CommScope, Inc. (NYSE: CTV) today announced first quarter results for the period ended March 31, 2006. The Company reported first quarter sales of $352.3 million and net income of $12.7 million, or $0.19 per diluted share. The reported net income includes after-tax charges of $2.4 million related to restructuring costs. Excluding restructuring costs, adjusted earnings were $15.2 million, or $0.22 per diluted share.
For the first quarter of 2005, CommScope reported sales of $309.1 million and net income of $5.5 million, or $0.09 per diluted share. The first quarter 2005 net income included after-tax restructuring charges of $1.3 million, or $0.02 per diluted share.
"Despite rising raw material costs, we delivered a strong start to the year," said Frank M. Drendel, CommScope Chairman and Chief Executive Officer. "We are encouraged by the positive order trends across each of our segments.
While we continue to face a challenging commodity cost environment, we intend to continue adjusting pricing to recover our costs."
Sales Overview
Sales for the first quarter of 2006 increased 14.0% year over year, primarily driven by price increases in response to higher raw material costs and improved Broadband and Carrier segment sales volumes.
First Fourth First ($ in millions) Quarter Quarter Quarter % Change 2006 2005 2005 YOY Sequential Enterprise $172.1 $163.1 $157.7 9.1% 5.5% Broadband $125.9 $119.3 $108.1 16.5% 5.5% Carrier $54.7 $64.0 $44.1 24.0% -14.5% Inter-segment eliminations ($0.4) ($0.6) ($0.8) n/a n/a Total CommScope Net Sales $352.3 $345.8 $309.1 14.0% 1.9%
Enterprise segment sales rose 9.1% year over year to $172.1 million, primarily due to higher sales prices for most cable products and higher global sales volumes. Enterprise sales increased year over year in all regions except the Europe/Middle East/Africa region, which experienced weaker market conditions than the first quarter of 2005.
Broadband segment sales rose to $125.9 million, up 16.5% year over year, as a result of both higher prices for coaxial cable products and increased global sales volumes.
Carrier segment sales rose 24.0% year over year to $54.7 million due to increased demand for Integrated Cabinet Solutions (ICS) products.
Total international sales rose 3.8% year over year to $107.2 million, or approximately 30% of total company sales.
Overall external orders booked in the first quarter of 2006 were $443.9 million. Book-to-bill ratios were positive in all segments with particular strength in the Carrier and Enterprise segments.
Additional Price Increases Announced
In response to substantial cost increases for certain key commodities, CommScope has announced additional price increases on selected cable products. CommScope is also implementing a new price adjustment mechanism in the Enterprise market due to the continuing volatility in the cost of copper. The Company intends to take additional pricing actions as necessary to recover the rising cost of raw materials.
Global Manufacturing Initiatives
CommScope's first quarter 2006 results reflect pretax restructuring charges of $3.7 million ($2.4 million after tax) for employee-related and equipment relocation costs associated with the Company's global manufacturing initiatives.
The global manufacturing initiatives, which were announced in September 2005, continue to progress on schedule. The initiatives are designed to improve service and reduce costs by redistributing production among global facilities and improving the efficiency of certain manufacturing processes. CommScope anticipates annualized pretax savings of $35-$40 million once the initiatives are completed in early 2007. The Company expects to realize about half of these annualized pretax savings during 2006, primarily in the second half of the year.
