10-K 1 a07-4876_110k.htm 10-K

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x                               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

o                                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from                            to                            

Commission file number: 001-12929


CommScope, Inc.

(Exact name of registrant as specified in its charter)

Delaware

 

36-4135495

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

1100 CommScope Place, S.E.
P.O. Box 339
Hickory, North Carolina

 

28602

 

(828) 324-2200

(Address of principal executive offices)

 

(Zip Code)

 

(Telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $.01 per share

Preferred Stock Purchase Rights

 

New York Stock Exchange

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).   Large accelerated filer x            Accelerated filer o            Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x

The aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant was approximately $1.83 billion as of June 30, 2006 (based on the $31.42 closing price on the New York Stock Exchange on that date). For purposes of this computation, shares held by affiliates and by directors and officers of the Registrant have been excluded.

As of February 14, 2007 there were 59,909,349 shares of the Registrant’s Common Stock outstanding.

Documents Incorporated by Reference
Portions of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Stockholders are
incorporated by reference in Part III hereof.

 




TABLE OF CONTENTS

 

 

 

Page

 

Part I

 

 

 

 

 

 

Item 1.

 

Business

 

1

 

 

Item 1A.

 

Risk Factors

 

10

 

 

Item 1B.

 

Unresolved Staff Comments

 

18

 

 

Item 2.

 

Properties

 

18

 

 

Item 3.

 

Legal Proceedings

 

19

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

19

 

 

Part II

 

 

 

 

 

 

Item 5.

 

Market for the Registrant’s Common Equity and Related Stockholder Matters

 

22

 

 

Item 6.

 

Selected Financial Data

 

24

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

44

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

86

 

 

Item 9A.

 

Controls and Procedures

 

86

 

 

Item 9B.

 

Other Information

 

88

 

 

Part III

 

 

 

 

 

 

Item 10.

 

Directors and Executive Officers of the Registrant

 

89

 

 

Item 11.

 

Executive Compensation

 

89

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

89

 

 

Item 13.

 

Certain Relationships and Related Transactions

 

89

 

 

Item 14.

 

Principal Accountant Fees and Services

 

89

 

 

Part IV

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

90

 

 

 

 

Signatures

 

91

 

 

 

i




PART     I

Unless the context otherwise requires, references to “CommScope, Inc.,” “CommScope,” “we,” “us,” or “our” are to CommScope, Inc. and its direct and indirect subsidiaries on a consolidated basis.

This Form 10-K includes “Forward-Looking Statements” within the meaning of the Securities Exchange Act of 1934, as amended, the Private Securities Litigation Reform Act of 1995 and related laws. 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,” “plans,” “anticipate,” “should,” “designed to,” “foreseeable future,” “believe,” “think,” “scheduled,” “outlook,” “guidance” and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Item 1A of this Form 10-K sets forth more detailed information about the factors that may cause our actual results to differ, perhaps materially, from the views stated in such forward-looking statements. We do not intend, and are not undertaking any duty or obligation, to update any forward-looking statements to reflect developments or information obtained after the date of this Form 10-K.

ITEM 1.                BUSINESS

General

CommScope, Inc. is a world leader in infrastructure solutions for communications networks. Our highly-engineered cable and connectivity solutions enable a host of information-rich and interactive services that are delivered to the home, office and mobile devices. We focus on the “last mile” in communications networks, which is the distribution access, or final link to the customer. We believe we are a global leader in structured cabling solutions for business enterprise applications and a global leader in broadband coaxial cables for the cable television industry. We also design, manufacture and market a broad line of high-performance electronic, coaxial and fiber optic cable and related products for data networking, Internet access, wireless communication, telephony and other broadband applications. In addition, we are an industry leader in the design and manufacture of environmentally secure enclosures to integrate complex equipment for digital subscriber line (DSL) and Fiber-to-the-Node (FTTN) deployments by telecommunication service providers in the United States.

We are a global manufacturer, employing state-of-the-art processes in 11 manufacturing facilities on five continents. We sell our products directly to customers and through a global network of distributors, system integrators and value-added resellers. We sell our products in more than 130 countries.

CommScope, Inc. was incorporated in Delaware on January 28, 1997.

For the year ended December 31, 2006, our revenues were $1.62 billion and our net income was $130.1 million. Historically, our operating performance is typically weaker during the first and fourth quarters and stronger during the second and third quarters. For further discussion of our current and prior year financial results, see Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements included elsewhere in this Form 10-K.

Our Acquisition of Connectivity Solutions

On January 31, 2004, we acquired the Connectivity Solutions business (Connectivity Solutions) from Avaya Inc. (Avaya). We acquired Connectivity Solutions primarily to expand our position in the “last mile” of telecommunications, establish a leadership position in the global enterprise connectivity market and enhance our global growth opportunities. We believe that this combination of businesses positions us as a leading provider of cable products and apparatus to both the enterprise and telecommunications markets.

We acquired substantially all of the assets, subject to specified current liabilities, and also assumed approximately $65 million of other specified liabilities, primarily related to employee benefits, of

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Connectivity Solutions, for approximately $250 million in cash and approximately 1.8 million shares of our common stock valued at $32.4 million. The Connectivity Solutions business, as operated by Avaya, was organized into three product groups:

·       SYSTIMAX®—a global leader in the design, development, manufacture and marketing of physical layer end-to-end structured cabling solutions for connecting telephones, workstations, local area networks (LANs), storage area networks and other critical communication devices through buildings or across campuses of businesses, enterprises and other organizations.

·       Integrated Cabinet Solutions (ICS)—a leading provider of secure environmental enclosures engineered to protect and optimize the performance of DSL, wireless and other electronic equipment, primarily in outdoor locations of telecommunications providers.

·       ExchangeMAX®—a provider of physical layer structured cabling solutions supporting central offices of telecommunications service providers in the U.S. We exited the twisted pair telephone central office cable business but retained the ExchangeMAX apparatus business.

Our historical financial information and other information given as of a date prior to January 31, 2004 reflects the business of CommScope prior to the acquisition of Connectivity Solutions, unless the context specifically requires otherwise. Financial and other information included in this Form 10-K relating to the Connectivity Solutions business as operated by Avaya for periods prior to the acquisition are not necessarily indicative of the future performance of the Connectivity Solutions business as operated by us. For a description of the factors affecting such future performance, see Item 1A.

Strategy

Our strategic vision is to be the leading global developer, producer and seller of high-performance communications solutions for deployment by communication service providers and enterprise users. Our acquisition and integration of Connectivity Solutions were important milestones in achieving this objective. We strive to be recognized for the superior quality and performance of our products, outstanding service to our customers, the excellence of our employees and the value we deliver for our stockholders.

Our business strategy focuses on enhancing operational efficiency and internal growth from our existing businesses. We intend to enhance revenue growth by developing proprietary products and building upon our worldwide facilities and presence as well as our extensive global network of distributors, system integrators and value-added resellers. We will also consider opportunities for acquisitions, joint ventures or other investments that are a complementary fit strategically with our existing business. Our industry-leading research and development teams continue to spearhead innovative developments in cable and connectivity. We plan to build upon this legacy of innovation and leverage our worldwide portfolio of more than 1,300 patents and pending patent applications to provide leading-edge technology and new, high-performance cable and connectivity solutions products to our customers. We also intend to use our existing market channels to expand sales of our products.

We intend to improve efficiency by increasing operating focus, improving productivity and simplifying processes. We also intend to maintain our emphasis on superior customer service, which we believe has helped us maintain our market leadership in enterprise and broadband applications.

Operating Segments

Our reportable segments are defined by major product category as follows: Enterprise, Broadband and Carrier. Reported amounts include the results of the Connectivity Solutions business for the applicable periods since January 31, 2004, the date of the acquisition.

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Net revenues are distributed among the reportable segments as follows:

 

 

Year Ended December 31,

 

 

 

2006

 

2005

 

2004

 

Enterprise

 

49.3

%

49.4

%

50.9

%

Broadband

 

33.9

 

34.4

 

36.7

 

Carrier

 

16.8

 

16.2

 

12.4

 

Total

 

100.0

%

100.0

%

100.0

%

 

See Note 17 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K for additional segment and geographic financial data relating to our business.

Enterprise

The Enterprise segment includes SYSTIMAX Solutions and Uniprise SolutionsÔ. Through these brands, we believe we are the leading global provider of structured cabling systems for business enterprise applications. A structured cabling system is the transmission network inside a building or campus of buildings that connects voice and data communication devices, video and building automation devices, switching equipment and other information-management systems to one another as well as to outside communications networks. It includes all of the in-building and outside plant campus cabling and associated distribution components from the point of demarcation where the building or campus cabling connects to outside communications networks. A structured cabling system consists of various components, including transmission media (cable), circuit administration hardware, connectors, jacks, plugs, adapters, transmission electronics, electrical protection devices, wireless access devices and support hardware. Cables are classified by their construction, their data transmission capability and the environments in which they can be installed. Components are designed to allow easy implementation, moves, changes and maintenance as customer requirements change. A well-designed distribution system is independent of the equipment it serves and is capable of interconnecting many different devices, including computer and peripheral equipment, analog and digital telephones, personal computers and servers.

We believe that enterprises are faced with a growing need for higher bandwidth connectivity solutions as network traffic and the number of network devices increase. Applications such as storage area networks, streaming audio/video, multi-site collaboration, database downloads, grid computing and large file transfers create an increasing demand for bandwidth and higher-performance structured cabling systems. While the rate of technology adoption or application development is difficult to predict, we believe that demand for bandwidth will continue to increase. We also believe that enterprises are developing consolidated data centers to enhance performance, lower costs and improve controls and that we are well-positioned to be a leading supplier of the cabling infrastructure for such data centers.

We utilize a unique approach to developing structured cabling systems that is supported by modal decomposition and simulation techniques developed by our laboratories. This sophisticated measurement and modeling tool analyzes the hundreds of interactions present in multi-conductor transmission systems. We believe this proprietary tool increases measurement accuracy and can effectively cascade individual components mathematically into a link or a channel. After collection of the modal data for a large number of individual components, through a mathematical process we can simulate a link or channel as if all components were physically connected. We believe this modeling tool provides us a more comprehensive understanding of the properties of a cabling channel than our competitors. In addition, we are better able to identify weak links and refine components for system tuning and optimization. With this optimization, an unshielded twisted pair (UTP) cabling system can sustain speeds in the multi-gigabit range without radical new design. We believe that our unique tools help us create better-structured cabling solutions, deliver best-in-class total system performance and maintain a strong competitive position globally.

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Broadband

We design, manufacture and market coaxial and fiber optic cable and supporting apparatus, most of which is used in the cable television industry. We are the world’s largest manufacturer of coaxial cable and a leading domestic supplier of fiber optic cable for cable television and other video applications. Our coaxial and fiber optic cables are primarily used in Hybrid Fiber Coaxial (HFC) networks being deployed throughout the world. HFC networks utilize a combination of fiber optic and coaxial cable and are widely recognized as one of the most cost-effective ways to offer multi-channel video, voice and data services. Our broadband coaxial cables and zero water peak optical fiber cables provide bandwidth connectivity for services such as cable television, video on demand, high-speed Internet access, cable telephony and other interactive services.

Many other specialized markets or applications are served by multiple cable media such as coaxial, twisted pair, fiber optic or combinations of each. We are a leading producer of composite cables made of flexible coaxial and twisted copper pairs for full-service communications providers worldwide. We also provide a variety of cable-in-conduit products for telecommunication applications.

Carrier

We sell a variety of solutions and products, including secure environmental enclosures, cables and components used by wireless providers to connect antennae to transmitters and connectivity solutions for telephone central offices. These products are primarily used by telecommunication service providers or “carriers.”

Our ICS products are sturdy environmental enclosures for electronic devices and equipment deployed in the outside plant and inside buildings. Enclosures are designed to meet each customer’s needs, including thermal characteristics, and are used mostly by carriers to protect wireless equipment, transmission access equipment, switching equipment and broadband electronic equipment. Each cabinet is assembled, completely wired and system-tested to ensure high quality and ease of installation. We believe we are a leading provider of environmental enclosures for domestic DSL and FTTN applications of telecommunications original equipment manufacturers (OEMs) and carriers.

Our wireless products include innovative, high-frequency cables and components for connecting wireless antennae to their transmitters. Semi-flexible coaxial cables are used to connect the antennae located at the top of wireless antenna towers to the radios and power sources located adjacent to or near the antenna site. Over the past few years, we developed and patented Cell ReachÔ, a line of smooth-wall copper or aluminum-shielded semi-flexible coaxial cables and related connectors and accessories to address this market. Cell Reach has been installed in thousands of domestic wireless base stations with leading service providers and has achieved market acceptance in a limited number of international locations.

We also manufacture other broadband coaxial cables, fiber optic cables and twisted pair cables that are used for various wireless applications, including Third Generation Wireless (3G), Personal Communications Systems (PCS), Global System for Mobile Communications (GSM), Universal Mobile Telecommunications Systems (UMTS), Cellular, Multichannel Multipoint Distribution Service (MMDS), Local Multipoint Distribution System (LMDS), land mobile radio, paging, automotive and in-building wireless applications.

Our ExchangeMAX solution is primarily deployed in U.S. central offices of telephone service providers and combines our family of central office connectivity products with an overall system architecture to support the copper cable distribution networks of a central office. Our products include coaxial cable, copper main distributing frames, digital signal cross connect frames, connectors, patch cords and cable management tools. We manufacture and market the ExchangeMAX product line primarily to OEMs, telecommunication service providers and third-party value-added resellers in the U.S. We have

4




exited the telephone central office twisted pair cable business but retained the ExchangeMAX apparatus business.

Manufacturing

Most of our manufacturing facilities have received IS0 9000 certification, the most widely recognized standard for quality management. In addition, several of our facilities have the TL 9000 certification, which is a telecommunications-specific standard for quality management. We employ a global manufacturing strategy and operate 11 manufacturing facilities located domestically in Nebraska, North Carolina and Nevada and internationally in Seneffe, Belgium; Jaguariuna, Brazil; Bray, Ireland; Brisbane, Australia; and Suzhou, China.

Communications Cables

We employ numerous advanced cable manufacturing processes. Many of these processes, some of which are proprietary and/or include trade secret information, are performed on equipment that has been modified for our purposes or specifically built to our specifications, often internally in our own machine shop facilities. These manufacturing processes include bimetallic wire fabrication, fine wire drawing, thermoplastic extrusion for insulating wires and cables, high-speed welding and swaging of metallic shields or outer conductors, braiding, cabling and stranding, and automated testing. Our manufacturing operations have a significant level of vertical integration. We outsource compounding and fabrication of selected materials when cost effective.

Apparatus Devices

Apparatus devices support a complete systems solution. These products include jacks, outlets, panels, cords, connectors, protectors and network management tools. The manufacture of a typical part includes the following steps: molding of the parts, stamping metal parts, forming of sheet metal parts, insertion of printed wiring boards, assembly, wire wrapping, labeling and packaging. These products are composed of various plastics, stamped metal components and purchased assembled components. We outsource the manufacture and/or assembly of various apparatus devices when cost effective.

