-based compensation plans
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9,153
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32,832
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Tax benefit from the issuance of shares
under equity-based compensation plans
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3,402
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15,253
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Long-term financing costs
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(246
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)
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Net cash (used in) provided by financing
activities
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|
(212,617
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)
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30,785
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Effect of exchange rate changes on cash
|
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14,941
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|
634
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|
|
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Change in cash and cash equivalents
|
|
(149,878
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)
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(28,395
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)
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Cash and cash equivalents, beginning of
period
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649,451
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276,042
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Cash and cash equivalents, end of period
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$
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499,573
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$
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247,647
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See notes to unaudited condensed consolidated financial statements.
5
Table of Contents
CommScope, Inc.
Condensed
Consolidated Statements of Stockholders Equity
and Comprehensive Income
(Unaudited In thousands, except share amounts)
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Six Months Ended
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June 30,
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2008
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2007
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Number of common shares outstanding:
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Balance at beginning of period
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66,870,029
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59,734,533
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Issuance of shares under equity-based
compensation plans
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387,064
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1,864,683
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Issuance of shares for conversion of
convertible debentures
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2,878,249
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Balance at end of period
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70,135,342
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61,599,216
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|
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|
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Common stock:
|
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|
|
|
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Balance at beginning of period
|
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$
|
770
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|
$
|
699
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Issuance of shares under equity-based
compensation plans
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4
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|
19
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Issuance of shares for conversion of
convertible debentures
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29
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|
|
|
Balance at end of period
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$
|
803
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|
$
|
718
|
|
|
|
|
|
|
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Additional paid-in capital:
|
|
|
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|
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Balance at beginning of period
|
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$
|
856,452
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|
$
|
532,344
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Issuance of shares under equity-based
compensation plans
|
|
9,149
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|
32,813
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Tax benefit from shares issued under
equity-based compensation plans
|
|
3,402
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|
15,253
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Equity-based compensation expense
recognized
|
|
9,892
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|
5,000
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Issuance of shares for conversion of
convertible debentures
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76,578
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Balance at end of period
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$
|
955,473
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$
|
585,410
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|
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Retained earnings:
|
|
|
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Balance at beginning of period
|
|
$
|
545,607
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|
$
|
346,821
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|
Net income
|
|
29,167
|
|
106,984
|
|
Impact of adoption of FIN 48
|
|
|
|
(6,055
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)
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Balance at end of period
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$
|
574,774
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|
$
|
447,750
|
|
|
|
|
|
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
22,714
|
|
$
|
4,775
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|
Other comprehensive income, net of tax
|
|
36,471
|
|
3,608
|
|
Balance at end of period
|
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$
|
59,185
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|
$
|
8,383
|
|
|
|
|
|
|
|
Treasury stock, at cost:
|
|
|
|
|
|
Balance at beginning and end of period
|
|
$
|
(145,535
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)
|
$
|
(145,535
|
)
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
1,444,700
|
|
$
|
896,726
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
40,216
|
|
$
|
61,129
|
|
$
|
29,167
|
|
$
|
106,984
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
9,750
|
|
344
|
|
39,688
|
|
844
|
|
Foreign currency transaction gain on
long-term intercompany loans
|
|
1,484
|
|
2,068
|
|
2,511
|
|
3,214
|
|
Gain (loss) on derivative financial
instruments
|
|
24,731
|
|
(122
|
)
|
(5,306
|
)
|
(224
|
)
|
Amortization of unrecognized pension and
other postretirement benefit amounts
|
|
(200
|
)
|
(113
|
)
|
(422
|
)
|
(226
|
)
|
Total other comprehensive income, net of
tax
|
|
35,765
|
|
2,177
|
|
36,471
|
|
3,608
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
75,981
|
|
$
|
63,306
|
|
$
|
65,638
|
|
$
|
110,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
6
Table
of Contents
CommScope, Inc.
Notes to Unaudited Condensed
Consolidated Financial Statements
(In Thousands, Unless Otherwise Noted)
1. BACKGROUND AND BASIS OF
PRESENTATION
Background
CommScope, Inc. and its wholly owned subsidiaries (CommScope or
the Company) is a world leader in infrastructure solutions for communications
networks. With the December 27, 2007 acquisition of Andrew Corporation
(Andrew), the Company is a global leader in providing radio frequency subsystem
solutions for wireless networks. Through its SYSTIMAX® and Uniprise® brands,
the Company is also a global leader in structured cabling systems for business
enterprise applications. In addition, CommScope is the premier manufacturer of
coaxial cable for broadband cable television networks and one of the leading
North American providers of environmentally secure cabinets for digital
subscriber line (DSL) and Fiber-to-the-Node applications.
Basis of Presentation
The condensed
consolidated balance sheet as of June 30, 2008, the condensed consolidated
statements of operations and comprehensive income for the three and six months
ended June 30, 2008 and 2007, and the condensed consolidated statements of
cash flows and stockholders equity for the six months ended June 30, 2008
and 2007 are unaudited and reflect all adjustments of a normal recurring nature
that are, in the opinion of management, necessary for a fair presentation of
the interim period financial statements. The results of operations for the
interim period are not necessarily indicative of the results of operations to
be expected for the full year.
The
unaudited interim condensed consolidated financial statements of CommScope have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted. The significant accounting policies
followed by the Company are set forth in Note 2 to the consolidated
financial statements in the Companys Annual Report on Form 10-K for the
year ended December 31, 2007 (the 2007 Form 10-K). There were no
changes in the Companys significant accounting policies during the three or
six months ended June 30, 2008 other than the implementation of Statement
of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements
(SFAS No. 157) and SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS No. 159) (see Note 7). In addition, the Company reaffirms the use of
estimates in the preparation of the financial statements as set forth in the
2007 Form 10-K. These interim condensed consolidated financial statements
should be read in conjunction with the Companys audited consolidated financial
statements and notes thereto included in the 2007 Form 10-K.
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
Concentrations of Risk
Net sales to Anixter
International Inc. and its affiliates (Anixter) accounted for approximately 11%
of the Companys total net sales during both the three and six months ended June 30,
2008, and approximately 26% and 27% of the Companys total net sales during the
three and six months ended June 30, 2007, respectively. Sales to Anixter primarily originate within
the Enterprise segment.
Net sales to
Alcatel-Lucent, an original equipment manufacturer (OEM) for telecommunications
companies, were less than 10% of the Companys total net sales during the three
and six months ended June 30, 2008, but accounted for approximately 13%
and 12% of the Companys total net sales during the three and six months ended June 30,
2007. Sales to Alcatel-Lucent primarily
originate within the Antenna, Cable and Cabinets Group segment. Other than Anixter and Alcatel-Lucent, no
customer accounted for 10% or more of the Companys total net sales for the
three and six months ended June 30, 2008 or 2007.
Accounts receivable from
Anixter, Alcatel-Lucent and Nokia Siemens Networks represented approximately
13%, 10% and 10%, respectively, of net accounts receivable as of June 30,
2008. No other customer accounted for 10% or more of the Companys net accounts
receivable as of June 30, 2008.
7
Table
of Contents
Product Warranties
The Company recognizes a
liability for the estimated claims that may be paid under its customer warranty
agreements to remedy potential deficiencies in quality or performance of the
Companys products. These product warranties extend over periods ranging from
one to twenty-five years from the date of sale, depending upon the product
subject to the warranty. The Company records a provision for estimated future
warranty claims as cost of sales based upon the historical relationship of
warranty claims to sales and specifically-identified warranty issues. During
the three and six months ended June 30, 2008, the Company recorded
additions to the product warranty accrual as adjustments to the Andrew
preliminary purchase price allocation as a result of additional information
obtained regarding warranty exposure on certain products sold prior to
CommScopes acquisition of Andrew. The
Company bases its estimates on assumptions that are believed to be reasonable
under the circumstances and revises its estimates, as appropriate, when events
or changes in circumstances indicate that revisions may be necessary.
The following table
summarizes the activity in the product warranty accrual, included in other
accrued liabilities, for the three and six months ended June 30, 2008 and
2007. The beginning balance and the
activity for the three and six months ended June 30, 2008 include the
activity related to legacy Andrew products.
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Product warranty accrual, beginning of
period
|
|
$
|
33,878
|
|
$
|
2,103
|
|
$
|
29,183
|
|
$
|
2,090
|
|
Provision for warranty claims
|
|
5,496
|
|
1,829
|
|
9,369
|
|
1,843
|
|
Revision of Andrew purchase price
allocation
|
|
4,787
|
|
|
|
14,162
|
|
|
|
Warranty claims paid
|
|
(7,919
|
)
|
(220
|
)
|
(16,472
|
)
|
(221
|
)
|
Product warranty accrual, end of period
|
|
$
|
36,242
|
|
$
|
3,712
|
|
$
|
36,242
|
|
$
|
3,712
|
|
Commitments
and Contingencies
In 2007, a jury ruled in
favor of TruePosition, Inc., finding that Andrew had willfully infringed a
single TruePosition patent, and the jury awarded $45.3 million in damages to
TruePosition (see Note 16 in the Notes to the Consolidated Financial Statements
in the 2007 Form 10-K). As a result of the jury verdict, a $45.3 million liability
was included in other accrued liabilities as of December 31, 2007. On July 31, 2008, the court reduced the
compensatory damages award to $18.6 million and awarded enhanced damages of
$4.7 million for willful infringement.
As a result, the liability was reduced to $27.6 million (including
interest) as of June 30, 2008, which represents the Companys best estimate of
the probable liability to TruePosition. Subject to the outcome of possible
additional legal actions taken by the Company and/or TruePosition, the ultimate
resolution of the TruePosition litigation may be materially different than the
Companys current estimate, which does not include legal fees the Company may
incur in appeals or other proceedings. In addition to the TruePosition litigation
described above, 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, other than the TruePosition litigation, will have
a materially adverse effect on the Companys financial statements upon final
disposition. In addition, CommScope is subject to various federal, state, local
and foreign laws and regulations governing the use, discharge, disposal and
remediation of hazardous materials. Compliance with current laws and
regulations has not had, and is not expected to have, a materially adverse
effect on the Companys financial condition or results of operations.
Earnings Per Share
Basic earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
during the applicable period. Diluted earnings per share is based on net income
adjusted for after-tax interest and amortization of debt issuance costs related
to convertible debt, if dilutive, divided by the weighted average number of
common shares outstanding adjusted for the dilutive effect of stock options,
restricted stock units, performance share units and convertible securities.
8
Table
of Contents
Below is a reconciliation
of earnings and weighted average common shares and potential common shares
outstanding for calculating diluted earnings per share:
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income for basic earnings per share
|
|
$
|
40,216
|
|
$
|
61,129
|
|
$
|
29,167
|
|
$
|
106,984
|
|
Effect of assumed conversion of convertible
senior subordinated debentures
|
|
499
|
|
629
|
|
1,146
|
|
1,258
|
|
Income applicable to common shareholders
for diluted earnings per share
|
|
$
|
40,715
|
|
$
|
61,758
|
|
$
|
30,313
|
|
$
|
108,242
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding for basic earnings per share
|
|
69,974
|
|
61,380
|
|
68,694
|
|
60,817
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Employee stock options (a)
|
|
997
|
|
1,408
|
|
967
|
|
1,469
|
|
Restricted stock units and performance
share units
|
|
776
|
|
473
|
|
693
|
|
427
|
|
Convertible senior subordinated debentures
|
|
9,175
|
|
11,494
|
|
10,322
|
|
11,494
|
|
Weighted average number of common and
potential common shares outstanding for diluted earnings per share
|
|
80,922
|
|
74,755
|
|
80,676
|
|
74,207
|
|
(a)
Options to
purchase approximately 0.7 million and 0.9 million common shares were excluded
from the computation of diluted earnings per share for the three and six months
ended June 30, 2008, respectively, because they would have been
antidilutive. No options to purchase
common shares were excluded from the computation of diluted earnings per share
for the three and six months ended June 30, 2007.