Other First Quarter 2006 Highlights - Gross margin for the first quarter rose to 24.1%, up 70 basis points from the year-ago level. Gross margin improved year over year primarily due to higher sales volumes. The positive impact of higher sales prices was essentially offset by higher raw material costs. - SG&A for the first quarter of 2006 was $54.2 million or 15.4% of sales, compared to $53.9 million or 17.4% of sales in the year-ago quarter. SG&A declined as a percentage of sales primarily due to higher sales levels, ongoing cost management and lower bad debt expense. - First quarter 2006 results include $1.0 million (pretax) of equity- based compensation expense related to the implementation of SFAS 123(R). - Operating income for the first quarter of 2006 was $19.3 million or 5.5% of sales. Excluding restructuring costs, operating income would have been $23.1 million or 6.6% of sales. In the year-ago quarter, operating income was $8.5 million or 2.7% of sales. Adjusted operating income was $10.5 million or 3.4% of sales for the first quarter of 2005, excluding restructuring charges. - Total depreciation and amortization expense was $14.2 million for the first quarter, which included $3.9 million of intangibles amortization. - The effective tax rate for the first quarter of 2006 was 36.5%, compared to 24.7% in the year-ago quarter. The increase in the effective tax rate was due primarily to changes in the mix of international and domestic income. - Net cash used in operating activities in the first quarter was $18.4 million. The use of cash primarily reflects increased accounts receivable, payments related to year-end incentive programs and severance payments related to the implementation of the global manufacturing initiatives. - During the first quarter of 2006, capital spending was $6.8 million. CommScope also acquired the MC2(R) trunk and distribution cable television products business and certain other assets from Trilogy Communications, Inc. for $13.8 million. CommScope received proceeds from the exercise of stock options of $27.7 million during the quarter.
Outlook
"In the face of rapidly rising material costs, we are pleased to start 2006 with solid first quarter financial results," said Jearld L. Leonhardt, Executive Vice President and Chief Financial Officer. "The strong order input for the first quarter confirms our belief that our end markets are improving. While we remain concerned about the volatile raw material environment, we intend to continue taking appropriate actions to recover costs. Looking ahead to the second quarter, we anticipate sales of $390-$410 million and operating margin of 7.0%-8.0%, excluding special items," Leonhardt stated. "We are updating our guidance for calendar year 2006 to reflect our expectation of improving Enterprise sales volume and higher sales prices," noted Leonhardt. "We now expect 2006 sales in the $1.475-$1.525 billion range.
While we face the challenge of rising raw material costs, we believe that we can achieve a 2006 operating margin around the 8.5% level, excluding special charges. The expected benefits of higher prices, the global manufacturing initiatives, the new agreement with represented employees at the Omaha facility, the MC2 asset acquisition and normal seasonal trends should all help drive operating margin in the second half of 2006 higher than the first half of the year," Leonhardt added.
Conference Call Information
CommScope plans to host a call today at 5:00 p.m. EDT to discuss first quarter results. You are invited to listen to the conference call or live webcast with Frank Drendel, Chairman and CEO; Brian Garrett, President and COO; and Jearld Leonhardt, Executive Vice President and CFO.
To participate in the conference call, domestic and international callers should dial +1-212-676-5389. Please plan to dial in 10-15 minutes before the start of the call to facilitate a timely connection. The live, listen-only audio of the conference call will also be available via the Presentations page on CommScope's website at http://phx.corporate-ir.net/phoenix.zhtml?c=101146&p=irol-presentations.
If you are unable to participate on the call and would like to hear a replay, you may dial 800-633-8284.
International callers should dial 1-402- 977-9140 for the replay. The replay ID is 21290157. The replay will be available through Thursday, May 4. A webcast replay will also be archived for a limited period of time following the conference call via the Internet on CommScope's web site.
About CommScope
CommScope (NYSE: CTV)(www.commscope.com) is a world leader in the design and manufacture of "last mile" cable and connectivity solutions for communication networks. Through its SYSTIMAX(R) Solutions(TM) and Uniprise(R) Solutions brands CommScope is the global leader in structured cabling systems for business enterprise applications. It is also the world's largest manufacturer of coaxial cable for Hybrid Fiber Coaxial applications. Backed by strong research and development with a Bell Labs heritage, CommScope combines technical expertise and proprietary technology with global manufacturing capability to provide customers with high-performance wired or wireless cabling solutions.
Forward-Looking Statements
This press release contains forward-looking statements regarding, among other things, the business position, plans, transition, outlook, revenues, margins, accretion, earnings, global manufacturing initiatives, recent product-line acquisition, synergies and other financial items relating to CommScope that are based on information currently available to management, management's beliefs and a number of assumptions concerning future events.