Integrated Cabinets

An integrated cabinet starts with base-metal sheets that are stamped or cut and then formed to specification. These parts are then treated and sealed in a dry paint line process. The metal parts are then assembled and engineered around specific power and thermodynamic components and designs, some of which are developed internally and others of which are purchased from third-party providers. A base line cabinet can then be assembled using cable or apparatus products and integrated to high-end electronic devices as provided by the end-user drawings. We outsource the production and/or assembly of integrated cabinets in order to meet higher demand levels and when cost effective.

Cost Reduction Initiatives

In order to improve the long-term competitive position of our business, we initiated major restructuring initiatives in 2005 and 2004.

The purpose of the 2005 initiative, which began in the third quarter, was to reduce costs by improving manufacturing efficiency, primarily for our Enterprise and Broadband segment cable operations. This included shifting production among our global manufacturing facilities, consolidating operations at the Omaha facility of Connectivity Solutions Manufacturing, Inc. (CSMI), our wholly owned manufacturing subsidiary, into one building and closing the Scottsboro, Alabama facility in late 2006. Implementation of this initiative was substantially completed by the end of 2006.

5




During the fourth quarter of 2004, CSMI adopted organizational and cost-reduction initiatives at its Omaha facility. The primary components of this restructuring were: a) a reorganized management structure that created more focused stand-alone management organizations for cable, apparatus and cabinets, b) re-engineered, simplified business practices and manufacturing processes and c) a reduced number of management, production and support personnel. Implementation of this initiative was substantially completed by the middle of 2005.

See Note 6 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K for additional detail about the restructuring costs recognized and expected future costs related to these initiatives.

Restructured Relationship with Furukawa

From November 2001 through June 2004, we owned a minority equity interest in OFS BrightWave, LLC (OFS BrightWave), one of the world’s largest manufacturers of optical fiber and fiber optic cable. OFS BrightWave was formed by us and The Furukawa Electric Co., Ltd. (Furukawa) to operate certain fiber optic cable and transmission fiber assets of the Optical Fiber Solutions Group acquired from Lucent Technologies Inc. in 2001. The remaining equity interest in OFS BrightWave was owned by an indirect wholly owned subsidiary of Furukawa.

Primarily as a result of the continuing weakness in the global fiber optic cable market and Furukawa’s efforts to restructure the OFS BrightWave operations, we agreed with Furukawa to amend our contractual arrangements in the second quarter of 2004 for the mutual benefit of both companies. In June 2004, we exercised our contractual right to sell and sold our 9.4% equity ownership interest in OFS BrightWave to Furukawa in exchange for the 7,656,900 shares of our common stock owned by Furukawa. We hold these shares as treasury stock. As a result of this transaction, we no longer own any equity interest in OFS BrightWave.

This transaction did not affect our right to receive full payment from OFS BrightWave under an existing $30 million loan, which was scheduled to mature in late 2006. In conjunction with the sale of our ownership interest in OFS BrightWave, we had fully impaired the remaining balance of this loan due to market conditions and because we no longer had an equity ownership in OFS BrightWave. The impairment loss was included in the net gain on sale in our 2004 Consolidated Statement of Operations. OFS BrightWave continued to make interest payments in accordance with the terms of the original loan agreement and in June 2006 we agreed to accept a principal payment of $29.8 million plus accrued interest in full satisfaction of the loan.

We recorded a net pretax gain during the second quarter of 2004 of $121.3 million ($76.4 million net of tax or $1.13 per diluted share) as a result of the sale of our equity interest. We also recorded a pretax gain during the second quarter of 2006 of $29.8 million ($18.6 million net of tax or $0.26 per diluted share) as a result of the repayment of the loan. For more information about this transaction, see Note 5 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K.

In addition, we agreed with an affiliate of Furukawa to continue our existing optical fiber supply relationship by entering into a new four-year supply agreement that expires June 2008. We will continue to have access to a broad array of technologically advanced optical fibers as well as a cross-license agreement for key intellectual property.

Research and Development

Our research and development (R&D) expenditures for the creation and application of new and improved products and processes were $32.9 million, $31.3 million and $29.3 million for the years ended December 31, 2006, 2005 and 2004, respectively. Our major R&D activities relate to developing new

6




enterprise structured cabling solutions as well as improved functionality and more cost-effective designs for cables, apparatus and cabinets.

Many of our professionals maintain a presence in standards-setting organizations so that our products can be formulated to achieve broad market acceptance. These organizations include the Telecommunications Industry Association, the Electronic Industry Association, the Institute of Electrical and Electronic Engineers, the Society of Cable Telecommunications Engineers and the International Standards Organization.

Sales and Distribution

We market our products directly to telecommunication service providers or to OEMs selling equipment to the providers as well as through an extensive global network of distributors, system integrators and value-added resellers. We support our sales organization with regional service centers in locations around the world. A key aspect of our North American customer support and distribution system is the use of our private truck fleet, which primarily serves our Broadband segment customers. We believe our ability to offer rapid delivery services, materials management and logistics services to customers in the continental U.S. by utilizing our private truck fleet is an important competitive advantage.

Our Broadband segment products are primarily sold directly to cable television system operators. According to the National Cable & Telecommunications Association, the five largest cable television system operators (Comcast Corporation, Time Warner Inc., Charter Communications, Inc., Cox Communications, Inc. and Cablevision Systems Corporation) account for over 75% of the cable television subscribers in the United States. Although we sell to a wide variety of customers dispersed across many different geographic areas, sales to our five largest domestic broadband service provider customers represented 17%, 17% and 18% of our net sales during 2006, 2005 and 2004, respectively. No Broadband customer accounted for 10% or more of our net sales during 2006, 2005 or 2004.

Our Enterprise segment products are sold to customers primarily through independent distributors, system integrators and value-added resellers. During 2006, 2005 and 2004, sales of Enterprise products to our top three distributors, system integrators and value-added resellers represented 38%, 42% and 47%, respectively, of our consolidated net sales. During 2006, 2005 and 2004, Anixter International and its affiliates (Anixter) accounted for 29%, 32% and 35%, respectively, of our net sales. No other Enterprise customer accounted for more than 10% of our net sales during 2006, 2005 or 2004. Selling products through distributors has associated risks, including, without limitation, that sales can be negatively affected on a short-term basis as a result of changes in inventory levels maintained by distributors. These inventory changes may be unrelated to the purchasing trends by the ultimate customer.

We believe the enterprise structured cabling market has three segments: premium, mid-tier and basic. Products in the premium segment consist of end-to-end solutions created from cable, connectors and components that are specifically designed for compatibility to provide cutting-edge performance and best-in-class system transmission. Products in the mid-tier segment generally consist of value-oriented solutions based on established technology or cable that is matched with connectors from a variety of manufacturers. Products in the basic segment consist of lower performance cables typically used for telephone wiring or lower speed networks.

We deploy a two-tier strategy to address different market needs with our Enterprise brands. Our SYSTIMAX branded products focus on the premium segment and are purchased primarily by large, multinational companies. Our Uniprise branded products focus on the middle-tier market and are purchased primarily by large and medium sized enterprises in the U.S.

Our Carrier segment products are primarily sold directly to telecommunication service providers or to OEMs that sell equipment to the providers. Our customer service and engineering groups maintain particularly close working relationships with these carrier customers due to the significant amount of

7




design and customization associated with some of these products. Although our Carrier segment sales are concentrated among a limited number of large domestic telecommunication service providers or their OEMs, no Carrier customer accounted for 10% or more of our net sales during 2006, 2005 or 2004.

Our international sales consist primarily of our Enterprise and Broadband segment products. Our primary channels to international markets are through distributors and direct sales to end users and OEMs. We support our international sales efforts with sales representatives based in Europe, Latin America, Asia/Pacific Rim and other regions throughout the world. Our net sales from international operations were $512.2 million, $450.4 million and $373.7 million during 2006, 2005 and 2004, respectively.

Changes in the relative value of currencies may impact our results of operations. We may attempt to limit our exposure to currency fluctuations by matching the currency of expected revenues and costs or engaging in foreign currency hedging transactions. For more information about our foreign currency exposure management, see Note 10 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K.

Patents and Trademarks

We pursue an active policy of seeking intellectual property protection, namely patents and registered trademarks, for new products and designs. As of December 31, 2006, on a worldwide basis, we held over 1,300 patents and pending patent applications. As of December 31, 2006, we also had over 800 registered trademarks and pending trademark applications worldwide. We consider our patents and trademarks to be valuable assets, but no single patent or trademark is material to our operations as a whole. We intend to rely on our intellectual property rights, including our proprietary knowledge, trade secrets and continuing technological innovation, to develop and maintain our competitive position. We will continue to protect certain key intellectual property rights.

We have entered into cross-licensing arrangements with Furukawa, providing us with access to key technology for communications cables, especially fiber optic cables.

Backlog

At December 31, 2006, 2005 and 2004, we had an order backlog of $88 million, $81 million and $91 million, respectively. Orders typically fluctuate from quarter to quarter based on customer demand and general business conditions. Backlog includes only orders for products scheduled to be shipped within six months. In some cases, unfilled orders may be canceled prior to shipment of goods, but cancellations historically have not been material. However, our current order backlog may not be indicative of future demand.

Competition

The market for cable products and structured cabling systems is highly competitive and subject to rapid technological change. We encounter competition in substantially all areas of our business and from both international and domestic companies. Our competitors include large, diversified companies, some of which have substantially greater assets and financial resources than we do, as well as medium to small companies. We also face competition from certain smaller companies that have concentrated their efforts in one or more areas of the Enterprise, Broadband or Carrier markets. Some of our representative competitors by segment include: Enterprise—ADC Telecommunications, Inc., Belden CDT, Inc., Corning Incorporated, General Cable Corp., Ortronics, Inc., Nexans SA, Panduit Corp. and Tyco Electronics Corporation; Broadband—Amphenol Corporation, Corning Incorporated and Pirelli & C. SpA; Carrier—Alcatel-Lucent, ADC Telecommunications, Inc., Andrew Corporation, Eupen Cable, Inc. and Emerson Electric Co.

8




We compete primarily on the basis of product specifications, quality, price, engineering, customer service and delivery time. We believe that our structured cabling systems have a strong competitive position in the Enterprise segment markets because of long-standing relationships with distributors, system integrators and value-added resellers, strong brand recognition and premium product features and reliability. We believe that we have a strong competitive position in the Broadband segment markets due to our position as a low-cost, high-volume cable producer and reputation as a high-quality provider of state-of-the-art cables with a strong orientation toward customer service. We believe that the ICS and wireless products within our Carrier segment are able to compete effectively in these markets based on strong technological capabilities and customer relationships.

Raw Materials

Our manufacturing operations are process oriented and we use significant quantities of various raw materials, including copper, fabricated aluminum, steel, plastics and other polymers, fluoropolymers, bimetals and optical fiber, among others. Fluorinated ethylene propylene is the primary raw material used throughout the industry for producing flame-retarding cables for LAN applications in North America. We use fabricated aluminum, copper and steel in the manufacture of coaxial and twisted pair cables. Portions of these metal materials are purchased under supply arrangements with some portion of the unit pricing indexed to commodity market prices for these metals. We have adopted a hedging policy pursuant to which we may, from time to time, purchase physical inventory or attempt to match futures contracts or option contracts for a specific metal with some portion of the anticipated metal purchases for the same periods. Optical fiber is a primary raw material used for making fiber optic cables.

Our profitability may be materially affected by changes in the market price of our raw materials, most of which are linked to the commodity markets. Prices for copper, aluminum, fluoropolymers and certain other polymers derived from oil and natural gas have increased substantially within the past two years and exhibited greater than normal levels of volatility. As a result, we have increased our prices for certain Enterprise and Broadband segment products and may have to increase prices again in the future. Delays in implementing price increases, failure to achieve market acceptance of future price increases or price reductions in response to a rapid decline in raw material costs could have a material adverse impact on the results of our operations.

Environment

We are subject to various federal, state, local and foreign environmental laws and regulations governing, among other things, discharges to air and water, management of hazardous substances, the handling and disposal of solid and hazardous waste, and the investigation and remediation of hazardous substance contamination. Because of the nature of our business, we have incurred, and will continue to incur, costs relating to compliance with these environmental laws and regulations. Compliance with current laws and regulations has not had and is not expected to have a material adverse effect on our financial condition. However, new laws and regulations, including those regulating the types of substances allowable in certain of our products, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new remediation or discharge requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business. Our Enterprise and Broadband segment cable products are compliant with the European Union Directive on Restriction of Hazardous Substances (RoHS) in electrical and electronic equipment.

Pursuant to the Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes, current or former owners or operators of a contaminated property, as well as companies that generated, disposed of, or arranged for the disposal of hazardous substances at a contaminated property, can be held jointly and severally liable for the costs of investigation and remediation of the contaminated property, regardless of fault. Certain of our owned facilities are the subject of ongoing investigation and/or remediation of hazardous substance contamination in the soil

9




and/or groundwater. Costs relating to these investigations or remediation activities are being indemnified by prior owners and operators of these facilities. Based on currently available information and the availability of indemnification, we do not believe the costs associated with these contaminated sites will have a material adverse effect on our financial condition or results of operations. However, our present and former facilities have or had been in operation for many years and, over such time, these facilities have used substances or generated and disposed of wastes that are or may be considered hazardous. Therefore, it is possible that environmental liabilities may arise in the future that we cannot now predict.

Employees

As of December 31, 2006, we employed approximately 4,550 people. The majority of our employees are located in the U.S., but we also have employees in numerous foreign countries, including Australia, Belgium, Brazil, China, Ireland, Singapore and The Netherlands.

CSMI has collective bargaining agreements with the International Brotherhood of Electrical Workers (IBEW), Locals 1614 and 1974. These collective bargaining agreements govern the pay, benefits and working conditions for approximately 610 production, maintenance and clerical employees represented by the two IBEW Locals. New agreements were ratified by the IBEW Locals during 2006. These agreements became effective on June 1, 2006 and expire on December 31, 2008.

We believe that our relations with our employees and unions are satisfactory.

Available Information

Our web site (www.commscope.com) contains frequently updated information about us and our operations. Our filings with the Securities and Exchange Commission (SEC) on Form 10-K, Form 10-Q and Form 8-K and all amendments to those reports can be viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC by accessing www.commscope.com and clicking on Investors and then clicking on SEC Filings.

SEC Certifications

The certifications by the Chief Executive Officer and Chief Financial Officer of the Company, required under Section 302 of the Sarbanes-Oxley Act of 2002, have been filed as exhibits to this Form 10-K.

New York Stock Exchange Annual CEO Certification

Our common stock is listed on the New York Stock Exchange. In accordance with New York Stock Exchange rules, on June 1, 2006 we filed the annual certification by our CEO that, as of the date of the certification, he was unaware of any violation by CommScope of the New York Stock Exchange’s corporate governance listing standards.