Income
Taxes
The Company adopted the
provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48
(FIN 48) as of January 1, 2007, resulting in a $4.2 million increase in
the liability for unrecognized tax benefits with an offsetting reduction to
opening retained earnings. In addition, the Company reduced a long-term
deferred tax asset by $4.0 million with an offsetting reduction to opening retained
earnings of $1.9 million and an increase of $2.1 million to long-lived assets
as a purchase accounting adjustment related to the 2004 acquisition of
Connectivity Solutions.
The
liability for unrecognized tax benefits and related interest and penalties under
FIN 48 was $61.4 million at June 30, 2008 and $68.0 million at December 31,
2007. Of the net decrease in this liability for the six months ended June 30,
2008, $3.9 million related to the effective settlement of various U.S. and
foreign income tax audits that was recorded as a reduction of income tax
expense. The remainder of the net
decrease was primarily related to amounts transferred to income taxes payable.
The Companys effective
income tax rate was 29.6% and 33.3% for the three and six months ended June 30,
2008, respectively, compared to 32.1% and 31.6% for the three and six months
ended June 30, 2007, respectively. Income before income taxes for the
three and six months ended June 30, 2008 includes $22.3 million and $25.5
million, respectively, of charges, primarily related to restructuring
initiatives, for which tax benefits have not been recognized. Also included in
income tax expense for the three and six months ended June 30, 2008 is the
benefit of $3.9 million described above related to the settlement of tax
audits. The Companys effective tax rate reflects the benefits derived from
significant operations outside the U.S., which are generally taxed at rates
lower than the U.S. statutory rate of 35%, partially offset by U.S. state
income taxes and valuation allowances for losses in certain foreign
jurisdictions for which tax benefits cannot be recognized.
Impact of Newly Issued Accounting Standards
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations (SFAS No. 141(R)). SFAS No. 141(R) modifies
how acquirers recognize and measure the consideration transferred, identifiable
assets acquired, liabilities assumed, noncontrolling interests and goodwill
acquired in a business combination. SFAS No. 141(R) requires that
acquisition related expenses and restructuring costs be expensed. SFAS No. 141(R) will be implemented
as of January 1, 2009 and will generally be effective, on a prospective
basis, for transactions consummated on or after January 1, 2009. Provisions of SFAS No. 141(R) related
to the accounting for certain income tax assets and liabilities will also be
effective for
9
Table
of Contents
acquisitions
completed prior to the effective date.
The Company is unable to determine the impact of adopting SFAS No. 141(R).
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements (SFAS No. 160).
SFAS No. 160 establishes requirements for ownership interests in
subsidiaries held by parties other than the Company (i.e., minority
interests) to be shown separate from the parents equity within the equity
section of the consolidated statement of financial position. Changes in the
parents ownership interests are required to be accounted for as equity
transactions and any noncontrolling equity investments in unconsolidated
subsidiaries must be measured initially at fair value. SFAS No. 160 will
be implemented, on a prospective basis, as of January 1, 2009. Presentation and disclosure requirements must
be retrospectively applied to comparative financial statements. SFAS No. 160
is not expected to have a material impact on the Companys consolidated
financial position and results of operations.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161 expands required disclosure about an
entitys derivative instruments and hedging activities and is effective for
fiscal years beginning after November 15, 2008.
In
April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, Determination
of the Useful Life of Intangible Assets, which amends guidance regarding the
assumptions used in determining the useful lives of intangible assets that may
be renewed or extended. This FSP is
effective for fiscal years beginning after December 15, 2008 and is not
expected to have a material impact on the Companys consolidated financial
statements.
In
May 2008, the FASB issued FSP No. APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement), which requires the liability and equity
components of convertible debt to be accounted for separately with interest
expense recognized on the liability component at a non-convertible debt
borrowing rate. This FSP is effective
for fiscal years beginning after December 15, 2008 and is required to be
applied retrospectively to all past periods presented. The Company does not expect this FSP to have
an impact on its consolidated financial statements based upon the convertible
debt instruments currently outstanding.
2. ACQUISITIONS
Andrew Corporation
On December 27, 2007,
CommScope completed its acquisition of Andrew. The total purchase price
consisted of approximately $2.3 billion in cash and approximately
5.1 million shares of CommScope common stock, with a value of
approximately $255 million. The cash portion of the purchase price was
funded primarily through $2.1 billion of borrowings under new senior
secured credit facilities. The Company prepared the following preliminary
estimate of the acquisition date fair values of each major asset and liability
category of Andrew as of June 30, 2008 (in millions):
|
|
Estimated Fair
Value
|
|
Cash and cash
equivalents
|
|
$
|
165.7
|
|
Accounts
receivable
|
|
590.7
|
|
Inventories
|
|
386.6
|
|
Other current
assets
|
|
185.7
|
|
Property, plant
and equipment
|
|
318.4
|
|
Identifiable
intangible assets
|
|
970.4
|
|
Goodwill
|
|
1,125.7
|
|
Other noncurrent
assets
|
|
38.5
|
|
Total assets
|
|
$
|
3,781.7
|
|
Accounts payable
|
|
$
|
279.9
|
|
Other accrued
liabilities
|
|
212.8
|
|
Current portion
of long-term debt
|
|
234.2
|
|
Long-term debt
|
|
11.7
|
|
Noncurrent
pension and postretirement benefit liabilities
|
|
35.9
|
|
Noncurrent
deferred tax liabilities
|
|
403.0
|
|
Other noncurrent
liabilities
|
|
48.2
|
|
Total liabilities
|
|
$
|
1,225.7
|
|
Net acquisition
cost
|
|
$
|
2,556.0
|
|
10
Table of Contents
Revisions to the preliminary
purchase price allocation from the initial allocation reflect new information
received. Such information included the
determination that certain foreign earnings will be repatriated to the U.S., developments
in the TruePosition litigation, warranty exposure from certain products
exhibiting performance issues, asset valuations related to assets that were
either sold or subject to sales agreements, updated information in support of
identifiable intangible asset valuations and initial restructuring plans that
have been put into place. As additional
information is obtained regarding these and other matters, including additional
restructuring initiatives, there may be further adjustments to the preliminary
purchase price allocation.
The table below summarizes
preliminary valuations of the intangible assets acquired that were determined
by management to meet the criteria for recognition apart from goodwill. The
values presented below are preliminary estimates and are subject to change as
management completes its valuation of the Andrew acquisition.
|
|
Estimated Fair
Value
|
|
Weighted Average
Amortization
Period
|
|
|
|
(in millions)
|
|
(in years)
|
|
Customer base
|
|
$
|
552.6
|
|
7.1
|
|
Trade names and trademarks
|
|
336.2
|
|
23.0
|
|
Patents and technologies
|
|
81.6
|
|
6.6
|
|
Total amortizable intangible assets
|
|
$
|
970.4
|
|
12.6
|
|
The identifiable intangible
assets were determined by management to have finite lives. The useful lives for
the customer base were based on managements forecasts of customer turnover,
sales levels with major customers and types of customers. The useful lives for
the trade names and trademarks were estimated based on the periods that the
trade names and trademarks have been in use and the absence of a definite plan
to discontinue their use in the foreseeable future. The useful lives for the
patents and technologies were based on review of historical lives of similar
products, in conjunction with technology-specific factors and anticipated
future trends in the industry as well as the remaining lives of the related
patents.
The goodwill arising from the
preliminary purchase price allocation is believed to be consistent with Andrews
reputation in the marketplace (which is expected to lead to sales to new
customers), synergies expected to be realized from the acquisition and the
going concern value of the assembled Andrew business. The goodwill is not
expected to be deductible for tax purposes.
The Andrew amounts included in the
following pro forma information are based on Andrews historical results
and, therefore, may not be indicative of the actual results when operated as part
of CommScope. The pro forma adjustments represent managements best
estimates based on information available at the time the pro forma
information was prepared and may differ from the adjustments that may actually
have been required. Accordingly, the pro forma financial information
should not be relied upon as being indicative of the historical results that
would have been realized had the acquisition occurred as of the date indicated
or that may be achieved in the future.
The following table presents
consolidated results of operations for CommScope for the three and six months
ended June 30, 2007 as though the acquisition had been completed as of January 1,
2007 (in millions, except per share amounts):
|
|
Three Months Ended
June 30, 2007
|
|
Six Months Ended
June 30, 2007
|
|
Net sales
|
|
$
|
1,064.8
|
|
$
|
2,003.0
|
|
Net loss
|
|
(68.7
|
)
|
(61.2
|
)
|
Loss per share
|
|
(1.03
|
)
|
(0.92
|
)
|
|
|
|
|
|
|
|
|
The pro forma results
above reflect pro forma adjustments for net interest expense,
depreciation, amortization and related income taxes. No pro forma adjustments
have been made to reverse asset impairments or to provide a tax benefit for
Andrews actual net losses.
Net income during the three
and six months ended June 30, 2008 includes certain charges that relate
directly or indirectly to the acquisition, as listed below on a pretax basis
(in millions):
|
|
Three Months Ended
June 30, 2008
|
|
Six Months Ended
June 30, 2008
|
|
Purchase accounting inventory adjustment
|
|
$
|
4.7
|
|
$
|
57.5
|
|
Acquisition and integration related costs
|
|
0.9
|
|
3.8
|
|
|
|
|
|
|
|
|
|
11
Table of Contents
On January 31, 2008,
the Company sold the Satellite Communications (SatCom) product line acquired as
part of the Andrew acquisition to ASC Signal Corporation (ASC). The Company
received $8.5 million in cash, $2.5 million in notes receivable due April 30,
2010, a 17.9% ownership interest in ASC and the potential for up to an
additional $25.0 million of cash if certain financial targets are met over
a three year period from the date of the divestiture. In addition, the Company
will receive an additional note receivable for $2.5 million also due April 30,
2010, upon completion of certain manufacturing asset transfers, expected to be
completed within one year of the sale. Net sales from the SatCom product line
for the six months ended June 30, 2008 and 2007 were $11.6 million
and $53.6 million, respectively. No
gain or loss was recognized on the sale of SatCom.
On March 26, 2008, the
Company entered into an agreement to divest its minority interest in Andes
Industries, Inc. (Andes), which had been acquired as part of the Andrew
acquisition. The agreement was approved
by the United States Department of Justice on April 24, 2008 and the
transaction was consummated on April 28, 2008. No gain or loss was recognized on the
disposal of the Andes interest.
Signal
Vision, Inc.
On
May 1, 2007, CommScope acquired substantially all of the assets and
assumed certain current liabilities of Signal Vision, Inc., a leading
supplier of broadband radio frequency subscriber products, for approximately
$19.0 million, of which $18.5 million has been paid as of June 30, 2008
and the balance is payable by May 2009.
The acquisition is included within the Broadband segment and resulted in
net sales of $4.6 million and $10.1 million for the three and six months ended June 30,
2008, respectively, and $4.2 million for the three and six months ended June 30,
2007.
The
allocation of the purchase price, based on estimated fair values of the assets
acquired, is as follows:
|
|
Estimated Fair
Value
|
|
Amortization
Period
|
|
|
|
(in millions)
|
|
(in years)
|
|
Inventory
|
|
$
|
4.4
|
|
|
|
Accounts receivable
|
|
2.5
|
|
|
|
Machinery and equipment
|
|
0.1
|
|
|
|
Intangible assets:
|
|
|
|
|
|
Customer base
|
|
5.2
|
|
9.7
|
|
Trade name
|
|
0.7
|
|
3.7
|
|
Patents and technologies
|
|
0.4
|
|
10.0
|
|
Other
|
|
3.0
|
|
5.0
|
|
Goodwill
|
|
3.1
|
|
|
|
Less: Current liabilities assumed
|
|
(0.4
|
)
|
|
|
Total purchase price
|
|
$
|
19.0
|
|
|
|
The
weighted average estimated useful life of the amortizable intangible assets
acquired is 7.8 years.
