CommScope Holding Company Inc (COMM) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CommScope third quarter earnings conference call. During the presentation, all participants will be a listen-only mode. Afterwards, we will have a question-and-answer session. At that time, press the 1 followed by the 4 on your telephone to ask a question. This conference is being recorded Monday, November 4, 2002. I would now like to turn the conference over to Mr. Phil Armstrong, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining us on this call. Frank Drendel, CommScope's Chairman and Chief Executive Officer; Brian Garrett, CommScope's President and Chief Operating Officer; and Jearld Leonhardt, CommScope's Chief Financial Officer are joining me on the call.

During this conference call, we may make forward-looking statements regarding CommScope as well as its market position, plans and outlook that are based on information currently available to management, management's beliefs and a number of assumptions concerning future events. 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. For a more detailed description of factors that could cause such a difference, see the press release we issued today in CommScope's filing with the Securities and Exchange Commission. In providing forward-looking statements, the Company doesn't intend and does not undertake any duty or obligation to update these statements as a result of new information. Jearld Leonhardt will review third quarter results. Then we will open it up for questions. Jearld?

Thank you, Phil. Today CommScope reported third quarter sales of $148 million and a net loss of $20 million or 32 cents per share. Loss included non-cash impairment charges of 26 cents per share and after-tax equity and losses of OFS BrightWave of 10 cents per share. This compares to net income of $6 million and earnings of 12 cents per diluted share for the year-ago period.

Third quarter 2001 results included pretax charges of $9 million, or 11 cents per diluted share, related to the financing and formation of the original joint venture arrangements with the [Purecol] electric company of Japan, which was subsequently restructured. On a pro forma basis excluding only impairment charges and the Company's share of after-tax net losses in OFS BrightWave, CommScope earned $2.7 million, or 4 cents per share, for the third quarter of 2002. CommScope's sales and gross margins were in line with previous company guidance.

CommScope sales for the third quarter were $148 million compared to $178 million in the year-ago quarter and $155 million in the second quarter of 2002. Third quarter 2002 domestic sales were stable sequentially at $121 million, largely due to strong sales to AT&T Broadband but declined from the $143 million level in the prior year, primarily due to lower sales to Adelphia as well as lower sales of fiber optic cable and wireless products. International sales in the third quarter were $27 million compared to $34 million in both the prior quarter and the third quarter of 2001.

Orders booked in the third quarter were $146 million compared to $142 million in the same quarter last year and $157 million in the second quarter. The third quarter 2002 book-to-bill was roughly 1.0 times for both the domestic and international product areas. Broadband video sales worldwide decreased 4% sequentially and 14% year-over-year to $120 million for the third quarter. The significant year-over-year increase in the sales to AT&T Broadband was more than offset by the lower sales to Adelphia and the reduced sales of fiper optic cable products.

Domestic broadband video sales rose slightly from second quarter levels, strengthening sales to AT&T, which represented 18% of total company sales for the quarter. Pricing for coaxial cable remained relatively stable during the quarter. However, the market to fiber-optic cable remains challenging with pricing pressure in the face of declining end-user demand. Sales for fiber-optic cable, which are primarily for broadband applications, were down significantly year-over-year. However, overall sales of fiber cable were relatively stable, sequentially, and represented more than 10% of total company sales. We believe that our ability to offer both coaxial and fiber-optic cable products continues to be a competitive advantage.

Third quarter international sales were at $27 million compared to $34 million in both the prior quarter and in the third quarter of 2001. Our international sales were down essentially in all regions. Due to the uncertain global business environment, the international markets remain volatile and difficult to predict. We expect a moderate decline in fourth sale quarter sales for broadband video products as we move into the traditionally weaker winter quarters.

Local area network sales increased 4% year-over-year and 6% sequentially to $24 million for the third quarter. We believe that we were able to more than offset the loss of [Gray Bar] as a distribution in channel and LAN by redirecting project business and utilizing our strong brand recognition. During the quarter, we also announced the addition of fiber-optic connectivity components to other -- to our LAN product line, through a new marketing line with OFS. However, we expect our LAN sales to decline in the fourth quarter. We expect reduced demand due to a very challenging business conditions and as distributors reduce inventories. We plan to continue to work diligently to redirect future project business to other established distribution channels.

