CommScope Holding Company Inc (COMM) 2002 Q4 法說會逐字稿

Welcome to the fourth quarter 2002 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded, Thursday, February 20, 2003. I would now like to turn to call over to Phil Armstrong, Vice President of Investor Relations with CommScope. Please go ahead sir.

Thank you. Good afternoon and thank you for joining us on this call. Frank Drendel, CommScope's Chairman and CEO, Brian Garret, CommScope's President and COO, and Jearld Leonhardt, CommScope's CFO, join me on the call. During this conference call, we may make forward-looking statements regarding CommScope and OFS BrightWave's market financial position, plans and outlook based on information currently available to management, management 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 which could cause results to differ materially from those currently expected. For a more detailed description of factors that could cause such a difference, please see our press release that we issued today or CommScope's filings with the Securities and Exchange Commission. 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. After Jearld Leonhardt reviews the fourth quarter results, Frank Drendel will make a few remarks and then we'll open it up to questions.

Thanks, Phil. Today CommScope announced sales of $136 million and other results from the 4th quarter, 2002. While our sales and gross margin were slightly higher than previous company guidance, the company incurred a net loss of $3 million or $0.6 per share for the 4th quarter, which included equity losses of OFS BrightWave of $0.8 per share. This compares to a net loss of $1 million, or two cents per share, for the 4th quarter of 2001, which included equity losses of BrightWave of $0.12 cents per share.

CommScope's sales for the 4th quarter were $136 million, compared to $144 million in the year ago quarter, and 148 million in the preceding quarter. 4th quarter 2002 domestic sales were stable year-over-year at $110 million, primarily due to strong sales to Comcast Corporation, which merged with AT&T Broadband in November of 2002. However, domestic sales declined sequentially from 121 million, principally because of lower sales to local area network customers. International sales for the quarter were $25 million, compared to 27 million in the 3rd quarter of 2002, and 33 million in the 4th quarter of 2001.

Orders booked in the 4th quarter of 2002 were equal with a year ago levels at $133 million. 4th quarter 2002 book-to-bill ratio was slightly less than 1.0 times for broadband video and about 1.2 times for the other product categories. Broadband video sales worldwide decreased 2% sequentially and 1% year-over-year to 118 million for the 4th quarter. While domestic sales remained stable, our international sales continued to be affected by the challenging global business environment. International sales were 25 million for the quarter, and 112 million for the year, down 24% and 36% respectively. While we are confident of long term opportunities internationally, our near term visibility remains limited.

In contrast, domestic broadband video sales for the 4th quarter rose 8% year-over-year, primarily because of a substantial increase in sales to Comcast, as well as a increase in fiber-optic cable products. These increases were somewhat offset by lower sales to Adelphia and Charter Communications. Comcast, on a combined basis with AT&T Broadband, represented roughly 30% of total company sales for the quarter and about 20% of CommScope's sales for the year.

During 2002 CommScope enhanced its fiber-optic cable market position for HFC applications despite lower overall sales and significant pricing pressure. We believe this progress results from CommScope's strong service model and value-added products like our LightScope ZWP fiber-optic cables, which are based on technologically advanced fibers from OFS. The fiber-optic cable, primarily for broadband applications, represented more than 10% of total CommScope sales for the quarter and year. Pricing for coaxial cable remained relatively stable during the quarter.

We expect a normal seasonal downturn for broadband video products during the traditionally slower 1st quarter. Although we do expect increases in spending by some major domestic MSOs during 2003, we do not anticipate a sequential increase in sales until the 2nd quarter.

LAN sales decreased 7% year-over-year to approximately 14 million for the 4th quarter. Consistent with last year, LAN sales declined sequentially, primarily because of year-end inventory reductions by distributors, normal seasonal patterns and difficult business conditions. For calendar year 2002, LAN sales were $81 million. LAN sales were -- have strengthened so far in 2003. And we believe we will rebound sequentially from 4th quarter levels.

Wireless and other telecom sales rose slightly sequentially to $4 million for the 4th quarter. Calendar year 2002 wireless and other telecom sales were $21 million. While we were disappointed with our wireless performance in 2002, we remain committed to building this business. We continue to bring innovative products to market and recently became approved vendor with several industry leading wireless and service providers.