3. BALANCE SHEET DATA
Inventories
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Raw materials
|
|
$
|
144,623
|
|
$
|
137,606
|
|
Work in process
|
|
133,579
|
|
158,721
|
|
Finished goods
|
|
228,405
|
|
252,033
|
|
|
|
$
|
506,607
|
|
$
|
548,360
|
|
12
Table of Contents
Other Current Accrued Liabilities
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Compensation and employee benefit
liabilities
|
|
$
|
112,499
|
|
$
|
118,361
|
|
Purchase price payable
|
|
3,876
|
|
61,240
|
|
Litigation reserve
|
|
27,620
|
|
45,300
|
|
Warranty reserve
|
|
36,242
|
|
29,183
|
|
Restructuring reserve
|
|
45,259
|
|
34,695
|
|
Other
|
|
109,087
|
|
111,165
|
|
|
|
$
|
334,583
|
|
$
|
399,944
|
|
4.
FINANCING
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Seven-year senior secured term loan
|
|
$
|
1,333,599
|
|
$
|
1,350,000
|
|
Six-year senior secured term loan
|
|
750,000
|
|
750,000
|
|
1% convertible senior subordinated
debentures
|
|
199,550
|
|
250,000
|
|
3.25% convertible senior subordinated
debentures
|
|
105
|
|
231,264
|
|
Other
|
|
18,880
|
|
14,555
|
|
|
|
2,302,134
|
|
2,595,819
|
|
Less current portion
|
|
(217,702
|
)
|
(247,662
|
)
|
|
|
$
|
2,084,432
|
|
$
|
2,348,157
|
|
See
Note 9 in the Notes to the Consolidated Financial Statements in the 2007 Form 10-K
for information on the terms and conditions of the senior secured credit
facilities. As of June 30, 2008, the Company had availability of
approximately $372 million and no outstanding borrowings under the senior
secured revolving credit facility. The weighted average effective interest rate
on outstanding borrowings under the above debt instruments, including the
effect of the interest rate swap (see Note 6 below) and amortization of associated
loan fees was 6.03% and 6.23% at June 30, 2008 and December 31, 2007,
respectively.
During
the six months ended June 30, 2008, the Company agreed with certain
holders of the 1% convertible senior subordinated debentures to increase the
conversion rate as an inducement for them to convert their debentures to common
stock. Accordingly, $50.45 million of
the debentures were converted into 2,393,513 shares of common stock (2,319,540
related to the original conversion ratio and 73,973 related to the inducement). As a result of the inducement, the Company
recorded a $2.8 million pretax charge in other expense in the Condensed
Consolidated Statement of Operations.
During the six months ended June 30, 2008, holders of
substantially all of the 3.25% convertible senior subordinated debentures
assumed in the Andrew acquisition chose to convert their debentures into the
contractual merger consideration. As a
result, $207.5 million of cash was paid and 484,736 shares of CommScope common
stock were issued.
See
Note 9 in the Notes to the Consolidated Financial Statements in the 2007 Form 10-K
for information on the terms and conditions of the 1% convertible senior
subordinated debentures. The 1% convertible senior debentures are classified as
current liabilities as of June 30, 2008 because they may be redeemed by
the holders on March 20, 2009.
5. RESTRUCTURING COSTS
During the three and six
months ended June 30, 2008, the Company recorded net restructuring charges
of $22,636 and $22,768, respectively.
The net restructuring charges for the three months ended June 30,
2008 were primarily composed of $18,404 related to further restructuring
actions at the Companys legacy CommScope Belgian manufacturing facility and
$3,917 related to restructuring actions at the Companys legacy CommScope
Brazilian manufacturing facility. The
restructuring charges recognized during the three and six months ended June 30,
2008 resulted from actions taken to lower the overall manufacturing cost
structure following the Andrew acquisition.
The pretax restructuring charges recognized by the Company by segment
during the three and six months ended June 30, 2008 and 2007 were as
follows:
13
Table of Contents
|
|
Three Months
Ended
June 30,
|
|
Six Months
Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Antenna, Cable and Cabinets Group segment
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
86
|
|
Enterprise segment
|
|
890
|
|
|
|
610
|
|
488
|
|
Wireless Network Solutions segment
|
|
|
|
|
|
|
|
|
|
Broadband segment
|
|
21,746
|
|
169
|
|
22,158
|
|
324
|
|
Total
|
|
$
|
22,636
|
|
$
|
169
|
|
$
|
22,768
|
|
$
|
898
|
|
The
activity within the liability (included in other accrued liabilities) for these
restructuring initiatives was as follows:
|
|
Employee-
Related
Costs
|
|
Lease
Termination
Costs
|
|
Asset
Impairment
Charges
|
|
Equipment
Relocation
Costs
|
|
Total
|
|
Balance as of March 31, 2008
|
|
$
|
24,158
|
|
$
|
2,392
|
|
$
|
|
|
$
|
|
|
$
|
26,550
|
|
Additional charge recorded
|
|
22,142
|
|
362
|
|
|
|
132
|
|
22,636
|
|
Revision of Andrew purchase price
allocation
|
|
2,968
|
|
1,816
|
|
|
|
|
|
4,784
|
|
Cash paid
|
|
(8,257
|
)
|
(831
|
)
|
|
|
(132
|
)
|
(9,220
|
)
|
Foreign exchange and other non-cash items
|
|
470
|
|
39
|
|
|
|
|
|
509
|
|
Balance as of June 30, 2008
|
|
$
|
41,481
|
|
$
|
3,778
|
|
$
|
|
|
$
|
|
|
$
|
45,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
32,506
|
|
$
|
2,189
|
|
$
|
|
|
$
|
|
|
$
|
34,695
|
|
Additional charge (recovery) recorded
|
|
22,554
|
|
362
|
|
(280
|
)
|
132
|
|
22,768
|
|
Revision of Andrew purchase price
allocation
|
|
4,905
|
|
2,374
|
|
|
|
|
|
7,279
|
|
Cash paid
|
|
(18,938
|
)
|
(1,186
|
)
|
|
|
(132
|
)
|
(20,256
|
)
|
Foreign exchange and other non-cash items
|
|
454
|
|
39
|
|
280
|
|
|
|
773
|
|
Balance as of June 30, 2008
|
|
$
|
41,481
|
|
$
|
3,778
|
|
$
|
|
|
$
|
|
|
$
|
45,259
|
|
Employee-related costs include
the expected severance costs and related benefits, accrued over the remaining
period employees are required to work in order to receive severance
benefits. Lease termination costs relate
to the cost of vacating leased facilities, net of anticipated sub-rental
income. Equipment relocation costs
relate to the costs to uninstall, pack, ship and reinstall manufacturing
equipment as well as the costs to prepare the receiving facility to accommodate
the equipment. The Company expects to complete these restructuring actions by
late 2009. Additional charges and purchase accounting adjustments are expected
during the balance of 2008 as further restructuring plans related to the
integration of Andrew operations and other cost reduction initiatives are
implemented.
As
a result of restructuring and consolidation actions, there is unutilized real
estate at various facilities in the U.S. and internationally, which is recorded
in property, plant and equipment on the Condensed Consolidated Balance Sheets at
the lower of cost or fair value. The
Company is attempting to sell or lease this unutilized space. As additional
restructuring initiatives are implemented, additional excess property may be
identified and impairment charges, which may be material, may be incurred.
6. DERIVATIVES AND HEDGING
ACTIVITIES
In December 2007, the Company entered into an interest rate swap
agreement to hedge the variability of forecasted interest payments attributable
to changes in interest rates on a portion of the term loans issued under the
new senior secured credit facilities. Through this swap, the Company fixed the
following notional amounts at 4.1275% (before application of the applicable
margin): $1.5 billion from December 27, 2007 through December 31,
2008; $1.3 billion during 2009; $1.0 billion during 2010; and
$400 million during 2011. The interest rate swap agreement was designated
as a cash flow hedge at inception and such designation was substantially
effective at June 30, 2008 and is expected to continue to be effective for
the duration of the swap agreement. During the three and six months ended June 30,
2008, interest income (expense) of $0.2 million and $(1.7) million,
respectively, was recognized as a result of hedge ineffectiveness related to
the interest rate swap. The fair value
of the interest rate swap, reflected in other noncurrent liabilities, was $13.8
million as of June 30, 2008 and $4.5 million as of December 31,
2007.
During the three months ended June 30, 2008, the Company paid
approximately $5.0 million to amend its cross currency swap of U.S. dollars for
euros to reduce the notional amount from $14 million to $7 million. This
payment is included as an investing use of cash on the Condensed Consolidated
Statement of Cash Flows. Prior to this amendment, a
14
Table of Contents
portion
of the swap was designated and documented as a hedge of the Companys net
investment in its Belgian subsidiary to reduce the volatility in stockholders
equity caused by changes in euro exchange rates. Subsequent to this amendment, the entire swap
is designated as a hedge against fluctuations in the fair value of certain of
the Companys euro-denominated assets. Pretax gains (losses) of $17 and $(49)
on the portion designated as a fair value hedge are reflected in the Companys
Condensed Consolidated Statements of Operations for the three months ended June 30,
2008 and 2007, respectively. Pretax losses of $(884) and $(90) on the portion
designated as a fair value hedge are reflected in the Companys Condensed
Consolidated Statements of Operations for the six months ended June 30,
2008 and 2007, respectively. The
designation of the hedging instrument as a fair value hedge was effective as of
June 30, 2008 and is expected to continue to be effective for the duration
of the agreement, resulting in no anticipated hedge ineffectiveness. The fair
value of the hedging instrument, reflected in other noncurrent liabilities, was
$5.1 million and $8.7 million as of June 30, 2008 and December 31,
2007, respectively.
There
were no reclassifications from accumulated other comprehensive income to
earnings related to derivatives and hedging activities during the three and six
months ended June 30, 2008 and 2007.
Activity
in the accumulated net loss on derivative instruments included in accumulated
other comprehensive income consisted of the following:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Accumulated net loss on derivative
instruments, beginning of period
|
|
$
|
(38,886
|
)
|
$
|
(5,303
|
)
|
$
|
(8,849
|
)
|
$
|
(5,201
|
)
|
Gain (loss) on cross currency swap
designated as a net investment hedge, net of taxes
|
|
81
|
|
(122
|
)
|
(486
|
)
|
(224
|
)
|
Gain (loss) on interest rate swap
designated as a cash flow hedge, net of taxes
|
|
24,650
|
|
|
|
(4,820
|
)
|
|
|
Accumulated net loss on derivative
instruments, end of period
|
|
$
|
(14,155
|
)
|
$
|
(5,425
|
)
|
$
|
(14,155
|
)
|
$
|
(5,425
|
)
|
During the three months ended June 30, 2008 and
2007, the income tax expense (benefit) related to the gain (loss) on the
derivative financial instruments reported within other comprehensive income was
$14,525 and $(72), respectively. During the six months ended June 30, 2008
and 2007, the income tax benefit related to the loss on the derivative
financial instruments reported within other comprehensive income was $(3,116)
and $(132), respectively.
7.
FAIR VALUE MEASUREMENTS
As
of January 1, 2008, the Company implemented SFAS No. 157, which
defines fair value, establishes a framework for measuring fair value as
required by other accounting pronouncements and expands disclosure
requirements. In February 2008, the
FASB issued FSP No. FAS 157-2, which delays the effective date of SFAS No. 157
as it applies to non-financial assets and liabilities that are not required to
be measured at fair value on a recurring (at least annual) basis. As a result of the delay, SFAS No. 157
will be applied to non-financial assets and liabilities for fiscal years
beginning after November 15, 2008.