Third quarter wireless and other telecom sales were at $3 million, down 52% sequentially and down 78% year-over-year. Wireless and other telecom sales continued to be effected by reduced infrastructure spending, capital constraints and the uncertain global business environment. However, we are optimistic about our long-term opportunities in wireless and recently named Ted Howly as Executive Vice President and General Manager of our Wireless Products Group. We believe that Ted's strong leadership capabilities and diverse international experience will be tremendous assets to us as we continue to expand our wireless business globally. During the fourth quarter, we expect to conduct trials of our new flexible cable with several major European wireless operators.

Total comp in the gross margin for the third quarter was 18.3%, compared to 24.7% in the year-ago period and 20.5% in the second quarter of 2002. Gross margin for the quarter was affected by our lower sales line, product mix, and ongoing pricing pressure for fiber-optic cable, wireless, and local area network products. During the quarter, we also incurred approximately $1 million in costs related to the previously announced workforce reduction.

General administrative expense for the quarter was about $21 million and included $1.6 million related to bad debt expense, primarily associated with a distributor bankruptcy. R&D expense was approximately $1 million or roughly 1% of sales in the third quarter. The non-cash impairment charges of $25 million, or 26 cents per share, recorded during the third quarter primarily relate to underutilized idle production equipment due to the ongoing severe downturn in telecommunications broadly. The charges were $15 million for wireless cable production assets, $5 million for fiber cable production assets, $3 million for other telecom cable production assets, and $2 million for other production assets. Overall, the $25 million charge represented about 10% of plant, property and equipment or about 3% of total assets. While this action did not reduce our manufacturing capability, it will reduce our future depreciation expense about $3 million a year.

Our equity method invested, OFS BrightWave, had another challenging quarter, reflecting the extremely difficult market for optical fiber products. During the third quarter, OFS BrightWave had revenues of $21 million, a negative gross profit of $36 million, and a negative loss of $54 million, which included net special charges of about $5 million, primarily related to employee separation costs. CommScope recorded the charge of $6 million, or 10 cents per share, of after-tax equity and losses of OFS BrightWave related to the minority interest in this venture during the third quarter.

We believe that OFS BrightWave continues to take the appropriate steps to reduce its cost structure to adjust to the challenging market environment. However, we continue to expect ongoing operating losses for OFS BrightWave in the near term. Despite these OFS BrightWave losses, we believe our strategic investment remains sound for the longer term. We believe we have enhanced our competitive position with the domestic MFOs and LANs customers. As a result of this investment, we look forward to building upon our strategic relationship with [Purecol].

[Purecol] announced in October that we had privately purchased 10.2 million shares of CommScope comstock held by Lucent. CommScope originally issued shares at a price of 19.94 per share to Lucent in connection with our investment in OFS BrightWave in November of last year. The total price for the 10.2 million shares block purchased in October was approximately $53 million, or $5.20 per share. [Purecol] purchased 7.7 million shares, which it plans to hold for investment purposes. CommScope repurchased 2.5 million shares, which it holds as treasury stock. CommScope funded its $13 million purchase using existing cash balances. We believe that this was a [well-made] transaction, because we enhanced our long-term strategic relationship with [Purecol] while satisfying Lucent's desire to monetize their CommScope holdings a difficult market environment.

Turning to cash flow and balance sheet issues: Third quarter EBITDA was $12 million, excluding losses in OFS Bright Wave and impairment charges. It is important to note that the impairment losses in CommScope's losses attributed to OFS BrightWave are non-cash and don't reduce CommScope's cash flows. Net accounts receivables was $80 million and inventories were $44 million.

We are pleased with our ongoing progress in managing working capital. During the third quarter, we reduced inventories and improved our day sales outstanding performance. The working capital improvements contributed to another quarter of solid cash flow. Net cash provided by operating activities for the third quarter was $27 million, and capital expenditures for the quarter were $3 million resulting in $24 million of free cash flow. CommScope has generated $64 million in free cash flow year-to-date, which is more than the $1 per share.

During the third quarter, CommScope advanced $6.5 million to OFS BrightWave under an existing $30 million credit facility. As of September 30, 2002, OFS BrightWave had approximately 24 million drum under this revolving credit loan from CommScope. We expect OFS BrightWave to borrow the remaining $6 million available under this facility during the fourth quarter.