These forward-looking statements are identified by the use of certain terms and phrases, including but not limited to "intends," "intend," "intended," "goal," "estimate," "estimates," "expects," "expect," "expected," "expectations," "project," "projects," "projected," "projections," "plans," "anticipates," "anticipated," "should," "designed to," "foreseeable future," "believe," "believes," "think," "thinks" and "scheduled" and similar expressions. Forward-looking statements are not a guarantee of performance and are subject to a number of uncertainties and other factors that could cause the actual results to differ materially from those currently expected. The potential risks and uncertainties that could cause actual results of CommScope to differ materially include, but are not limited to, changes in cost and availability of key raw materials and our ability to recover these costs from our customers through price increases; the challenges of executing our previously announced global manufacturing initiatives; the integration and expected synergies related to the acquisition of the MC2(R) product line from Trilogy Communications, Inc.; customer demand for our products and the ability to maintain existing business alliances with key Enterprise, Broadband and Carrier customers or distributors; competitive pricing and acceptance of our products; industry competition and the ability to retain customers through product innovation; possible production disruption due to supplier bankruptcy, reorganization or restructuring; successful ongoing operation of our vertical integration activities; the possibility of further restructuring actions; possible future impairment charges for fixed or intangible assets; increased obligations under employee benefit plans; ability to achieve expected sales, growth and earnings goals; ability to achieve expected benefits from future acquisitions; costs of protecting or defending our intellectual property; ability to obtain capital on commercially reasonable terms; adequacy and availability of insurance; costs and challenges of compliance with domestic and foreign environmental laws; variability in expected tax rate; product performance issues and associated warranty claims; regulatory changes affecting us or the industries we serve; any changes required by the Securities and Exchange Commission in connection with its review of our public filings; authoritative changes in generally accepted accounting principles by standard-setting bodies; environmental remediation issues; terrorist activity or armed conflict; political instability; major health concerns; and any statements of belief and any statements of assumptions underlying any of the foregoing. For a more complete description of factors that could cause such a difference, please see CommScope's filings with the Securities and Exchange Commission, which are available on CommScope's website or at www.sec.gov. In providing forward-looking statements, the Company does not intend, and is not undertaking any duty or obligation, to update these statements as a result of new information, future events or otherwise.
CommScope, Inc. Condensed Consolidated Statements of Operations (Unaudited -- In thousands, except per share amounts) Three Months Ended March 31, 2006 2005 Net sales $352,254 $309,054 Operating costs and expenses: Cost of sales 267,515 236,892 Selling, general and administrative 54,177 53,882 Research and development 7,465 7,770 Restructuring costs 3,749 2,029 Total operating costs and expenses 332,906 300,573 Operating income 19,348 8,481 Other income (expense), net 638 (57) Interest expense (1,985) (2,078) Interest income 2,053 999 Income before income taxes 20,054 7,345 Income tax expense (7,327) (1,811) Net income $12,727 $5,534 Net income per share: Basic $0.22 $0.10 Assuming dilution (a) $0.19 $0.09 Weighted average shares outstanding: Basic 56,724 54,512 Assuming dilution (a) 70,667 66,784 (a) Calculation of net income per share, assuming dilution: Net income (basic) $12,727 $5,534 Convertible debt add-back (b) 629 629 Numerator (assuming dilution) $13,356 $6,163 Weighted average shares (basic) 56,724 54,512 Dilutive effect of: Stock options (c) 2,373 778 Phantom stock and performance units 76 - Convertible debt (b) 11,494 11,494 Denominator (assuming dilution) 70,667 66,784 (b) In March 2004, the Company issued $250 million of 1% convertible senior subordinated debentures, which are convertible into shares of common stock at a conversion