SFAS
No. 157 establishes a three-tier hierarchy for evaluating fair values
based on the inputs utilized to measure the fair values as follows:
Level
1 Observable inputs such as quoted prices in active markets;
Level 2 Inputs other than quoted market prices in
active markets that are observable, either directly or indirectly; and
Level 3 Inputs for which there is little or no
observable market data, which requires the reporting entity to develop its own
assumptions.
15
Table of Contents
For
financial assets and liabilities measured at fair value as of June 30,
2008, the following table provides the quantitative disclosures regarding the
fair value. A market approach, based on
prices or other relevant information from market transactions involving
identical or comparable assets or liabilities, was used to determine the fair
values.
|
|
Fair Value as of
June 30, 2008
|
|
Valuation
Inputs
|
|
Cash and cash equivalents
|
|
$
|
499,573
|
|
Level 1
|
|
Auction rate securities (included in other
noncurrent assets) (1)
|
|
4,568
|
|
Level 2
|
|
Interest rate and cross currency swap
liabilities (included in other noncurrent liabilities)
|
|
(18,926
|
)
|
Level 2
|
|
|
|
|
|
|
|
|
(1) During the six months ended June 30,
2008, the Company determined these auction rate securities (original principal
of $5.8 million) were further impaired and that the impairment was
other-than-temporary, resulting in a pretax loss of approximately $0.6 million,
which is included in other expense.
The
provisions of SFAS No. 159 became effective for the Company as of January 1,
2008. This standard gives companies the
irrevocable option to carry most financial assets or liabilities at fair value,
with changes in fair value recorded in earnings. The Company did not elect to
carry any of its financial assets or liabilities at fair value under the
provisions of SFAS No. 159.
8. EMPLOYEE BENEFIT PLANS
|
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Service cost
|
|
$
|
872
|
|
$
|
785
|
|
$
|
842
|
|
$
|
1,039
|
|
Interest cost
|
|
3,620
|
|
1,804
|
|
1,509
|
|
1,319
|
|
Recognized actuarial (gain) loss
|
|
|
|
|
|
(124
|
)
|
25
|
|
Amortization of prior service credit
|
|
(192
|
)
|
(193
|
)
|
(21
|
)
|
(21
|
)
|
Amortization of transition obligation
|
|
13
|
|
11
|
|
|
|
|
|
Expected return on plan assets
|
|
(4,106
|
)
|
(2,195
|
)
|
(126
|
)
|
(119
|
)
|
Net periodic benefit cost
|
|
$
|
207
|
|
$
|
212
|
|
$
|
2,080
|
|
$
|
2,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Service cost
|
|
$
|
1,733
|
|
$
|
1,563
|
|
$
|
1,684
|
|
$
|
2,078
|
|
Interest cost
|
|
7,232
|
|
3,605
|
|
3,018
|
|
2,638
|
|
Recognized actuarial (gain) loss
|
|
|
|
|
|
(248
|
)
|
51
|
|
Amortization of prior service credit
|
|
(385
|
)
|
(386
|
)
|
(42
|
)
|
(43
|
)
|
Amortization of transition obligation
|
|
25
|
|
22
|
|
|
|
|
|
Expected return on plan assets
|
|
(8,206
|
)
|
(4,386
|
)
|
(252
|
)
|
(237
|
)
|
Net periodic benefit cost
|
|
$
|
399
|
|
$
|
418
|
|
$
|
4,160
|
|
$
|
4,487
|
|
The Company contributed
approximately $0.5 million and $10.7 million to its pension plans during the
three and six months ended June 30, 2008, respectively, and anticipates
making additional contributions of approximately $1.0 million to these plans
during 2008. The Company contributed approximately $1.2 million and $2.4 million
to its other postretirement benefit plans during the three and six months ended
June 30, 2008, respectively, and anticipates making additional
contributions of approximately $2.4 million to these plans during 2008.
9.
EQUITY-BASED COMPENSATION PLANS
As of June 30, 2008, $41.9 million of
unrecognized compensation costs related to non-vested awards are expected to be
recognized over a weighted average period of 2.2 years. There were no
significant capitalized equity-based compensation costs at June 30, 2008.
16
Table of Contents
Stock Options
The following table summarizes the stock option
activity for the three and six months ended June 30, 2008 (in thousands,
except per share data):
|
|
Shares
|
|
Weighted
Average
Exercise
Price Per
Share
|
|
Weighted
Average
Grant Date
Fair
Value Per
Share
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding and expected to vest at March 31,
2008
|
|
3,600
|
|
$
|
27.82
|
|
|
|
|
|
Exercised
|
|
(331
|
)
|
$
|
24.53
|
|
|
|
|
|
Expired or forfeited
|
|
(39
|
)
|
$
|
61.25
|
|
$
|
8.86
|
|
|
|
Outstanding and expected to vest at June 30,
2008
|
|
3,230
|
|
$
|
27.75
|
|
|
|
$
|
86,513
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest at
December 31, 2007
|
|
3,585
|
|
$
|
28.45
|
|
|
|
|
|
Granted
|
|
278
|
|
$
|
41.22
|
|
$
|
20.85
|
|
|
|
Exercised
|
|
(387
|
)
|
$
|
23.65
|
|
|
|
|
|
Expired or forfeited
|
|
(246
|
)
|
$
|
59.66
|
|
$
|
3.98
|
|
|
|
Outstanding and expected to vest at June 30,
2008
|
|
3,230
|
|
$
|
27.75
|
|
|
|
$
|
86,513
|
|
Exercisable at June 30, 2008
|
|
2,756
|
|
$
|
26.30
|
|
|
|
$
|
78,617
|
|
The total intrinsic value of options exercised
during the three and six months ended June 30, 2008 was $8.4 million and
$9.8 million, respectively. The total
intrinsic value of options exercised during the three and six months ended June 30,
2007 was $18.4 million and $44.0 million, respectively. All of the non-vested options at June 30,
2008 are expected to vest as they are primarily held by senior management and
directors.
The exercise prices of outstanding options at June 30,
2008 were in the following ranges:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Shares
(in thousands)
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average
Exercise Price
Per Share
|
|
Shares
(in thousands)
|
|
Weighted
Average
Exercise Price
Per Share
|
|
$ 7.43 to
$16.50
|
|
1,177
|
|
4.6
|
|
$
|
12.98
|
|
1,177
|
|
$
|
12.98
|
|
$16.51 to $24.00
|
|
809
|
|
5.4
|
|
$
|
18.63
|
|
745
|
|
$
|
18.52
|
|
$24.01 to $52.76
|
|
845
|
|
6.3
|
|
$
|
38.50
|
|
435
|
|
$
|
38.36
|
|
$52.77 to $75.48
|
|
399
|
|
1.7
|
|
$
|
67.01
|
|
399
|
|
$
|
67.01
|
|
$ 7.43 to
$75.48
|
|
3,230
|
|
4.9
|
|
$
|
27.75
|
|
2,756
|
|
$
|
26.30
|
|
The Company uses
the Black-Scholes model to estimate the fair value of stock option awards. Key
input assumptions used in the model to estimate the fair value of stock options
include the grant price of the award, the expected option term, volatility of
the Companys stock, the risk-free rate and the Companys projected dividend
yield. The Company believes that the valuation technique and the approach
utilized to develop the underlying assumptions are appropriate in estimating
the fair values of CommScope stock options. Estimates of fair value are not
intended to predict actual future events or the value ultimately realized by
employees who receive equity awards, and subsequent events are not indicative
of the reasonableness of the original estimates of fair value made by the
Company. The following table presents
the weighted average assumptions used to estimate the fair value of stock
option awards granted during the six months ended June 30, 2008. No stock option awards were granted in the
three months ended June 30, 2008 or the three or six months ended June 30,
2007.
|
|
Six Months Ended
June 30, 2008
|
|
Expected option term (in years)
|
|
7.0
|
|
Risk-free interest rate
|
|
3.0
|
%
|
Expected volatility
|
|
45
|
%
|
Expected dividend yield
|
|
0
|
%
|
Weighted-average fair value at grant date
|
|
$
|
20.85
|
|
|
|
|
|
|
17
Table of Contents
Performance Share Units
The following table summarizes the performance
share unit activity for the three and six months ended June 30, 2008 (in
thousands, except per share data):
|
|
Performance
Share
Units
|
|
Weighted
Average Grant
Date Fair
Value Per
Share
|
|
Outstanding and non-vested at March 31, 2008
|
|
840
|
|
$
|
30.86
|
|
Forfeited
|
|
(2
|
)
|
$
|
41.22
|
|
Outstanding and non-vested at June 30, 2008
|
|
838
|
|
$
|
30.82
|
|
|
|
|
|
|
|
Outstanding and non-vested at December 31,
2007
|
|
514
|
|
$
|
24.29
|
|
Granted
|
|
329
|
|
$
|
41.22
|
|
Forfeited
|
|
(5
|
)
|
$
|
41.22
|
|
Outstanding and non-vested at June 30, 2008
|
|
838
|
|
$
|
30.82
|
|
Restricted Stock Units
The following table summarizes the restricted
stock unit activity for the three and six months ended June 30, 2008 (in
thousands, except per share data):
|
|
Restricted
Stock
Units
|
|
Weighted
Average Grant
Date Fair
Value Per
Share
|
|
Outstanding and non-vested at March 31, 2008
|
|
954
|
|
$
|
33.09
|
|
Forfeited
|
|
(9
|
)
|
$
|
38.94
|
|
Outstanding and non-vested at June 30, 2008
|
|
945
|
|
$
|
33.00
|
|
|
|
|
|
|
|
Outstanding and non-vested at December 31,
2007
|
|
495
|
|
$
|
25.43
|
|
Granted
|
|
467
|
|
$
|
41.21
|
|
Forfeited
|
|
(17
|
)
|
$
|
36.58
|
|
Outstanding and non-vested at June 30, 2008
|
|
945
|
|
$
|
33.00
|
|
10. SEGMENTS
As a result of the
acquisition of Andrew, management reorganized its internal reporting structure,
which consequently affects the Companys reportable segments. The Companys four reportable segments, which
align with the manner in which the business is managed, are as follows: Antenna,
Cable and Cabinets Group (ACCG); Enterprise; Broadband; and Wireless Network
Solutions (WNS).
The ACCG segment includes
product offerings of primarily passive transmission devices for the wireless
infrastructure market including base station antennas, coaxial cable and
connectors and microwave antennas as well as secure environmental enclosures
for electronic devices and equipment used by wireline and wireless
providers. The ACCG segment is largely
composed of product lines that were part of legacy Andrew.
The Enterprise segment
consists mainly of structured cabling systems for business enterprise
applications and connectivity solutions for wired and wireless networks within
organizations. The segment also includes coaxial cable for various video and data
applications that are not related to cable television.
The WNS segment
includes a variety of active electronic devices and services including power
amplifiers, filters and tower mounted amplifiers, geolocation products, network
optimization analysis systems, and engineering and consulting services as well
as products that are used to extend and enhance the coverage of wireless
networks in areas where signals are difficult to send or receive such as
tunnels, subways, airports and commercial buildings. The WNS segment is entirely composed of
product lines that were part of legacy Andrew.
18
Table of Contents
The Broadband
segment consists mainly of coaxial cable, fiber optic cable and conduit for
cable television system operators. These products support multi-channel video,
voice and high-speed data services for residential and commercial customers
using Hybrid Fiber Coaxial architecture.