ITEM 1A.        RISK FACTORS

The Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and other related laws provide a “safe harbor” for forward-looking statements. This Form 10-K, our Annual Report to Stockholders, any Form 10-Q or Form 8-K of ours, or any other oral or written statements made by us or on our behalf, may include forward-looking statements which reflect our current views with respect to future events and financial performance. These forward-looking statements are identified by their use of such terms and phrases as “intend,” “goal,” “estimate,” “expect,” “project,” “projections,” “plans,” “anticipate,” “should,” “designed to,” “foreseeable future,” “believe,” “think,” “scheduled,” “outlook,” “guidance” and similar expressions. This list of indicative terms and phrases is not intended to be all-inclusive. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. We do not intend, and are not undertaking any duty or obligation, to update any forward-looking statements to reflect developments or information obtained after the date of this Form 10-K.

10




Our actual results may differ significantly from the results discussed in forward-looking statements. Factors that might cause such a difference include, but are not limited to (a) the general political, military, economic and competitive conditions in the United States and other markets where we operate; (b) changes in capital availability or costs, such as changes in interest rates, market perceptions of the industry in which we operate, security ratings or general stock market fluctuations; (c) workforce factors; (d) authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board, the Public Company Accounting Oversight Board and the Securities and Exchange Commission (SEC); (e) the impact of corporate governance, accounting and securities law reforms by the United States Congress, the SEC and the New York Stock Exchange; (f) risks related to production and inventory, including warranty costs, obsolescence charges, excess capacity and material and labor costs; and (g) the factors set forth below.

We are dependent on a limited number of key customers or distributors for a substantial portion of the net sales in each of our business segments.

Within each of our business segments, a limited number of key customers or distributors account for a substantial portion of our net sales:

Enterprise

We distribute enterprise and certain other products to customers primarily through a large, worldwide network of independent distributors, system integrators and value-added resellers. For the year ended December 31, 2006, sales of such products to the top three distributors, system integrators and value-added resellers represented approximately 38% of our consolidated net sales. In particular, Anixter International Inc. and affiliates accounted for approximately 29% of our consolidated net sales during such period.

Broadband

Although the domestic cable television industry is comprised of thousands of cable systems, a small number of cable television system operators own a majority of cable television systems and account for a majority of the capital expenditures made by cable television system operators. Although we sell to a wide variety of customers dispersed across many different geographic areas, sales to our five largest Broadband segment customers represented approximately 17% of our consolidated net sales for the year ended December 31, 2006.

Carrier

Sales of carrier products are concentrated among a limited number of large telecommunication service providers and original equipment manufacturers (OEMs) who supply such telecommunication service providers. Net sales to an OEM, our largest Carrier segment customer, accounted for approximately 7% of our consolidated net sales for the year ended December 31, 2006.

The concentration of our net sales among these key customers or distributors subjects us to a variety of risks that could have a material adverse impact on our net sales and profitability, including, without limitation:

·       loss of one or more of our key customers or distributors, including failure to renegotiate new distributor agreements;

·       financial difficulties experienced by one or more of our key customers or distributors resulting in reduced purchases of our products and/or uncollectible accounts receivable balances;

11




·       reductions in inventory levels held by distributors, which may be unrelated to purchasing trends by the ultimate customer;

·       consolidations in the cable television and/or telecommunications industry could result in delays in purchasing decisions, or reduced purchases, by the merged businesses;

·       the cable television and telecommunications industry are each subject to significant government regulation and implementation of new or existing laws or regulations could impact capital spending plans and, therefore, adversely impact our business;

·       increases in the cost of capital and/or reductions in the amount of capital available to the cable television and telecommunications industry could reduce the level of their capital spending and, therefore, adversely impact our business;

·       reductions in the level of capital spending in the corporate information technology sector could have an adverse impact on sales of our enterprise products;

·       changes in the technology deployed by cable television or telecommunication customers could have an adverse impact on our business;

·       reductions in the level of spending on network maintenance and/or capital improvements by cable television and/or telecommunications customers could have an adverse impact on our sales of broadband and/or carrier products; and

·       competition for cable television operators from satellite and wireless television providers, telephone companies or others could result in lower capital spending and have an adverse impact on our sale of broadband products.

We face competitive pressures with respect to all of our major products.

In each of our major product groups, we compete with a substantial number of foreign and domestic companies, some of which have greater resources (financial or otherwise) or lower operating costs than we have. The rapid technological changes occurring in the telecommunications industry could lead to the entry of new competitors. Existing competitors’ actions, such as price reductions or introduction of new innovative products, use of Internet auctions by customers or competitors, and new entrants may have a material adverse impact on our sales and profitability. We cannot assure you that we will continue to compete successfully with our existing competitors or that we will be able to compete successfully with new competitors.

Fiber optic technology presents a potential substitute for some of the communications cable products we sell. A significant decrease in the cost of fiber optic systems could make these systems superior on a price/performance basis to copper systems. A significant decrease in the cost of fiber optic systems would reasonably be expected to have a materially adverse effect on our coaxial and twisted pair cable sales.

There are various complementary and competitive wireless technologies that could be a potential substitute for some of the communications cable products we sell. A significant technological breakthrough or significant decrease in the cost of deploying these wireless technologies could have a material adverse effect on our cable sales.

Successful implementation and roll-out of product innovations is necessary to preserve customer relationships.

Many of our markets are characterized by advances in information processing and communications capabilities that require increased transmission speeds and greater capacity, or “bandwidth,” for carrying information. These advances require ongoing improvements in the capabilities of cable and connectivity

12




products. We believe that our future success will depend in part upon our ability to enhance existing products and to develop and manufacture new products that meet or anticipate these changes. The failure to introduce successful new or enhanced products on a timely and cost-competitive basis or the inability to continue to market existing products on a cost-competitive basis could materially adversely affect our results of operations and financial condition.

Orders received from customers may be cancelled or may result in lower levels of orders in future periods.

The quarterly volume of orders received from customers may be volatile. Orders received from customers may not ultimately result in sales as customers may cancel or modify orders prior to shipment of the goods. In addition, the volume of orders received from one or more customers in one quarter may result in a lower volume of orders from those customers in subsequent quarters.

Our dependence on commodities subjects us to price fluctuations and potential availability constraints which could materially adversely affect our profitability.

Our profitability may be materially affected by changes in the market price and availability of certain raw materials, most of which are linked to the commodity markets. The principal raw materials we purchase are rods, tapes, tubes and wires made of copper, steel or aluminum; plastics and other polymers; and optical fiber. Fabricated aluminum, copper and steel are used in the production of coaxial and twisted pair cables and polymers are used to insulate and protect cables. Prices for copper, aluminum, steel, fluoropolymers and certain other polymers, derived from oil and natural gas, have increased and experienced greater volatility as a result of increased global demand and supply disruptions. As a result, we have significantly increased our prices for certain products and may have to increase prices again in the future. Delays in implementing price increases or a failure to achieve market acceptance of future price increases could have a material adverse impact on our results of operations. In an environment of falling commodities prices, we may be unable to sell higher-cost inventory before implementing price decreases, which could have a material adverse impact on our results of operations.

We are dependent on a limited number of key suppliers for certain raw materials.

For certain of our raw material purchases, including fluorinated ethylene propylene (FEP), copper rod, fine aluminum wire, steel wire and optical fiber, we are dependent on key suppliers.

FEP is the primary raw material used throughout the industry for producing flame-retarding cables for LAN applications in North America. There are few worldwide producers of FEP and market supplies have been periodically limited over the past several years. Availability of adequate supplies of FEP will be critical to future LAN cable sales growth in North America. If FEP is not available in adequate quantities on acceptable terms, our results of operations and financial condition could be materially adversely affected.

We internally produce a significant portion of our requirements for fine aluminum wire, which is available externally from only a limited number of suppliers. Our failure to manufacture or adequately expand our internal production of fine aluminum wire, and/or our inability to obtain these materials from other sources in adequate quantities on acceptable terms, could have a material adverse effect on our results of operations and financial condition.

Optical fiber is a primary material used for making fiber optic cables. There are few worldwide suppliers of the premium optical fibers we use in our products. Availability of adequate supplies of premium optical fibers will be critical to future fiber optic cable sales growth. We believe that our optical fiber supply arrangements with two suppliers address concerns about the continuing availability of these materials to us, although there can be no assurance of this.

13




Our key suppliers could experience financial difficulties, or there may be global shortages of the raw materials we use, and our inability to find sources of supply on reasonable terms could materially adversely affect our ability to manufacture products in a cost-effective way.

If our products, or components or completed products purchased from our suppliers, experience performance issues, our business will suffer.

Our business depends on delivering products of consistently high quality. To this end, our products, including components and raw materials purchased from our suppliers and completed goods purchased for resale, are rigorously tested for quality both by us and our customers. Nevertheless, our products are highly complex and our customers’ testing procedures are limited to evaluating our products under likely and foreseeable failure scenarios. For various reasons (including, among others, the occurrence of performance problems unforeseeable in testing), our products and components and raw materials purchased from our suppliers may fail to perform as expected. Performance issues could result from faulty design or problems in manufacturing. We have experienced such performance issues in the past and remain exposed to such performance issues. In some cases, recall of some or all affected products, product redesigns or additional capital equipment may be required to correct a defect. In addition, we generally warrant certain products for periods ranging from one to twenty-five years from the date of sale, depending upon the product subject to the warranty. In particular, we warrant the operation of our SYSTIMAX products for a period of 20 years from installation. In some cases, we indemnify our customers against damages or losses that might arise from certain claims relating to our products. Although historical warranty and indemnity claims have not been significant, we cannot assure you that future claims will not have a material adverse effect on our results of operations and financial position. Any significant or systemic product failure could also result in lost future sales of the affected product and other products, as well as customer relations problems.

If our integrated global manufacturing operations suffer production or shipping delays, we may experience difficulty in meeting customer demands.

We internally produce a significant portion of certain components used in our finished products, including bimetallic center conductors, braided core and fine aluminum wire, at certain of our domestic and international manufacturing facilities. Disruption of our ability to produce at or distribute from these facilities due to failure of our technology, fire, electrical outage, natural disaster, acts of terrorism, shipping interruptions or some other catastrophic event could materially adversely affect our ability to manufacture products at our other manufacturing facilities in a cost-effective and timely manner.

We periodically realign manufacturing capacity among our global facilities in order to reduce costs by improving manufacturing efficiency and to improve our long-term competitive position. The implementation of these initiatives may include significant shifts of production capacity among facilities.

There are significant risks inherent in the implementation of these initiatives, including, but not limited to, ensuring that: there is adequate production capacity to meet customer demand while capacity is being shifted among facilities; there is no decrease in product quality as a result of shifting capacity; adequate raw material and other service providers are available to meet the needs at the new production locations; equipment can be successfully removed, transported and re-installed; and adequate supervisory, production and support personnel are available to accommodate the shifted production.

In the event that manufacturing realignment initiatives are not successfully implemented, we could experience lost future sales and increased operating costs as well as customer relations problems, which could have a material adverse effect on our results of operations.

14




If we encounter capacity constraints with respect to our internal facilities and/or existing or new contract manufacturers, it could have an adverse impact on our business.

If we do not have sufficient production capacity, either through our internal facilities and/or through independent contract manufacturers, to meet customer demand for our products, we may experience lost sales opportunities and customer relations problems, which could have a material adverse effect on our business.

If contract manufacturers that we rely on to produce products or key components of products encounter production, quality, financial or other difficulties, we may experience difficulty in meeting customer demands.

We rely on unaffiliated contract manufacturers, both domestically and internationally, to produce certain products or key components of products. If we are unable to arrange for sufficient production capacity among our contract manufacturers or if our contract manufacturers encounter production, quality, financial or other difficulties, we may encounter difficulty in meeting customer demands. Any such difficulties could have an adverse effect on our business and financial results, which could be material.

Our significant international operations present economic, political and other risks.

We have a significant level of international manufacturing operations and international sales. We have manufacturing facilities in Belgium, China, Brazil, Ireland and Australia. For the year ended December 31, 2006, international sales represented approximately 32% of our net sales. Our international sales, manufacturing and distribution operations are subject to the risks inherent in operating abroad, including, but not limited to, risks with respect to currency exchange rates; economic and political destabilization; restrictive actions by foreign governments; nationalizations; the laws and policies of the United States affecting trade, foreign investment and loans; foreign tax laws, including the ability to recover amounts paid as value added taxes; compliance with local laws and regulations; armed conflict; terrorism; shipping interruptions; and major health concerns (such as infectious diseases).

We may not fully realize the anticipated savings from prior restructuring actions and may need to undertake further restructuring actions in the future.

We recognized pretax restructuring charges of $12.6 million during the year ended December 31, 2006. These charges were related to the global manufacturing initiative that commenced in the third quarter of 2005. Implementation of this initiative and the calculation of anticipated benefits was complex and the anticipated benefits may not be fully realized.

In response to general business conditions, the then current level of business and the outlook for future business, we may again need to initiate restructuring actions that could result in workforce reductions and restructuring charges, which could be material.

We may need to recognize impairment charges related to fixed assets, amortizable intangible assets or goodwill or other intangible assets with indefinite lives.

We have recognized impairment charges in the past as a result of adverse changes in business conditions or in conjunction with restructuring activities. As a result of an event or a change in circumstances or through our periodic testing, we may, in the future, determine that one or more of our long-lived assets is impaired and that an impairment charge is required. Any such impairment charge could have a material effect on our results of operations and financial position.

15




We have significant obligations under our employee benefit plans.

Significant changes to the assets and/or the liabilities related to our employee benefit obligations as a result of changes in actuarial estimates, asset performance or benefit changes, among others, could have a material impact on our financial position and/or results of operations.

In addition, legislative or regulatory changes could require us to fund a material portion of our significant unfunded obligations, which could have a material adverse impact on our financial flexibility.

We may not fully realize anticipated benefits from prior or future acquisitions or equity investments.

Although we expect to realize strategic, operational and financial benefits as a result of any acquisition or equity investment, we cannot predict whether and to what extent such benefits will be achieved. There are significant challenges to integrating an acquired operation into our business, including, but not limited to:

·       successfully managing the operations, manufacturing facilities and technology;

·       maintaining and increasing the customer base;

·       retention of key employees, suppliers and distributors;

·       integrating management information, inventory, accounting and sales systems; and

·       addressing significant operating losses related to individual facilities or product lines.

We may incur costs and may not be successful in protecting our intellectual property and in defending claims that we are infringing on the intellectual property of others.

We may encounter difficulties, costs or risks in protecting our intellectual property rights or obtaining rights to additional intellectual property to permit us to continue or expand our business. Other companies, including some of our largest competitors, hold intellectual property rights in our industry, and the intellectual property rights of others could inhibit our ability to introduce new products unless we secure licenses on commercially reasonable terms, as such are needed.

In addition, we have been required and may be required in the future to initiate litigation in order to enforce any patents issued or licensed to us or to determine the scope and/or validity of a third party’s patent or other proprietary rights. We also have been and may in the future be subject to lawsuits by third parties seeking to enforce their own intellectual property rights. Any such litigation, regardless of outcome, could subject us to significant liabilities or require us to cease using proprietary third party technology and, consequently, could have a material adverse effect on our results of operations and financial condition.

