**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

#### **Washington, D.C. 20549**

 

----

 

#### **FORM 10-Q**

#### ** **

**(Mark One)**

 
| **ý**                                              | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                    |       |                                                                                                     |
| **For the quarterly period ended  March 31, 2005** |
|                                                    |       |                                                                                                     |
| **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 itscharter)

 
| **Delaware**                                                    | ** ** | **36-4135495**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**1100 CommScope Place, SEP.O. Box 339Hickory, North Carolina**

(Address of principal executive offices)

 

**28602**

(Zip Code)

 

**(828) 324-2200**

(Registrant’s telephone number, includingarea code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes ý     No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

 

Yes ý     No o

 

As of April 29, 2005 there were 54,533,155 shares of Common Stockoutstanding.

 

 

----

 

**CommScope, Inc.Form 10-QMarch 31, 2005Table of Contents**

 
| Part I - Financial Information (Unaudited): |                                                                                                |
|--------------------------------------------------|-----------------------------------------------------------------------------------------------------|
|                                             |                                                                                                |   |
|                                             | Item 1. Condensed Consolidated Financial  Statements:                                               |   |
|                                             |                                                                                                | Condensed  Consolidated Statements of Operations | 3 |
|                                             |                                                                                                | Condensed Consolidated Balance Sheets | 4 |
|                                             |                                                                                                | Condensed Consolidated Statements of Cash  Flows | 5 |
|                                             |                                                                                                | Condensed Consolidated Statements of  Stockholders’ Equity and Comprehensive Income (Loss) | 6 |
|                                             |                                                                                                | Notes to Condensed Consolidated Financial  Statements | 7 – 16 |
|                                             |                                                                                                |   |
|                                             | Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 17 – 24 |
|                                             |                                                                                                |   |
|                                             | Item 3. Quantitative and Qualitative  Disclosures About Market Risk                                 | 24 |
|                                             |                                                                                                |   |
|                                             | Item 4. Controls and Procedures                                                                     | 25 |
|                                             |                                                                                                |   |
| Part II - Other Information:                |                                                                                                |
|                                             |                                                                                                |   |
|                                             | Item 6.  Exhibits                                                                                   | 25 |
|                                             |                                                                                                |   |
|                                             | Signatures                                                                                          | 26 |

 

2

----

 

**CommScope, Inc.**

**Condensed Consolidated Statements of Operations**

**(Unaudited — In thousands, except per share amounts)**

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                     | ** ** | **March 31,**     | ** ** |
| ** **                                                                     | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                                           |       |                   |       |   |   |
| Net sales                                                                      |       | $                      | 309,054    |   | $ | 235,061 |   |
|                                                                           |       |                   |       |   |   |
| Operating costs and expenses:                                                  |       |                   |       |   |   |
| Cost of sales                                                                  |       | 236,892                |       | 197,677 |   |
| Selling, general and administrative                                            |       | 53,882                 |       | 35,984 |   |
| Research and development                                                       |       | 7,770                  |       | 4,866 |   |
| In-process research and development charges                                    |       | —                 |       | 3,894 |   |
| Acquisition-related transition and startup  costs                              |       | —                 |       | 6,739 |   |
| Restructuring costs                                                            |       | 2,029                  |       | — |   |
| Total operating costs and expenses                                             |       | 300,573                |       | 249,160 |   |
|                                                                           |       |                   |       |   |   |
| Operating income (loss)                                                        |       | 8,481                  |       | (14,099 | ) |
| Other income (expense), net                                                    |       | (57                    | )          | (1,126 | ) |
| Loss on early extinguishment of debt                                           |       | —                 |       | (5,029 | ) |
| Interest expense                                                               |       | (2,078                 | )          | (2,759 | ) |
| Interest income                                                                |       | 999                    |       | 479 |   |
|                                                                           |       |                   |       |   |   |
| Income (loss) before income taxes and  equity in losses of OFS BrightWave, LLC |       | 7,345                  |       | (22,534 | ) |
| Income tax benefit (expense) before equity  in losses of OFS BrightWave, LLC   |       | (1,811                 | )          | 6,979 |   |
|                                                                           |       |                   |       |   |   |
| Income (loss) before equity in losses of  OFS BrightWave, LLC                  |       | 5,534                  |       | (15,555 | ) |
|                                                                           |       |                   |       |   |   |
| Equity in losses of OFS BrightWave, LLC,  net of tax of $503                   |       | —                 |       | (815 | ) |
|                                                                           |       |                   |       |   |   |
| Net income (loss)                                                              |       | $                      | 5,534      |   | $ | (16,370 | ) |
|                                                                           |       |                   |       |   |   |
| Net income (loss) per share:                                                   |       |                   |       |   |   |
| Basic                                                                          |       | $                      | 0.10       |   | $ | (0.27 | ) |
| Assuming dilution                                                              |       | $                      | 0.09       |   | $ | (0.27 | ) |
|                                                                           |       |                   |       |   |   |
| Weighted average shares outstanding:                                           |       |                   |       |   |   |
| Basic                                                                          |       | 54,512                 |       | 60,653 |   |
| Assuming dilution                                                              |       | 66,784                 |       | 60,653 |   |

 

See notes to condensed consolidated financial statements.

 

3

----

 

**CommScope, Inc.**

**Condensed Consolidated Balance Sheets**

**(Unaudited — In thousands, except share amounts)**

 
| ** **                                                                                                                                                                                                                                                                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                      | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| **Assets**                                                                                                                                                                                                                                                                                      |       |               |       |                  |       |
|                                                                                                                                                                                                                                                                                            |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                       |       | $                  | 89,519     |                  | $          | 99,631 |   |
| Short-term investments                                                                                                                                                                                                                                                                          |       | 65,495             |       | 77,620                |       |
| Total cash, cash equivalents and short-term  investments                                                                                                                                                                                                                                        |       | 155,014            |       | 177,251               |       |
|                                                                                                                                                                                                                                                                                            |       |               |       |                  |       |
| Accounts receivable, less allowance for  doubtful accounts of $13,512 and $12,761, respectively                                                                                                                                                                                                 |       | 162,366            |       | 122,612               |       |
| Inventories                                                                                                                                                                                                                                                                                     |       | 110,059            |       | 108,342               |       |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                       |       | 24,470             |       | 13,244                |       |
| Deferred income taxes                                                                                                                                                                                                                                                                           |       | 28,295             |       | 26,644                |       |
| Total current assets                                                                                                                                                                                                                                                                            |       | 480,204            |       | 448,093               |       |
|                                                                                                                                                                                                                                                                                            |       |               |       |                  |       |
| Property, plant and equipment, net                                                                                                                                                                                                                                                              |       | 293,768            |       | 311,453               |       |
| Goodwill                                                                                                                                                                                                                                                                                        |       | 151,373            |       | 151,384               |       |
| Other intangibles, net                                                                                                                                                                                                                                                                          |       | 79,111             |       | 82,315                |       |
| Deferred income taxes                                                                                                                                                                                                                                                                           |       | 14,414             |       | 17,341                |       |
| Other assets                                                                                                                                                                                                                                                                                    |       | 20,931             |       | 19,993                |       |
|                                                                                                                                                                                                                                                                                            |       |               |       |                  |       |
| Total Assets                                                                                                                                                                                                                                                                                    |       | $                  | 1,039,801  |                  | $          | 1,030,579 |   |
|                                                                                                                                                                                                                                                                                            |       |               |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                   |       |               |       |                  |       |
|                                                                                                                                                                                                                                                                                            |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                                                                |       | $                  | 65,856     |                  | $          | 52,898 |   |
| Other accrued liabilities                                                                                                                                                                                                                                                                       |       | 85,005             |       | 90,775                |       |
| Current portion of long-term debt                                                                                                                                                                                                                                                               |       | 13,000             |       | 13,000                |       |
| Total current liabilities                                                                                                                                                                                                                                                                       |       | 163,861            |       | 156,673               |       |
|                                                                                                                                                                                                                                                                                            |       |               |       |                  |       |
| Long-term debt                                                                                                                                                                                                                                                                                  |       | 294,050            |       | 297,300               |       |
| Pension and postretirement benefit  liabilities                                                                                                                                                                                                                                                 |       | 93,501             |       | 90,620                |       |
| Other noncurrent liabilities                                                                                                                                                                                                                                                                    |       | 33,758             |       | 36,523                |       |
| Total Liabilities                                                                                                                                                                                                                                                                               |       | 585,170            |       | 581,116               |       |
|                                                                                                                                                                                                                                                                                            |       |               |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                                                                                                   |       |               |       |                  |       |
|                                                                                                                                                                                                                                                                                            |       |               |       |                  |       |
| Stockholders’ Equity:                                                                                                                                                                                                                                                                      |       |               |       |                  |       |
| Preferred stock, $.01 par value; Authorized  shares: 20,000,000; Issued and outstanding shares: None at March 31,  2005 and December 31, 2004                                                                                                                                         |       | —             |       | —                |       |
| Common stock, $.01 par value; Authorized  shares: 300,000,000; Issued shares, including treasury stock: 64,727,221 at March 31,  2005 and 64,687,745 at December 31, 2004; Issued and outstanding shares:  54,527,221 at March 31, 2005 and 54,487,745 at December 31, 2004 |       | 647                |       | 647                   |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                      |       | 433,246            |       | 432,839               |       |
| Retained earnings                                                                                                                                                                                                                                                                               |       | 172,244            |       | 166,710               |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                            |       | (5,971             | )          | (5,198                | )          |
| Treasury stock, at cost: 10,200,000 shares  at March 31, 2005 and December 31, 2004                                                                                                                                                                                                   |       | (145,535           | )          | (145,535              | )          |
| Total Stockholders’ Equity                                                                                                                                                                                                                                                                 |       | 454,631            |       | 449,463               |       |
|                                                                                                                                                                                                                                                                                            |       |               |       |                  |       |
| Total Liabilities and Stockholders’ Equity                                                                                                                                                                                                                                                 |       | $                  | 1,039,801  |                  | $          | 1,030,579 |   |
|                                                                                                                                                                                                                                                                                                 |            |                    |            |                       |            |  |  |  |  |  |

 

See notes to condensed consolidated financial statements.