The following table
provides summary asset information by segment as of June 30, 2008 and December 31,
2007 (in millions):
|
|
As of
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Identifiable segment related assets:
|
|
|
|
|
|
ACCG
|
|
$
|
2,496.9
|
|
$
|
2,560.0
|
|
Enterprise
|
|
394.6
|
|
352.6
|
|
WNS
|
|
1,018.5
|
|
1,048.7
|
|
Broadband
|
|
418.8
|
|
389.3
|
|
Total identifiable segment related assets
|
|
4,328.8
|
|
4,350.6
|
|
|
|
|
|
|
|
Reconciliation to total assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
499.6
|
|
649.5
|
|
Deferred income taxes
|
|
79.8
|
|
106.5
|
|
Total assets
|
|
$
|
4,908.2
|
|
$
|
5,106.6
|
|
The following table
presents the allocation of goodwill, including the preliminary goodwill
allocation arising from the Andrew acquisition, to reportable segments as of June 30,
2008 and December 31, 2007 (in millions):
|
|
As of
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Goodwill allocation:
|
|
|
|
|
|
ACCG
|
|
$
|
822.5
|
|
$
|
760.9
|
|
Enterprise
|
|
20.9
|
|
20.9
|
|
WNS
|
|
303.2
|
|
295.9
|
|
Broadband
|
|
133.7
|
|
133.5
|
|
Total goodwill
|
|
$
|
1,280.3
|
|
$
|
1,211.2
|
|
The following table
provides net sales and operating income (loss) by segment for the three and six
months ended June 30, 2008 and 2007 (in millions):
|
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
ACCG
|
|
$
|
500.2
|
|
$
|
116.7
|
|
$
|
979.2
|
|
$
|
203.8
|
|
Enterprise
|
|
243.1
|
|
239.4
|
|
454.6
|
|
440.3
|
|
WNS
|
|
185.4
|
|
|
|
366.0
|
|
|
|
Broadband
|
|
163.7
|
|
163.4
|
|
299.2
|
|
311.5
|
|
Inter-segment eliminations
|
|
(5.0
|
)
|
(0.4
|
)
|
(6.5
|
)
|
(1.0
|
)
|
Consolidated net sales
|
|
$
|
1,087.4
|
|
$
|
519.1
|
|
$
|
2,092.5
|
|
$
|
954.6
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
ACCG
|
|
$
|
66.1
|
|
$
|
18.3
|
|
$
|
86.4
|
|
$
|
30.9
|
|
Enterprise
|
|
40.9
|
|
47.8
|
|
76.9
|
|
77.3
|
|
WNS
|
|
(0.7
|
)
|
|
|
(32.6
|
)
|
|
|
Broadband
|
|
(8.7
|
)
|
20.3
|
|
(5.4
|
)
|
41.9
|
|
Consolidated operating income
|
|
$
|
97.6
|
|
$
|
86.4
|
|
$
|
125.3
|
|
$
|
150.1
|
|
19
Table of Contents
11. SUPPLEMENTAL CASH
FLOW INFORMATION
|
|
Six Months
Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Cash paid during the period for:
|
|
|
|
|
|
Income taxes, net of refunds
|
|
$
|
7,616
|
|
$
|
27,724
|
|
Interest
|
|
70,215
|
|
2,628
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
Conversion of senior subordinated debentures to
common stock
|
|
$
|
76,607
|
|
|
|
Assets acquired under capital lease
|
|
4,830
|
|
|
|
|
|
|
|
|
|
|
|
20
Table
of Contents
ITEM 2.
MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion
and analysis of our financial condition and results of operations for the three
and six months ended June 30, 2008 and 2007 is provided to increase the
understanding of, and should be read in conjunction with, the unaudited
condensed consolidated financial statements and accompanying notes included in
this document as well as the audited consolidated financial statements, related
notes thereto and managements discussion and analysis of financial condition
and results of operations, including managements discussion and analysis about
the application of critical accounting policies, included in our 2007 Annual
Report on Form 10-K.
Overview
CommScope, Inc. is a world leader in
infrastructure solutions for communications networks. With the acquisition of
Andrew Corporation (Andrew), we are a global leader in providing radio
frequency subsystem solutions for wireless networks. Through our SYSTIMAX
®
and Uniprise
®
brands, we are
also a global leader in structured cabling systems for business enterprise
applications. In addition, we are the premier manufacturer of coaxial cable for
broadband cable television networks and one of the leading North American
providers of environmentally secure cabinets for digital subscriber line (DSL)
and Fiber-to-the-Node applications.
As a result of the acquisition of Andrew, management
reorganized its internal reporting structure and revised our reportable
segments. Our four reportable segments,
which align with the manner in which the business is managed, are as follows:
Antenna, Cable and Cabinet Group (ACCG); Enterprise; Broadband; and Wireless
Network Solutions (WNS).
CRITICAL ACCOUNTING POLICIES
There have been no
changes in our critical accounting policies or significant accounting estimates
as disclosed in our 2007 Annual Report on Form 10-K other than the
implementation of SFAS No. 157, Fair Value Measurements and SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities. See Note 7 to the Condensed Consolidated
Financial Statements included elsewhere in this Form 10-Q.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND
SIX MONTHS ENDED JUNE 30, 2008 WITH THE THREE AND SIX MONTHS ENDED
JUNE 30, 2007
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
%
of
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Net
|
|
Dollar
|
|
%
|
|
|
|
Amount
|
|
Sales
|
|
Amount
|
|
Sales
|
|
Change
|
|
Change
|
|
|
|
(dollars in millions, except per share amounts)
|
|
Net sales
|
|
$
|
1,087.4
|
|
100.0
|
%
|
$
|
519.1
|
|
100.0
|
%
|
$
|
568.3
|
|
109.5
|
%
|
Gross profit
|
|
310.6
|
|
28.6
|
|
162.6
|
|
31.3
|
|
148.0
|
|
91.1
|
|
SG&A expense
|
|
131.6
|
|
12.1
|
|
66.3
|
|
12.8
|
|
65.3
|
|
98.5
|
|
R&D expense
|
|
34.3
|
|
3.2
|
|
8.5
|
|
1.6
|
|
25.8
|
|
305.4
|
|
Amortization of purchased intangible assets
|
|
24.6
|
|
2.3
|
|
1.2
|
|
0.2
|
|
23.4
|
|
1,865.7
|
|
Restructuring costs
|
|
22.6
|
|
2.1
|
|
0.2
|
|
0.0
|
|
22.4
|
|
13,294.1
|
|
Net income
|
|
40.2
|
|
3.7
|
|
61.1
|
|
11.8
|
|
(20.9
|
)
|
(34.2
|
)
|
Earnings per diluted share
|
|
0.50
|
|
|
|
0.83
|
|
|
|
(0.33
|
)
|
(39.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
%
of
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Net
|
|
Dollar
|
|
%
|
|
|
|
Amount
|
|
Sales
|
|
Amount
|
|
Sales
|
|
Change
|
|
Change
|
|
|
|
(dollars in millions, except per share amounts)
|
|
Net sales
|
|
$
|
2,092.5
|
|
100.0
|
%
|
$
|
954.6
|
|
100.0
|
%
|
$
|
1,137.9
|
|
119.2
|
%
|
Gross profit
|
|
527.1
|
|
25.2
|
|
294.5
|
|
30.9
|
|
232.6
|
|
79.0
|
|
SG&A expense
|
|
259.6
|
|
12.4
|
|
125.0
|
|
13.1
|
|
134.6
|
|
107.8
|
|
R&D expense
|
|
70.2
|
|
3.4
|
|
16.3
|
|
1.7
|
|
53.9
|
|
330.3
|
|
Amortization of purchased intangible assets
|
|
49.1
|
|
2.3
|
|
2.3
|
|
0.2
|
|
46.8
|
|
2,045.2
|
|
Restructuring costs
|
|
22.8
|
|
1.1
|
|
0.9
|
|
0.1
|
|
21.9
|
|
2,435.4
|
|
Net income
|
|
29.2
|
|
1.4
|
|
107.0
|
|
11.2
|
|
(77.8
|
)
|
(72.7
|
)
|
Earnings per diluted share
|
|
0.38
|
|
|
|
1.46
|
|
|
|
(1.08
|
)
|
(74.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Table
of Contents
Net sales
The
increase in net sales for the three and six months ended June 30, 2008
over the comparable prior year periods is primarily attributable to the
acquisition of Andrew on December 27, 2007. Net sales for Andrew during the three and six
months ended June 30, 2008 were $581.0 million and $1,149.9 million,
respectively, and are included in the ACCG and WNS segments. Net sales of $11.3 million for the four day
period from December 28, 2007 to December 31, 2007 are included in
sales for the six months ended June 30, 2008. For further details by
segment, see the section titled Segment Results below.
Gross profit (net sales less cost of sales)
The year-over-year
increase in gross profit of $148.0 million and $232.6 million for the three and
six months ended June 30, 2008, respectively, is primarily attributable to
the acquisition of Andrew. Gross profit
for the three and six months ended June 30, 2008 was adversely affected by
$4.7 million and $57.5 million, respectively, of purchase accounting
adjustments, primarily related to the effect on cost of sales of the step-up of
the acquired inventory to its estimated fair value less the costs to sell the
inventory. Cost of sales for the three
and six months ended June 30, 2008 includes amortization expense of $3.9
million and $7.8 million, respectively, related to intangible assets.
Our gross profit margin
for the three months ended June 30, 2008 was 28.6% compared to 31.3% for
the comparable prior year period. The
gross profit margin for the three months ended June 30, 2008, excluding
the impact of the purchase accounting adjustments and amortization expense
discussed above, was 29.4%. Our gross
profit margin for the six months ended June 30, 2008 was 25.2% compared to
30.9% for the comparable prior year period.
The gross profit margin for the six months ended June 30, 2008,
excluding the impact of the purchase accounting adjustments and amortization
expense discussed above, was 28.3%.
These adjusted gross profit margins are lower than the prior periods
reflecting legacy Andrew products whose historical gross profit margins were
lower than those of CommScope and a reduction in certain legacy CommScope
product lines, particularly in the Broadband segment (see the section titled Segment
Results below).
In response to increased
raw material costs, we announced price increases for certain cable products
within the ACCG, Enterprise and Broadband segments. These price increases provided slight benefit
to gross profit in the second quarter and are expected to provide more
significant benefits in the second half of the year.
We expect continued
volatility in the costs of certain raw materials, particularly copper,
aluminum, plastics and other polymers. If raw material costs continue to
increase and we delay implementing price increases or are unable to achieve
market acceptance of announced or future price increases, gross profit may be
adversely affected. Price reductions in
response to a significant decline in raw material costs may also have an
adverse impact on gross profit.
Selling, general and administrative expense
The increase in selling,
general and administrative expense (SG&A) for the three and six months
ended June 30, 2008 as compared to the same periods in 2007 was primarily
due to the acquisition of Andrew.
Included in SG&A for the three and six months ended June 30,
2008 are acquisition and integration related costs of $0.9 million and $3.8
million, respectively. The reduction in
SG&A expense as a percentage of net sales is a result of the higher sales
levels.
Research and development
Research and development
(R&D) expense increased by $25.8 million and $53.9 million for the three
and six months ended June 30, 2008, respectively, as compared to the same
periods in 2007 primarily as a result of the Andrew acquisition. R&D expense as a percentage of net sales
increased to 3.2% and 3.4% for the three and six months ended June 30,
2008, respectively, as compared to 1.6% and 1.7% for the comparable 2007 three
and six month periods. This
year-over-year increase in R&D expense as a percentage of net sales
reflects the higher level of R&D spending required to support the Andrew
products, particularly those in the WNS segment. R&D activities generally
relate to ensuring that our products are capable of meeting the developing
technological needs of our customers, bringing new products to market and
modifying existing products to better serve our customers.
Amortization of purchased intangibles
As a result of the Andrew
acquisition, we recognized approximately $970 million of identifiable
intangible assets, which increased our total amortization expense by $26.5
million to $28.5 million for the three months ended June 30, 2008 and by
$52.8 million to $56.9 million for the six months ended June 30,
2008. Of the total amortization expense
for the three
22
Table of Contents
and
six months ended June 30, 2008, $3.9 million and $7.8 million,
respectively, relates to patents and technologies and is included in cost of
sales. In the comparable prior year
periods, amortization expense of $0.8 million and $1.8 million was included in
cost of sales.