Total company gross margin for the 4th quarter was 19.4%, compared to 18.3 percent in the 3rd quarter of 2002. Despite lower sales volume, gross margin rose sequentially, primarily because of positive impact previously -- and previously announced cost reductions. That is the positive impact of previously announced cost reductions. For calendar year 2002, gross margin was roughly 20%, down from approximately 24% for 2001, primarily due to lower sales volume and significantly lower fiber prices.

Selling, general and administrative expense for the quarter was about $22 million, which was stable year-over-year. R&D expense was approximately $1 million or roughly 1% of sales in the 4th quarter. In the midst of an extremely difficult market for optical fiber products, our equity method investee, OFS BrightWave, made progress on both revenue expansion and cost reduction. 4th quarter revenues rose $6 million sequentially to $27 million, the highest of the year.

While OFS BrightWave had a negative gross profit of 23 million and a net loss of 39 million for the quarter, they achieved meaningful cost reduction. For example, in the 4th quarter, cost of sales was down 6 million dollars sequentially and other operating expenses down 3 million sequentially. Overall operating income improved $15 million compared to 3rd quarter. We believe that OFS BrightWave has taken significant steps to reduce their cost structure. While we expect them to make ongoing progress towards cash flow break even during 2003, we continue to expect ongoing net losses for OFS BrightWave in the near term.

CommScope recorded a charge of $4.5 million or $0.8 per share of after tax equity for losses in OFS BrightWave related to the companies minority ownership in this venture during the 4th quarter. Despite the 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 MSOs and LAN customers as a result of this investment and look forward to building upon our strategic relationship with [INAUDIBLE].

Turning to cash flow and balance sheet issues, net accounts receivable were $65 million and inventories were $36 million at December 31. We're pleased with the improvement in our working capital metrics contributing to another solid quarter of cash flow. Depreciation and amortization expense was $9 million for the quarter and about 37 million for the year. It is also important to note that the significant charges included in our results that related to impairment of OFS BrightWave -- that related to impairment, as well as OFS BrightWave, do not reduce our cash flow. Overall, net cash provided by operating activities was $32 million for the 4th quarter, and $104 million for calendar year 2002.

We also significantly reduced our capital spending in 2003. Cap ex was 14 million in the quarter, and included 13 million for the purchase of a previously leased corporate office building. Capital expenditures for calendar year 2002 were approximately $23 million, and we expect them to be around 15 million in 2003.

Other important transactions that affected cash during the 4th quarter were a $13 million repurchase of 2.5 million shares of CommScope stock at $5.20 share from Lucent Technologies. Lucent had acquired the company's common stock in connection with CommScope's investment in OFS BrightWave in November of 2001. Second, we made a $10 million repayment of a Eurodollar loan. And third, there was a $6.1 million advance to OFS BrightWave under a existing $30 million revolving credit facility. As of December the 31st, 2002, OFS BrightWave owed CommScope $30 million under this fully drawn facility. Despite these uses of cash, CommScope ended the year with $120 million in cash and cash equivalents, up from 52 million at the end of 2001.

Total long-term debt outstanding at December 31 was approximately 183 million or about 26% of our capital structure. We also recently announced that we had entered into a new $100 million senior secured revolving credit facility for future liquidity, working capital needs and other general corporate purposes. CommScope has not borrowed under this facility.

Looking ahead to the seasonally slow 1st quarter, we expect sales to be in the $120 to $130 million range and gross margin to be in the 18 to 19% range.

Although it continues to be a difficult forecast -- to be difficult forecasting the future, due to global business conditions, we expect another year of restrained capital expenditures. We also expect to generate CommScope's modest free cash flow in 2003, defined as cash from operations plus capital spending. Over the longer term, we expect capital spending to remain well below depreciation and amortization for the next few years.

Now, thank you and Frank Drendel would like to make a few comments.

Thank you, Jearld.

It is very difficult to face a year that we faced in 2002. Jearld and I started this company in 1976. And this was the first loss CommScope's had in its entire history. But I feel confident that CommScope is positioned like it's never been positioned before.

No one has the market position in the last [INAUDIBLE] technology that CommScope has with its partner OFS. If you look at our customer base, and as much difficulty as some of them had this year, there are some very bright spots in what is happening with the MSOs and the customers they're serving. We have 62 cities in the United States with high definition TV. We have 11 million subscribers that are receiving high-speed data, and the cable industry has 2.5 million phones hooked up to networks. Consider the fact for a moment that Comcast and AT&T now represent after that merger almost 25% of the industry. So the consolidation in the industry brings strength and operations and this one and capital formation. The Adelphia bankruptcy continues to proceed orderly. I expect that to be done by mid-year. And Germany finally has sold their properties and we believe in the middle of the year we'll see progress in Germany.