 

4

----

 

**CommScope, Inc.**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited —In thousands)**

 
| ** **                                                                                          | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                          | ** ** | **March 31,**     | ** ** |
| ** **                                                                                          | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                                                                |       |                   |       |   |   |
| **Operating  Activities:**                                                                          |       |                   |       |   |   |
| Net income (loss)                                                                                   |       | $                      | 5,534      |   | $ | (16,370 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                                       |       | 15,743                 |       | 14,493 |   |
| In-process research and development charges                                                         |       | —                 |       | 3,894 |   |
| Equity in losses of OFS BrightWave, LLC,  pretax                                                    |       | —                 |       | 1,318 |   |
| Restructuring costs related to fixed asset  impairment                                              |       | 1,678                  |       | — |   |
| Deferred income taxes                                                                               |       | 1,370                  |       | (2,627 | ) |
| Tax benefit from stock option exercises                                                             |       | 87                     |       | 789 |   |
| Changes in assets and liabilities:                                                                  |       |                   |       |   |   |
| Accounts receivable                                                                                 |       | (39,916                | )          | (28,815 | ) |
| Inventories                                                                                         |       | (1,930                 | )          | 31,209 |   |
| Prepaid expenses and other current assets                                                           |       | (693                   | )          | (6,384 | ) |
| Accounts payable and other accrued  liabilities                                                     |       | 7,418                  |       | 21,319 |   |
| Other noncurrent liabilities                                                                        |       | 797                    |       | 2,915 |   |
| Other                                                                                               |       | 1,236                  |       | (122 | ) |
| Net cash provided by (used in) operating  activities                                                |       | (8,676                 | )          | 21,619 |   |
|                                                                                                |       |                   |       |   |   |
| **Investing  Activities:**                                                                          |       |                   |       |   |   |
| Additions to property, plant and equipment                                                          |       | (8,226                 | )          | (1,761 | ) |
| Acquisition of Connectivity Solutions                                                               |       | 653                    |       | (253,003 | ) |
| Net proceeds from short-term investments                                                            |       | 9,158                  |       | 84,940 |   |
| Proceeds from disposal of fixed assets                                                              |       | 426                    |       | 72 |   |
| Net cash provided by (used in) investing  activities                                                |       | 2,011                  |       | (169,752 | ) |
|                                                                                                |       |                   |       |   |   |
| **Financing  Activities:**                                                                          |       |                   |       |   |   |
| Proceeds from issuance of long-term debt                                                            |       | —                 |       | 100,000 |   |
| Principal payments on long-term debt                                                                |       | (3,250                 | )          | (28,750 | ) |
| Proceeds from issuance of convertible notes                                                         |       | —                 |       | 250,000 |   |
| Repayment of convertible notes                                                                      |       | —                 |       | (102,925 | ) |
| Long-term financing costs                                                                           |       | —                 |       | (10,013 | ) |
| Proceeds from exercise of stock options                                                             |       | 320                    |       | 5,110 |   |
| Net cash provided by (used in) financing  activities                                                |       | (2,930                 | )          | 213,422 |   |
|                                                                                                |       |                   |       |   |   |
| Effect of exchange rate changes on cash                                                             |       | (517                   | )          | (252 | ) |
|                                                                                                |       |                   |       |   |   |
| Change in cash and cash equivalents                                                                 |       | (10,112                | )          | 65,037 |   |
| Cash and cash equivalents, beginning of  period                                                     |       | 99,631                 |       | 110,358 |   |
| Cash and cash equivalents, end of period                                                            |       | $                      | 89,519     |   | $ | 175,395 |   |

 

See notes to condensed consolidated financial statements.

 

5

----

 

**CommScope, Inc.**

**Condensed Consolidated Statements of Stockholders’ Equity**

**and Comprehensive Income (Loss)**

**(Unaudited — In thousands, except share amounts)**

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **March 31,**     | ** ** |
| ** **                                     | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                           |       |                   |       |   |   |
| Number of common shares outstanding:           |       |                   |       |   |   |
| Balance at beginning of period                 |       | 54,487,745             |       | 59,318,276 |   |
| Issuance of shares to Avaya Inc.               |       | —                 |       | 1,761,538 |   |
| Issuance of shares for stock option  exercises |       | 39,476                 |       | 434,140 |   |
| Balance at end of period                       |       | 54,527,221             |       | 61,513,954 |   |
|                                           |       |                   |       |   |   |
| Common stock:                                  |       |                   |       |   |   |
| Balance at beginning of period                 |       | $                      | 647        |   | $ | 619 |   |
| Issuance of shares to Avaya Inc.               |       | —                 |       | 18 |   |
| Issuance of shares for stock option  exercises |       | —                 |       | 4 |   |
| Balance at end of period                       |       | $                      | 647        |   | $ | 641 |   |
|                                           |       |                   |       |   |   |
| Additional paid-in capital:                    |       |                   |       |   |   |
| Balance at beginning of period                 |       | $                      | 432,839    |   | $ | 384,889 |   |
| Issuance of shares to Avaya Inc.               |       | —                 |       | 32,335 |   |
| Issuance of shares for stock option  exercises |       | 320                    |       | 5,106 |   |
| Tax benefit from stock option exercises        |       | 87                     |       | 789 |   |
| Balance at end of period                       |       | $                      | 433,246    |   | $ | 423,119 |   |
|                                           |       |                   |       |   |   |
| Retained earnings:                             |       |                   |       |   |   |
| Balance at beginning of period                 |       | $                      | 166,710    |   | $ | 90,955 |   |
| Net income (loss)                              |       | 5,534                  |       | (16,370 | ) |
| Balance at end of period                       |       | $                      | 172,244    |   | $ | 74,585 |   |
|                                           |       |                   |       |   |   |
| Accumulated other comprehensive loss:          |       |                   |       |   |   |
| Balance at beginning of period                 |       | $                      | (5,198     | ) | $ | (7,533 | ) |
| Other comprehensive loss, net of tax           |       | (773                   | )          | (1,080 | ) |
| Balance at end of period                       |       | $                      | (5,971     | ) | $ | (8,613 | ) |
|                                           |       |                   |       |   |   |
| Treasury stock, at cost:                       |       |                   |       |   |   |
| Balance at beginning of period                 |       | $                      | (145,535   | ) | $ | (13,224 | ) |
| Treasury shares repurchased                    |       | —                 |       | — |   |
| Balance at end of period                       |       | $                      | (145,535   | ) | $ | (13,224 | ) |
|                                           |       |                   |       |   |   |
| Total stockholders’ equity                |       | $                      | 454,631    |   | $ | 476,508 |   |

 
| ** **                                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                                                                      |       |                                   |       |   |   |
| Comprehensive income (loss):                                                              |       |                                   |       |   |   |
| Net income (loss)                                                                         |       | $                                      | 5,534      |   | $ | (16,370 | ) |
| Other comprehensive income (loss):                                                        |       |                                   |       |   |   |
| Foreign currency translation loss - foreign  subsidiaries                                 |       | (752                                   | )          | (36 | ) |
| Foreign currency transaction loss on  long-term intercompany loans - foreign subsidiaries |       | (379                                   | )          | (1,162 | ) |
| Gain on derivative financial instrument  designated as a net investment hedge             |       | 358                                    |       | 118 |   |
| Total other comprehensive income (loss),  net of tax                                      |       | (773                                   | )          | (1,080 | ) |
|                                                                                      |       |                                   |       |   |   |
| Total comprehensive income (loss)                                                         |       | $                                      | 4,761      |   | $ | (17,450 | ) |

 

See notes to condensed consolidated financial statements.

 

6

----

 

**CommScope, Inc.**

**Notes to Condensed Consolidated FinancialStatements**

**(Unaudited - In Thousands, Unless OtherwiseNoted)**

 

**1.****            ****BACKGROUND AND BASIS OFPRESENTATION**

 

**Background**

 

CommScope, Inc.and its wholly owned subsidiaries (“CommScope” or the “Company”) is aworld leader in the design and manufacture of cable and connectivity solutionsfor communications networks.  The Companyfocuses on the ‘last mile’ in communications networks, which is thedistribution access, or final link to the customer.  Through the acquisition of substantially allof the assets and the assumption of certain liabilities of the ConnectivitySolutions business (“Connectivity Solutions”) of Avaya Inc. (“Avaya”) asof January 31, 2004 (see Note 2), the Company became a global leaderin structured cabling for business enterprise applications.  The Company is also a global leader inbroadband coaxial cables for the cable television industry.  The Company also designs, manufactures andmarkets a broad line of high-performance electronic, coaxial and fiber opticcable products for data networking, Internet access, wireless communication,telephony and other broadband applications. In addition, the Company is a leading provider of environmentally secureenclosures and structured cabling solutions supporting central offices fortelecommunication service providers in the United States.

 

#### **Basis of Presentation**

#### ** **

Thecondensed consolidated balance sheet as of March 31, 2005 and thecondensed consolidated statements of operations, cash flows, stockholders’equity and comprehensive income (loss) for the three months ended March 31,2005 and 2004 are unaudited and reflect all adjustments of a normal recurringnature that are, in the opinion of management, necessary for a fairpresentation of the interim period financial statements.  The results of operations for the interimperiod are not necessarily indicative of the results of operations to beexpected for the full year.

 

Theaccompanying condensed consolidated financial statements for the three monthsended March 31, 2004 include the results of Connectivity Solutions from January 31,2004, the date of the Connectivity Solutions acquisition (see Note 2).  In addition, the condensed consolidatedresults of operations for the three months ended March 31, 2004 includethe results of operations of OFS BrightWave, LLC (“OFS BrightWave”).  On June 14, 2004, CommScope disposed ofits equity interest in OFS BrightWave (see Note 6).