In certain markets, we may be required to address counterfeit versions of our products. We may incur significant costs in pursuing the originators of such counterfeit products and, if we are unsuccessful in eliminating them from the market, may experience a diminution in the value of our products.

Our ability to obtain additional capital on commercially reasonable terms may be limited.

Although we believe our current cash, cash equivalents and short-term investments as well as future cash from operations and availability under our senior secured revolving credit facility provide adequate resources to fund ongoing operating requirements, we may need to seek additional financing to compete effectively. Our public debt ratings affect our ability to raise capital and the cost of that capital. As of December 31, 2006, our corporate debt rating from Standard & Poor’s is BB. Future downgrades of our debt ratings may increase our borrowing costs and affect our ability to access the debt or equity capital markets on terms and in amounts that would be satisfactory to us.

16




If we are unable to obtain capital on commercially reasonable terms, it could:

·       reduce funds available to us for purposes such as working capital, capital expenditures, research and development, strategic acquisitions and other general corporate purposes;

·       restrict our ability to introduce new products or exploit business opportunities;

·       increase our vulnerability to economic downturns and competitive pressures in the markets in which we operate;

·       limit our financial flexibility to finance a full or partial redemption of our $250 million aggregate principal amount of 1% convertible senior subordinated debentures; and

·       place us at a competitive disadvantage.

We may incur additional indebtedness in the future under the revolving facility that is part of our senior secured credit facility, through future debt issuance, through assumption of liabilities in connection with future acquisitions or otherwise.

Our business depends on effective information management systems.

We rely on our enterprise resource planning (ERP) systems to support such critical business operations as processing sales orders and invoicing; inventory control; purchasing and supply chain management; payroll and human resources; and financial reporting. We periodically implement upgrades to such systems or migrate one or more of our affiliates, facilities or operations from one system to another. If we are unable to adequately maintain such systems to support our developing business requirements or effectively manage any upgrade or migration, we could encounter difficulties that could have an adverse impact on our business, internal controls over financial reporting, financial results, or our ability to timely and accurately report such results, which could be material.

A significant uninsured loss or a loss in excess of our insurance coverage could materially adversely affect our financial condition.

We maintain insurance covering our normal business operations, including fire, property and casualty protection that we believe is adequate. We do not generally carry insurance covering wars, acts of terrorism, earthquakes or other similar catastrophic events. Because insurance has generally become more expensive, we may not be able to obtain adequate insurance coverage on financially reasonable terms in the future. A significant uninsured loss or a loss in excess of our insurance coverage could materially adversely affect our financial condition.

Compliance with domestic and foreign environmental laws and potential environmental liabilities may have a material adverse impact.

We are subject to various federal, state, local and foreign environmental laws and regulations governing, among other things, discharges to air and water, management of hazardous substances, handling and disposal of solid and hazardous waste, and investigation and remediation of hazardous substance contamination. Because of the nature of our business, we have incurred and will continue to incur costs relating to compliance with these environmental laws and regulations. Compliance with current laws and regulations has not had and is not expected to have a material adverse effect on our financial condition. However, new laws and regulations, including those regulating the types of substances allowable in certain of our products, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new remediation or discharge requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our financial condition and results of operations. For example, the European Union has issued

17




directives relating to hazardous substances contained in electrical and electronic equipment and the disposal of waste electrical and electronic equipment. If we are unable to comply with these and similar laws in other jurisdictions, it could have a material adverse effect on our financial condition and results of operations.

Pursuant to the Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes, current or former owners or operators of a contaminated property, as well as companies that generated, disposed of, or arranged for the disposal of hazardous substances at a contaminated property can be held jointly and severally liable for the costs of investigation and remediation of the contaminated property, regardless of fault. Our present and past facilities have been in operation for many years and over that time, in the course of those operations, these facilities have used substances or generated and disposed of wastes which are or might be considered hazardous. We have been indemnified by prior owners and operators of certain of these facilities for costs of investigation and/or remediation, but there can be no assurance that we will not ultimately be liable for some or all of these costs. Therefore, it is possible that environmental liabilities may arise in the future which we cannot now predict.

We may experience significant variability in our quarterly and annual effective tax rate.

For the years ended December 31, 2006, 2005 and 2004, our effective tax rate has ranged from 29.7% to 32.8%. Variability in the mix and profitability of domestic and international activities, identification and resolution of various tax uncertainties and the failure to realize tax benefits related to equity-based compensation, among other matters, may significantly impact our effective income tax rate in the future. A significant increase in our effective income tax rate could have a material impact on our results of operations.

ITEM 1B.       UNRESOLVED STAFF COMMENTS

None.

ITEM 2.                PROPERTIES

As of December 31, 2006, our principal administrative, production, and research and development facilities (including those owned by subsidiaries) were as follows:

Location

 

 

 

Square
Feet Size

 

Use

 

Segment

 

Owned or
Leased

Hickory, NC(1)

 

84,000

 

Corporate Center/Administrative/
Sales/Customer Service

 

All

 

Owned

Catawba, NC(1)

 

1,000,000

 

Production/Distribution/
Administrative/Engineering

 

Broadband

 

Owned

Claremont, NC(1)

 

587,500

 

Production/Distribution/
Administrative/Sales/ Engineering

 

Enterprise

 

Owned

Conover, NC

 

89,000

 

Operations/Storage

 

Broadband and Enterprise

 

Leased

Scottsboro, AL(1)(2)

 

150,000

 

Vacant

 

Broadband

 

Owned

Statesville, NC(1)

 

315,000

 

Production/Distribution/
Engineering

 

Broadband

 

Owned

Seneffe, Belgium

 

134,000

 

Production/Distribution/Sales/
Administrative

 

Broadband

 

Owned

Newton, NC(1)

 

455,000

 

Production/Distribution/
Administrative/Sales/R&D

 

Carrier

 

Owned

18




 

Sparks, NV

 

225,500

 

Production/Distribution/
Customer Service

 

Broadband

 

Leased

Suzhou, China

 

298,000

 

Production/Distribution/
Administrative

 

Broadband

 

Leased

Jaguariuna, Brazil

 

221,000

 

Production/Distribution/
Administrative/Sales

 

Broadband

 

Owned

Richardson, TX

 

125,000

 

Administrative/R&D

 

Enterprise and Carrier

 

Leased

Omaha, NE(1)(3)

 

1,748,000

 

Production/Distribution/
Administrative

 

Enterprise and Carrier

 

Owned

Bray, Ireland

 

130,000

 

Production/Distribution/
Administrative/Sales

 

Enterprise

 

Owned

Brisbane, Australia

 

113,000

 

Production/Distribution/
Administrative

 

Enterprise

 

Leased

Singapore

 

75,000

 

Distribution/Administrative/Sales

 

Enterprise

 

Leased

Hilversum, The
Netherlands

 

42,500

 

Distribution

 

Enterprise

 

Leased

Miscellaneous
International

 

45,000

 

Sales/Distribution

 

Enterprise

 

Leased


(1)          Our interest in each of these properties is encumbered by a lien securing our senior secured credit facility (see Note 9 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K).

(2)          As of December 31, 2006, this facility is no longer utilized and is being marketed for sale (see Note 6 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K).

(3)          Several buildings, comprising approximately 626,000 square feet of this facility, are currently being marketed for sale.

We believe that our facilities and equipment generally are well maintained, in good condition and suitable for our purposes and adequate for our present operations. While we currently have excess manufacturing capacity in certain of our facilities, utilization is subject to change based on customer demand. We can give no assurances that we will not have excess manufacturing capacity or encounter capacity constraints over the long term.

ITEM 3.                LEGAL PROCEEDINGS

We are either a plaintiff or a defendant in pending legal matters in the normal course of business; however, management believes none of these legal matters will have a material adverse effect on our business or financial condition upon their final disposition.

ITEM 4.                SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the three months ended December 31, 2006.

19




EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is certain information with respect to the executive officers of the Company as of February 23, 2007.

Name and Title

 

 

 

Age

 

Business Experience

Frank M. Drendel
Chairman and Chief Executive Officer

 

62

 

Frank M. Drendel has been our Chairman and Chief Executive Officer since July 28, 1997 when we were spun-off (the Spin-off) from General Instrument Corporation (subsequently renamed General Semiconductor, Inc.) and became an independent company. Prior to that time, Mr. Drendel has held various positions with CommScope, Inc. of North Carolina (CommScope NC), our wholly owned subsidiary, since 1971. Mr. Drendel is a director of Sprint Nextel Corporation and the National Cable & Telecommunications Association. Mr. Drendel was inducted into the Cable Television Hall of Fame in 2002.

Brian D. Garrett
President and Chief Operating Officer

 

58

 

Brian D. Garrett has been President and Chief Operating Officer of CommScope and CommScope NC since October 1997. He was our Executive Vice President, Operations from the Spin-off until October 1997. Prior to that time, Mr. Garrett has held various positions with CommScope NC since 1980.

Jearld L. Leonhardt
Executive Vice President and Chief Financial Officer

 

58

 

Jearld L. Leonhardt has been our Executive Vice President and Chief Financial Officer since 1999. He served as our Executive Vice President, Finance and Administration from the Spin-off until 1999. Prior to that time, Mr. Leonhardt has held various positions with CommScope NC since 1970.

Randall W. Crenshaw
Executive Vice President and General Manager, Enterprise

 

49

 

Randall W. Crenshaw has been our Executive Vice President and General Manager, Enterprise, since February 2004. From 2000 to February 2004, he served as Executive Vice President, Procurement, and General Manager, Network Products Group, of CommScope and CommScope NC. Prior to that time, Mr. Crenshaw has held various positions with CommScope NC since 1985.

Marvin S. Edwards, Jr.
Executive Vice President, Business Development

 

58

 

Marvin S. Edwards, Jr. has been our Executive Vice President—Business Development and Chairman of our wholly owned subsidiary, Connectivity Solutions Manufacturing, Inc. (CSMI), since April 2005. He was previously Acting President of CSMI from October 2004 to April 2005. Between 2001 and 2003, he was President and Chief Executive Officer of OFS Fitel, LLC and OFS BrightWave, LLC, a joint venture between CommScope and The Furukawa Electric Co., Ltd. Mr. Edwards joined CommScope earlier in 2001 as Executive Vice President—Strategic Development and President of the Wireless Products Group. Between 1986 and 2001, he served in various capacities with Alcatel, including President of Alcatel North America Cable Systems and President of Radio Frequency Systems (RFS).

William R. Gooden
Senior Vice President and Controller

 

65

 

William R. Gooden has been our Senior Vice President and Controller since the Spin-off. Prior to that time, Mr. Gooden has held various positions with CommScope NC since 1978.

20




 

Edward A. Hally
Executive Vice President and General Manager, Carrier

 

57

 

Edward A. Hally has been Executive Vice President and General Manager, Carrier of CommScope and CommScope NC since November 2004. From 2002 to November 2004, he served as Executive Vice President and General Manager, Wireless Products of CommScope. From 2001 to 2002, he served as Senior Vice President and General Manager for Inktomi Corporation, a global provider of information-retrieval solutions.

James R. Hughes
Executive Vice President, Broadband—Sales and Marketing

 

46

 

James R. Hughes has been Executive Vice President, Broadband—Sales and Marketing of CommScope and CommScope NC since January 1, 2005. From 1997 until 2005, he was Senior Vice President, North American Broadband Sales and Marketing of CommScope NC. Prior to joining CommScope in 1995, Mr. Hughes held various positions with Belden Wire & Cable from 1983 to 1995.

Christopher A. Story
Executive Vice President, Broadband—Operations

 

47

 

Christopher A. Story has been Executive Vice President, Broadband—Operations of CommScope and CommScope NC since 2000. Prior to that time, Mr. Story has held various positions with CommScope NC since 1989.

Frank B. Wyatt, II
Senior Vice President, General Counsel and Secretary

 

44

 

Frank B. Wyatt, II has been Senior Vice President, General Counsel and Secretary of CommScope since 2000. Prior to joining CommScope NC as General Counsel and Secretary in 1996, Mr. Wyatt was an attorney in private practice with Bell, Seltzer, Park & Gibson, P.A. (now Alston & Bird LLP). Mr. Wyatt is CommScope’s Corporate Compliance and Ethics Officer.

 

21




PART II

ITEM 5.                MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the New York Stock Exchange under the symbol CTV. The following table sets forth the high and low sale prices as reported by the New York Stock Exchange for the periods indicated.

 

Common Stock
Price Range

 

 

 

High

 

Low

 

2005

 

 

 

 

 

First Quarter

 

$

19.23

 

$

13.98

 

Second Quarter

 

$

18.17

 

$

13.83

 

Third Quarter

 

$

19.73

 

$

16.87

 

Fourth Quarter

 

$

21.13

 

$

16.38

 

2006

 

 

 

 

 

First Quarter

 

$

29.42

 

$

19.95

 

Second Quarter

 

$

33.72

 

$

25.92

 

Third Quarter

 

$

33.67

 

$

25.74

 

Fourth Quarter

 

$

35.91

 

$

29.25

 

 

As of February 14, 2007, the approximate number of registered stockholders of record of our common stock was 503.

We have never declared or paid any cash dividends on our common stock. We do not currently intend to pay cash dividends in the foreseeable future, but intend to reinvest earnings in our business. Certain of our debt agreements contain limits on our ability to pay cash dividends on our common stock.

22




PERFORMANCE GRAPH

The following graph compares cumulative total return on $100 invested on December 31, 2001 in each of CommScope’s Common Stock, the Standard & Poor’s 500 Stock Index (S&P 500 Index) and the Standard & Poor’s MidCap 400 Communications Equipment Index (S&P 400 Communications Equipment) (formerly the Standard & Poor’s MidCap 400 Telecommunications Equipment Index). The return of the Standard & Poor’s indices is calculated assuming reinvestment of dividends. The Company has not paid any dividends. The stock price performance shown on the graph below is not necessarily indicative of future price performance.

COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN

GRAPHIC

 

 

Base Period

 

Indexed Returns

 

 

 

December 31,

 

Years Ending December 31,

 

Company/Index

 

 

 

2001

 

2002

 

2003

 

2004

 

2005

 

2006

 

CommScope, Inc.

 

 

100

 

 

37.14

 

76.77

 

88.86

 

94.64

 

143.30

 

S&P 500 Index

 

 

100

 

 

77.90

 

100.25

 

111.15

 

116.61

 

135.03

 

S&P 400 Communications Equipment

 

 

100

 

 

54.26

 

90.27

 

84.08

 

79.24

 

88.24

 

 

23




ITEM 6.                SELECTED FINANCIAL DATA

The following table presents our historical selected financial data as of the dates and for the periods indicated. The data for each of the years presented are derived from our audited consolidated financial statements. The information set forth below should be read in conjunction with our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-K. This financial data does not reflect financial information of the Connectivity Solutions business for periods prior to the acquisition on January 31, 2004 or pro forma information relating to the acquisition and the related financing, and therefore may not be indicative of our financial condition and performance for future periods.