For the calendar year 2002, we expect capital expenditures to be in the range of 12 to $13 million. We continue to expect capital expenditures to remain below depreciation and amortization expense for the next few years. Depreciation and intangible amortization expense for the third quarter were $9.6 million. Total long-term debt outstanding at September 30 was approximately $194 million or about 27% of our booked capital structure.

CommScope also recently terminated its existing revolving credit facility, which was scheduled to expire in December 2002. CommScope had no outstanding debt under the terminated facility and ended the third quarter with $132 million of cash and cash equivalents on the balance sheet. The company expects to enter into a new secure credit facility of up to $125 million during the fourth quarter. In anticipation, this new primary facility, we obtained two temporary covenant waivers under an $11 million credit agreement and $13 million operating lease. If we're unable to establish a new primary credit facility by year-end, we intend to further amend the [euro dollar] arrangement and the operating lease or repay the obligations using existing cash balances.

In the current fiscal market environment, we believe it is prudent to maintain strong liquidity and flexibility. However once we establish a new credit facility, we will continue to review our capital structures along with other strategic opportunities.

Looking ahead, it continues to be difficult forecasting the future due to the business conditions in costless customer spending. However, we currently expect sales in the 125 to $135 million range and gross margins in the 18 to 19% range for the fourth quarter of 2002. While we anticipate lower fourth quarter sales as we move into the traditionally weaker part of the year, we expect our gross margin to be stable, sequentially, primarily due to positive impact of our cost reduction actions.

During the current downturn, we intend to continue focusing on fundamentals and intend to run our business for long-term success. We have managed through downturns before and are prepared to take the necessary steps to maintain positive cash flow and our strong market position. Thank you, and we will be glad to answer questions now. Christopher?

Thank you. Ladies and gentlemen, if you would like register a question at this time, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt acknowledging your request. If your question has been answered and you'd like to withdraw your request, please press the 1 followed by the 3. As a reminder, if you're on a speaker phone, please pick up your handset before entering your request. One moment, please, for the first question. The first question comes from the line of Daryl Armstrong with Salomon Smith Barney. Please proceed.

Thank you very much. Two quick questions. First, could you describe the linearity of business in the quarter, particularly relative to the activity level from AT&T Broadband? And then, second of all, in terms of your guidance for the fourth calendar quarter, the quarter-to-quarter decline; is that all seasonality driven or is there some lumpiness around the AT&T as well? Thanks.

Well to begin with, the AT&T Broadband business was very strong and they continue to build up their facilities and plant. We probably will see some interruption of that as they put the merger with Comcast together, but I wouldn't expect it to be severe. Clearly that's been a very strong one. I'm sorry, I missed your last question, that was your first one.

Yes, in terms of the guidance on the top line, the quarter-to-quarter decline, is the decline due totally to seasonality or is there some lumpiness from AT&T or other issues that would bring revenues down to that level?

Number one, the major downturn is more price-driven in the other products besides coax. Coax is fairly stable, but you still have the price range in some of these other areas. And then you do have normal seasonality, if you look at us over history, that quarter's always been the weakest due to the weather [INAUDIBLE].

Right. Okay. Congratulations on your induction into the Cable TV Hall of Fame.

Thank you very much!

The next question comes from the line of Steven Fox with Merrill Lynch. Please proceed.

Good afternoon. A couple of questions, first of all, the international business, as you said, is very depressed. Can you talk about where you did do business during the quarter? And what would you -- how would you gauge the prospects for different geographic regions say over the next 6, 12 months? And secondly, any comment on the OFS losses? Do you expect them to lessen during the fourth quarter, given some of the restructuring that OFS has taken?

Hi, Steve. The international flavor, it was about where it had been for most of the year. We're running about 8% in the quarter fr Europe, about 5% for Latin America, about 3% for Asia Pac, and 2% for Canada. So, and that's pretty much in line with our year-to-date look at the business. So, it wasn't much change from that.

And, Steve, on the OFS situation, they clearly are doing as is Alcatel and as is Corning, you know, looking at right sizing the businesses, which I think will be beneficial long-term against some of the excess capacity out in the marketplace.

Great. Thank you very much.

Thanks.

The next question will come from the line of Alan Bezoza with CIBC World Markets.

Hi, guys. First, my congratulations to you, Frank. It was truly a pleasure to be there.

I appreciate you coming. We had a great time.