 

The unaudited interim condensed consolidated financial statements ofCommScope have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted. The significant accounting policies followed by theCompany are set forth in Note 2 in the consolidated financial statements withinthe Company’s Annual Report on Form 10-K for the year ended December 31,2004 (the “2004 Form 10-K”).  Therewere no changes in the Company’s significant accounting policies during thethree months ended March 31, 2005. In addition, the Company reaffirms the use of estimates in thepreparation of the financial statements as set forth in the 2004 Form 10-K.These interim condensed consolidated financial statements should be read inconjunction with the Company’s December 31, 2004 audited consolidatedfinancial statements and notes thereto included in the 2004 Form 10-K.

 

7

----

 

###### **Concentrations of Risk**

###### ** **

Netsales to Anixter International Inc. and its affiliates (“Anixter”) accountedfor approximately 32% and 29% of the Company’s total net sales during the threemonths ended March 31, 2005 and 2004, respectively.  Sales to Anixter primarily originate withinthe Enterprise segment.  No othercustomer accounted for 10% or more of the Company’s total net sales for thethree months ended March 31, 2005 and 2004.

 

Accountsreceivable from Anixter represented approximately 34% of net accountsreceivable as of March 31, 2005.  Noother customer accounted for 10% or more of the Company’s net accountsreceivable as of March 31, 2005.

 

**Product Warranties**

 

TheCompany recognizes a liability for the estimated claims that may be paid underits customer warranty agreements to remedy potential deficiencies of quality orperformance of the Company’s products. These product warranties extend over periods ranging from one totwenty-five years from the date of sale, depending upon the product subject tothe warranty.  The Company records aprovision for estimated future warranty claims based upon the historicalrelationship of warranty claims to sales and specifically-identified warrantyissues.  The Company bases its estimateson historical experience and on assumptions that are believed to be reasonableunder the circumstances and revises its estimates, as appropriate, when eventsor changes in circumstances indicate that revisions may be necessary.

 

Activityin the product warranty accrual, included in other accrued liabilities, for thethree months ended March 31, 2005 consisted of the following:

 
| Product warranty accrual, beginning of  period |   | $    | 1,531  |   |
|------------------------------------------------|--------|------|--------|--------|
| Provision for warranty claims                  |   | 14   |   |
| Less: warranty claims paid                     |   | (112 | )      |
| Product warranty accrual, end of period        |   | $    | 1,433  |   |

 

**Commitments and Contingencies**

 

CommScopeis either a plaintiff or a defendant in pending legal matters in the normalcourse of business; however, management believes none of these legal matterswill have a materially adverse effect on the Company’s financial statementsupon final disposition.  In addition,CommScope is subject to various federal, state, local and foreign laws andregulations governing the use, discharge, disposal and remediation of hazardousmaterials.  Compliance with current lawsand regulations has not had, and is not expected to have, a materially adverseeffect on the Company’s financial condition or results of operations.

 

### ***Net Income(Loss) Per Share***

 

### *Basicnet income (loss) per share is computed by dividing net income (loss) by theweighted average number of common shares outstanding during the applicableperiod.  Diluted net income (loss) pershare is based on net income (loss) adjusted for after-tax interest andamortization of debt issuance costs related to convertible debt, if dilutive,divided by the weighted average number of common shares outstanding adjustedfor the dilutive effect of stock options and convertible securities.*

 

Belowis a reconciliation of net income (loss) and weighted average common shares andpotential common shares outstanding for calculating diluted net income (loss)per share:

 

8

----

 
| ** **                                                                                                         | ** ** | **Three Months  Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| Numerator:                                                                                                         |       |                                    |       |   |   |
| Net income (loss) for basic net income  (loss) per share                                                           |       | $                                       | 5,534      |   | $ | (16,370 | ) |
| Effect of assumed conversion of 1%  convertible senior subordinated debentures due 2024                            |       | 629                                     |       | — |   |
| Income available to common shareholders for  diluted net income (loss) per share                                   |       | $                                       | 6,163      |   | $ | (16,370 | ) |
|                                                                                                               |       |                                    |       |   |   |
| Denominator:                                                                                                       |       |                                    |       |   |   |
| Weighted average number of common shares  outstanding for basic net income (loss) per share                        |       | 54,512                                  |       | 60,653 |   |
| Effect of dilutive securities:                                                                                     |       |                                    |       |   |   |
| Employee stock options (a)                                                                                         |       | 778                                     |       | — |   |
| 1% convertible senior subordinated  debentures due 2024                                                            |       | 11,494                                  |       | — |   |
| Weighted average number of common and  potential common shares outstanding for diluted net income (loss) per share |       | 66,784                                  |       | 60,653 |   |

 

----

(a)   Options to purchase approximately 5.6 millionand 7.4 million common shares were excluded from the computation of net income(loss) per share, assuming dilution, for the three months ended March 31,2005 and 2004, respectively, because they would have been antidilutive.

 

### ***Stock Options***

### * *

Thefollowing table illustrates the effect on net income (loss) and net income(loss) per share as if the Company had applied the fair value recognitionprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation,” to stock-based employee compensationusing the Black-Scholes option pricing model:

 
| ** **                                                                                                                                    | ** ** | **Three Months  Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                                | ** ** | **2004** | ** ** |
|                                                                                                                                          |       |                                    |       |   |   |
| Net income (loss), as reported                                                                                                                |       | $                                       | 5,534      |   | $ | (16,370 | ) |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | 1,998                                   |       | 1,638 |   |
|                                                                                                                                          |       |                                    |       |   |   |
| Pro forma net income (loss) for basic net  income per share                                                                                   |       | $                                       | 3,536      |   | $ | (18,008 | ) |
|                                                                                                                                          |       |                                    |       |   |   |
| Add: Effect of assumed conversion of 1%  convertible senior subordinated debentures due 2024                                                  |       | 629                                     |       | — |   |
|                                                                                                                                          |       |                                    |       |   |   |
| Pro forma net income (loss) for diluted net  income per share                                                                                 |       | $                                       | 4,165      |   | $ | (18,008 | ) |
|                                                                                                                                          |       |                                    |       |   |   |
| Net income (loss) per share:                                                                                                                  |       |                                    |       |   |   |
| Basic—as reported                                                                                                                        |       | $                                       | 0.10       |   | $ | (0.27 | ) |
| Basic—pro forma                                                                                                                          |       | $                                       | 0.06       |   | $ | (0.30 | ) |
|                                                                                                                                          |       |                                    |       |   |   |
| Diluted—as reported                                                                                                                      |       | $                                       | 0.09       |   | $ | (0.27 | ) |
| Diluted—pro forma                                                                                                                        |       | $                                       | 0.06       |   | $ | (0.30 | ) |

 

9

----

 

**Impact of Newly Issued Accounting Standards**

 

In December 2004, the Financial Accounting Standards Board issuedSFAS No. 123 (revised), “Share-Based Payment,” which establishes standardsrelated to the accounting for transactions in which an entity exchanges itsequity instrument for goods or services. This revised standard also addressestransactions in which an entity incurs liabilities in exchange for goods orservices that are based on the fair value of the entity’s equity instruments orthat may be settled by the issuance of these equity instruments. SFAS No. 123(revised) focuses primarily on accounting for transactions in which an entityobtains employee services in share-based payment transactions. This standardrequires a public entity to measure the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award and recognize the cost over the period during which an employee isrequired to provide service in exchange for the award. In April 2005, theSEC amended the effective date to allow companies to implement this standard atthe beginning of their next fiscal year beginning after June 15, 2005.CommScope believes that this statement will have a material impact on itsconsolidated statement of operations. The pro forma effects on net income(loss) and net income (loss) per share related to the application of thisstandard had CommScope applied fair value recognition provisions for the threemonths ended March 31, 2005 and 2004 are reported within this Note in the section titled“Stock Options.”

 

**2.****            ****ACQUISITION OF CONNECTIVITY SOLUTIONS**

 

EffectiveJanuary 31, 2004, CommScope completed the acquisition of substantially allof the assets and assumed certain liabilities of Connectivity Solutions.  The total purchase price consisted ofapproximately $250 million in cash and approximately 1.8 million shares ofCommScope common stock, valued at $32.4 million.  CommScope assumed certain current liabilitiesand approximately $65 million of other specified liabilities, primarily relatedto employee benefits.

 

CommScope’sconsolidated results of operations for the three months ended March 31,2004 include the results of operations of the Connectivity Solutions businessfor the two-month period from February 1, 2004 through March 31,2004.  The following table presents proforma consolidated results of operations for CommScope for the three monthsended March 31, 2004, as though the acquisition of Connectivity Solutionshad been completed as of January 1, 2004. This pro forma information is intended to provide information regardinghow CommScope might have looked if the acquisition had occurred as of January 1,2004 and is based on the historical results of the Connectivity Solutionsbusiness as a division of Avaya for the month of January 2004. Therefore,the pro forma information may not be indicative of the actual results of theConnectivity Solutions business when operated as part of CommScope.  Moreover, the pro forma information does notreflect all of the changes that may result from the acquisition, including, butnot limited to, challenges of transition, integration and restructuringassociated with the transaction; challenges of achieving anticipated synergies;ability to retain qualified employees and existing business alliances;maintaining satisfactory relationships with represented employees; and customerdemand for Connectivity Solutions products. The pro forma adjustments represent management’s best estimates based oninformation available at the time the pro forma information was prepared andmay differ from the adjustments that may actually have been required.  Accordingly, the pro forma financialinformation should not be relied upon as

 

10

----

 

beingindicative of the historical results that would have been realized had theacquisition occurred as of the date indicated or that may be achieved in thefuture.

 
| ** **                   | ** ** | **Three Months  Ended  March 31, 2004** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|
|                         |       |                                         |       |
| Pro forma revenue            |       | $                                            | 260,771    |   |
| Pro forma net loss           |       | (23,053                                      | )          |
| Pro forma net loss per share |       | (0.38                                        | )          |
|                              |            |                                              |            |  |

 

Thesepro forma results reflect the elimination of intercompany sales and immaterialadjustments for interest expense, depreciation, amortization and related incometaxes.  These pro forma results alsoinclude an estimate of $4.0 million, pretax, for corporate overhead costs thatwould have been allocated by Avaya to the Connectivity Solutions businessduring January 2004.  During thetwo-month period from February 1, 2004 through March 31, 2004,CommScope incurred corporate overhead costs of approximately $1.3 million onbehalf of Connectivity Solutions.