Restructuring Costs
We recognized pretax
restructuring costs of $22.6 million and $22.8 million during the three and six
months ended June 30, 2008, respectively, compared with $0.2 million and
$0.9 million during the comparable periods ended June 30, 2007,
respectively. The restructuring costs in
the three months ended June 30, 2008 included an $18.4 million charge related
to restructuring actions at legacy CommScopes Belgian manufacturing facility
and a $3.9 million charge related to restructuring actions at the legacy
CommScope Brazilian manufacturing facility. Both of these facilities have
primarily supported operations of the Broadband segment. The restructuring
costs incurred during the three and six months ended June 30, 2008
resulted from an effort to lower the overall manufacturing cost structure of
the Company following the Andrew acquisition.
We anticipate that there
will be additional restructuring charges recognized and additions to the
liability for restructuring activities through further adjustments to the preliminary
allocation of the Andrew purchase price during 2008. We have announced the consolidation of
certain legacy Andrew cable and antenna production operations, which may result
in the closure of locations in the Stratford, England area and changes at other
facilities. The costs associated with
this initiative, which have not yet been determined, are expected to be
recognized primarily as an adjustment to the preliminary purchase price
allocation. In addition, we have also announced the planned closure of a legacy
CommScope manufacturing facility in Australia which is expected to result in
restructuring charges during the third and fourth quarters of 2008. The level
of such charges has not been determined. We expect to complete these
restructuring actions by late 2009. Additional restructuring initiatives
related to the Andrew integration or cost reduction efforts are being evaluated
and any resulting charges or additions to the liability for restructuring
activities as adjustments to the preliminary allocation of the Andrew purchase
price could be material.
As a result of
restructuring and consolidation actions, there is unutilized real estate at
various facilities in the U.S. and internationally. We are attempting to sell or lease this
unutilized space. As additional restructuring initiatives are implemented,
additional excess real estate or equipment may be identified and impairment
charges, which may be material, may be incurred.
Other
expense, net
During the three and six months ended June 30,
2008, net other expense increased $8.8 million and $15.7 million, respectively,
due primarily to foreign exchange losses of $9.0 million and $11.8 million,
respectively. Also included in net other
expense for the six months ended June 30, 2008, is a $2.8 million cost
related to the inducement of our 1% senior subordinated convertible debentures
and a $0.6 million impairment of our auction rate securities.
Net interest income (expense)
We incurred net interest expense of $31.2 million and
$65.6 million during the three and six months ended June 30, 2008,
respectively, compared to recognizing net interest income of $4.0 million
and $6.6 million for the three and six months ended June 30, 2007,
respectively. This change is the result of the significant borrowings
undertaken and the cash, cash equivalents and short-term investments that were
utilized to finance the Andrew acquisition.
Our weighted average effective interest rate on outstanding borrowings,
including the interest rate swap and amortization of long-term financing costs,
was 6.03% as of June 30, 2008 compared to 6.23% as of December 31,
2007.
Interest expense for the three and six months ended June 30,
2008 includes a $0.2 million benefit and a $1.7 million charge, respectively,
related to ineffectiveness on the interest rate swap entered into to fix the
interest rate on a portion of the debt incurred to finance the Andrew
acquisition. No material amount of
additional ineffectiveness is expected over the remainder of the term of the
interest rate swap.
Income taxes
Our effective income tax
rate was 29.6% and 33.3% for the three and six months ended June 30, 2008,
respectively, compared to 32.1% and 31.6% for the three and six months ended June 30,
2007, respectively. Income before income taxes for the three and six months
ended June 30, 2008 includes $22.3 million and $25.5 million, respectively,
of charges primarily related to restructuring initiatives, for which we do not expect
to realize tax benefits. Also included in the income tax provision for the
23
Table
of Contents
three and six months ended June 30, 2008 is a
benefit of $3.9 million related to the settlement of various U.S. and foreign
income tax audits. The effective rate excluding these items was 26.1% and 26.6%
for the three and six months ended June 30, 2008, respectively. Our
effective tax rate reflects the benefits derived from significant operations
outside the U.S., which are generally taxed at rates lower than the U.S.
statutory rate of 35%, partially offset by U.S. state income taxes and
valuation allowances for losses in certain foreign jurisdictions for which we
cannot record tax benefits. The
effective tax rate (excluding the items noted above) decreased from the
comparable prior year periods primarily due to a shift in the geographic mix of
earnings as a result of the Andrew acquisition.
Segment
Results
The pro forma information provided below is intended
to show how CommScopes results might have looked if the acquisition of Andrew
had occurred as of January 1, 2007.
The Andrew amounts included in this pro forma information are based on
Andrews actual results and, therefore, may not be indicative of the actual
results when operated as part of CommScope.
No pro forma adjustments have been made other than combining CommScopes
historical results with those of Andrew.
The pro forma financial information should not be relied upon as being
indicative of the historical results that would have been realized had the
acquisition occurred as of the date indicated or that may be achieved in the
future.
|
|
Actual
|
|
Pro Forma
|
|
|
|
Three Months Ended
June 30,
|
|
Three Months Ended
June 30,
2007
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
Amount
|
|
% of Net
Sales
|
|
Amount
|
|
% of Net
Sales
|
|
Amount
|
|
% of Net
Sales
|
|
Dollar
Change
|
|
%
Change
|
|
|
|
(dollars in millions)
|
|
Net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCG
|
|
$
|
500.2
|
|
46.0
|
%
|
$
|
116.7
|
|
22.4
|
%
|
$
|
466.7
|
|
43.8
|
%
|
$
|
33.5
|
|
7.2
|
%
|
Enterprise
|
|
243.1
|
|
22.4
|
%
|
239.4
|
|
46.1
|
%
|
239.4
|
|
22.5
|
%
|
3.7
|
|
1.5
|
%
|
WNS
|
|
185.4
|
|
17.1
|
%
|
|
|
|
%
|
195.7
|
|
18.4
|
%
|
(10.3
|
)
|
(5.3
|
)%
|
Broadband
|
|
163.7
|
|
15.1
|
%
|
163.4
|
|
31.5
|
%
|
163.4
|
|
15.3
|
%
|
0.3
|
|
0.2
|
%
|
Inter-segment eliminations
|
|
(5.0
|
)
|
(0.5
|
)%
|
(0.4
|
)
|
(0.0
|
)%
|
(0.4
|
)
|
(0.0
|
)%
|
(4.6
|
)
|
NM
|
|
Consolidated net sales
|
|
$
|
1,087.4
|
|
100.0
|
%
|
$
|
519.1
|
|
100.0
|
%
|
$
|
1,064.8
|
|
100.0
|
%
|
$
|
22.6
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total domestic sales
|
|
$
|
502.7
|
|
46.2
|
%
|
$
|
359.0
|
|
69.2
|
%
|
$
|
550.3
|
|
51.7
|
%
|
$
|
(47.6
|
)
|
(8.6
|
)%
|
Total international sales
|
|
584.7
|
|
53.8
|
%
|
160.1
|
|
30.8
|
%
|
514.5
|
|
48.3
|
%
|
70.2
|
|
13.6
|
%
|
Total worldwide sales
|
|
$
|
1,087.4
|
|
100.0
|
%
|
$
|
519.1
|
|
100.0
|
%
|
$
|
1,064.8
|
|
100.0
|
%
|
$
|
22.6
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCG
|
|
$
|
66.1
|
|
13.2
|
%
|
$
|
18.3
|
|
15.7
|
%
|
$
|
49.4
|
|
10.6
|
%
|
$
|
16.7
|
|
33.8
|
%
|
Enterprise
|
|
40.9
|
|
16.8
|
%
|
47.8
|
|
20.0
|
%
|
47.8
|
|
20.0
|
%
|
(6.9
|
)
|
(14.4
|
)%
|
WNS
|
|
(0.7
|
)
|
(0.4
|
)%
|
|
|
|
%
|
(116.8
|
)
|
(59.7
|
)%
|
116.1
|
|
NM
|
|
Broadband
|
|
(8.7
|
)
|
(5.5
|
)%
|
20.3
|
|
12.4
|
%
|
20.3
|
|
12.4
|
%
|
(29.0
|
)
|
NM
|
|
Consolidated operating income
|
|
$
|
97.6
|
|
9.0
|
%
|
$
|
86.4
|
|
16.6
|
%
|
$
|
0.7
|
|
0.0
|
%
|
$
|
96.9
|
|
NM
|
|
24
Table
of Contents
|
|
Actual
|
|
Pro Forma
|
|
|
|
Six Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
Amount
|
|
% of Net
Sales
|
|
Amount
|
|
% of Net
Sales
|
|
Amount
|
|
% of Net
Sales
|
|
Dollar
Change
|
|
% Change
|
|
Net sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCG
|
|
$
|
979.2
|
|
46.8
|
%
|
$
|
203.8
|
|
21.4
|
%
|
$
|
867.9
|
|
43.3
|
%
|
$
|
111.3
|
|
12.8
|
%
|
Enterprise
|
|
454.6
|
|
21.7
|
%
|
440.3
|
|
46.1
|
%
|
440.3
|
|
22.0
|
%
|
14.3
|
|
3.2
|
%
|
WNS
|
|
366.0
|
|
17.5
|
%
|
|
|
|
%
|
384.3
|
|
19.1
|
%
|
(18.3
|
)
|
(4.8
|
)%
|
Broadband
|
|
299.2
|
|
14.3
|
%
|
311.5
|
|
32.6
|
%
|
311.5
|
|
15.6
|
%
|
(12.3
|
)
|
(3.9
|
)%
|
Inter-segment eliminations
|
|
(6.5
|
)
|
(0.3
|
)%
|
(1.0
|
)
|
(0.0
|
)%
|
(1.0
|
)
|
(0.0
|
)%
|
(5.5
|
)
|
NM
|
|
Consolidated
net sales
|
|
$
|
2,092.5
|
|
100.0
|
%
|
$
|
954.6
|
|
100.0
|
%
|
$
|
2,003.0
|
|
100.0
|
%
|
$
|
89.5
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
domestic sales
|
|
$
|
1,007.1
|
|
48.1
|
%
|
$
|
658.2
|
|
69.0
|
%
|
$
|
1,039.0
|
|
51.9
|
%
|
$
|
(31.9
|
)
|
(3.1
|
)%
|
Total
international sales
|
|
1,085.4
|
|
51.9
|
%
|
296.4
|
|
31.0
|
%
|
964.0
|
|
48.1
|
%
|
121.4
|
|
12.6
|
%
|
Total
worldwide sales
|
|
$
|
2,092.5
|
|
100.0
|
%
|
$
|
954.6
|
|
100.0
|
%
|
$
|
2,003.0
|
|
100.0
|
%
|
$
|
89.5
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCG
|
|
$
|
86.4
|
|
8.8
|
%
|
$
|
30.9
|
|
15.2
|
%
|
$
|
87.4
|
|
10.1
|
%
|
$
|
(1.0
|
)
|
(1.1
|
)%
|
Enterprise
|
|
76.9
|
|
16.9
|
%
|
77.3
|
|
17.6
|
%
|
77.3
|
|
17.6
|
%
|
(0.4
|
)
|
(0.5
|
)%
|
WNS
|
|
(32.6
|
)
|
(8.9.
|
)%
|
|
|
|
%
|
(133.3
|
)
|
(34.7
|
)%
|
100.7
|
|
NM
|
|
Broadband
|
|
(5.4
|
)
|
(1.8
|
)%
|
41.9
|
|
13.5
|
%
|
41.9
|
|
13.5
|
%
|
(47.3
|
)
|
NM
|
|
Consolidated
operating income
|
|
$
|
125.3
|
|
6.0
|
%
|
$
|
150.1
|
|
15.7
|
%
|
$
|
73.3
|
|
3.7
|
%
|
$
|
52.0
|
|
70.9
|
%
|
Antenna, Cable and Cabinet Group
The ACCG segment includes
product offerings of primarily passive transmission devices for the wireless
infrastructure market including base station antennas, coaxial cable and
connectors, and microwave antennas and secure environmental enclosures for electronic
devices and equipment used by wireline and wireless telecommunications
providers.