A couple of questions: First, on AT&T, did you say it was18.5% of sales in the quarter?

Yes, 18.5%.

18.

Is that both coax and fiber?

All products, all products we deliver into that market sector.

Okay. And how cautious are you being in the next quarter with AT&T? Are you fairly confident? You said about the, you know, with the possible interruption in the quarter with the merger going through; is that just you being cautious or do you have a pretty good sense that they're telling you that there's some kind hiccup going to happen in the --

No, I don't think we're being cautious, and we haven't seen any indication they won't, but they will be putting two companies together. They will be merging their abilities and acquisition, and you know, so they clearly could have [INAUDIBLE], but it's an AT&T with Comcast. It's in their best interest to fulfill this pact, because they've now proven that upgraded plan is a good deterrent against DBS and DirecTV. Comcast is committed to putting the physical plant in place. They've publicly spoken to the fact that they're going to continue their physical plant upgrades, making sure they build a barrier against the DirecTV on site.

And if you look at your business on the coax side and fiber side, on what level are you at, you know, bare bone maintenance spending by the cable operators, assuming there is no build-out? And how does it look as far as TND versus drop?

Alan, you and I have run those numbers 100 times. I still stand by the in fact that on an annualized basis, the cable industry spends between 6 and 10 dollars per [INAUDIBLE] per year on just maintenance and fixing repair daily and sharing in the marketplace, adding subscribers and taking back subscribers. If you do that times the 70 million existing customers and 25 million homes passed, you get to about where the market is right now. So, one year you will have a big operating like AT&T doing a lot of upgrade and maintenance, but generally speaking, I think we're -- right now I believe we're both fiber and coax at sustainable maintenance levels. Virtually everything out there right now is being cautiously built based on improving cash flows for the MSOs so they can improve their market matrix in the marketplace.

And the last question would be at Adelphia; have you seen any kind of, you know, any kind of pickup or signs of life out of Adelpha?

Well, we continue to ship to Adelphia very modest amounts, but Adelphia continues to work through the reorganization. I believe Adelpha will be a survivor. I think they'll get through that reorganization and clearly those properties are very desirable to some of the MSOs that operate in those regions.

Any idea of timing over there, Frank?

I don't know. I think that process will probably still be another six to nine months, at least. Germany is the same thing, Alan. I think that Germany is certainly making progress, but I wouldn't expect to ship any products into Germany well into next year and some of those properties have been clearly spoken for.

How about in the U.K., anything there?

Same deal. Fixing-and-repair business.

Okay. Thanks a lot.

You bet.

Our next question will come from Jeff Beach with Stifel, Nicolaus & Company, Inc. Please proceed with your question.

Good morning, Frank and Jearld. Good afternoon.

Hi, Jeff.

Hi, Jeff.

Can you expand a little bit on your land performance, I thought it was real good in the quarter. And give us some sense for increased sales from the fiber optic connectivity in -- in the alliance, whether the LAN sales were up or down? What the impact, you know, from Gray Bar was and maybe talk a little bit about price there, quarter-to-quarter?

Jeff, Brian Garrett. You know, I will say much as you suggested. I think we're very pleased with the quarter. It was successful from the standpoint of completing project activity. As it relates to Gray Bar, I will be equally as frank. I think the decline we saw in orders from Gray Bar in the quarter was greater than we anticipated, but that was offset by much stronger project business than we also anticipated. A big contributor for us in that sequential growth was our fiber; as a percentage sequentially in that segment, if grew more than our LAN UTP business did. As it relates to pricing, the segment still remains very competitive. Sequentially, I would say we were maybe 5-plus percent down in pricing.

Versus second quarter or year-over-year?

Versus second quarter.

Wow! Back -- just one other question, on the fiber, is that primarily fiber cable, is there connectors and other components involved?

The fiber in the quarter at the end of the quarter was exclusively cable. You know, we made an announcement about this connectivity product line with OFS BrightWave, and that announcement was mid to late quarter. The amount of sales that were in that category were inconsequential. But it's a key part of of the strategy and I think it's going to help us pull more fiber and more UTP sales into that segment for us.

All right, thank you.

Yes, sir.

Thanks, Jeff.

The next question will come from the line of Steve Wilson with Rich and Tang. Please proceed with w your question.

Good afternoon, everyone.