Five-Year Summary of Selected Financial Data
(In thousands, except per share amounts)

 

 

Year Ended December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

Results of Operations:

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,623,946

 

$

1,337,165

 

$

1,152,696

 

$

573,260

 

$

598,467

 

Gross profit

 

444,085

 

344,475

 

254,815

 

114,640

 

120,555

 

Impairment charges

 

 

 

 

31,728

 

25,096

 

Restructuring costs

 

12,578

 

38,558

 

14,243

 

 

 

Operating income (loss)

 

158,584

 

74,862

 

5,906

 

(8,954

)

(15,410

)

Loss on early extinguishment of debt

 

 

 

5,029

 

 

 

Equity in losses of OFS BrightWave, LLC

 

 

 

(1,393

)

(61,745

)

(53,722

)

Gain on sale of OFS BrightWave, LLC

 

 

 

76,437

 

 

 

Gain on OFS BrightWave, LLC note receivable

 

18,625

 

 

 

 

 

Net income (loss)

 

130,133

 

49,978

 

75,755

 

(70,560

)

(67,152

)

Net Income (Loss) Per Share Information:

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

58,524

 

54,828

 

57,353

 

59,231

 

61,171

 

Assuming dilution

 

72,266

 

67,385

 

67,685

 

59,231

 

61,171

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.22

 

$

0.91

 

$

1.32

 

$

(1.19

)

$

(1.10

)

Assuming dilution

 

$

1.84

 

$

0.78

 

$

1.15

 

$

(1.19

)

$

(1.10

)

Other Information:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

118,824

 

$

86,255

 

$

108,348

 

$

91,444

 

$

103,825

 

Depreciation and amortization

 

55,557

 

60,166

 

60,534

 

34,162

 

36,916

 

Additions to property, plant and equipment

 

31,552

 

19,943

 

13,211

 

5,322

 

22,616

 

 

 

 

As of December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

276,042

 

$

146,549

 

$

99,631

 

$

110,358

 

$

30,017

 

Short-term investments

 

151,868

 

102,101

 

77,620

 

95,680

 

90,085

 

Property, plant and equipment, net

 

242,012

 

252,877

 

311,453

 

176,290

 

229,515

 

Total assets

 

1,302,473

 

1,102,181

 

1,030,579

 

739,781

 

772,668

 

Working capital

 

624,557

 

412,320

 

291,420

 

280,636

 

213,971

 

Long-term debt, including current maturities

 

284,100

 

297,300

 

310,300

 

183,300

 

183,300

 

Stockholders’ equity

 

739,104

 

522,025

 

449,463

 

455,706

 

517,535

 

 

24




ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our historical results of operations and financial condition should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form 10-K. On January 31, 2004 we acquired the Connectivity Solutions business of Avaya. Historical financial and other information included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations for periods prior to January 31, 2004 reflects the business of CommScope prior to our acquisition of the Connectivity Solutions business, unless otherwise noted. Because the acquisition of the Connectivity Solutions business is significant to us, historical financial information for periods prior to the acquisition may not be indicative of our financial condition and performance for future periods.

OVERVIEW

CommScope, Inc. is a world leader in infrastructure solutions for communications networks. Our highly-engineered cable and connectivity solutions enable a host of information-rich and interactive services that are delivered to the home, office and mobile devices. We focus on the “last mile” in communications networks, which is the distribution access, or final link to the customer. We are a global leader in structured cabling for business enterprise applications and in broadband coaxial cables for the cable television industry. We are an industry leader in the design and manufacture of environmentally secure enclosures to integrate complex equipment for digital subscriber line (DSL) and Fiber-to-the-Node (FTTN) deployments by telecommunication service providers in the United States. We also design, manufacture and market a broad line of high-performance electronic, coaxial and fiber optic cable products for data networking, Internet access, wireless communication, telephony and other broadband applications.

Net sales for 2006 increased by $286.8 million or 21.4% to $1,623.9 million as compared to 2005 due to strong sales growth within each of our operating segments. The strong sales growth was primarily attributable to price increases, increases in sales volumes of existing products and new product introductions. The sales growth was realized both domestically as well as in most international regions. Operating income for 2006 increased to $158.6 million from $74.9 million in 2005, primarily due to an increase in gross margin to 27.3% during 2006 compared with 25.8% during 2005 and a $26.0 million reduction in restructuring costs incurred. Operating income for 2005 was favorably impacted by a $13.2 million recovery of accounts receivable that had previously been written-off. Net income increased to $130.1 million for 2006 compared to $50.0 reported for 2005, reflecting the improved operating income results, an $18.6 million gain realized during 2006 on a note receivable from OFS BrightWave and a $7.0 million pretax improvement in net interest income.

During the periods presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the primary source of revenue from our Enterprise segment was sales of structured cabling solutions to large, multinational companies, primarily through a global network of distributors, system integrators and value-added resellers. The segment also includes coaxial cable for various video and data applications, other than cable television. Demand for Enterprise segment products depends primarily on information technology spending by enterprises, such as communications projects in new buildings or campuses, building expansions or upgrades of network systems within buildings, campuses or data centers. The primary source of revenue for our Broadband segment was product sales to cable television system operators. Demand for our Broadband segment products depends primarily on capital spending by cable television system operators for maintaining, constructing and rebuilding or upgrading their systems. The primary source of revenue for our Carrier segment was sales of secure environmental enclosures for electronic devices and equipment. These products are used by wireline and wireless telecommunication service providers (carriers) and may be sold directly to the carriers or to original

25




equipment manufacturers (OEMs) providing equipment to such carriers. The Carrier segment also derives revenue from the sale of cables and components used by wireless providers to connect antennae to transmitters. Demand for Carrier segment products depends primarily on capital spending by carriers to expand their distribution networks or increase the capacity of their networks.

Our future financial condition and performance will be largely dependent upon 1) global spending by business enterprises on information technology; 2) investment by telecommunication companies in the communications infrastructure; 3) overall global business conditions; 4) our ability to manage costs successfully among our global operations; and 5) the other factors set forth in Item 1A of this Form 10-K. Our profitability is also affected by the mix and volume of sales among our various product groups and between domestic and international customers and competitive pricing pressures. We have experienced significant increases and greater volatility in raw material prices during the past several years as a result of increased global demand and supply disruptions. We attempt to mitigate the risk of increases in raw material price volatility through effective requirements planning, working closely with key suppliers to obtain the best possible pricing and delivery terms and implementing price increases. Delays in implementing price increases, failure to achieve market acceptance of future price increases, or price reductions in response to a rapid decline in raw material costs could have a material adverse impact on the results of our operations.

CRITICAL ACCOUNTING POLICIES

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a discussion and analysis of our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and their underlying assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other objective sources. Management bases its estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when changes in events or circumstances indicate that revisions may be necessary.

The following significant accounting estimates reflected in our financial statements are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events. It is reasonably possible that they may ultimately differ materially from actual results.

Allowance for Doubtful AccountsWe maintain allowances for doubtful accounts for estimated losses expected to result from the inability of our customers to make required payments. These estimates are based on management’s evaluation of the ability of our customers to make payments, focusing on customer financial difficulties and age of receivable balances. An adverse change in financial condition of a significant customer or group of customers could materially affect management’s future estimates related to doubtful accounts.

Reserves for Sales Returns, Discounts, Allowances, Rebates and Distributor Price Protection ProgramsWe record estimated reductions to revenue for potential sales returns as well as customer programs and incentive offerings, such as discounts, allowances, rebates and distributor price protection programs. These estimates are based on contract terms, historical experience, inventory levels in the distributor channel and other factors. Management believes it has sufficient historical experience to allow for reasonable and reliable estimation of these reductions to revenue. However, declining market conditions could result in increased sales returns and allowances and potential distributor price protection incentives, resulting in future reductions to revenue.

26




Inventory Excess and Obsolescence ReservesWe maintain reserves to reduce the value of inventory based on the lower of cost or market principle, including allowances for excess and obsolete inventory. These reserves are based on management’s assumptions about and analysis of relevant factors including current levels of orders and backlog, shipment experience, forecasted demand and market conditions. We do not believe our products are subject to a significant risk of obsolescence in the short term and management believes it has the ability to adjust production levels in response to declining demand. However, if actual market conditions deteriorate from those anticipated by management, additional allowances for excess and obsolete inventory could be required.

Product Warranty Reserves—We recognize a liability for the estimated claims that may be paid under our customer warranty agreements to remedy potential deficiencies of quality or performance of our products. The 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. We record a provision for estimated future warranty claims based upon the historical relationship of warranty claims to sales and specifically identified warranty issues. We base our estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revise our estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is reasonably possible that they may ultimately differ materially from actual results.

Equity-Based Compensation—As of January 1, 2006 we adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” and therefore recognize the estimated fair value of stock options and other equity-based instruments as an expense over the requisite service period. We use the Black-Scholes valuation method to estimate the fair value of options granted to employees or directors. Numerous assumptions are required to estimate the fair value of options granted and the expense to be recognized, including but not limited to stock price volatility, risk-free interest rates, expected dividend rates, option exercise rates and forfeiture rates. Management believes that the valuation approach and assumptions utilized are reasonable. Use of a different valuation methodology or assumptions could produce a materially different result.

Tax Valuation AllowancesWe establish an income tax valuation allowance when available evidence indicates that it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider the amounts and timing of expected future deductions or carryforwards and sources of taxable income that may enable utilization. We maintain an existing valuation allowance until sufficient positive evidence exists to support its reversal. Changes in the amount or timing of expected future deductions or taxable income may have a material impact on the level of deferred tax valuation allowances. If we determine that we will not be able to realize all or part of a deferred tax asset in the future, an increase to an income tax asset valuation allowance would be charged to earnings in the period such determination was made. We also establish allowances for value added and similar tax recoverables when it is considered probable that those assets are not collectible. Changes in the probability of recovery or in the estimates of the amount recoverable are recognized in the period such determination is made and may be material to earnings.

Impairment ReviewsManagement reviews intangible assets, investments and other long-lived assets for impairment when events or changes in circumstances indicate that their carrying values may not be fully recoverable. Goodwill and other intangible assets with indefinite lives are tested for impairment annually as of August 31 and on an interim basis when events or circumstances change. Management assesses potential impairment of the carrying values of these assets based on market prices, if available, or assumptions about and estimates of future cash flows expected from these assets. Operating performance, market conditions and other factors may adversely impact estimates of expected future cash flows. Any impairment indicated by this analysis would be measured as the amount by which the carrying value

27




exceeds fair value, estimated by management based on market prices, if available, or forecasted cash flows, discounted using a discount rate commensurate with the risks involved. Assumptions related to future cash flows and discount rates involve management judgment and are subject to significant uncertainty. If assumptions used in the assessment and measurement of impairment differ from management’s prior estimates and forecasts, additional impairment charges could be required.

Pension and Postretirement BenefitsOur pension and postretirement benefit costs and liabilities are developed from actuarial valuations. Critical assumptions inherent in these valuations include the discount rate, health care cost trend rate, rate of return on plan assets and mortality rates. Assumptions are subject to change each year based on changes in market conditions and in management’s assumptions about future events. Changes in these assumptions may have a material impact on future pension and postretirement benefit costs and liabilities.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 WITH THE YEAR ENDED DECEMBER 31, 2005

 

 

2006

 

2005

 

 

 

 

 

 

 

Amount

 

% of Net
Sales

 

Amount

 

% of Net
Sales

 

Dollar
Change

 

%
Change

 

 

 

(dollars in millions, except per share amounts)

 

Net sales

 

$

1,623.9

 

 

100.0

%

 

$

1,337.2

 

 

100.0

%

 

$

286.7

 

 

21.4

%

 

Gross profit

 

444.1

 

 

27.3

 

 

344.5

 

 

25.8

 

 

99.6

 

 

28.9

 

 

SG&A expense

 

240.0

 

 

14.8

 

 

199.7

 

 

14.9

 

 

40.3

 

 

20.2

 

 

R&D expense

 

32.9

 

 

2.0

 

 

31.3

 

 

2.3

 

 

1.6

 

 

4.9

 

 

Restructuring costs

 

12.6

 

 

0.8

 

 

38.6

 

 

2.9

 

 

(26.0

)

 

(67.4

)

 

Net gain on OFS BrightWave note receivable, net of tax

 

18.6

 

 

1.1

 

 

 

 

 

 

18.6

 

 

100.0

 

 

Net income

 

130.1

 

 

8.0

 

 

50.0

 

 

3.7

 

 

80.1

 

 

160.4

 

 

Net income per diluted share

 

1.84

 

 

 

 

 

0.78

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

Consolidated net sales increased during 2006 primarily due to higher prices for Enterprise and Broadband segment products in response to higher raw material costs, increased domestic sales of ICS products and sales growth in the Enterprise and Broadband segments. For further details by segment, see the section titled “Segment Results” below.

Gross profit (net sales less cost of sales)

Gross profit for 2006 increased by $99.6 million to $444.1 million and 2006 gross profit margin increased to 27.3% compared to 25.8% for 2005. These improvements reflect the impact of price increases implemented in response to increases in raw material costs, changes in the mix of products sold, increased sales volume and cost reductions, including those resulting from the global manufacturing initiatives begun during the third quarter of 2005 (see Restructuring Costs below).

Increased prices and greater volatility in the cost of raw materials, such as copper, aluminum, steel and plastics and other polymers increased cost of sales. As a result of these higher costs, we implemented price increases for certain products during 2005 and 2006, which substantially offset the impact of higher raw material prices on gross margin.

We expect gross profit and gross profit margin to improve in 2007, largely as a result of higher sales volume and additional cost savings from the global manufacturing initiatives. However, changes in pricing in response to volatility in raw material costs may reduce gross profit and gross profit margin if we delay

28




implementing price increases, are unable to achieve market acceptance of future price increases or implement price reductions in response to a rapid decline in raw material prices.

Selling, general and administrative expense

Selling, general and administrative (SG&A) expenses increased by $40.3 million to $240.0 million during 2006 and decreased modestly as a percentage of net sales to 14.8% during 2006 compared to 14.9% during 2005. The increase in SG&A is largely attributable to higher selling expenses directly related to the increase in sales and somewhat attributable to a $13.2 million benefit recognized in 2005 related to recovery of accounts receivable from Adelphia that had been written off in 2002. See Note 7 in the Notes to the Consolidated Financial Statements in this Form 10-K for additional discussion of this recovery. Also contributing to the increase in SG&A were $2.9 million of equity-based compensation expense recognized as a result of implementing SFAS No. 123(R), “Share-Based Payment,” during 2006 and $1.3 million of costs incurred in connection with the proposed acquisition of Andrew Corporation. Excluding the impact of the Adelphia recovery, SG&A as a percentage of net sales was 15.9% for 2005. The reduction in SG&A as a percentage of sales from this adjusted 2005 percentage reflects the impact of increased sales prices and higher sales volumes in 2006 as well as the benefit from cost reduction initiatives.