If you look at CommScope for 2002, we reduced our cost structure, we let go 11% of our great workforce, and that's always difficult. We had great positive cash flow, 100 million from operations, $1.30 per share in free cash flow. Our enhanced fiber-optic products are making tremendous inroads into the TV industry. We've gained substantial market share with the MSOs and the fiber cable offerings, and I think we are positioned for the long term.

As Jearld said, our goals are to stay cash flow positive for the year, to met all the challenges in the international markets with our positions, to be orderly and correct and prepared for Germany, to build on our position in the HFC markets and build on our strategic relationship with OFS and bring a meaningful position in the wireless industry with the new management team we've hired this year. With that, we'll open it up for questions and have everyone available for that.

Thank you. Ladies and gentlemen, if you would like to register a question, press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If you question has been answered and you would like to withdraw, press the 1 followed by 3. If you are using a speakerphone, lift the handset. One moment please for the first question. Our first question comes from the line of Steven Fox of Merrill Lynch. Go ahead.

Good afternoon, guys. Can you talk a little bit about pricing on the fiber cable, how it fared in the most recent quarter? And based on the costs that have come out of OFS, is there a reasonable break even point we can target on revenues going forward? That's my first question.

Okay, Steve. You clearly follow the fiber industry, probably the [INAUDIBLE]. I believe as I look at it recently the year-over-year was down 26%. We're hitting that kind of the bottom of the curve, where I do not expect it to go down over 26% because I think it would be close to negative. From that point of view, we've seen the -- it -- kind of the bottom of the pricing. I expect dumping, and still expect unusual activity out there as people try to figure out where they are in the process. And so I -- I expect that to be spotty. On the question of OFS, I think JD Edwards and the team have done a outstanding job of bringing a major operation into very close to a potential to break even this year, taking a scale of business doing a billion-and-a-half dollars in sales and brought it into a operating roll at 100 million, it's getting close. So any turn around in the buy-ins and improvement in any type of pricing will help. The strength that we have, Steve, as you know, is we've taken the broadband fiber, the fiber and introduced that into the more commodity markets giving us tremendous strength in the selling position because it gives you 30% more bandwidth. From a sales proposition to the customer base, we have a very unique opportunity to offer all the products in the last year. Brian, you want to add anything to the pricing what you see.

I think you were right, frank. We experienced two consecutive years of almost 25% price reduction. And if you look at it sequentially, Steve, that rate of reduction is much, much smaller. And we do not anticipate those types of reductions moving forward.

And then, Frank, just to clarify what you were saying about Germany, are you feeling more comfortable that you will start to see orders out of Germany, the second half, or are you just saying that is the earliest it could happen.

I'm saying, Steve, the second is correct. The earliest that I think any of that can be resolved, packaged and crafted would be the second half. Fortunately as you know, Steve, they finally did, at least on the surface sell the properties. The price was such it would lead you to believe that there's available capital to rebuild those properties.

Great. Thank you very much.

Thank you.

Yes, sir.

Our next question comes from the line of Daryl Armstrong from Salomon Smith Barney. Please go ahead.

This is Matt Davigon for Daryl Armstrong. I wonder if you could tell us how much of a factor you believe the recent slate of bad weather is likely to have on the MSO plans and how does that factor.

Excellent question. Clearly the snowstorm on the East Coast was a 1 in 50 or 100 year situation. We've talked about that before the call. We had difficulty getting raw materials from some of our supplies on the East Coast and having difficulty making some deliveries. I believe we'll still have enough time in this quarter to normalize that somewhat. It may have a modest impact. Depends if we do not get hit with another one. We are working around it, trying to get the emergency supplies to them as soon as we can.

Thanks. If I could ask one more follow-up.

Sure.

On Comcast, what is your expectations for spending in calendar 2003, do you think it will be front end loaded or back end loaded.

I would expect Comcast, as well managed as they are, it will be a relatively balanced per quarter per quarter per quarter spending. I would expect it to accelerate as they get better and better control of the AT&T properties, but they've always been a very balanced management team. I mean, they try to do those things on an orderly basis and orderly period. Clearly there is a lot of work to be done at AT&T and they are in the process of getting their management people established. As you get to a second half, you could look at a very orderly transition taking prays there.