Hi, Steve.

Can you talk about where the write-offs of plant capacity took place? Were these some of the new plants? Or international plants like Brazil or what you have in Europe? Or is these, you know, down in North Carolina?

Steve, they took place in all facilities, but basically the major one, the 50 OEM business took place in our Newton facility. Now we have that facility down for PP&E, something on the order of $15 million. It still has the same amount of capacity. So, we have sales capacity in excess of $200 million out of that facility. So that, was the major one. The rest were just kind of all over the place. None of the plants were shut down or anything like that.

What's the status of that Brazilian plant right now?

It's functioning, operating, producing product.

At a very low operating rate?

True, a very low operating rate, but it's still operating. And interesting enough, given the dollar equivalent price down there, it is a very cost-effective facility. It can produce product given the exchange ratio, almost as competitively as the plants we looked at in Japan -- I mean in China.

And the last question is just looking at OFS, I can't tell entirely without a cash flow statement, but certainly they're burning through a lot of money. You have $6 million left that you're obligated to lend to them. Where are they going to source the money to keep this thing going, going forward? What other access to either credit and funding do they have?

I think that if you look at [Purecol] in its aggregate, [Purecol] continues to believe that we have a unique position in fiber optics. Eddie Edwards has done a great job getting the cash burn lower down there. I believe he honestly will have it at break-even next year. We are so much better off than the others in this business, because we have one facility and it has tremendous flexibility. We'll clearly have our other $6 million into them.

I look out in view that this will turn out to be one of the best investments we ever made if we can just make it through the next few years. The capacities will be organized and everything will get in right sized, and I think [Purecol] clearly can sustain that. Obviously, they must have some interest in it because they bought our stock with it, too. I think down the road this looks like a very interesting opportunity. I think, Steve, [Purecol's] a publicly traded company. You can ask them what their views are.

I'm just trying to understand if they're going come back to you at some point and say now that you're putting 30 to keep this think alive, we want another 30.

I don't know if they did, we wouldn't do it to start with. And I don't think there's any intention of that, because we just went through the restructuring of our opportunity with them, Steve, and they picked up a big chunk of our stock and we bought stock back ourselves. I think they understand that. I don't think they're going to come to us, if they did that, we'd have to restructure the entire deal.

And taking the other side of that, so, they continue to fund the business; are we looking at a scenario where by the time they're done you have 5% interest?

You can count that anyway you want. You can make the scenario that our put is worth exactly what it was the day we did it, maybe $200 million of the business. I mean our put hasn't deteriorated at all in the valuation.

It's just been expend extended.

Right, but it also has a cash option. So if the business isn't something we want to be in, we will just take the cash.

Thanks, Frank.

Yes, sir.

The next question will come from the line of William Schwartz, a private investor. Please proceed with your question.

Hello.

William Schwartz, your line is open. The next question comes from the line of Richard Diamond with Inwood Capital Partners. Please proceed with your question.

Good afternoon. Could we have some granularity on Adelphia? Has Adelphia begun rebuilding using coax they purchased before going bankrupt? Or have they not started rebuilding at all?

To our understanding, Adelphia continues to operate their businesses in a very orderly fashion. So they're not in what I would call an aggressive rebuilding mode, but they are buying products from us and they are using most of the inventory they had in place before the bankruptcy. So they're continuing to operate. Clearly, Adelphia has to maintain those customers and has to maintain that cash flow. We have not seen anything that would indicate to us that they're not doing that in an orderly fashion and that they have plans to continue to upgrade the plant.

What would you estimate the burn time on their inventory where they have to come back into the marketplace more aggressively?

Their drop wire, or the flexible cable that goes between the outside and insider your house, so obviously some of that has been -- the majority of that has been used up. I would say they probably have more than enough current inventory, from what we have seen, to get them through the next quarter and possibly the next six months.

Thank you very much.

Yes, sir.

Ladies and gentlemen, at this time, if you'd like to register for any additional questions, please press the 1 followed by the 4 on your telephone. Gentlemen, I'm currently showing no additional questions at this time. Please proceed with your presentation or closing remarks you may have.

I appreciate everyone being with us today and we continue to do the best we can for you in this very difficult telecom environment. We've got a good group of people, a great group of employees and will do the very best we can.

Thank you very much.

Thank you.

Thank you.

Good evening.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.