rate of 45.9770 shares per $1,000 principal amount representing a conversion price of $21.75 per share. These debentures are convertible into shares of CommScope common stock under specific circumstances as described in the Company's Form 10-K for the year ended December 31, 2005. (c) Options to purchase approximately 0.6 million and 5.6 million common shares were excluded from the computation of net income (loss) per share, assuming dilution, for the three months ended March 31, 2006 and March 31, 2005, respectively, because they would have been antidilutive. CommScope, Inc. Condensed Consolidated Balance Sheets (Unaudited -- In thousands, except share amounts) March 31, December 31, 2006 2005 Assets Cash and cash equivalents $133,226 $146,549 Short-term investments 108,746 102,101 Total cash, cash equivalents and short-term investments 241,972 248,650 Accounts receivable, less allowance for doubtful accounts of $12,944 and $13,644, respectively 191,561 165,608 Inventories 137,303 123,603 Prepaid expenses and other current assets 17,694 26,156 Deferred income taxes 25,761 25,245 Total current assets 614,291 589,262 Property, plant and equipment, net 261,986 252,877 Goodwill 151,360 151,356 Other intangibles, net 73,250 69,297 Deferred income taxes 22,595 24,623 Other assets 14,636 14,766 Total Assets $1,138,118 $1,102,181 Liabilities and Stockholders' Equity Accounts payable $77,644 $63,444 Other accrued liabilities 75,525 100,498 Current portion of long-term debt 13,000 13,000 Total current liabilities 166,169 176,942 Long-term debt 281,050 284,300 Pension and postretirement benefit liabilities 99,502 101,989 Other noncurrent liabilities 17,395 16,925 Total Liabilities 564,116 580,156 Commitments and contingencies Stockholders' Equity: Preferred stock, $.01 par value; Authorized shares: 20,000,000; Issued and outstanding shares: None at March 31, 2006 and December 31, 2005 - - Common stock, $.01 par value; Authorized shares: 300,000,000; Issued shares, including treasury stock: 68,042,350 at March 31, 2006 and 66,073,347 at December 31, 2005; Issued and outstanding shares: 57,842,350 at March 31, 2006 and 55,873,347 at December 31, 2005 681 661 Additional paid-in capital 490,175 462,842 Deferred equity compensation - (8,980) Retained earnings 229,415 216,688 Accumulated other comprehensive loss (734) (3,651) Treasury stock, at cost: 10,200,000 shares at March 31, 2006 and December 31, 2005 (145,535) (145,535) Total Stockholders' Equity 574,002 522,025 Total Liabilities and Stockholders' Equity $1,138,118 $1,102,181 CommScope, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited -- In thousands) Three Months Ended March 31, 2006 2005 Operating Activities: Net income $12,727 $5,534 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 14,216 15,743 Equity based compensation 1,020 - Deferred income taxes 1,614 1,370 Restructuring costs related to fixed asset impairment and curtailment - 1,678 Tax benefit from stock option exercises - 87 Changes in assets and liabilities (47,970) (33,088) Net cash used in operating activities (18,393) (8,676) Investing Activities: Additions to property, plant and equipment (6,762) (8,226) Acquisition of MC2 product line (13,810) - Acquisition of Connectivity Solutions - 653 Net (purchases of) proceeds from short-term investments (6,645) 9,158 Proceeds from disposal of fixed assets 297 426 Net cash provided by (used in) investing activities (26,920) 2,011 Financing Activities: Principal payments on long-term debt (3,250) (3,250) Proceeds from exercise of stock options 27,670 320 Tax benefit from stock option exercises 7,143 - Net cash provided by (used in) financing activities 31,563 (2,930) Effect of exchange rate changes on cash 427 (517) Change in cash and cash equivalents (13,323) (10,112) Cash and cash equivalents, beginning of period 146,549 99,631 Cash and cash equivalents, end of period $133,226 $89,519 CommScope, Inc. Sales and Operating Income by Reportable Segment (Unaudited -- In millions) Three Months Ended March 31, 2006 2005 Net Sales: Enterprise $172.1 $157.7 Broadband 125.9 108.1 Carrier 54.7 44.1 Inter-segment eliminations (0.4) (0.8) Consolidated Net Sales $352.3 $309.1 Operating Income (Loss): Enterprise $11.3 $8.9 Broadband 8.0 6.5 Carrier - (6.9) Consolidated Operating Income $19.3 $8.5
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding CommScope's business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.
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