 

Thepro forma net loss and net loss per share for the three months ended March 31,2004 include certain material nonrecurring charges incurred during the period,as listed below on a pretax basis:

 
| Impact of inventory purchase accounting  adjustments             |   | $     | 13,317 |   |
|------------------------------------------------------------------|--------|-------|--------|--------|
| Acquisition-related in-process research and  development charges |   | 3,894 |   |
| Acquisition-related transition and startup  costs                |   | 6,739 |   |
| Loss on early extinguishment of debt                             |   | 5,029 |   |

 

**3.****            ****INVENTORIES**

 
| ** **      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2005**           | ** ** | **2004**              | ** ** |
|            |       |               |       |                  |       |
| Raw materials   |       | $                  | 41,070     |                  | $          | 40,250 |   |
| Work in process |       | 23,040             |       | 22,156                |       |
| Finished goods  |       | 45,949             |       | 45,936                |       |
|            |       | $                  | 110,059    |                  | $          | 108,342 |   |

 

**4.****             LONG-TERM DEBT**

 
| ** **                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **2005**           | ** ** | **2004**              | ** ** |
|                                          |       |               |       |                  |       |
| Senior secured term loan                      |       | $                  | 46,250     |                  | $          | 49,500 |   |
| 1% convertible senior subordinated debentures |       | 250,000            |       | 250,000               |       |
| IDA notes                                     |       | 10,800             |       | 10,800                |       |
|                                          |       | 307,050            |       | 310,300               |       |
| Less: current portion                         |       | (13,000            | )          | (13,000               | )          |
|                                          |       | $                  | 294,050    |                  | $          | 297,300 |   |
|                                               |            |                    |            |                       |            |  |  |  |  |

 

TheCompany entered into a new 5-year, $185 million senior secured credit facilityon January 31, 2004 in connection with its acquisition of ConnectivitySolutions.  See Note 12 in the Notes tothe Consolidated Financial Statements in the 2004 Form 10-K forinformation on the terms and conditions of the senior secured creditfacility.  As of March 31, 2005, theCompany

 

11

----

 

hadavailability of approximately $67 million and no outstanding borrowings underthe senior secured revolving credit facility. Management believes the Company was in compliance with all of itscovenants under this facility as of March 31, 2005.

 

InMarch 2004, the Company issued $250 million aggregate principal amount of1% convertible senior subordinated debentures due March 15, 2024.  The proceeds from these debentures were usedprimarily to extinguish the Company’s outstanding 4% convertible subordinatednotes due December 15, 2006, to repay outstanding borrowings under theCompany’s revolving credit facility, and for general corporate purposes.  The Company repurchased $102.9 million of its4% convertible subordinated notes during March 2004 and redeemed theremaining $69.6 million of these notes in April 2004.  The repurchase and pending redemption ofthese 4% convertible subordinated notes resulted in a $5.0 million pretax losson the early extinguishment of debt during the three months ended March 31,2004.  The Company also repaid $25million of borrowings under its senior secured revolving credit facility in March 2004.  See Note 12 in the Notes to the ConsolidatedFinancial Statements in the 2004 Form 10-K for information on the termsand conditions of the 1% convertible senior subordinated debentures.

 

**5.****             RESTRUCTURING CHARGE AND EMPLOYEETERMINATION BENEFITS**

 

In October 2004, the Board of Directors of Connectivity SolutionsManufacturing, Inc. (“CSMI”), a wholly owned subsidiary of the Company,adopted organizational and cost reduction initiatives at its Omaha, Nebraskafacility in order to improve its competitive position.

 

Theactivity within the liability for these restructuring initiatives during thethree months ended December 31, 2004 and March 31, 2005 was asfollows:

 
| ** **                                      | ** ** | **Employee-  Related  Costs** | ** ** | **Process  Improvement  Costs** | ** ** | **Impairment  Charges** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|-------------------------|------------|-----------|------------|
| Charge recorded in the fourth quarter of  2004: |       | $                             | 5,859      |                            | $          | 1,574                   |       | $         | 6,810      |   | $ | 14,243 |   |
| Cash paid                                       |       | (1,205                        | )          | (1,574                          | )          | —                  |       | (2,779    | )          |
| Non-cash                                        |       | (522                          | )          | —                          |       | (6,810                  | )          | (7,332    | )          |
| Balance as of December 31, 2004            |       | $                             | 4,132      |                            | $          | —                  |       | $         | —     |   | $ | 4,132 |   |
| Activity during first quarter 2005:             |       |                          |       |                            |       |                    |       |      |       |
| Additional charge recorded                      |       | $                             | —     |                            | $          | 1,604                   |       | $         | 1,678      |   | $ | 3,282 |   |
| Cash paid                                       |       | (665                          | )          | (1,604                          | )          | —                  |       | (2,269    | )          |
| Non-cash                                        |       | —                        |       | —                          |       | (1,678                  | )          | (1,678    | )          |
| Reversal of reserves                            |       | (1,253                        | )          | —                          |       | —                  |       | (1,253    | )          |
| Balance as of March 31, 2005               |       | $                             | 2,214      |                            | $          | —                  |       | $         | —     |   | $ | 2,214 |   |

 

Included in the asset impairment charge recorded in the first quarterof 2005 is approximately $1.1 million related to equipment that is no longerused in production and approximately $575 related to a warehouse building thatis no longer in use.  The warehouse andsome of the equipment have been classified as held for sale ($10.2 million and$1.0 million, respectively), are carried at estimated fair value less costs tosell and reported in other current assets within the condensed consolidatedbalance sheet as of March 31, 2005.

 

A portion of the reserves established in the fourth quarter of 2004 foremployee-related costs were released during the first quarter of 2005.  There were fewer reductions in personnelunder the initiatives than had been initially projected by the Company,primarily due to higher than anticipated levels of business volume during thefirst quarter of 2005.

 

12

----

 

Approximately 60% of the restructuring costs recognized in both thefourth quarter of 2004 and the first quarter of 2005 were allocable to theEnterprise segment with the balance being allocable to the Carriersegment.  The Company expects torecognize additional pretax restructuring costs during the second quarter of2005 related to completing these initiatives of up to $3 million. The amountand timing of such costs will depend on issues encountered and marketconditions during implementation of the initiatives.

 

During the first quarter of 2004, CommScope reduced the ConnectivitySolutions workforce by approximately 45 employees. The reductions wereprimarily related to the Company’s efforts to improve operational efficiencyand reduce cost. The affected employees were employed in management and supportfunctions at the Omaha, Nebraska facility. This workforce reduction resulted inpretax charges of approximately $1.6 million during the first quarter of2004 (which was partially offset by an adjustment of approximately$0.3 million in the fourth quarter of 2004) that are recorded inacquisition-related transition and startup costs.  As of December 31, 2004, there was noremaining liability related to this workforce reduction.

 

**6.****             EQUITY IN LOSSES OF OFS BRIGHTWAVE, LLC**

 

In November 2001, CommScope acquired an 18.4% ownership interestin OFS BrightWave, an optical fiber and fiber cable venture between CommScopeand The Furukawa Electric Co., Ltd. (“Furukawa”).  On June 14, 2004, CommScope exercisedits contractual right to sell and sold its ownership interest in OFS BrightWaveto Furukawa in exchange for the approximately 7.7 million shares of CommScopecommon stock owned by Furukawa, which were valued at $132.3 million as of thetransaction date.  As a result of thistransaction, CommScope no longer owns any equity interest in OFS BrightWave.

 

CommScope’s portion of the losses of OFS BrightWave for the threemonths ended March 31, 2004 have been included in the condensedconsolidated financial statements of CommScope.   These results are net of elimination ofintercompany profit in the amount of $15, net of tax, related to interestpayments received from OFS BrightWave under a $30 million revolving note.  During 2004, the carrying value of the notewas reduced to $0, as it was determined that the note wasother-than-temporarily impaired.  Theimpairment did not affect CommScope’s right to receive full payment from OFSBrightWave under the $30 million note. OFS BrightWave has elected to be taxed as a partnership; therefore, theCompany’s income tax benefit from flow-through losses has been recorded basedon the Company’s tax rates.

 

The following table provides summary financial information for OFSBrightWave for the three months ended March 31, 2004:

 
| Net revenues |   | $       | 20,522 |   |
|--------------|--------|---------|--------|--------|
| Gross profit |   | (5,841  | )      |
| Net loss     |   | (11,956 | )      |

 

**7.****            ****DERIVATIVES AND HEDGING ACTIVITIES**

 

As of March 31, 2005and 2004, the only derivative financial instrument outstanding was a crosscurrency swap of U.S. dollars for euros, which was designated and documented atinception as a net investment hedge of a portion of the Company’s netinvestment in its Belgian subsidiary. The hedging instrument was effective as of March 31, 2005 and 2004,and is expected to continue to be effective for the duration of the agreement,resulting in no anticipated hedge ineffectiveness.

 

13

----

 

Thefair value of the derivative instrument, reflected in other noncurrentliabilities, was approximately $7.9 million and $8.4 million as of March 31,2005 and December 31, 2004, respectively.

 

There were no material reclassifications from other comprehensiveincome (loss) to earnings during the three months ended March 31, 2005 and2004.