Thank, very much.

Yes, sir.

Thanks.

Our next question comes from the line of James Jenjohan with CIBC World Markets. Go ahead with your question.

Hi, guys.

Hi, Jim.

On the guidance in March, you mentioned the weather but I'm assuming that guidance also does not include any upside from Adelphia if they were to turn on. Tell us your opinion there. There should not be a lot of coax inventory there.

You're absolutely right. Part of the guidance is ensuring we are conservative on the weather and some situations. Adelphia continues to buy modest amounts to fill in their inventory but we have not seen anything to indicate that they could possibly get started on any major upbuild on those properties and rebuild until the second half. As you know, you are following it, there is a new management team being produced and there is a possibility of moving the head quarters to Denver. Obviously the way the proposition is being made to the bankruptcy court is based on improving the value per subscriber of that network which will require them to finish their upgrades, which is bullish for all the suppliers when and if that is finalized. They will certainly have the balance sheet capacity to do it, given what they are looking at and the writedowns between the bond holders and others. I still believe that is more of a second half issue than could possibly get started here.

Okay. My second question is more on the fiber side. It looked like fiber was up sequentially. Even though you'll be down sequentially in March, do you think that will still grow sequentially? And then, as a aside to that, Corning at their meeting they were saying they were taking share ever since Lucent sold the fiber business. And if you could comment on how you are doing, not on the equity line, but how CommScope is doing on fiber sales into the MSOs and maybe specifically, how that might look like at Comcast since the change of ownership occurred there.

We saw the note where they said about worldwide where they thought their position with Purecom was, and I think Purecom would take issue with that saying that the difference between 31 and 32% worldwide shares is close. Having said that, it is absolutely clear we are gaining market share in the fiber business in the CTV industry. Our ability to unload at the same warehouse, the condo, the drop bar, the unload is unique. As you know, this stuff goes up at once. Plus the value proposition available only to us, this broadband, wide band low water peek fiber in our cables at basically the commodity fiber pricing for others is a excellent value proposition. I expect us to continue to gain market share. I think we've had at least a 15 to 20% increase in market share year-over-year in fiber. Obviously those numbers would be larger had there not been a two year reduction in sales, priced to sales volume. I have confident about what Brian's team has done in that area. Brian do you want to comment on part of that.

Well, the ZWP is a big part. Of course, I always play our traditional position in terms of service. And long term, our goal has been to have the same participation in fiber that we've had historically in coax. And I think we'll come very close to that in 2003.

All right. So -- so basically you went from maybe 5% market share of fiber, last year, to maybe 20% this year? Is that what I'm reading?

I would -- I would characterize our historical position, maybe going back 5 years ago or -- or pre-OFS, we were probably in the 10 to 15% range, Jim.

I would say we -- we had bigger market share than most people thought, Jim, closer to 10 to 15%, and I think you can add 20% onto that plus another few points and get close to where we are now, and we're not satisfied with that.

So you -- I mean, you're well up into the 75% market share on the coax side. Do you think that you could get above 50% of market share in fiber and the MSO business by the end of this year.

I would hope so. I mean, it is dependent on a whole bunch of things, but we certainly have that goal.

That's it. Thanks, guys.

Thanks, Jim.

Our next question comes from the line of Dan Earns from Rodman and Renshaw. Go ahead.

Yes, good afternoon, a couple of questions if I could. First, to finish off on the OFS side ,I realize you are under no obligation to, but given that they are, you know, maxed out on the revolver with you, what is the likelihood of them requesting a -- additional capital, and then I have a follow-up question.

Well, that is always a possibility. But we've stated to them, to our shareholders and to our board that we have no intention of doing that. I mean, it is obvious that they -- anything could change, but they are getting better and better and closer and closer to being able to make it through this without substantial additional financing. So our view has been we love them as a partner. We are doing -- one of their biggest customers now. But our original deal is our original deal and we're sticking with it.

Just to follow up on that then quickly, I mean is it your understanding then that FARACARA, would -- as they're able to, would continue to fund the -- the losses to the end of this year.

I think so. I think that they're very -- they're a very disciplined company, 150-year-old well-managed company who believes in this technology, they are there for the future. I think if you stand back for a meant and understand that the funding requirements are going to be substantially less this year than they were last year, plus you have the protection of over 850 patents resting inside this nest egg, a value I think that they believe that they have one of the remaining positions in the world in fiber-optics, so do we.