Higher international
sales of most product lines as well as the positive impact of foreign exchange
rate changes were primarily responsible for the increase in ACCG segment net
sales for the three and six months ended June 30, 2008 as compared to the
pro forma net sales for the comparable 2007 periods. For the three and six months ended June 30,
2008, the ACCG segment experienced particularly strong international growth in
the Europe, Middle East and Africa (EMEA) region. Higher sales of microwave antennas and base
station antennas contributed to the increase in ACCG net sales in the three and
six months ended June 30, 2008 as compared to pro forma 2007 net sales for
the same periods. These increased sales
were somewhat offset by lower wireline sales for both the three and six months
ended June 30, 2008.
In response to increases
in raw material costs, price increases have been announced for certain ACCG
cable products, the impact of which should begin to be realized in the second
half of 2008.
We expect demand for our
ACCG products to be affected by wireless capacity expansion in emerging markets
and growth in mobile data services in developed markets.
Operating income for the
ACCG segment for the three and six months ended June 30, 2008 includes the
negative impact of $0.3 million and $31.7 million, respectively, from the
step-up of inventory to its estimated fair value as a result of the acquisition
of Andrew and approximately $16.9 million and $33.3 million, respectively, of
incremental intangible asset amortization expense resulting from the
preliminary purchase price allocation from the Andrew acquisition. These
increased costs were offset by the benefits of higher sales volumes and cost
reduction synergies realized in both the three and six months ended June 30,
2008.
25
Table of Contents
Enterprise
The Enterprise segment
consists mainly of structured cabling systems for business enterprise
applications and connectivity solutions for wired and wireless networks within
organizations. The segment also includes coaxial cable for various video and
data applications that are not related to cable television.
The increase in
Enterprise segment net sales for the three and six months ended June 30,
2008 over the comparable prior year periods was primarily driven by higher
international sales volume with all major regions generating higher sales. Domestic net sales were slightly lower in the
three and six months ended June 30, 2008 than in the comparable prior year
periods. In response to higher raw
material costs, price increases for several major product groups were announced
earlier in the year and more price increases are expected to be announced in
the third quarter of 2008. These price
increases are expected to provide benefits during the second half of 2008.
We expect demand for
Enterprise products to be driven by the ongoing need for bandwidth and
high-performance structured cabling in the enterprise market and affected by
global information technology spending.
The year-over-year
decline in Enterprise segment operating income for the three months ended June 30,
2008 is primarily attributable to flat sales, increased raw material costs and
increasing selling and marketing costs. For the six months ended June 30,
2008, operating income was essentially unchanged when compared to the six months
ended June 30, 2007. Operating income was also adversely affected by a $0.9
million and $0.1 million increase in restructuring costs for the three and six
months ended June 30, 2008, respectively, compared to the same periods in
2007.
Wireless
Network Solutions
The WNS segment
includes a variety of active electronic devices and services including power
amplifiers, filters and tower mounted amplifiers, geolocation products, network
optimization analysis systems, and engineering and consulting services as well
as products that are used to extend and enhance the coverage of wireless
networks in areas where signals are difficult to send or receive, such as
tunnels, subways, airports and commercial buildings.
WNS segment net
sales decreased during the three and six months ended June 30, 2008
compared to the comparable pro forma 2007 periods primarily due to the
divestiture of the Satellite Communications (SatCom) product line on January 31,
2008. SatCom sales for the three and six
months ended June 30, 2008 were $3.0 million and $11.6 million,
respectively, as compared to $22.9 million and $53.6 million for the pro forma
three and six months ended June 30, 2007.
The SatCom sales subsequent to its divestiture relate to transition
services. Excluding the impact of
SatCom, WNS segment net sales increased 5.5% and 6.9% during the three and six
months ended June 30, 2008, respectively, as compared to the comparable
pro forma 2007 periods, primarily due to increased sales of repeaters, filters
and tower mounted amplifiers. Net sales
in the WNS segment also benefited from changes in foreign exchange rates in
both the three and six months ended June 30, 2008. Net sales of
geolocation products in the WNS segment are not material and are not expected
to be materially impacted by developments in the TruePosition litigation (see
Part IIOther Information, Item 1Legal Proceedings).
WNS
segment operating income for the three and six months ended June 30, 2008
improved over the comparable prior year periods primarily due to an asset
impairment charge of $107.9 million that was recorded in the pro forma three
months ended June 30, 2007. WNS
operating income for the three and six months ended June 30, 2008 included
the negative impact of $4.4 million and $25.8 million, respectively, from the
step-up of inventory to its estimated fair value as a result of the acquisition
of Andrew and $4.9 million and $9.4 million, respectively, of incremental
intangible amortization from the Andrew acquisition preliminary purchase price
allocation. Operating income from filter
products benefited from improved product mix, higher volume, cost reductions
and a rationalized product portfolio.
WNS operating income was also favorably affected by reduced SatCom
losses as a result of the sale of the SatCom product line in January 2008.
Broadband
The Broadband segment
consists mainly of coaxial cable, fiber optic cable and conduit for cable
television system operators. These products support multi-channel video, voice
and high-speed data services for residential and commercial customers using
Hybrid Fiber Coaxial architecture.
Broadband segment net
sales were essentially flat in the three months ended June 30, 2008 as
compared to the comparable prior year period due to a decline in domestic sales
that was offset by stronger international sales, particularly in Central and
Latin America. The decrease in net sales of Broadband products for the six
months ended June 30, 2008 as compared to the comparable prior year period
primarily resulted from reduced sales volume to domestic cable system
operators. The slowdown in purchasing by
these domestic customers is largely attributable to the deterioration in
general economic conditions, particularly the residential housing market. The increase in international sales reflects
continued
26
Table of
Contents
spending on new projects
and system maintenance. Net sales for
the three and six months ended June 30, 2008 includes incremental net
sales of $1.4 million and $6.9 million, respectively, related to the Signal
Vision product line that was acquired in May 2007.
The reduction in
Broadband segment operating income for the three and six months ended June 30,
2008 as compared to the same periods in the prior year is primarily due to an
increase of $21.6 million and $21.8 million in restructuring charges,
respectively. In addition to the
restructuring charges, operating income in the Broadband segment declined due
to the impact of higher raw material prices, lower production volume due to the
decline in domestic sales and product warranty charges of $2.8 million and $4.6
million in the three and six months ended June 30, 2008, respectively,
related to an isolated manufacturing defect. Operating income is expected to
improve during the balance of 2008 as a result of higher projected sales
volume, price increases that have been announced and price increases that are
expected to be announced in the third quarter of 2008. Further increases in raw
material costs, a continued slowdown in purchasing by cable system operators
and further charges for the warranty matter may limit the improvement in
operating income.
LIQUIDITY AND CAPITAL RESOURCES
The following table
summarizes certain key measures of our liquidity and capital resources.
|
|
As of
|
|
|
|
|
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Dollar
Change
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
499.6
|
|
$
|
649.5
|
|
$
|
(149.9
|
)
|
(23.1
|
)%
|
Working capital, excluding cash and cash
equivalents and current portion of long-term debt
|
|
859.8
|
|
831.4
|
|
28.4
|
|
3.4
|
|
Long-term debt, including current portion
|
|
2,302.1
|
|
2,595.8
|
|
(293.7
|
)
|
(11.3
|
)
|
Total capitalization
(1)
|
|
3,746.8
|
|
3,875.8
|
|
(129.0
|
)
|
(3.3
|
)
|
Long-term debt as a percentage of total
capitalization
|
|
61.4
|
%
|
67.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Total
capitalization includes long-term debt, including the current portion, and
stockholders equity.
Our principal sources of
liquidity, both on a short-term and long-term basis, are cash and cash
equivalents, cash flows provided by operations and availability under credit
facilities. The primary uses of liquidity include funding working capital
requirements (primarily inventory and accounts receivable, net of accounts
payable and other accrued liabilities), debt service requirements, capital
expenditures, payment of certain restructuring costs and funding of pension and
other postretirement obligations.
The decrease in cash and
cash equivalents during the six months ended June 30, 2008 was primarily
driven by $207.5 million disbursed in conjunction with exchanging substantially
all of the 3.25% convertible debentures assumed in the Andrew acquisition into
merger consideration and the payment of $57.0 million as part of the merger
consideration paid to former Andrew shareholders as their Andrew shares were
presented. These decreases were offset
by $121.9 million in net cash flow from operations.
The decrease in long-term
debt and the reduction in long-term debt as a percentage of total
capitalization were primarily the result of the exchange of substantially all
of the 3.25% convertible debentures for merger consideration and the negotiated
conversion of a portion of the 1% convertible debentures into shares of our
common stock. The decline in total
capitalization was primarily driven by the cash portion of the merger
consideration that was exchanged for the 3.25% convertible debentures.
Cash Flow Overview
|
|
Six Months Ended
June 30,
|
|
Dollar
|
|
%
|
|
|
|
2008
|
|
2007
|
|
Change
|
|
Change
|
|
|
|
(dollars in millions)
|
|
Net cash provided by operating activities
|
|
$
|
121.9
|
|
$
|
57.9
|
|
$
|
64.0
|
|
110.5
|
%
|
Net cash used in investing activities
|
|
(74.1
|
)
|
(117.7
|
)
|
43.6
|
|
37.0
|
|
Net cash provided by (used in) financing
activities
|
|
(212.6
|
)
|
30.8
|
|
(243.4
|
)
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Table of Contents
Operating Activities
During the six months
ended June 30, 2008, operating activities generated $121.9 million in cash
compared to $57.9 million during the six months ended June 30, 2007. During the six months ended June 30,
2008, net income of $29.2 million, depreciation and amortization of $109.3
million and a decrease of $52.5 million in inventories were partially offset by
a $69.8 million increase in accounts receivable. The increase in accounts receivable is
primarily attributable to the increase in sales during the second quarter of
2008 over the fourth quarter of 2007 as well as the shift in the mix of sales
to more international customers whose payment terms are generally longer than
domestic customers.
We expect to continue to
generate net cash from operations during 2008, primarily due to improved
operating income from higher sales, the impact of our cost reduction efforts
and the anticipated reduction in the level of working capital excluding cash
and cash equivalents and the current portion of long-term debt.
Investing Activities
Investment in property,
plant and equipment during the six months ended June 30, 2008 increased by
$11.7 million year over year to $23.0 million largely due to capital
expenditures made by the acquired Andrew business. We currently expect total capital
expenditures of $60 million to $70 million in 2008 compared to $27.9 million in
2007. The expected capital spending during 2008 is primarily for expanding and
upgrading production capability, cost reduction efforts and investments in
information technology.
During the six months
ended June 30, 2008, we received proceeds of approximately $8.5 million
from the sale of the SatCom product line.
These proceeds were used to reduce the principal outstanding under our
seven-year senior secured term loan.
During the six months
ended June 30, 3008, we paid an additional $59.2 million in connection
with the Andrew acquisition. The
majority ($57.0 million) of this cash outflow related to the payment of merger
consideration to former Andrew shareholders.
In the six months ended June 30, 2008, we also paid $1.5 million of
the remaining $2.0 million balance related to the SVI acquisition that was
completed in May 2007.
During the six months
ended June 30, 2008, we paid approximately $5.0 million to amend our cross
currency swap of U.S. dollars for euros to reduce the notional amount from $14
million to $7 million.