 

Activityin the accumulated net loss on derivative instruments included in accumulatedother comprehensive loss consisted of the following:

 
| ** **                                                                        | ** ** | **Three Months  Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                        | ** ** | **March 31,**      | ** ** |
| ** **                                                                        | ** ** | **2005**                | ** ** | **2004** | ** ** |
| Accumulated net (loss) on derivative  instruments, beginning of period            |       | $                       | (5,716     | ) | $ | (3,981 | ) |
| Net gain on derivative financial instrument  designated as a net investment hedge |       | 358                     |       | 118 |   |
| Accumulated net (loss) on derivative  instruments, end of period                  |       | $                       | (5,358     | ) | $ | (3,863 | ) |

 

During the three months ended March 31, 2005 and 2004, the incometax expense related to the gain on the derivative financial instrumentdesignated as a net investment hedge and reported within other comprehensiveincome (loss) was $210 and $70, respectively.

 

**8.****            ****SUPPLEMENTAL CASH FLOWINFORMATION**

 
| ** **                                                                                                                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Cash paid during the period for:                                                                                                           |       |                                   |       |   |   |
| Income taxes                                                                                                                               |       | $                                      | 4,726      |   | $ | 63 |   |
| Interest                                                                                                                                   |       | 2,223                                  |       | 1,651 |   |
|                                                                                                                                       |       |                                   |       |   |   |
| Noncash investing and financing activities:                                                                                                |       |                                   |       |   |   |
| Fair value of CommScope, Inc. common  stock issued as partial consideration for Connectivity Solutions acquisition                    |       | $                                      | —     |   | $ | 32,853 |   |
| Fair value less costs to sell of held for  sale assets transferred from property, plant and equipment to prepaid and  other current assets |       |                                   | 11,190     |   |   | — |   |

 

**9.****            ****SEGMENTS**

 

During2004, as a result of the acquisition of Connectivity Solutions, the Company’smanagement evaluated the results of operations in two reportable businesssegments: the Cable segment, which was the same as CommScope’s cable businessprior to the acquisition of Connectivity Solutions, and the ConnectivitySolutions segment, which was the Connectivity Solutions business that wasacquired as of January 31, 2004.

 

Duringthe three months ended March 31, 2005, as a result of the continuedintegration of the Connectivity Solutions business into the Company’s globaloperations and financial reporting systems, management changed the reportablesegments used to evaluate the Company’s results of operations.  The new reportable segments that have beenidentified are defined by major

 

14

----

 

productcategory as follows: Enterprise, Broadband and Carrier.  Results for the three months ended March 31,2004, which include the results of the Connectivity Solutions business for theperiod from February 1, 2004 through March 31, 2004, have beenrestated to conform to the new reportable segments.

 

The Enterprise segment consists mainly of structured cabling systemsfor business enterprise applications. The segment also includes coaxial cable for various video and dataapplications.

 

The Broadband segment primarily consists of coaxial cable, fiber opticcable and conduit for cable television system operators.  These products support multi-channel video,voice and high-speed data services for residential and commercial customersusing Hybrid Fiber Coaxial architecture.

 

The Carrier segment consists of secure environmental enclosures forelectronic devices and equipment, structured cabling solutions for telephonecentral offices and cables and components used by wireless providers to connectantennae to transmitters.  These productsare primarily used by telecommunications service providers or “carriers.”

 

The following tables provide summary financial information for thesenew reportable segments as of March 31, 2005 and December 31, 2004and for the three months ended March 31, 2005 and 2004 (in millions):

 
| ** **                                         | ** ** | **As of  March 31,  2005** | ** ** | **As of  December 31,  2004** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|------------------------------------|------------|
| Identifiable Segment Related Assets                |       |                            |       |                               |       |
| Enterprise                                         |       | $                               | 370.5      |                               | $          | 337.4 |   |
| Broadband                                          |       | 355.5                           |       | 353.1                              |       |
| Carrier                                            |       | 95.2                            |       | 98.9                               |       |
| Total Identifiable Segment Related Assets          |       | 821.2                           |       | 789.4                              |       |
|                                               |       |                            |       |                               |       |
| Reconciliation to Total Assets                     |       |                            |       |                               |       |
| Cash, cash equivalents and short-term  investments |       | 155.0                           |       | 177.3                              |       |
| Deferred income taxes                              |       | 42.7                            |       | 43.9                               |       |
| Other assets, long-term                            |       | 20.9                            |       | 20.0                               |       |
| Total Assets                                       |       | $                               | 1,039.8    |                               | $          | 1,030.6 |   |

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net Sales:                           |       |                                   |       |   |   |
| Enterprise                           |       | $                                      | 157.7      |   | $ | 112.4 |   |
| Broadband                            |       | 108.1                                  |       | 91.1 |   |
| Carrier                              |       | 44.1                                   |       | 32.1 |   |
| Inter-segment eliminations           |       | (.8                                    | )          | (.5 | ) |
| Consolidated Net Sales               |       | $                                      | 309.1      |   | $ | 235.1 |   |
|                                 |       |                                   |       |   |   |
| Operating Income (loss):             |       |                                   |       |   |   |
| Enterprise                           |       | $                                      | 8.9        |   | $ | (10.9 | ) |
| Broadband                            |       |                                   | 6.5        |   |   | 5.7 |   |
| Carrier                              |       | (6.9                                   | )          | (8.9 | ) |
| Consolidated Operating Income (Loss) |       | $                                      | 8.5        |   | $ | (14.1 | ) |

 

15

----

 

**10.****   ****EMPLOYEE BENEFIT PLANS**

 
| ** **                            | ** ** | **Pension Benefits**                   | ** ** | **Other Postretirement  Benefits** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|
| ** **                            | ** ** | **Three Months Ended  March 31,** | ** ** |
| ** **                            | ** ** | **2005**                               | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                  |       |                                   |       |                               |       |   |   |   |   |
| Service cost                          |       | $                                      | 991        |                               | $          | 567 |   | $ | 1,053 |   | $ | 1,058 |   |
| Interest cost                         |       | 1,570                                  |       | 894                                |       | 1,152 |   | 1,044 |   |
| Recognized actuarial loss             |       | —                                 |       | —                             |       | 89 |   | 203 |   |
| Amortization of transition obligation |       | 11                                     |       | 10                                 |       | — |   | — |   |
| Return on plan assets                 |       | (1,584                                 | )          | (896                               | )          | (131 | ) | (101 | ) |
|                                  |       |                                   |       |                               |       |   |   |   |   |
| Net periodic benefit cost             |       | $                                      | 988        |                               | $          | 575 |   | $ | 2,163 |   | $ | 2,204 |   |

 

TheCompany contributed approximately $0.2 million to its pension plans during thethree months ended March 31, 2005 and anticipates making additionalcontributions of approximately $7.8 million to these plans during 2005.  The Company contributed approximately $0.3million to the postretirement benefit plans during the three months ended March 31,2005 and anticipates making additional contributions of approximately $1.0million to these plans during 2005.

 

16

----

 
| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS  OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

Thefollowing discussion and analysis of our financial condition and results ofoperations for the three months ended March 31, 2005 and 2004 is providedto increase the understanding of, and should be read in conjunction with, theunaudited condensed consolidated financial statements and accompanying notesincluded in this document as well as the audited consolidated financialstatements, related notes thereto and management’s discussion and analysis offinancial condition and results of operations, including management’sdiscussion and analysis about the application of critical accounting policiesincluded in our 2004 Annual Report on Form 10-K.

 

**Overview**

 

CommScope, Inc.,through our wholly-owned subsidiaries, is a world leader in the design andmanufacture of cable and connectivity solutions for communications networks. Wefocus on the ‘last mile’ in communications networks, which is the distributionaccess, or final link to the customer. Through our acquisition of theConnectivity Solutions business of Avaya, Inc. (“Avaya”) on January 31,2004, we became a global leader in structured cabling for business enterpriseapplications. We are also a global leader in broadband coaxial cables for thecable television industry. We also design, manufacture and market a broad lineof high-performance electronic, coaxial and fiber optic cable products for datanetworking, Internet access, wireless communication, telephony and otherbroadband applications. In addition, we are a leading provider ofenvironmentally secure enclosures and structured cabling solutions supportingcentral offices for telecommunication service providers in the United States.

 

During2004, as a result of the acquisition of Connectivity Solutions, managementevaluated the results of operations in two reportable business segments: theCable segment, which was the same as our cable business prior to theacquisition of Connectivity Solutions, and the Connectivity Solutions segment,which was the Connectivity Solutions business that was acquired as of January 31,2004.

 

Duringthe three months ended March 31, 2005, as a result of the continuedintegration of the Connectivity Solutions business into our global operationsand financial reporting systems, management changed the reportable segmentsused to evaluate our results of operations. The new reportable segments that have been identified are defined bymajor product category as follows: Enterprise, Broadband and Carrier.  Information for prior periods has beenrestated based on the new segments.

 

### ***CRITICALACCOUNTING POLICIES***

### * *

Therehave been no changes in our critical accounting policies or significantaccounting estimates as disclosed in our 2004 Annual Report on Form 10-K.