Fair enough. Then we talked a lot about the fiber and MSO space, but, you know, you mentioned during your comments that you are not particularly happy with your performance in the wireless group. And I think your sales there, you know, reflect -- are somewhat off with the industry. So, can you talk about, you know, what your potential for market share gains in the wireless group, and maybe just speak directly to the Andrew Alan merger and whether it makes a stronger competitor with wider offering.

Excellent question. First, yes, we're disappointed in our position. You know, the wireless market is unique in one respect: It is a very traditional telecom market. We have in our opinion a very far superior product, better attenuation, electricals, more robust in environments, we gain traction each year as we get approved by more and more and more of the major cellular providers, would I guess now we're 4 or 5 of the top nine of approvals. It is a [INAUDIBLE] to get out to do it. We have without question the lower cost potential to produce the product because of our scale. Clearly from a management point of view, and a shareholder point of view, I'm disappointed in that, but I still believe in this product and believe in our market capacity. This is one of the few products to be on the same scale as CommScope, 500 million a year market. Every time we win a account, it gets traction. We like to now, to the Alan Andrew merger, it was a great move for them. A excellent company. It gives them a larger base for them to deal off of. But I go back to my years in the cable TV. The individual product suppliers always won over the consolidated operator. In the end, these companies are big enough they want to make sure they have product differentiation and more than one supplier to come to. I still think there is plenty of market share for us to make it a attractive business. We are not quitters.

Sounds good. Thank you much.

Thank you.

Our next question comes from the line of Larry Harris with Wainwright. Please go ahead with your question.

Yes, thank you. I was wondering, if you could provide some thoughts regarding further uses of the free cash flow. You had a unique opportunity this past year to repurchase some of the Lucent shares. Do you see perhaps further repayment of debt, or share repurchase, if your free cash flow continues to be positive in 2003.

Larry, as you know, we had a excellent opportunity, had a long working relationship with Lucent from the beginning of this deal through that process. Clearly at those types of prices I would be a aggressive buyer of the stock. We never know at which time these opportunities come up. That was a single block of stock, a significant block of stock tied to a longer term arrangement with Purecom becoming our largest shareholder. At 8.20 whatever we closed at, and we have 8.50 something plus, you begin to question where you are in the public arena and public market. My view would be that our goal this year is to stabilize, improve our wireless business, gain more market share in fiber, make sure we have plenty of cash in revolver for the working capital requirements if business starts to take off faster than we had in our plan. Once we've kind stabilized in here, understand the customer base, understand where Adelphia is, understand where Germany is, in the second half of the year I would not rule out what we do with the cash, but for the first half I would think we are going to be very, very conservative and watch this very closely.

Yes. All right. Well thank you.

Yes, sir.

Our next question comes from the line of Richard Diamond with Inwood Partners. Please go ahead with your question.

Yes, for my first question, could you, Frank, potentially size the opportunities at Adelphia and in Germany, as well as give us a idea of what the total Comcast opportunity could be in terms of sales?

Well, there's no question that Comcast will be CommScope's largest customer as they will be everybody that supplies the CTV industry, Motorola, Seacore, all of them will find Comcast given they have 22 to 27% of the subscribers. If you just do the math on our sales, they should be our first 100 million customer, it is the combination of AT&T and Comcast. Now to size the opportunity is dependent upon what length of time Comcast wants to execute upgrading the properties that they clearly recognize they have to upgrade. That kind of the -- their decision, more than any of our decision. So I expect them to continue to be our largest customer. Now, Germany, Germany represents the same as rebuilding a third of the United States. I mean there is a number -- the numbers there are very large. It is a question of when, and how they get started and at what pace they do it. But if you assume for a moment, in the last -- since 1997, in the last seven-plus years, the cable industry has spent $1,000 per subscriber updating its plan, domestic U.S. So if you do the same math and say that $1,000 equipment in Germany would be issued on every one of those 17 million subscribers, it gets to be a interesting number. And if you should say 10% plus or minus should be coax. Again, it is more dependent on how they get started how long it takes for them to do it. For us, the most important thing is they get started.

Who would be your competitors in the German marketplace.