Research and development

R&D expense increased by $1.6 million to $32.9 million during 2006 primarily related to developing new products and modifying existing products to better serve our customers. R&D expenses are primarily incurred in the Enterprise and Carrier segments.

Restructuring Costs

We recognized $12.6 million of pretax restructuring charges during 2006, compared to $38.6 million recognized during 2005. The 2006 charges relate to the global manufacturing initiatives adopted in August 2005 and the 2005 charges included $34.5 million related to the global manufacturing initiatives and $4.1 million related to completing the organizational and cost reduction initiatives begun in 2004 at CSMI, the Company’s wholly owned subsidiary.

The objectives of the global manufacturing initiatives are to reduce costs by improving manufacturing efficiency and to enhance the Company’s long-term competitive position. Implementation of these initiatives includes shifting significant Enterprise and Broadband segment cable production capacity among our global facilities, consolidating operations at the CSMI Omaha facility into one building and closing a Broadband segment manufacturing facility in Scottsboro, Alabama in late 2006.

Charges incurred during 2006 for the global manufacturing initiatives included $5.2 million for employee-related costs and $7.9 million for equipment relocation costs, partially offset by a $0.5 million net asset impairment gain primarily related to the sale of previously impaired assets. The employee-related costs include accruals for severance and related fringe benefits and are accrued ratably over the period employees are obligated to provide services in order to receive benefits. Additional pretax employee-related charges of up to $0.1 million are expected to be recognized in 2007 to complete the global manufacturing initiatives.

Equipment relocation costs relate directly to shifting manufacturing capacity among our global manufacturing facilities and include costs to uninstall, pack, ship and re-install equipment as well as the costs to prepare the receiving facility to accommodate the equipment. These costs are recognized as the expenses are incurred and additional costs of approximately $1.0 million are expected to be recognized in 2007 to complete the global manufacturing initiatives.

29




The net asset impairment gain recognized during 2006 reflects primarily a gain of $1.6 million from the sale of production equipment that had been impaired during 2005 and an impairment charge of $1.1 million relating to land at the Omaha facility that is being marketed for sale and for certain assets from the Scottsboro, Alabama facility that were abandoned.

Charges incurred during 2005 related to the global manufacturing initiatives included $18.0 million for employee-related costs (including $10.0 million of curtailment and special termination benefits relating from an early retirement offer), $2.4 million for equipment relocation costs and $14.1 million for asset impairment charges. The asset impairment charges related to production equipment that was identified as excess, pending consolidation of certain production operations in other facilities.

As a result of restructuring actions, there is significant unutilized space in our Omaha facility as well as the unutilized Scottsboro, Alabama facility. We are currently attempting to sell all of this unutilized space. As of December 31, 2006, assets with a net book value of $15.8 million, which are classified as property, plant and equipment, are being marketed for sale. Additional charges, which are not expected to be material, may be incurred in completing this process.

Net interest income (expense)

Net interest income during 2006 was $3.8 million, compared to net interest expense of $3.3 million during 2005. This improvement is primarily due to higher interest income from the significantly higher balances of invested cash, cash equivalents and short-term investments during 2006. Our weighted average effective interest rate on outstanding borrowings, including amortization of associated loan fees, was 2.68% as of December 31, 2006, compared to 2.74% as of December 31, 2005. The average interest rate on outstanding borrowing was essentially unchanged due to the reduction in the balance of our senior term note due to principal payments, offset by increases in the rate on the note due to increases in short-term interest rates.

Income taxes

Our effective income tax rate was 32.7% for 2006 (31.9% excluding the impact of the gain on the OFS BrightWave note receivable), compared to 29.7% for 2005. 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%. The modestly higher effective tax rate for 2006 reflects changes in the mix of our taxable earnings between domestic and foreign operations and the impact of not recognizing tax benefits of operating losses in certain of our foreign operations. Our 2005 tax provision included the establishment of a $2.3 million valuation allowance related to deferred tax assets arising from net operating losses from one of our foreign subsidiaries and $2.3 million related to establishing tax reserves for various prior year state income tax matters arising from tax audits, which were substantially offset by the release of $4.2 million of previously established valuation allowances related to state net operating loss and tax credit carryforwards.

OFS BrightWave, LLC

In June 2006, the Company agreed to accept and received $29.8 million plus accrued interest in full satisfaction of the amount owed by OFS BrightWave under a $30 million note receivable. The note had originally been entered into in 2001 in conjunction with the Company’s initial acquisition of an equity interest in OFS BrightWave. The carrying value of the note receivable had been written down to zero through recording CommScope’s equity in OFS BrightWave losses and as a result of the 2004 transaction in which the Company’s interest in OFS BrightWave was reduced to zero.

The repayment of the note receivable resulted in a $29.8 million pretax gain ($18.6 million after tax or $0.26 per diluted share).

30




Segment Results

 

 

2006

 

2005

 

 

 

 

 

 

 

 

 

% of Net

 

 

 

% of Net

 

Dollar

 

%

 

 

 

Amount

 

Sales

 

Amount

 

Sales

 

Change

 

Change

 

 

 

(dollars in millions)

 

Net sales by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enterprise

 

$

802.3

 

 

49.4

%

 

$

662.5

 

 

49.5

%

 

$

139.8

 

 

21.1

%

 

Broadband

 

550.2

 

 

33.9

 

 

459.6

 

 

34.4

 

 

90.6

 

 

19.7

 

 

Carrier

 

273.1

 

 

16.8

 

 

217.4

 

 

16.3

 

 

55.7

 

 

25.6

 

 

Inter-segment eliminations

 

(1.7

)

 

(0.1

)

 

(2.3

)

 

(0.2

)

 

0.6

 

 

 

 

 

Consolidated net sales

 

$

1,623.9

 

 

100.0

%

 

$

1,337.2

 

 

100.0

%

 

$

286.7

 

 

21.4

%

 

Total domestic sales

 

$

1,111.7

 

 

68.5

%

 

$

886.8

 

 

66.3

%

 

$

224.9

 

 

25.4

%

 

Total international sales

 

512.2

 

 

31.5

 

 

450.4

 

 

33.7

 

 

61.8

 

 

13.7

 

 

Total worldwide sales

 

$

1,623.9

 

 

100.0

%

 

$

1,337.2

 

 

100.0

%

 

$

286.7

 

 

21.4

%

 

Operating income by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enterprise

 

$

95.9

 

 

12.0

%

 

$

34.1

 

 

5.1

%

 

$

61.8

 

 

181.2

%

 

Broadband

 

34.3

 

 

6.2

 

 

47.8

 

 

10.4

 

 

(13.5

)

 

(28.2

)

 

Carrier

 

28.4

 

 

10.4

 

 

(7.0

)

 

(3.2

)

 

35.4

 

 

 

 

 

Consolidated operating income

 

$

158.6

 

 

9.8

%

 

$

74.9

 

 

5.6

%

 

$

83.7

 

 

111.8

%

 

 

Enterprise Segment

The increase in net sales of Enterprise segment products was primarily due to higher prices, increased sales volumes of existing products, changes in product mix and sales of new products. The higher prices were implemented in response to significant increases in the cost of raw materials, particularly metals, plastics and other polymers. Sales volumes increased in every region, with particular strength in North America, Central and Latin America and Europe/Middle East/Africa.

We anticipate that sales volumes will continue to increase during 2007 as business enterprises continue to invest in higher capacity infrastructure solutions to support the demand for greater bandwidth.

The increase in operating income is attributable in large part to lower restructuring costs in 2006 ($8.6 million in 2006 compared to $33.9 million in 2005) as the global manufacturing initiatives were substantially concluded, higher sales volume and selling prices, shifts in the mix of products sold towards products with higher profit margins and the impact of cost reduction efforts, including those realized from the global manufacturing initiatives.

Broadband Segment

The increase in net sales of Broadband segment products was primarily due to higher prices, the increased sales volumes of existing products and the sales from the MC2 product line that was acquired in March 2006. The higher prices were implemented in response to significant increases in the cost of raw materials, particularly metals, plastics and other polymers. Sales volumes increased in all regions with particular strength in North America, Central and Latin America and Europe/Middle East/Africa. Domestic sales increases generally result from continued infrastructure needs of our large cable television system operators and international increases generally result from new projects and ongoing system maintenance.

We anticipate modest sales growth during 2007 as domestic cable television system operators continue to maintain their networks, expand product offerings and compete with telephone companies for residential and commercial customers.

31




The $13.5 million decrease in 2006 operating income was due primarily to the $13.2 million benefit recognized in 2005 related to the recovery of the accounts receivable from Adelphia that had been written off in 2002. Operating income in 2006 was favorably impacted by higher sales volumes and savings realized from the global manufacturing initiatives and negatively impacted by a provision of $4.7 million included in cost of goods sold related to the portion of value added taxes receivable at our Brazilian subsidiary that are not believed to be recoverable and by higher restructuring costs ($3.2 in 2006 compared to $0.7 million in 2005) as the global manufacturing initiatives were largely implemented during 2006.

Carrier Segment

The increase in net sales of Carrier segment products was due to significantly higher sales volume of Integrated Cabinet Solutions (ICS) products. The rapid growth of the ICS business reflects the demand from DSL and FTTN deployments by telephone companies to support video and high-speed data services. Net sales of wireless products was essentially unchanged between years and net sales of ExchangeMAX products decreased modestly as a result of our decision during 2005 to exit the twisted pair central office cable products business.

We expect continued sales growth of our ICS products as telephone companies continue to deploy DSL and other services in order to compete with cable companies and other telecommunication service providers.

Operating income improved by $35.4 million largely as a result of the higher sales volume of ICS products and the benefit of cost reduction efforts, including the global manufacturing initiatives. Operating income was also favorably impacted by lower restructuring costs ($0.8 million in 2006 compared to $3.9 million in 2005).

2007 Outlook

We are encouraged by the global outlook for our products. We believe market conditions for the Enterprise and Broadband segments should support revenue growth in 2007 from increases in global sales volume. Pricing actions in response to volatility in the cost of raw materials such as copper, aluminum and plastics could have a significant impact on our sales. Carrier segment sales are expected to continue to grow as certain wireline and wireless operators upgrade their communications networks. We are dependent upon continued spending for maintenance of existing infrastructure and ongoing capital investment by our customers in each segment in order to achieve an increase in sales.

We expect operating income to increase during 2007, primarily due to higher sales volumes, shifts of the mix of products sold to higher margin products and realizing the benefits of cost reduction initiatives implemented during 2006. Volatile raw materials costs continue to pose a risk to achieving operating margin targets.

32




COMPARISON OF RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005 WITH THE YEAR ENDED DECEMBER 31, 2004

 

 

2005

 

2004

 

 

 

 

 

 

 

Amount

 

% of Net
Sales

 

Amount

 

% of Net
Sales

 

Dollar
Change

 

%
Change

 

 

 

(dollars in millions, except per share amounts)

 

Net sales

 

$

1,337.2

 

 

100.0

%

 

$

1,152.7

 

 

100.0

%

 

$

184.5

 

16.0

%

Gross profit

 

344.5

 

 

25.8

 

 

254.8

 

 

22.1

 

 

89.7

 

35.2

 

SG&A expense

 

199.7

 

 

14.9

 

 

193.1

 

 

16.8

 

 

6.6

 

3.4

 

R&D expense

 

31.3

 

 

2.3

 

 

29.3

 

 

2.5

 

 

2.0

 

6.8

 

In-process research and development charges

 

 

 

 

 

4.0

 

 

0.3

 

 

(4.0

)

(100.0

)

Acquisition-related transition and startup costs

 

 

 

 

 

8.3

 

 

0.7

 

 

(8.3

)

(100.0

)

Restructuring costs

 

38.6

 

 

2.9

 

 

14.2

 

 

1.2

 

 

24.4

 

171.8

 

Equity in losses of OFS BrightWave, LLC, net of tax

 

 

 

 

 

1.4

 

 

0.1

 

 

(1.4

)

(100.0

)

Net gain on OFS BrightWave transaction, net of tax

 

 

 

 

 

76.4

 

 

6.6

 

 

(76.4

)

(100.0

)

Net income

 

50.0

 

 

3.7

 

 

75.8

 

 

6.6

 

 

(25.8

)

(34.0

)

Net income per diluted share

 

0.78

 

 

 

 

 

1.15

 

 

 

 

 

 

 

 

 

 

Effective January 31, 2004, we acquired substantially all of the assets and assumed certain liabilities of Connectivity Solutions from Avaya and the Connectivity Solutions operating results have been included in our consolidated financial statements since the date of acquisition. Accordingly, the consolidated results for the year ended December 31, 2004 include the operating results of Connectivity Solutions for the eleven-month period from February 1, 2004 through December 31, 2004. This information should be considered when comparing the financial results of 2005 and 2004. See Note 3 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K.

Net sales

Overall, consolidated net sales increased during 2005 primarily due to strong growth in domestic ICS and wireless product sales within the Carrier segment and higher prices in response to higher raw material costs and modest sales growth in the Enterprise and Broadband segments. For further details by segment, see the section titled “Segment Results” below.

Gross profit (net sales less cost of sales)

Gross profit for 2005 increased by $89.7 million to $344.5 million and 2005 gross profit margin increased to 25.8% compared to 22.1% for 2004. These improvements reflect the impact of price increases implemented in response to increases in raw material costs, changes in the mix of products sold and cost reductions, including those resulting from the initiatives begun during the fourth quarter of 2004 at the CSMI Omaha facility.

Gross profit margin for 2004 was adversely affected by the impact of purchase accounting adjustments on the Connectivity Solutions inventory. These purchase accounting adjustments resulted from the write-up of Connectivity Solutions finished goods and work in process inventory to reflect its acquired fair value as of the acquisition date. This write-up to fair value resulted in an increase of approximately $14.6 million in cost of sales and lower margins following the Connectivity Solutions acquisition as the acquired inventory was sold.

33




The rising cost of raw materials, such as copper, aluminum, plastics and other polymers, and steel increased cost of sales. As a result of these higher costs, we implemented price increases for certain products during 2004 and 2005, which somewhat offset the impact of higher raw material prices on gross margin.

Selling, general and administrative expense

Selling, general and administrative (SG&A) expenses increased by $6.6 million to $199.7 million during 2005 and decreased as a percentage of net sales to 14.9% during 2005 compared to 16.8% during 2004. The increase in SG&A is net of a $13.2 million benefit related to recovery of accounts receivable from Adelphia that had been written off in 2002. See Note 7 in the Notes to the Consolidated Financial Statements in this Form 10-K for additional discussion of this recovery. Excluding the impact of the Adelphia recovery, SG&A as a percentage of net sales was 15.9% for 2005. This adjusted percentage is lower than that for 2004 reflecting the impact of cost reduction initiatives and the absence of various costs incurred in 2004 associated with the acquisition of Connectivity Solutions.

Research and development

R&D expense increased by $2.0 million to $31.3 million during 2005 primarily related to developing new Enterprise segment structured cabling solutions, cost effective designs for products within each of our segments and production modifications for certain Enterprise and Broadband segment products in order to be in a position to comply with new regulations governing the use of certain hazardous substances in the manufacture of electronic equipment and components.