Financing Activities
In connection with
the exchange of substantially all of our 3.25% convertible senior subordinated
debentures for merger consideration, we paid $207.5 million in cash, which is
reflected as a financing use of cash, and issued 0.5 million shares of
CommScope common stock, which is reflected as a non-cash transaction. In connection with the negotiated conversion
of $50.5 million in face value of our 1% convertible senior subordinated debentures,
we issued 2.5 million shares of CommScope common stock, which is reflected as a
non-cash transaction. We also made other
principal repayments of $17.4 million, primarily to reduce the amount
outstanding under our seven-year senior secured term loan. As of June 30, 2008, our availability
under the $400 million revolving credit portion of the facilities was
approximately $372 million due to $28 million of letters of credit issued
under the facilities. We had no
outstanding borrowings under the revolving credit portion as of June 30,
2008.
Management is
evaluating our capital structure and may consider various alternatives,
including but not limited to, reducing debt levels by making additional
principal payments on our outstanding term loans, inducing additional
conversions of some or all of our 1% convertible debentures or raising
additional capital.
Future Cash Needs
We expect that our
primary future cash needs will be debt service, working capital, capital
expenditures, restructuring costs, disposition of TruePosition litigation and
employee benefit obligations. We paid $9.2 million and $20.3 million of
restructuring costs during the three and six months ended June 30, 2008,
respectively, and expect to pay the majority of the $45.3 million liability for
restructuring initiatives during the remainder of 2008. We made contributions of $1.7 million and $13.1
million to our pension and other postretirement benefit plans during the three
and six months ended June 30, 2008, respectively. We expect to make
additional contributions of up to $3.4 million to our pension and other
postretirement benefit plans during 2008. We expect that our noncurrent
employee benefit liabilities will be funded through cash flow from future
operations.
28
Table of
Contents
We believe that our
existing cash and cash equivalents and cash flows from operations, combined
with availability under our senior secured revolving credit facility, will be
sufficient to meet our presently anticipated future cash needs, including cash
requirements related to restructuring initiatives or other costs related to the
Andrew integration. We may, from time to time, borrow under our revolving
credit facility or issue securities, if market conditions are favorable, to
meet our future cash needs or to reduce our borrowing costs.
FORWARD-LOOKING
STATEMENTS
Certain statements in
this Form 10-Q 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 our business
position, plans, outlook, revenues, earnings, margins, synergies and other
financial items, restructuring plans, sales and earnings expectations, expected
demand, cost and availability of key raw materials, internal and external
production capacity and expansion, competitive pricing and relative market
position. 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 by the use of certain terms and
phrases including but not limited to intend, goal, estimate, expect, project, projections, plan, anticipate,
should, designed to, foreseeable future, believe, think, scheduled,
outlook, guidance and similar expressions.
These statements are
subject to various risks and uncertainties, many of which are outside our
control, including, without limitation, continued economic weakness and
uncertainties, changes in cost and availability of key raw materials and our
ability to recover these costs from our customers through pricing; customer
demand for our products and the ability to maintain existing business alliances
with key customers or distributors; the risk that our internal production
capacity and that of our contract manufacturers may be insufficient to meet
customer demand or quality standards for our products; the risk that customers
might cancel orders placed or that orders currently placed may reduce orders in
the future; continuing consolidation among our customers; competitive pricing
and acceptance of our products; industry competition and the ability to retain
customers through product innovation; possible production disruption due to
supplier or contract manufacturer bankruptcy, reorganization or restructuring;
successful ongoing operation of our vertical integration activities; the impact
of variability in foreign exchange rates; the possibility of further
restructuring actions; possible future impairment charges for fixed or
intangible assets; increased obligations under employee benefit plans; ability
to achieve expected sales growth and earnings goals; ability to achieve
expected benefits from prior or future acquisitions; costs of protecting or
defending our intellectual property; ability to obtain capital on commercially
reasonable terms; adequacy and availability of insurance; costs and challenges
of compliance with domestic and foreign environmental laws; variability in
effective tax rate and ability to recover amounts recorded as value added tax
receivables; product performance issues and associated warranty claims; ability
to successfully implement major systems initiatives; the outcome of the
TruePosition, Inc. litigations; regulatory changes affecting us or the
industries we serve; authoritative changes in generally accepted accounting
principles by standard-setting bodies; political instability; and any
statements of belief and any statements of assumptions underlying any of the
foregoing. These and other factors are discussed in greater detail in Item 1A
to our Annual Report on Form 10-K for the year ended December 31,
2007. The information contained in this Form 10-Q represents our best
judgment at the date of this report based on information currently available.
However, we do not intend, and are not undertaking any duty or obligation, to
update this information to reflect developments or information obtained after
the date of this report.
ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
As disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2007, our major market risk exposure
relates to adverse fluctuations in interest rates, commodity prices and foreign
currency exchange rates. We have established a risk management strategy that
includes the reasonable use of derivative and nonderivative financial
instruments primarily to manage our exposure to these market risks. With the
acquisition of Andrew, a greater portion of our sales are to foreign customers
and are denominated in currencies other than the U.S. dollar. Other than the increased level of exposure to
foreign currency fluctuations, we believe our exposure associated with these
market risks has not materially changed since December 31, 2007. We have
not acquired any new derivative financial instruments since December 31,
2007. During the three months ended June 30,
2008, we amended our cross currency swap of U.S. dollars for euros to reduce
the notional amount from $14 million to $7 million.
ITEM 4.
CONTROLS AND PROCEDURES
Our disclosure controls
and procedures are designed to ensure that information
required to be disclosed in reports that
we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission. Our Chief Executive Officer
and
29
Table of
Contents
our Chief Financial
Officer have reviewed the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report and have
concluded that the disclosure controls and procedures are effective.
There were no changes in
our internal control over financial reporting during the three months ended June 30,
2008 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On
October 25, 2005, TruePosition, Inc. filed a complaint in the U.S. District
Court for the District of Delaware, alleging that Andrews sale of certain
mobile
location
products to a
customer located in the Middle East infringed a TruePosition patent. Mobile
location systems installed in wireless networks are used to determine the
position of mobile devices. The complaint sought, among other things,
injunctive relief and unspecified monetary damages.
On
September 14, 2007, a jury ruled in favor of TruePosition, finding that Andrew
had willfully infringed a single TruePosition patent in providing a mobile
location system to the customer, and the jury awarded $45.3 million in damages
to TruePosition. Management believed the verdict was in error and sought to
have it reversed pursuant to various post-verdict motions.
On
October 1, 2007, TruePosition filed a motion seeking a permanent injunction and
a motion seeking to increase the damages awarded, up to trebling the amount.
TruePosition also sought to recover its attorneys fees and expenses as well as
interest on the judgment.
On
July 31, 2008, the trial court ruled on these pending motions. Although the court's order left a portion of
the original jury verdict undisturbed, it reduced the compensatory judgment
amount from $45.3 million to $18.6 million plus interest. While the court
denied TruePositions motion for trebling of damages, it enhanced the reduced
damage amount by 25%, bringing the total judgment to $23.25 million. The court also rejected TruePositions
request for recovery of its attorneys fees and expenses. The court also granted TruePositions motion
for a permanent injunction related to the products at issue and indicated that
it will enter such an injunction.
CommScope
disagrees with the underlying verdict, the enhancement of damages and the entry
of an injunction and continues to believe that the products at issue do not
infringe TruePosition's patent.
CommScope expects to appeal the remaining portion of the underlying
judgment, as well as the injunction which the court indicated it will enter.
As
a result of the July 31, 2008 ruling in the case, our estimate of the probable
loss was reduced from $45.3 million to $27.6 million (including interest). Subject to the outcome of possible additional
legal actions taken by CommScope and/or TruePosition, the ultimate resolution
of the TruePosition litigation may be materially different than our current
estimate, which does not include legal fees we may incur in appeals or other
proceedings. The litigation with TruePosition may result in the loss of future
revenue opportunities, including opportunities to manufacture and sell products
using uplink time difference of arrival (U-TDOA) technology; however, we are
not currently able to assess the likelihood or magnitude of such potential lost
opportunities.
At
issue in the litigation with TruePosition is a patent that TruePosition argued
was infringed by an Andrew U-TDOA mobile location system that is being deployed
under multiple phases with the customer. Andrew was awarded the initial two
phases with this customer for an expanded deployment of this strategic project
which, when completed, will cover approximately a thousand cell sites. There
are additional phases, not all of which have been awarded by the customer. The
jury verdict included claims related to all such cell sites, including those
already installed and those to be installed. The July 31, 2008 ruling in the
case awarded damages based upon the initial two phases of the project. The patent
at issue relates only to certain implementations using U-TDOA technology. As a
result, other customer installations and projects that use different mobile
location technologies are not impacted.
In
March 2008, TruePosition Inc. served Andrew with a complaint in a lawsuit filed
in the Superior Court, New Castle County in Delaware. The suit alleges that Andrew breached certain
patent license royalty obligations to TruePosition under a 2004 settlement
agreement related to a prior lawsuit between the parties and alleges that
Andrew owes TruePosition approximately $30 million. The Company believes it has valid defenses
and will vigorously defend itself in this action.
We
are either a plaintiff or a defendant in other pending legal matters in the
normal course of business. As a result of the Andrew acquisition, we became
subject to additional legal matters, including asserted and unasserted claims.
Management believes none of these other legal matters, other than that
discussed above, will have a material adverse effect on our business or
financial condition upon their final disposition.
ITEM 2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the six
months ended June 30, 2008, the Company agreed with certain holders of its
1% convertible senior subordinated debentures to increase the conversion rate
as an inducement for them to convert their debentures to common stock. Accordingly, $50.45 million of the debentures
were converted into 2,393,513 shares of common stock (2,319,540 related to the
original conversion ratio and 73,973 related to the inducement). The conversion was made in reliance on the
exemption from registration provided by Section 3(a)(9) of the
Securities Act of 1933.
30
Table
of Contents
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
The Company held its
Annual Meeting of Stockholders (the Meeting) on May 2, 2008. Proxies for
the Meeting were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended. A total of 67,394,991 shares of Common Stock
with one vote each were entitled to vote at the Meeting and holders of
59,885,680 shares voted in person or by proxy, constituting a quorum.
At the Meeting, the
Companys Class II directors were elected for three-year terms ending at
the 2011 Annual Meeting of Stockholders by the vote set forth below:
Name of Director
|
|
Votes For
|
|
Votes Withheld
|
|
June E. Travis
|
|
59,683,578
|
|
202,162
|
|
James N. Whitson
|
|
59,372,420
|
|
513,260
|
|
The Companys
other five directors, whose terms of office continue after the Meeting with
terms expiring at the annual meetings in parentheses after their names, are
George L. Boyd (2010), George N. Hutton, Jr. (2010), Katsuhiko (Kat) Okubo
(2010), Frank M. Drendel (2009), and Richard C. Smith (2009).
A proposal to re-approve
the material terms of the performance goals set forth under the annual
incentive plan as required under section 162(m) of the Internal Revenue
Code and the regulations promulgated thereunder was approved by 58,733,108
votes cast in favor, 1,085,086 votes cast against and 67,486 votes abstaining.
A proposal to ratify the
appointment of Ernst & Young LLP as the Companys independent
registered public accounting firm for the 2008 fiscal year by the Audit
Committee of the Board of Directors of the Company was approved by 59,289,072
votes cast in favor, 546,683 votes cast against and 49,925 votes abstaining.
ITEM 6.
|
|
EXHIBITS
|
|
|
|
31.1
|
|
Certification of
Chief Executive Officer pursuant to Rule 13a-14(a).
|
31.2
|
|
Certification of
Chief Financial Officer pursuant to Rule 13a-14(a).
|
32
|
|
Certification of
Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32)(ii) of
Regulation S-K).
|
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
COMMSCOPE, INC.
|
|
|
|
|
|
|
August 6, 2008
|
|
/s/ JEARLD L. LEONHARDT
|
Date
|
|
Jearld L. Leonhardt
|
|
|
Executive Vice President and
Chief Financial Officer
|
|
|
signing both in his capacity as
Executive Vice
|
|
|
President on behalf of the
Registrant and as
|
|
|
Chief Financial Officer of the
Registrant
|
31
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