You would expect the same competitors we face here,, some of the local manufacturers but no one has the scale in Europe that we have, no one has a dedicated coax manufacturing facility in the UK -- I mean in the -- we have in Brussels and Belgium a major position. So we should have a -- a cost deliverable advantage.

And what would the size of the Adelphia opportunity be if they do come back?

Adelphia was running at a 15 million dollar plus or minus pace per quarter when they basically ceased. So I would say that it can be somewhere between 10 and 15 million a quarter when they come back. Again, it is a basis of what their decision, how many properties will they keep, will they sell some off to pay debt? It is a very large variable. Because I do not know how they come out of bankruptcy. When it does, they will obviously have to fix those properties.

Last question. Am I thinking about OFS BrightWave correctly, and I'll just put out the following proposition: You know, if you value the stock -- you know, if you value the stock that you gave Lucent at what you bought it back for, 5.20, it looks like you -- the entire OFS BrightWave was purchased for under $300 million by yourselves and for Ikawa what is the replacement value for those assets.

Excellent. I do the math all the time, it is so wow because of the accounting rules. To give it to you straight, I mean the asset base is probably irreplaceable to start with. How do you value the patents? Forget the manufacturing facilities, the intellectual property is so valuable that you get -- take that out. But the hard book value of the business is probably still $550 million.

Great.

So --

Thank you.

It was a wonderful -- turned out to be a wonderful transaction if it works in the end.

I have no doubt it will. Thank you.

Thank you.

Our next question comes from the line of Ram Carsargot, with Morgan Keegan. Please go ahead.

I have a couple of questions for you. One is where is the industry in capacity utilization and do you have any thoughts on the upgrades that seem to be taking place in the cable markets, and how you are participating in that? And then I have a follow-up question.

Welcome back. Glad to have you back on the phone. Capacity utilization at best is somewhere, 50 to 60%. So there's no question that everyone has excess capacity. A lot of that capacity utilization depends both on physical capacity, utilization in price, linear foot capacity. But, nonetheless, I would guess that it is in that range. And I'm sorry I missed your last -- your second question.

What we keep hearing about, Frank, is many of the smaller communities are upgrading their cable systems to offer broadband, you know.

Yes.

We all talk about the larger companies being in financial difficulties. Can you give us a update on maybe what you are seeing in the smaller markets.

Actually, I mean if you think it for a moment, as bad as it seems for us, compared to our other telecom suppliers in the aggregate telecom market, I think CommScope is doing relatively well. I think the cable industry is doing much better than any of the other telecom operators, because the cable industry has a model that works for delivering broadband at the lowest price per bandwidth dollar into the home. High speed data is winning two to one over DSL in the marketplace. It does in the matter if it is a small community or a major city, the numbers still run two to one. Given that the FCC did not at least on the service make a make a major break through today on the regulatory relief, I can assure you that the cable industry will not stop marching forward. They have 2.5 million tell co-customers, 11.5 million high speed data customers and better than half of the top 100 cities preferring for HDTV over cable. My view is our model is working, revenue is improving. The cash flow for the MSOs is improving, we've had serious bumps with Adelphia and other things. I believe that in six months the bond markets will be back open to the cable industry and you will see aggressive building going on.

Thanks, Frank. You answered my second question when you discussed the UNIP issue today. Thank you.

Yes, sir.

Our next question comes from the line of Jason Yellen from Forest Capital. Please go ahead.

I was wondering if you could provide color around the guidance for modest free cash flow for 2003. You developed over 100,000 in 02 and for 2003 it looks like spending will be down over 7 to 8 million.

Obviously we cannot do the 100 million because a lot of that came out of the reduction in working capital. We had the best receivables -- DSOs, years in the 40s, Brian did a great job of bringing down inventory. So, you know, we will stay positive free cash flow but we are hoping business improves enough that we are working through the cash to bring up our working capital requirements for inventory and sales. You know, if it stays flat we will have more probably than we will if it starts going up. We clearly intend to be in positive cash flow. The capital is behind us. We have a lot of capacity. So, you know, I do not want to really put a number on it because it is determined based on how we feel about the business.

Great, one question for Jearld, it looked like the allowance for doubtful accounts came down see sequentially by a couple million dollars, is that Adelphia related.

Sequentially from the 3rd quarter? Jason?

Correct.