In-process research and development charges

We recognized a $4.0 million pretax charge in 2004 for the write-off of in-process R&D acquired in our acquisition of Connectivity Solutions. This R&D was valued as an intangible asset by independent appraisal in accordance with purchase accounting guidance. Since R&D activities are required to be expensed as incurred under U.S. generally accepted accounting principles, this acquired intangible asset was written off immediately following the acquisition date.

Acquisition-related transition and startup costs

We incurred pretax charges of $8.3 million during 2004 as a result of startup, transition and other costs related to the acquisition of Connectivity Solutions. These charges primarily related to information technology, transition activities and other acquisition-related costs.

We reduced the Connectivity Solutions workforce by approximately 45 employees, or 2% of the global workforce, during the first quarter of 2004. The reductions were primarily related to our efforts to improve operational efficiency and reduce cost and primarily affected the Enterprise segment. We recorded net pretax charges of $1.3 million in acquisition-related transition and startup costs for employee termination benefits related to this workforce reduction.

Restructuring Costs

We recognized $38.6 million of pretax restructuring charges during 2005, compared to $14.2 million recognized during 2004. The 2005 charges included $34.5 million related to global manufacturing initiatives adopted by the Board of Directors in August 2005 and $4.1 million related to completing the organizational and cost reduction initiatives begun in 2004 at CSMI.

The objectives of the global manufacturing initiatives are to reduce costs by improving manufacturing efficiency and to enhance the Company’s long-term competitive position. Implementation of these

34




initiatives includes shifting significant Enterprise and Broadband segment cable production capacity among our global facilities, consolidating operations at the CSMI Omaha facility into one building and closing a Broadband segment manufacturing facility in Scottsboro, Alabama in late 2006.

Charges incurred during 2005 for the global manufacturing initiatives included $18.0 million for employee-related costs, $2.4 million for equipment relocation costs and $14.1 million for asset impairment charges. The employee-related costs include accruals for severance and related fringe benefits of $8.0 million and $10.0 million related to pension and other postemployment benefit curtailment and special termination benefit costs resulting from an early retirement offer made available to and accepted by certain employees. Severance and related fringe benefits are accrued ratably over the period employees are obligated to provide services in order to receive benefits. Equipment relocation costs relate directly to shifting manufacturing capacity among our global manufacturing facilities and include costs to uninstall, pack, ship and re-install equipment as well as the costs to prepare the receiving facility to accommodate the equipment. These costs are recognized as the expenses are incurred.

Asset impairment charges relate to production equipment that has been identified as excess, pending consolidation of certain production operations in other facilities. It is anticipated that this equipment will be available for sale once the facility consolidation is complete. The equipment has been recorded at its estimated net realizable value upon sale plus an estimate of its remaining utility while in service. Charges incurred during 2005 related to the 2004 organizational and cost reduction initiatives included $3.7 million for process improvement costs, primarily consulting and other costs associated with modifying the manufacturing operations, and $2.1 million for asset impairment charges related to equipment that was no longer in use, including $0.5 million related to classifying a distribution facility as held for sale and reducing the carrying value to its estimated fair value less costs to sell. There was a $1.8 million reversal of reserves for severance and related fringe benefits established in 2004 as a result of there being fewer reductions in personnel, due to higher than anticipated levels of business for certain products.

Loss on early extinguishment of debt

We recognized a $5.0 million pretax loss during 2004 on the early extinguishment of our 4% convertible subordinated notes. This loss includes premiums paid and accrued to note holders of $3.1 million and the write-off of the remaining balance of related long-term financing costs of $1.9 million.

Net interest expense

Net interest expense during 2005 was $3.3 million, compared to $7.0 million during 2004. Our weighted average effective interest rate on outstanding borrowings, including amortization of associated loan fees, was 2.74% as of December 31, 2005, compared to 2.70% as of December 31, 2004. The average interest rate on outstanding borrowing was essentially unchanged due to the reduction in the balance of our senior term note due to scheduled principal payments, offset by increases in the rate on the note due to increases in short-term interest rates. The reduction in net interest expense was primarily the result of increased interest income due to the larger invested balances in 2005 and higher short-term interest rates.

Income taxes

Our effective income tax rate was 29.7% for 2005, compared to 32.8% for 2004. 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%. Our 2005 tax provision includes the establishment of a $2.3 million valuation allowance related to deferred tax assets arising from net operating losses from one of our foreign subsidiaries and $2.3 million related to establishing tax reserves for various prior year state income tax matters arising from tax audits, which are substantially offset by the release of $4.2 million of previously established valuation allowances related to state net operating loss and tax credit carryforwards.

35




OFS BrightWave, LLC

Effective April 1, 2004, Furukawa made additional equity investments in OFS BrightWave and we elected not to make further corresponding investments in OFS BrightWave. As a result, our ownership percentage was reduced from 18.4% to 9.4%.

Primarily as a result of the continuing weakness in the fiber optic cable market and Furukawa’s continuing efforts to restructure its OFS operations, we agreed with Furukawa to further amend our existing contractual arrangements in the second quarter of 2004 for the mutual benefit of both companies. On June 14, 2004, we agreed with Furukawa to change the period in which we could exercise our contractual right to sell our ownership interest in OFS BrightWave to Furukawa from 2006 to any time on or after June 14, 2004 and changed the exercise price from $173.4 million in cash to the approximately 7.7 million shares of our common stock owned by Furukawa. On June 14, 2004, we exercised our contractual right to sell our 9.4% ownership interest in OFS BrightWave to Furukawa in exchange for the approximately 7.7 million shares of our common stock owned by Furukawa, which had a fair value of $132.3 million as of the transaction date. We currently hold these shares as treasury stock.

As a result of this transaction, we no longer own any equity interest in OFS BrightWave. However, we maintained our strategic relationship with Furukawa by entering into a four-year optical fiber supply agreement with OFS Fitel, LLC (Fitel), a wholly owned subsidiary of Furukawa, replacing the existing supply agreement with Fitel that was scheduled to expire in November 2004. Through this supply agreement, we continue to have access to a broad array of technologically advanced optical fibers. We also have a cross license arrangement with a subsidiary of Furukawa for key intellectual property.

The OFS BrightWave transaction resulted in a net pretax gain of $121.3 million ($76.4 million net of tax or $1.13 per diluted share) during 2004. This gain represents (1) the fair value of the common stock received by us in exchange for the transfer of our ownership interest in OFS BrightWave to Furukawa, plus (2) the realized gain from our cumulative equity method share of OFS BrightWave’s unrealized foreign currency translation gains previously recorded in accumulated other comprehensive loss, less (3) an $11 million impairment charge related to fully impairing a $30 million note receivable from OFS BrightWave. This transaction did not affect our right to receive full payment from OFS BrightWave under the $30 million note due in November 2006, based on its original terms. We continued to receive quarterly interest payments in accordance with the terms of the note while it was outstanding.

Our share of the losses of OFS BrightWave for the period from January 1, 2004 through June 14, 2004 was $2.3 million, pretax. We realized a tax benefit related to our share of the losses of $0.8 million in 2004.

36




Segment Results

Below is a summary that reflects our actual net sales by segment for the years ended December 31, 2005 and 2004. The net sales for the year ended December 31, 2004 incorporate the Connectivity Solutions net sales for the eleven-month period from February 1, 2004 through December 31, 2004.

 

 

2005

 

2004

 

 

 

 

 

 

 

 

 

% of Net

 

 

 

% of Net

 

Dollar

 

%

 

 

 

Amount

 

Sales

 

Amount

 

Sales

 

Change

 

Change

 

 

 

(dollars in millions)

 

Net sales by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enterprise

 

$

662.5

 

 

49.5

%

 

$

588.0

 

 

51.0

%

 

$

74.5

 

12.7

%

Broadband

 

459.6

 

 

34.4

 

 

422.8

 

 

36.7

 

 

36.8

 

8.7

 

Carrier

 

217.4

 

 

16.3

 

 

143.5

 

 

12.4

 

 

73.9

 

51.5

 

Inter-segment eliminations

 

(2.3

)

 

(0.2

)

 

(1.6

)

 

(0.1

)

 

(0.7

)

 

 

Consolidated net sales

 

$

1,337.2

 

 

100.0

%

 

$

1,152.7

 

 

100.0

%

 

$

184.5

 

16.0

%

Total domestic sales

 

$

886.8

 

 

66.3

%

 

$

779.0

 

 

67.6

%

 

$

107.8

 

13.8

%

Total international sales

 

450.4

 

 

33.7

 

 

373.7

 

 

32.4

 

 

76.7

 

20.5

 

Total worldwide sales

 

$

1,337.2

 

 

100.0

%

 

$

1,152.7

 

 

100.0

%

 

$

184.5

 

16.0

%

Operating income (loss) by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enterprise

 

$

34.1

 

 

5.1

%

 

$

22.3

 

 

3.8

%

 

$

11.8

 

52.9

%

Broadband

 

47.8

 

 

10.4

 

 

29.2

 

 

6.9

 

 

18.6

 

63.7

 

Carrier

 

(7.0

)

 

 

 

 

(45.6

)

 

 

 

 

38.6

 

 

 

Consolidated operating income

 

$

74.9

 

 

5.6

%

 

$

5.9

 

 

0.5

%

 

$

69.0

 

1,169.5

%

 

Enterprise Segment

The increase in net sales of Enterprise segment products was primarily driven by improved international project business and the positive impact of price increases for certain products. We announced price increases for certain Enterprise segment products during 2004 as a result of significant increases in the cost of certain raw materials and further increased prices in 2005 in response to continued raw material cost increases. In addition, the 2004 launch of our Uniprise brand contributed to the increase in net sales. Domestic net sales volume of Enterprise segment products in 2005 was modestly lower than 2004, reflecting some limited customer acceptance of price increases. During 2004, SYSTIMAX sales volume was negatively impacted by an effort to reduce external inventory balances held by distributors to a more appropriate level. Had we acquired Connectivity Solutions on January 1, 2004, net sales in the Enterprise segment for 2004 would have been $14.4 million higher than reported in the table above.

The increase in operating income reflects the improvement in gross margin, which resulted from price increases, changes in the mix of products sold and cost reductions. The gross margin improvement was also impacted by the purchase accounting adjustments recorded in 2004 to write-up the acquired Connectivity Solutions inventory to the estimated fair value as of the acquisition date. The write-up had the effect of lowering gross margin and operating income in 2004 as the acquired inventory was sold.

Operating income in 2004 was also impacted by $5.9 million of acquisition-related transition and startup costs and $4.0 million of in-process research and development charges that were written-off in accordance with purchase accounting rules.

Operating income in 2005 was adversely impacted by higher restructuring costs than 2004 ($33.9 million in 2005 compared to $8.7 million in 2004). These higher costs in 2005 were primarily related to the global manufacturing initiatives begun during 2005 (see Note 6 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K).

37




Broadband Segment

The increase in net sales of Broadband segment products for 2005 primarily resulted from the positive impact of price increases for certain products. Sales were also positively affected by expansion of international cable networks and the rebuilding of infrastructure damaged by the Gulf Coast hurricanes in the United States.

The increase in operating income is largely attributable to the $13.2 million benefit recognized in 2005 related to recovery of accounts receivable from Adelphia that had been written-off in 2002. See Note 7 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K for additional discussion of this recovery. The balance of the increase in operating income is due to price increases and changes in the mix of products sold.

Carrier Segment

The ICS product line generated the largest portion of the increase in Carrier segment net sales for 2005. ICS sales increased substantially due to sales to wireline carriers for DSL and FTTN applications in the United States.

Sales of Cell Reach® wireless products during 2005 nearly doubled from 2004. The improvement in general financial conditions of our customers and competition to provide increased network capacity and capabilities has led to increased spending by the major wireless carriers. In addition, we have developed relationships with certain new customers, who generally purchase larger diameter products, which have comparatively higher prices.

Sales of ExchangeMAX products decreased in 2005 due largely to weak demand for central office telecommunications equipment. We have decided to exit the ExchangeMAX twisted pair central office cable business which had net sales of approximately $10 million during 2005. We are retaining the ExchangeMAX apparatus business.

Had we acquired Connectivity Solutions on January 1, 2004, net sales in the Carrier segment for 2004 would have been $11.3 million higher than reported in the table above.

The improvement in operating income was primarily attributable to the significant increase in sales and benefits realized from cost reduction efforts begun during 2004. Also contributing to the improvement was the impact of lower restructuring costs ($3.9 million during 2005 compared to $5.6 million during 2004) and $2.4 million of acquisition-related transition and startup costs incurred during 2004.

38




LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Overview

Our principal sources of liquidity, both on a short-term and long-term basis, are cash, cash equivalents and short-term investments, cash flows provided by operations and availability under credit facilities. Reduced sales and profitability could reduce cash provided by operations and limit availability under credit facilities. In addition, increases in working capital, excluding cash, cash equivalents and short-term investments, related to increasing sales could reduce our operating cash flows in the short term until cash collections of accounts receivable catch up to the higher level of billings.

 

 

2006

 

2005

 

Dollar
Change

 

%
Change

 

Cash, cash equivalents and short-term investments

 

$

427.9

 

$

248.7

 

$

179.2

 

 

72.1

%

 

Net cash provided by operating activities

 

118.8

 

86.3

 

32.5

 

 

37.7

 

 

Working capital excluding cash, cash equivalents and short-term investments and current portion of long-term debt

 

209.6

 

176.7

 

32.9

 

 

18.6

 

 

Capital expenditures

 

31.6

 

19.9

 

11.7

 

 

58.8

 

 

Long-term debt, including current portion

 

284.1

 

297.3

 

(13.2

)

 

(4.4

)

 

Book capital structure

 

1,023.2

 

819.3

 

203.9

 

 

24.9

 

 

Long-term debt as a percentage of book capital structure

 

27.8

%

36.3

%

 

 

 

 

 

 

 

The increase in cash, cash equivalents and short-term investments as of December 31, 2006 was primarily the result of cash flow from operations. The increase also reflects proceeds from the exercise of stock options and repayment of the OFS BrightWave note receivable, offset by net capital expenditures, the acquisition of the MC2 product line and principal repayments on our long-term debt.

The increase in working capital excluding cash, cash equivalents and short-term investments was primarily driven by an increase in accounts receivable attributable to higher sales volumes and higher inventory balances resulting from higher sales volumes and increased raw materials costs.

Our long-term debt as a percent of book capital structure decreased during 2006 primarily due to the increase in book capital from net earnings and issuance of common stock as a result of stock option exercises and the decrease in long-term debt of $13.2 million as a result of principal repayments.

Operating Activities

Net cash provided by operating activities increased year over year primarily due to higher operating income, which was somewhat offset by the increase in accounts receivable resulting from higher sales volumes and higher inventory levels due to increased raw material costs. We expect to generate increased net cash from operations during 2007 primarily due to improved margins from sales of certain product groups and the impact of our cost reduction efforts.