 

### ***COMPARISON OFRESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005 WITH THETHREE MONTHS ENDED MARCH 31, 2004***

 
| ** **                                        | ** ** | **Three Months Ended March 31,** | ** ** | ** **           | ** ** | ** **        | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                        | ** ** | **2005**                              | ** ** | **2004**             | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **$  (millions)**                     | ** ** | **% of  Net  Sales** | ** ** | **$  (millions)** | ** ** | **% of  Net  Sales** | ** ** | **Dollar  Change** | ** ** | **%   Change** | ** ** |
|                                              |       |                                  |       |                 |       |              |       |   |   |   |   |   |   |
| Net sales                                         |       | $                                     | 309.1      |                 | 100.0      | %                 | $          | 235.1 |   | 100.0 | % | $ | 74.0 |   | 31.5 | % |
| Gross profit                                      |       | 72.2                                  |       | 23.4                 |       | 37.4              |       | 15.9 |   | 34.8 |   | 93.0 |   |
| SG&A expense                                  |       | 53.9                                  |       | 17.4                 |       | 36.0              |       | 15.3 |   | 17.9 |   | 49.7 |   |
| R&D expense                                   |       | 7.8                                   |       | 2.5                  |       | 4.9               |       | 2.1 |   | 2.9 |   | 59.2 |   |
| In-process research and development charges       |       | —                                |       | —               |       | 3.9               |       | 1.7 |   | (3.9 | ) | (100.0 | ) |
| Acquisition-related transition and startup  costs |       | —                                |       | —               |       | 6.7               |       | 2.8 |   | (6.7 | ) | (100.0 | ) |
| Restructuring costs                               |       | 2.0                                   |       | 0.6                  |       | —            |       | — |   | 2.0 |   | — |   |
| Net income (loss)                                 |       | 5.5                                   |       | 1.8                  |       | (16.4             | )          | (7.0 | ) | 21.9 |   | 133.5 |   |
| Net income (loss) per diluted share               |       | 0.09                                  |       |                 |       | (0.27             | )          |   |   | 0.36 |   | 133.3 |   |
|                                                   |            |                                       |            |                      |            |                   |            |  |  |  |  |  |  |  |  |  |

 

17

----

 

EffectiveJanuary 31, 2004, we completed the acquisition of substantially all of theassets and assumed certain liabilities of Connectivity Solutions from Avaya andthe Connectivity Solutions operating results have been included in ourconsolidated financial statements since the date of acquisition. Accordingly,the consolidated results for the three months ended March 31, 2004 includethe operating results of Connectivity Solutions for the two-month period from February 1,2004 through March 31, 2004. However, the consolidated results reflectedabove for the three months ended March 31, 2004 do not include any actualor pro forma results for January 2004 for the Connectivity Solutionsbusiness. This information should be considered when comparing to financialresults of 2005. See Note 2 in the Notes to the Condensed ConsolidatedFinancial Statements included elsewhere in this Form 10-Q.

 

**Net sales**

 

Belowis a summary that reflects our actual net sales for the three months ended March 31,2005 and 2004.  The net sales for thethree months ended March 31, 2004 incorporate the Connectivity Solutionsnet sales for the two-month period from February 1, 2004 through March 31,2004.  This summary also reflects proforma net sales for the three months ended March 31, 2004, as ifConnectivity Solutions had been acquired on January 1, 2004.  The pro forma net sales of ConnectivitySolutions for the one-month period ended January 31, 2004, which isincluded in the pro forma net sales for the three months ended March 31,2004, is based on the historical results of the Connectivity Solutions businessas operated by Avaya and therefore may not be indicative of the actual resultsof the Connectivity Solutions business as operated by us.  Actual inter-segment sales eliminations forthe two-month period ended March 31, 2004 and pro forma inter-segmentsales eliminations for January 2004 are included below.

 
| ** **                 | ** ** | **Actual**              | ** ** | **Pro forma**           | ** ** | ** **              | ** ** | ** **           | ** ** |
|----------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|----------------------|------------|
| ** **                 | ** ** | **Three months  ended** | ** ** | **Three months  ended** | ** ** | **Three months  ended** | ** ** | ** **           | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **March 31,**      | ** ** | **March 31,**      | ** ** | **March 31,**      | ** ** | **2005 Compared to** | ** ** |
| ** **                 | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2004**                | ** ** | **2004 Pro forma**   | ** ** |
| ** **                 | ** ** | **Net  Sales**          | ** ** | **% of  Net  Sales**    | ** ** | **Net  Sales**          | ** ** | **% of  Net  Sales** | ** ** | **Net  Sales** | ** ** | **% of  Net  Sales** | ** ** | **Dollar  Change** | ** ** | **%  Change** | ** ** |
| Net sales by segment:      |       |                    |       |                    |       |                    |       |                 |       |   |   |   |   |   |   |   |   |
| Enterprise                 |       | $                       | 157.7      |                    | 51.0       | %                       | $          | 112.4                |       | 47.8 | % | $ | 126.8 |   | 48.6 | % | $ | 30.9 |   | 24.4 | % |
| Broadband                  |       | 108.1                   |       | 35.0                    |       | 91.1                    |       | 38.7                 |       | 91.1 |   | 34.9 |   | 17.0 |   | 18.7 |   |
| Carrier                    |       | 44.1                    |       | 14.3                    |       | 32.1                    |       | 13.7                 |       | 43.4 |   | 16.6 |   | 0.7 |   | 1.6 |   |
| Inter-segment eliminations |       | (0.8                    | )          | (0.3                    | )          | (0.5                    | )          | (0.2                 | )          | (0.5 | ) | (0.1 | ) | (0.3 | ) | 60.0 |   |
| Consolidated net sales     |       | $                       | 309.1      |                    | 100.0      | %                       | $          | 235.1                |       | 100.0 | % | $ | 260.8 |   | 100.0 | % | $ | 48.3 |   | 18.5 | % |
|                       |       |                    |       |                    |       |                    |       |                 |       |   |   |   |   |   |   |   |   |
| Total domestic sales       |       | $                       | 205.8      |                    | 66.6       | %                       | $          | 161.4                |       | 68.7 | % | $ | 175.7 |   | 67.4 | % | $ | 30.1 |   | 17.1 | % |
| Total international sales  |       | 103.3                   |       | 33.4                    |       | 73.7                    |       | 31.3                 |       | 85.1 |   | 32.6 |   | 18.2 |   | 21.4 |   |
| Total worldwide sales      |       | $                       | 309.1      |                    | 100.0      | %                       | $          | 235.1                |       | 100.0 | % | $ | 260.8 |   | 100.0 | % | $ | 48.3 |   | 18.5 | % |

 

Thefollowing discussion of net sales focuses on the changes in net sales for thethree months ended March 31, 2005 as compared to the pro forma net salesfor the three months ended March 31, 2004, since the actual net sales forthe three months ended March 31, 2004 would not be comparable.  However, these pro forma results may not beindicative of the actual results of the product groups of the ConnectivitySolutions business as operated by us.

 

Overall,we experienced growth in domestic and international sales in both theEnterprise and Broadband segments. Carrier segment sales were relativelyconstant.  The improvement in net salescan be attributed to the positive impact of price increases implemented for certainproducts during 2004 in response to significant increases in the costs of rawmaterials, the negative impact on 2004 net sales of actions taken by us duringthe first half of 2004 to reduce inventory levels of distributors of SYSTIMAXproducts to a more appropriate level and improved economic conditions for thetelecommunications industry.

 

18

----

 

*Enterprise Segment*

 

TheEnterprise segment consists mainly of structured cabling systems for businessenterprise applications.  The segmentalso includes coaxial cable for various video and data applications.

 

Theincrease in Enterprise segment net sales was primarily driven by the effect ofprice increases announced during 2004, improved project business and the introductionof new products. The Enterprise segment realized increases in net sales bothdomestically and internationally.  Weimplemented price increases for certain Enterprise products during 2004 as aresult of significant increases in the cost of certain raw materials.  The increase in net sales is also largelyattributable to actions taken during the first half of 2004 to reduce externalinventory of SYSTIMAX product held by distributors to a more appropriate level,which actions negatively impacted SYSTIMAX sales volume during such period.

 

Weexpect demand for Enterprise products to be driven by the ongoing need forbandwidth and high-performance structured cabling in the enterprise market andaffected by global information technology spending, among other things.

 

*Broadband Segment*

 

TheBroadband segment primarily consists of coaxial cable, fiber optic cable andconduit for cable television system operators. These products support multi-channel video, voice and high-speed dataservices for residential and commercial customers using Hybrid Fiber Coaxialarchitecture.

 

Theincrease in net sales of Broadband products primarily resulted from strongdomestic and international sales for most of our product lines.  The increase in net sales can be primarily attributedto price increases announced during 2004 for certain products to mitigate the significantincrease in raw material costs. The domestic sales increase can be alsoattributed to continued maintenance needs of our large cable television systemoperator customers.  Net sales increasedinternationally in most regions and such increase can be attributed to newprojects and maintenance projects initiated by international customers.  While the sale of fiber optic productsincreased during the first quarter of 2005, we expect ongoing price pressureduring 2005.

 

*Carrier Segment*

 

TheCarrier segment consists of secure environmental enclosures for electronicdevices and equipment, structured cabling solutions for telephone centraloffices and cables and components used by wireless providers to connectantennae to transmitters.  These productsare primarily used by telecommunications service providers or “carriers.”

 

TheCarrier segment net sales were relatively constant overall on a year over yearbasis.  The wireless product group withinthis segment reported strong sales growth both domestically andinternationally.   We have developedrelationships with new customers, who are generally purchasing a higher volumeof products.  We have made substantialprogress communicating the Cell Reach® value proposition to new and existingcustomers, both domestically and internationally, which was the primarycontributor to the increase in sales of wireless products.  In addition, the improvement in generaleconomic conditions has led to increased spending by the major wirelesscarriers.

 

Theincrease in net sales of wireless products was substantially offset by adecrease in net sales of the Integrated Cabinet Solutions (“ICS”) productgroup. The ICS business is somewhat project-driven in nature.  Although ICS net sales decreased year-over-yearon a pro forma basis due to lower volume, ICS net sales increased significantlyduring the first quarter of 2005 as compared to the fourth quarter of 2004.  The sequential change reflects an increase inshipments of integrated cabinets related to Digital Subscriber Line (“DSL”)deployments by telephone companies.  Inaddition, the ExchangeMAX product group also experienced a year over year decreasein net sales that is primarily related to the continued impact of competitivepricing pressures and weak demand for central office telecommunicationsequipment.

 

Whilewe expect sales of Carrier products to be somewhat volatile since customerspending is mainly project-driven, we remain optimistic about our opportunitiesfor the ICS and wireless product groups.