No. It would not necessarily be Adelphia related. As you saw, receivables in total came down in the quarter. We were down 65 million, at certainly our lowest part of the year. And as a percent, you know, the allowances much higher than it has been as percent of accounts receivable at any time during the year. So -- so it was other factors, other than Adelphia. We did collect some problem accounts during the quarter; that was beneficial. And it helped that both the DSO and the allowance situation.

Thank you, gentlemen.

Yes, sir.

Ladies and gentlemen, as a reminder, to register for a question, press the 1-4. Our next question comes from the lines of James Jenjohan, go ahead with a follow-up.

This is Alan Bezoza, a little switch up.

That's all right.

I have a question on the gross margin line. Generally with the mix changing, perhaps it's more T&D, AT&T spending, talk about oil prices and how that may impact the margins going forward.

You're absolutely right. We have some serious concern about oil, because it is a major byproduct for the plastics. Brian and I spoke about it this afternoon we have some room, not a lot. We'll have to just watch that very closely. And it could have a major impact, won't kill us but it will have a impact. Brian, do you want to add to it.

Oil comes to us in a couple of ways, obviously we have PBCs, polyethylenes. Our transportation company, a big part of what we do in our service model is deliver product on the specialized vehicles of ours. And in -- and in large quantity, those expenses are borne by CommScope. And so what we'll -- we will incur additional expense there.

Yes, Alan, you know this but our truck fleet does 15 million miles a year plus. This on-time delivery product that we try and do.

And how about on the mix, Frank? Talking about the mix with Comcast perhaps.

I will give you. The mix right now is traditional Comcast, traditional AT&T, we have not been able to see the blended design that they are going to do. Right now I would say that they look exactly like they did before the marriage. But as time progresses, I any you'll see more of the design -- think you'll see more of the design philosophy of Comcast move in which is different fiber richness versus AT&T. But right now there is hardly a deviation point from where it was historically.

Yes. I'll put some more color, Alan, because you asked it in the context of margin. And, you know, we've acknowledged what we consider to be a very successful program in fiber. And fiber is becoming a increasing part of our broadband business. And that is the good news. The lasting good news is that the margins in the fiber business today, the fiber cable business, are not as high as our traditional coaxial cable businesses. So as -- as we gain space on the fiber side, it is -- it is having a impact on our gross margins.

How would you characterize though, the mix between distribution and drop though at Comcast AT&T?

I would say no different than any other of our leading MSOs.

So you do not expect a shift towards T&D as the upgrade?

Well, I think they are upgrading now, Alan. I think what you are seeing happen here is that AT&T was clearly in the upgrade process, maybe not as fast as they will be, and Comcast continued to maintain and build their business as they always have. It is too early in this process, we are b barely two months into it, to understand if there is, A, a design philosophy change that will say it will be more fiber-rich or less fiber-rich that they are upgrade to more than 750 or one gigahertz versus where they are, I think it is too early. Fortunately, we have the products to supply them whichever way they go.

Great. Thank, guys.

Yes, sir.

Our next question comes from the line of Alan Metroni with Copper Beach Capital. Please go ahead.

Thank you. How many employees do you currently have?

2700. 2750. We are down 11% year-over-year.

Do you expect the number to stay roughly the same over this next year.

I would hope that we could add employees.

Okay.

I mean, I would like to -- that would say we're doing better in business. That would be my hope.

So I'm clear on this, the OFS does not generate cash losses for you, correct?

They -- Alan, they -- they generate losses through equity accounting that we report in our financial statements. They are partnership, they -- the tax benefits of those losses flow through that partnership up to us. So we -- we get some -- some cash benefit out of those losses through tax reduction.

Well, that is what I wanted to understand. What is your current NOL balance based off your losses from OFS and just where you stand in general from any charges you've taken?

Well, we've -- we do expect, for instance, to receive a tax refund from NOL, in 2003. For instance, if that is where you -- I do not have those numbers in front of me. But we are utilizing the operating losses that -- that OFS is -- is generating, and able to carry that back against CommScope's taxable income.

That's where I'm coming. What I'm trying to understand is this, just to get back to the question on free cash flow, if there is no growth in the business, and I add back all the, we'll call it one-time charges for OFS or at least non-income statement cash losses for OFS, non-cash loss for OFS as well as the Adelphia, if I add it all back you did roughly $0.26 cents this past year, if I assume it is somewhat flat, about 16 million in net income fully taxed. If you are saying that DNA is roughly 37 million, with cap ex of about 15, that is a additional 22 million of cash. I'm getting to somewhere between 38 and 40 before I give you the benefit of taxes before working capital changes, coming out to something on the order of about 64 cents a share, 65 cents a share of free cash flow, regarding less of what working capital changes are. Am I on the right track here?