Investing Activities

Our investment in property, plant and equipment was higher during 2006 primarily due to capital spending related to cost reduction efforts and additional production capability in Asia, including completing the expansion of our manufacturing facility in Suzhou, China. We realized net cash proceeds of $10.2 million from the sale of a building and land in Omaha that was no longer being utilized. As of December 31, 2006, we have land and buildings with a net carrying value of $15.8 million that are no longer being utilized that we are attempting to sell. We expect total capital expenditures during 2007 to remain at a level below consolidated depreciation and amortization expense.

39




Financing Activities

As of December 31, 2006 the balance outstanding under the term loan portion of our senior secured credit facility was $23.3 million and is required to be repaid by us in consecutive quarterly installments of $3.25 million with a final payment of all outstanding principal and interest on December 31, 2008. We had availability under the revolving credit portion of the facility of $84 million and had no outstanding borrowings under this facility as of December 31, 2006. Our ability to borrow under this revolving credit facility depends on the amount of our borrowing base, which is determined as specified percentages of our eligible receivables and inventory, reduced for certain reserves and the total amount of letters of credit issued under the credit facility. We believe we were in compliance with all of our covenants under this senior secured credit facility as of December 31, 2006. See Note 9 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K for additional discussion of the terms of this senior secured credit facility.

On June 7, 2006, we filed a shelf registration statement for the issuance of common or preferred stock, senior or subordinated debt, convertible debt securities, warrants exercisable for any of the foregoing, or any combination thereof. This registration statement was automatically effective upon filing, pursuant to SEC rules, and no securities have been issued under this registration statement.

Future Cash Needs

We expect that our primary future cash needs will be to fund working capital, capital expenditures, debt service and employee benefit obligations. We currently do not anticipate making any voluntary contributions to our defined benefit pension plans during 2007. Funding requirements for these employee benefit liabilities are expected to be met with cash flows from future operations and new funding requirements under the Pension Protection Act of 2006 are not expected to have a significant impact on our liquidity or cash flow from operations.

We believe that our existing cash, cash equivalents and short-term investments 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. 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.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations as of December 31, 2006 (in millions):

 

 

 

 

Amount of Payments Due per Period

 

Contractual Obligations

 

 

 

Total
Payments Due

 

Less than
1 year

 

1-3 years

 

3-5 years

 

After
5 years

 

Long-term debt, including current maturities(a)

 

 

$

284.1

 

 

 

$

13.0

 

 

 

$

10.3

 

 

 

$

 

 

$

260.8

 

Interest on long-term debt(a)(b)

 

 

49.4

 

 

 

4.3

 

 

 

6.5

 

 

 

6.2

 

 

32.4

 

Operating leases

 

 

47.6

 

 

 

9.8

 

 

 

15.7

 

 

 

9.5

 

 

12.6

 

Purchase obligations(c)

 

 

15.3

 

 

 

15.3

 

 

 

 

 

 

 

 

 

Pension and postretirement benefit liabilities(d)

 

 

45.8

 

 

 

3.4

 

 

 

8.0

 

 

 

8.7

 

 

25.7

 

Foreign currency derivative(e)

 

 

7.7

 

 

 

0.4

 

 

 

7.3

 

 

 

 

 

 

Total contractual obligations

 

 

$449.9

 

 

 

$

46.2

 

 

 

$

47.8

 

 

 

$

24.4

 

 

$331.5

 


(a)           No prepayment, redemption or conversion of any of our long-term debt balances has been assumed. Refer to Note 9 to the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K for information regarding the terms of our long-term debt agreements.

(b)          Interest on variable rate debt is estimated based upon rates in effect as of December 31, 2006.

(c)           Purchase obligations include minimum amounts owed under take-or-pay or requirements contracts. Amounts covered by open purchase orders are excluded as there is no contractual obligation until goods or services are received.

40




(d)          Amounts reflect expected payments under the postretirement benefit plans through 2016 (see Note 11 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K). As there is no contractual obligation to make pension contributions, no amounts have been reflected above.

(e)           Estimated payments are based on exchange rates in effect as of December 31, 2006.

EFFECTS OF INFLATION AND CHANGING PRICES

We continually attempt to minimize any effect of inflation on earnings by controlling our operating costs and selling prices. The principal raw materials purchased by us (copper, fabricated aluminum, steel, plastics and other polymers, bimetals and optical fiber) are subject to changes in market price as they are influenced by commodity markets. Prices for copper, fluoropolymers and certain other polymers derived from oil and natural gas have increased substantially and become highly volatile over the last several years. As a result, we have significantly increased our prices for certain products and may have to increase prices again in the future. To the extent that we are unable to pass on cost increases to customers without a significant decrease in sales volume or must implement price reductions in response to a rapid decline in raw material costs, these cost changes could have a material impact on the results of our operations.

OTHER

We are either a plaintiff or a defendant in pending legal matters in the normal course of business; however, we believe none of these legal matters will have a materially adverse effect on our financial condition and results of operations upon final disposition. In addition, we are subject to various federal, state, local and foreign environmental 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 our financial condition or results of operations.

NEWLY ISSUED ACCOUNTING STANDARDS

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This Interpretation establishes a two-step approach for the recognition and measurement of tax benefits arising from uncertainties about whether a tax position taken or expected to be taken in a tax return will ultimately be sustained. Only those positions that are considered more likely than not to be sustained, based on their technical merits, may be recognized. The amount recognized is the largest tax benefit that is at least 50% likely to be realized. We are required to apply the provisions of the Interpretation as of January 1, 2007 and recognize the initial impact as an adjustment to opening retained earnings. We have not determined the impact of adopting the Interpretation.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires that the underfunded or overfunded position of defined benefit plans be fully recognized as a liability or asset on the balance sheet of the sponsor. SFAS No. 158 does not change how the expense related to such plans is determined. Our accrued benefit liability was adjusted as of December 31, 2006 to fully recognize the underfunded portion of our plans as a result of implementing SFAS No. 158 (see Note 11 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K). The provisions of SFAS No. 158 requiring that plan assets and obligations be measured as of the year-end balance sheet date are not required to be adopted until December 31, 2008, though earlier adoption is permitted. We do not expect that there will be a material impact on results of operations or financial position from applying the provisions to be adopted by 2008.

41




ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have established a risk management strategy that includes the reasonable use of derivative and non-derivative financial instruments primarily to manage our exposure to market risks resulting from adverse fluctuations in commodity prices, interest rates and foreign currency exchange rates. Derivative financial instruments that may be used by us include commodity pricing contracts, foreign currency exchange contracts and contracts hedging exposure to interest rates. We do not use derivative financial instruments for trading purposes, nor do we engage in speculation.

Materials, in their finished form, account for a large portion of our cost of sales. These materials, such as copper, fabricated aluminum, steel, plastics and other polymers, bimetals and optical fiber, are subject to changes in market price as they are influenced by commodity markets. Management attempts to mitigate these risks through effective requirements planning and by working closely with key suppliers to obtain the best possible pricing and delivery terms. However, increases in the prices of certain commodity products have resulted in, and may continue to result in, higher overall production costs.

Approximately 32% and 34% of our 2006 and 2005 net sales, respectively, were to customers located outside the U.S. Although we primarily bill customers in foreign countries in U.S. dollars, a portion of our sales are denominated in currencies other than the U.S. dollar, particularly sales from some of our foreign subsidiaries. Significant changes in foreign currency exchange rates could adversely affect our international sales levels and the related collection of amounts due. In addition, a significant decline in the value of currencies used in certain regions of the world as compared to the U.S. dollar could adversely affect product sales in those regions because our products may become more expensive for those customers to pay for in their local currency. At December 31, 2006, we were continuing to evaluate alternatives to help us reasonably manage the market risk related to foreign currency exposures. In addition, we evaluated our commodity pricing exposures and concluded that it was not currently practical to use derivative financial instruments to hedge our current commodity price risks.

As of December 31, 2006, the only derivative financial instrument outstanding was a cross currency rate and forward foreign exchange swap agreement, which hedges a portion of our net investment in our Belgian subsidiary and a portion of our other euro-denominated asset exposure. Settlement of the fair value of this hedging instrument as of December 31, 2006 and 2005 would have resulted in a loss of approximately $5.2 million and $4.3 million, respectively, net of tax. The portion of these unrealized losses that relates to the hedge of our Belgian subsidiary is included in accumulated other comprehensive income (loss) while the remainder of the unrealized loss is recognized in earnings.

Our non-derivative financial instruments consist primarily of cash and cash equivalents, short-term investments, trade receivables, trade payables and debt instruments. At December 31, 2006 and 2005, the carrying values of each of the financial instruments recorded on our balance sheet were considered representative of their respective fair values due to their variable interest rates and/or short terms to maturity, with the exception of our 1% convertible debentures, which were recorded in the financial statements at $250.0 million and had a fair value of $370.3 million at December 31, 2006. Fair value of our debt is estimated using discounted cash flow analysis, based on our current incremental borrowing rates for similar types of arrangements, or quoted market prices whenever available.

The following tables summarize our market risks associated with long-term debt and foreign currency exposure as of December 31, 2006 and 2005. The tables present principal, interest and net settlement cash outflows and related interest rates by year of maturity. Variable interest rates and foreign currency exchange rates for each year represent the rate effective for the related loan or derivative instrument as of the date of the table. The tables assume payments will be made in accordance with due dates in the respective agreements and no prepayment of any amounts due.

42




The tabular format used below does not reflect (1) our option to redeem all or a portion of our $250 million aggregate principal amount of 1% convertible debentures at any time on or after March 20, 2009 at 100% of the principal amount plus accrued interest; (2) the holders’ option to require us to repurchase all or a portion of the debentures on March 20, 2009, March 15, 2014 and March 15, 2019 for 100% of the principal amount plus accrued interest; or (3) the holders’ right to convert the debenture into shares of our common stock if certain conditions are met (see Note 9 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K).

Long-term Debt and Foreign Currency Derivative
Principal and Interest Payments by Year
($ in millions)

 

 

As of December 31, 2006

 

There-

 

 

 

Fair

 

 

 

2007

 

2008

 

2009

 

2010

 

2011

 

after

 

Total

 

Value

 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate (USD)

 

$

2.5

 

$

2.5

 

$

2.5

 

$

2.5

 

$

2.5

 

$

280.6

 

$

293.1

 

$

370.3

 

Average interest rate

 

1.0

%

1.0

%

1.0

%

1.0

%

1.0

%

1.0

%

 

 

 

 

Variable rate (USD)

 

$

14.8

 

$

11.3

 

$

0.6

 

$

0.6

 

$

0.6

 

$

12.5

 

$

40.4

 

$

34.1

 

Average interest rate

 

6.68

%

5.96

%

5.35

%

5.35

%

5.35

%

5.35

%

 

 

 

 

Foreign currency derivative:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD functional currency—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cross currency swap (Receive USD/Pay EUR)

 

$

0.4

 

$

0.4

 

$

6.9

 

$

 

$

 

$

 

$

7.7

 

$

7.2

 

Contract amount (USD)

 

$

 

$

 

$

14.0

 

$

 

$

 

$

 

$

14.0

 

 

 

Average receive rate (USD)

 

4.00

%

4.00

%

4.00

%

 

 

 

 

 

 

 

 

 

 

Average pay rate (EUR)

 

4.54

%

4.54

%

4.54

%

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2005

 

There-

 

 

 

Fair

 

 

 

2006

 

2007

 

2008

 

2009

 

2010

 

after

 

Total

 

Value

 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate (USD)

 

$

2.5

 

$

2.5

 

$

2.5

 

$

2.5

 

$

2.5

 

$

283.1

 

$

295.6

 

$

258.2

 

Average interest rate

 

1.0

%

1.0

%

1.0

%

1.0

%

1.0

%

1.0

%

 

 

 

 

Variable rate (USD)

 

$

15.4

 

$

14.6

 

$

11.3

 

$

0.5

 

$

0.5

 

$

12.7

 

$

55.0

 

$

47.3

 

Average interest rate

 

5.94

%

5.83

%

5.10

%

4.37

%

4.37

%

4.37

%

 

 

 

 

Foreign currency derivative:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

USD functional currency—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cross currency swap (Receive USD/Pay EUR)

 

$

0.3

 

$

0.3

 

$

0.3

 

$

4.7

 

$

 

$

 

$

5.6

 

$

5.8

 

Contract amount (USD)

 

$

 

$

 

$

 

$

14.0

 

$

 

$

 

$

14.0

 

 

 

Average receive rate (USD)

 

4.00

%

4.00

%

4.00

%

4.00

%

 

 

 

 

 

 

 

 

Average pay rate (EUR)

 

4.54

%

4.54

%

4.54

%

4.54

%

 

 

 

 

 

 

 

 

 

43







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of CommScope, Inc.

We have audited the accompanying consolidated balance sheets of CommScope, Inc. and subsidiaries (the Company) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and related financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits, such consolidated financial statements present fairly, in all material respects, the financial position of CommScope, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the financial statements, the Company changed its method of accounting for equity-based compensation to conform to FASB Statement No. 123(R), Share-Based Payment, as of January 1, 2006 and for its defined benefit pension and other postretirement benefit plans to conform to FASB Statement No. 158, Accounting for Defined Benefit Pension and Other Postretirement Plans, as of December 31, 2006.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Charlotte, North Carolina

March 1, 2007

 

45




CommScope, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)

 

 

Year Ended December 31,

 

 

 

2006

 

2005

 

2004

 

Net sales

 

$

1,623,946

 

$

1,337,165

 

$

1,152,696

 

Operating costs and expenses:

 

 

 

 

 

 

 

Cost of sales

 

1,179,861

 

992,690

 

897,881

 

Selling, general and administrative

 

240,024

 

199,706

 

193,057

 

Research and development

 

32,899

 

31,349

 

29,336

 

In-process research and development charges

 

 

 

3,984

 

Acquisition-related transition and startup costs

 

 

 

8,289

 

Restructuring costs

 

12,578

 

38,558

 

14,243

 

Total operating costs and expenses

 

1,465,362

 

1,262,303

 

1,146,790

 

Operating income

 

158,584

 

74,862

 

5,906

 

Loss on early extinguishment of debt

 

 

 

(5,029

)

Other income (expense), net

 

1,324

 

(524

)

(186

)

Interest expense

 

(8,050

)

(8,328

)

(9,600

)

Interest income

 

11,837

 

5,077

 

2,601

 

Income (loss) before income taxes and OFS BrightWave transactions

 

163,695

 

71,087

 

(6,308

)

Income tax (expense) benefit before income tax effects of OFS BrightWave transactions

 

(52,187

)

(21,109

)

7,019

 

Income before OFS BrightWave transactions

 

111,508

 

49,978

 

711

 

OFS BrightWave transactions:

 

 

 

 

 

 

 

Gain on OFS BrightWave note receivable, net of tax of $11,175

 

18,625

 

 

 

Equity in losses of OFS BrightWave, net of tax of $865

 

 

 

(1,393

)

Net gain on sale of interest in OFS BrightWave, net of tax of $44,890

 

 

 

76,437