 

19

----

 

Weanticipate growth in sales primarily due to fiber to the node constructionactivity and DSL deployments and fiber to the node construction activity, whichprovide opportunities for our ICS product group. We also expect continuing expansionin cellular telephone base stations, which affects growth for our wirelessproduct group.

 

### ***Gross profit(net sales less cost of sales)***

### * *

Theyear-over-year increase in gross profit of $34.8 million was primarily due tothe acquisition of the Connectivity Solutions business as of January 31,2004.  The increase in gross profitmargin to 23.4% from 15.9% was primarily due to the impact of $13.3 million ofincreased cost of sales incurred during the first quarter of 2004 related toinventory purchase accounting adjustments on the Connectivity Solutionsbusiness.  These purchase accountingadjustments resulted from the write-up above replacement manufacturing cost ofa portion of Connectivity Solutions’ finished goods and work in processinventory to reflect its acquired fair value as of the acquisition date underpurchase accounting guidance.  Thewrite-up to fair value resulted in an increase in cost of sales and lowermargins following the Connectivity Solutions acquisition as the inventory wassold.   Also contributing to theincreased gross profit margin during the first quarter of 2005 were thepositive effects of changes in sales mix among our various product lines andthe impact of the implementation of price increases on certain product lines.

 

Duringthe first quarter of 2005, management decided to terminate a joint venture thatoperates a manufacturing facility in Tianjin, China primarily for telephonecentral office products. We own a 60% interest in the joint venture.  The planned termination will occur during2005.   In conjunction with the decisionto terminate the joint venture, we recognized an impairment loss during thefirst quarter of 2005 related to the investment in the joint venture as it wasdetermined that the investment was other than temporarily impaired.  The impairment loss recognized in cost ofsales was not material to our consolidated financial statements.

 

Weexpect additional increases in the costs of certain raw materials, such asplastics and other polymers, which are derived from oil and natural gas, andcopper to result in increased cost of sales. The inability to achieve higher sales volume and continued costefficiencies to offset the increasing costs of raw materials could result inlower gross profit and gross profit margin.

 

### ***Selling,general and administrative expense***

### * *

Theyear-over-year increase in selling, general and administrative expense (“SG&A”)of $17.9 million was primarily due to the acquisition of Connectivity Solutionsas of January 31, 2004.  SG&Aexpense, as a percentage of net sales, increased to 17.4% from 15.3%.  The increase in SG&A expense, as apercentage of sales, can be primarily attributed to increases in selling costsrelated to bringing new products to market and marketing existingproducts.  In addition, SG&Aincreased due to higher employee compensation and benefit costs, depreciationexpense and expenses related to ongoing regulatory reporting requirements.

 

### ***Research anddevelopment***

### * *

Researchand development (“R&D”) expense increased $2.9 million year over yearprimarily due to the acquisition of Connectivity Solutions as of January 31,2004.  R&D expense as a percentage ofnet sales increased moderately to 2.5% for the three months ended March 31,2005 compared to 2.1% for the three months ended March 31, 2004.  This year-over-year increase in R&Dexpense as a percentage of net sales is mainly due to the ongoing R&Dactivities related to bringing new products to market and to modifying existingproducts to better serve our customers.

 

# **In-process research and development charges**

 

Werecognized a $3.9 million pretax charge during the quarter ended March 31,2004 for the write-off of in-process R&D acquired in our acquisition ofConnectivity Solutions.  This in-processR&D was valued as an intangible asset by independent appraisal inaccordance 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 waswritten off immediately following the acquisition date.

 

20

----

 

**Acquisition-related transition and startup costs**

 

Weincurred pretax charges of $6.7 million during the quarter ended March 31,2004 for transition and startup costs related to the acquisition ofConnectivity Solutions.  These chargesprimarily related to information technology, transition services, and otheracquisition-related costs.

 

Wereduced the Connectivity Solutions workforce by approximately 45 employees, or2% of the acquired business’ global workforce, during the three months ended March 31,2004.  The reductions were primarilyrelated to our efforts to improve operational efficiency and reduce cost.  We recorded total pretax charges ofapproximately $1.6 million in acquisition-related transition and startup costsfor employee termination benefits related to this workforce reduction duringthe first quarter of 2004.

 

**Restructuring Costs**

 

Werecognized pretax restructuring costs of $2.0 million in the first quarter of2005.  These costs resulted from thecontinued implementation of the organizational and cost reduction initiativesat the Omaha facility of Connectivity Solutions Manufacturing, Inc., our whollyowned manufacturing subsidiary, which began during the fourth quarter of2004.  Included in the first quartercosts were ongoing process improvement costs of $1.6 million, which consistedof consulting and other costs associated with modifying manufacturingoperations; asset impairment charges of $1.7 million, which consisted of $1.1million related to equipment that was no longer in use, a portion of which wasclassified as held for sale, and $0.6 million related to a warehouse which wasclassified as held for sale; and a reversal of reserves for employee-relatedcosts of $1.3 million as a result of fewer reductions in personnel than we hadinitially projected, primarily due to higher than anticipated levels ofbusiness volume during the first quarter of 2005.

 

Weanticipate that we will recognize additional pretax restructuring charges of upto $3 million to complete the implementation of the initiatives during thesecond quarter of 2005.

 

Therecontinues to be excess real estate and equipment capacity at the Omahafacility.  Management is continuing toevaluate alternatives for such excess capacity and additional charges, whichcould be material to our results of operations and financial position, mayresult from such evaluation.

 

**Loss on early extinguishment of debt**

 

Werecognized a $5.0 million pretax loss during the quarter ended March 31,2004 on the early extinguishment of our 4% convertible subordinated notes.  This loss includes premiums paid and accrued tonote holders in the amount of $3.1 million and the write-off of the remainingbalance of related long-term financing costs in the amount $1.9 million.

 

### ***Net interestexpense***

### * *

Thedecrease in net interest expense was primarily due to the impact of having repurchasedor redeemed all $172.5 million aggregate principal amount of our 4% convertiblesubordinated notes in March and April 2004 with proceeds from ourissuance of $250 million of 1% convertible senior subordinated debentures in March 2004.  The decrease is also attributable to theborrowings under the term loan and revolving credit facility of our seniorsecured credit facility to finance a portion of the acquisition of ConnectivitySolutions that have since been repaid. Our weighted average effective interest rate on outstanding borrowings,including amortization of associated long-term financing costs, increased to2.91% as of March 31, 2005 compared to 2.70% as of December 31,2004.  This increase in our effectiveinterest rate was mainly due to increases in LIBOR and other short-terminterest rates.

 

### ***Income taxes***

### * *

Oureffective income tax rate was 24.7% for the three months ended March 31,2005 compared to 31% for the three months ended March 31, 2004.  The reduction in our effective income tax ratewas primarily due to continuing benefits derived from our expandedinternational activities in lower tax rate jurisdictions.

 

21

----

 

### ***Equity inlosses of OFS BrightWave, LLC***

### * *

During2004 we divested all of our equity interest in OFS BrightWave, LLC (“OFSBrightWave”).  We did not own any equityinterest in OFS BrightWave during the quarter ended March 31, 2005.

 

Forthe three months ended March 31, 2004, our share of the losses of OFSBrightWave was approximately $1.3 million, pretax.  Since OFS BrightWave elected to be taxed as apartnership, we recorded a tax benefit related to our share in the flow-throughlosses of approximately $0.5 million for the three months ended March 31,2004.

 

OFSBrightWave operates in some of the same markets we do and its financial resultswere adversely affected by the ongoing difficult global business conditions foroptical fiber and fiber optic cable.  Asa result, OFS BrightWave incurred losses of $12.0 million during the threemonths ended March 31, 2004.

 

### ***LIQUIDITY ANDCAPITAL RESOURCES***

### * *

**Cash Flow Overview**

 

Ourprincipal sources of liquidity both on a short-term and long-term basis arecash and cash equivalents, short-term investments, cash flows provided byoperations and availability under credit facilities.  A reduction in sales and profitability couldreduce cash provided by operations and limit availability under creditfacilities.  In addition, increases inworking capital, excluding cash, cash equivalents and short-term investments,related to increasing sales could reduce our operating cash flows in the shortterm until cash collections of accounts receivable catch up to the higher levelof billings.

 

 
| ** **                                                                                                          | ** ** | **As of**                 | ** ** | ** **             | ** ** | ** **         | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                                                                                          | ** ** | **March  31,  2005** | ** ** | **December 31,  2004** | ** ** | **Dollar  Change** | ** ** | **%  Change** | ** ** |
|                                                                                                                |       |                      |       |                   |       |               |       |   |   |
| Cash, cash equivalents and short-term  investments                                                                  |       | $                         | 155.0      |                   | $          | 177.3              |       | $ | (22.3 | ) | (12.6 | )% |
| Working capital, excluding cash, cash  equivalents and short-term investments and current portion of long-term debt |       | 174.3                     |       | 127.2                  |       | 47.1               |       | 37.0 |   |
| Long-term debt, including current portion                                                                           |       | 307.1                     |       | 310.3                  |       | (3.2               | )          | (1.0 | ) |
| Book capital structure                                                                                              |       | 761.7                     |       | 759.8                  |       | 1.9                |       | 0.3 |   |
| Long-term debt as a percentage of book  capital structure                                                           |       | 40.3                      | %          | 40.8                   | %          |               |       |   |   |
|                                                                                                                     |            |                           |            |                        |            |                    |            |  |  |  |  |  |

 

Thedecrease in cash, cash equivalents and short-term investments during thequarter ended March 31, 2005 was primarily driven by an increase inaccounts receivable.  The increase inaccounts receivable was primarily the result of a change in our terms of salesfor certain customers to reduce the prompt payment discount. The increase inworking capital was attributable to the increase in accounts receivable and thereclassification of certain assets from property, plant and equipment toprepaid and other current assets on the balance sheet. In conjunction with theongoing restructuring initiatives at our Omaha facility, we have reclassifiedassets with a net carrying value of approximately $11.2 million from property,plant and equipment to prepaid expenses and other current assets as a result oftheir being considered held for sale.