I cannot say that I followed that entirely, Alan. But, yes, I think it does lend itself to that sort of analysis. There are benefits that come out of the losses and one -- one thing to think about, though, is that all of the losses, all the tax benefits that come out of losses are not all current. In other words, we cannot carry them all back in the current period. They're -- there partly the deferred taxes of CommScope. And so that would have some actual impact on free cash generated out of that.

Okay. You still have a Adelphia receivable. I just wanted to know, have you cashed that in at all. I've been hearing people offering unsecured creditors more than probably the value they are carrying on their books in general. Have you gotten any offers on your Adelphia receivable and have you thought about selling it at all.

We wrote off the receivables outstanding at June 30th, 100%. And we have gotten quotations of -- of potentials to buy those, which we have declined. So -- so the answer is, yes, we've gotten answers for them. We're caring it forward on the books.

The amount that you had before you -- before the 100%, what was the amount that you had all together, was it 20 million dollars.

Plus, a little over 20, I think $21 million in total with Adelphia.

And the reason you.

Our -- our view on that is we will continue to monitor. We are very close to that situation. I understand where you are going. But I am not disposed to sell it for as cheap as it has been offered to us. We have never suffered a failure in the cable industry, and I've been in this business 33 years. Usually if you stick with this, you'll come out better at the end than if you jump on the first bid that comes by you, our balance sheet is strong enough to stay with it, and I think we'll end up with a better package at the end of the day than running out and selling it.

I appreciate the time you are spending. When do you think we should see it or where should we see it, the potential increase in orders that Comcast and the combined Comcast AT&T should give if they rebuild the way they've said they will rebuild, I thought I would have seen it in your backlog or the contractor's backlog. To me it not showing up in big enough offers. Are you seeing it yet or do you expect it.

First of all, this is not a backlog business. Our service levels are so high, capacity utilization is at such low levels, all the customers are comfortable than they can get 48 hour delivery. There is no backlog in the issue here.

Okay.

We clearly stay close to the customers, we understand what their thinking is and what their reserve. They put in a order, the stuff is on the truck the next 48 hours. That is the way the system works. We'll see it when we see it. But you know my view is that it is still working through this -- you know, that was a major, major, major combination. So you have to make sure that all of the kind of things tighten up, all the new regional managers are in place, all the regional procurement people in place. Clearly they're buying from us. Look at the numbers that we have now. I think you have to give this some time to understand where it bases out.

Okay. Thank you.

All right. Thank you.

If -- we'll take one more question, if there are any. If not, we'll wrap it up.

All right. Our next question comes from the line of Chris Blackman with Imperial Capital. Please go ahead with your question.

Frank, you just mentioned that customers know that they can receive delivery within 24 hours, and -- or 48 hours and capacity utilization is running so low right now. What is -- how much volume is it going to take for us to be able to start seeing increase in price in this industry?

That -- that -- that is a excellent question. I tell you, I cannot see it this year. I think the only possibilities for a price increase, and I'll take the two products, in the coaxial broadband market is if in fact we have run away costs in oil, and -- and in energy and all of those things related to it, the customers are bright, smart. And you usually can get some help on those. The fiber market is a entirely different set of circumstances. You are going to have to have failures out there which will happen in the second rate, third rate, fourth run, fiber manufacturers that are probably so far out of line on their -- you know, on their intellectual property before you see any chance to bring back a stability and lift in pricing, so I view them as two different markets. I do not expect, nor do we have in our plan, any price lift this year.

What about potential decrease in price.

That is always a possibility. I mean, you could have run away idiots go out there. But I mean, again, there is a point of diminishing returns here that the ones who keep doing that seem to disappear. The customers are not stupid. They want longevity, suppliers with scale, suppliers with balance sheets. I mean, they're not going to walk away for four or 5% and then end up with someone that cannot repair it or take care of it. The best thing that has happened to all of us is the scale of the MSOs lead them to like the larger suppliers.

Right. Thank you.

Yes, sir. Thank you.

We thank everyone for joining us on the call today. And we look forward to talking with you in 2003. And to a better year in 2003 than 2002. Thanks again.

Thank you.

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