 

22

----

 
| ** **                                                                                                                                             | ** ** | **Three months ended** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                                             | ** ** | **March 31,**     | ** ** | **Dollar** | ** ** | **%**      | ** ** |
| ** **                                                                                                                                             | ** ** | **2005**               | ** ** | **2004**   | ** ** | **Change** | ** ** | **Change** | ** ** |
|                                                                                                                                                   |       |                   |       |       |       |       |       |   |   |
| Net cash provided by (used in) operating  activities                                                                                                   |       | $                      | (8.7       | )          | $          | 21.6       |       | $ | (30.3 | ) | (140.3 | )% |
| Depreciation and amortization                                                                                                                          |       | 15.7                   |       | 14.5       |       | 1.2        |       | 8.3 |   |
| Increase (decrease) in working capital,  excluding cash, current portion of long-term debt, and acquisition of  Connectivity Solutions working capital |       | 47.1                   |       | (10.1      | )          | 57.2       |       | 566.3 |   |
| Capital expenditures                                                                                                                                   |       | 8.2                    |       | 1.8        |       | 6.4        |       | 355.6 |   |
|                                                                                                                                                        |            |                        |            |            |            |            |            |  |  |  |  |  |

 

**Operating Activities**

 

Duringthe three months ended March 31, 2005, operating activities usedapproximately $8.7 million in cash compared to providing $21.6 million duringthe three months ended March 31, 2004. During the three months ended March 31, 2005, net income of $5.5million, depreciation and amortization of $15.7 million and an increase inaccounts payable and accrued liabilities of $7.4 million were more than offsetby a $39.8 million increase in accounts receivable.  The increase in accounts receivable balancecan be primarily attributed to a change in terms of sales for certain customersto reduce the prompt payment discount, seasonal trends and an increase in salesfrom the fourth quarter of 2004. The change in credit practices was implementedduring January 2005.

 

Weexpect to generate net cash from operations during 2005, primarily due toincreased margins from sales of certain product groups.  In addition, we will continue to focus on enhancingoperational efficiency, growth from all of our product groups and the furtherintegration of the Connectivity Solutions business.

 

**Investing Activities**

 

Investmentin property, plant and equipment during the first quarter increased by $6.5million year-over-year to $8.2 million. Expenditures related to theconstruction of our new manufacturing facility in Asia that will provideadditional production capability and continuing information technologyinitiatives were the primary reason for the increase in capital expendituresduring the first quarter of 2005.

 

Wecurrently expect total capital expenditures to be $30 million or less in 2005compared to $13.2 million in 2004.  Theexpected increase in capital spending during 2005 is primarily for cost reductionefforts, information technology initiatives and additional productioncapability in Asia.  We expect totalcapital expenditures to remain at a level below consolidated depreciation andamortization expense for the next several years.

 

**Financing Activities**

 

Duringthe three months ended March 31, 2005, we reduced the principal balance ofour outstanding long-term debt by $3.25 million in accordance with thescheduled maturities outlined in our respective debt agreements.

 

**Future Cash Needs**

 

Weexpect that our primary future cash needs will be to fund working capital,capital expenditures, debt service, and employee benefit obligations.  We elected to contribute $3.0 million to adefined benefit pension plan during April 2005. We expect to makeadditional contributions of approximately $5.0 million to the plan during 2005.We expect that our noncurrent employee benefit liabilities will be fundedthrough cash flow from future operations. In conjunction with the restructuring initiatives at our Omaha facility,we have accrued a liability of approximately $2.2 million as of March 31,2005, which is expected to be substantially paid during 2005 with final cashsettlements during the first quarter of 2006.

 

Webelieve that our existing cash, cash equivalents and short-term investments andcash flows from operations, combined with availability under our senior securedrevolving credit facility, will be sufficient to meet our presently anticipatedfuture cash needs.  We may, from time totime, borrow under our revolving credit facility

 

23

----

 

orissue securities, if market conditions are favorable, to meet our future cashneeds or to reduce our borrowing costs.

 

Therewere no material changes in our contractual obligations during the quarterended March 31, 2005.

 

### ***FORWARD-LOOKINGSTATEMENTS***

### * *

Certain statements in this Form 10-Q that are other thanhistorical facts are intended to be “forward-looking statements” within themeaning of the Securities Exchange Act of 1934, the Private SecuritiesLitigation Reform Act of 1995 and other related laws and include but are notlimited to those statements relating to our business position, plans,transition, outlook, revenues, earnings, margins, accretion, synergies andother financial items, integration and restructuring plans related to ouracquisition of substantially all of the assets and certain liabilities of theConnectivity Solutions business, sales and earnings expectations, expecteddemand, cost and availability of key raw materials, internal productioncapacity and expansion, competitive pricing, relative market position andoutlook. While we believe such statements are reasonable, the actual resultsand effects could differ materially from those currently anticipated. Theseforward-looking statements are identified, including, without limitation, bytheir use of such terms and phrases as “intends,” “intend,” “intended,” “goal,”“estimate,” “estimates,” “expects,” “expect,” “expected,” “project,” “projects,”“projected,” “projections,” “plans,” “anticipates,” “anticipated,” “should,” “designedto,” “foreseeable future,” “believe,” “believes,” “think,” “thinks” and “scheduled”and similar expressions.

 

Thesestatements are subject to various risks and uncertainties, many of which areoutside our control, including, without limitation, the challenges ofintegration and restructuring associated with the acquisition of ConnectivitySolutions or any future acquisition, including cost reduction plans at CSMI’sOmaha, Nebraska facility; the challenges of achieving anticipated synergies;the ability to retain qualified employees and existing business alliances;maintaining satisfactory relationships with represented employees; customerdemand for our products, applications and services; expected demand from majordomestic MSOs; telecommunications industry capital spending; ability tomaintain successful relationships with our major distributors; industryconsolidation; ability of our customers to secure adequate financing to fundtheir infrastructure projects or to pay us; changes or fluctuations in globalbusiness conditions; competitive pricing and acceptance of our products;changes in cost and availability of key raw materials, especially those thatare available only from limited sources; ability to recover higher material andtransportation costs from our customers through price increases; possiblefuture impairment charges for goodwill and other long-lived assets; industrycompetition and the ability to retain customers; possible production disruptiondue to supplier bankruptcy, reorganization or restructuring; variability in oureffective tax rate; our ability to obtain financing and capital on commerciallyreasonable terms; covenant restrictions and our ability to comply with covenantsin our debt agreements; successful operation of our vertical integrationactivities; successful expansion and related operation of our facilities;achievement of sales, growth and earnings goals; ability to achieve reductionsin costs; ability to retain and attract key personnel; developments intechnology; intellectual property protection; product performance issues andassociated warranties; adequacy and availability of insurance; regulatorychanges affecting us or the industries we serve; any changes required by theSecurities and Exchange Commission in connection with its review of our publicfilings; authoritative changes in generally accepted accounting principles bystandard-setting bodies; environmental remediation issues; terrorist activity orarmed conflict; political instability; major health concerns and other factors;and any statements of belief and any statements of assumptions underlying anyof the foregoing. These and other factors are discussed in greater detail in Exhibit 99.1to this Form 10-Q. The information contained in this Form 10-Qrepresents our best judgment at the date of this report based on informationcurrently available. However, we do not intend, and are not undertaking anyduty or obligation, to update this information to reflect developments orinformation obtained after the date of this report.

 

# **ITEM 3.**      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

# ** **

Asdisclosed in our Annual Report on Form 10-K for the year ended December 31,2004, our major market risk exposure relates to adverse fluctuations incommodity prices, interest rates and foreign currency exchange rates.  We have established a risk managementstrategy that includes the reasonable use of derivative and nonderivativefinancial instruments primarily to manage our exposure to these marketrisks.  We believe our exposureassociated with these market risks has not materially changed since December 31,2004.  We have not acquired any newderivative financial instruments since December 31, 2004 or terminated anyderivative financial instruments that existed at that date.

 

24

----

 

# **ITEM 4.**      CONTROLS AND PROCEDURES

# ** **

Ourdisclosure controls and procedures are designed to ensure that information****required to be disclosed in reports thatwe file or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission. Our Chief Executive Officer andour Chief Financial Officer have reviewed the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this report andhave concluded that the disclosure controls and procedures are effective.

 

Therewere no changes in our internal control over financial reporting during thethree months ended March 31, 2005 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

# **PART II – OTHER INFORMATION**

# ** **

| **IT**EM 6. | ** ** | **EXHIBITS** |
|-------------|------------|--------------|
| ** **  | ** ** | ** **   |
|        |       | 10.1         | CommScope, Inc.  Annual Incentive Plan 2005 Financial  Targets (Incorporated by reference from the Company’s Current Report on  Form 8-K dated March 24, 2005 (File No. 1-12929)) |
|        |       |         |   |
|        |       | 31.1         | Certification of Chief Executive Officer pursuant  to Rule 13a-14(a). |
|        |       |         |   |
|        |       | 31.2         | Certification of Chief Financial Officer pursuant  to Rule 13a-14(a). |
|        |       |         |   |
|        |       | 32           | Certification of Chief Executive Officer  and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished pursuant to Item 601(b)(32)(ii) of Regulation S-K). |
|        |       |         |   |
|        |       | 99.1         | Forward-Looking Information |

 

25

----

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|             | COMMSCOPE, INC.                                       |
|------------------|-------------------------------------------------------|
|             |                                                  |
| May 9, 2005 |                                                  | /s/ Jearld L.  Leonhardt |   |
| Date             | Jearld L.  Leonhardt                                  |
|             | Executive Vice  President and Chief Financial Officer |
|             | signing both in  his capacity as Executive Vice       |
|             | President on  behalf of the Registrant and as         |
|             | Chief Financial  Officer of the Registrant            |
|                  |                                                       |  |  |

 

26

----