UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

 

7701 Forsyth Boulevard

Suite 800 St. Louis, Missouri 63105

(Address of Principal Executive Offices and Zip Code)

 

(314) 854-8000

(Registrant’s Telephone Number, Including Area Code)

 

 

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

 

The registrant (1) is a well-known seasoned issuer, (2) is required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Act”), (3) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months, and (4) has been subject to such filing requirements for the past 90 days.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ

 

The registrant is a large accelerated filer and is not a shell company.

 

At June 23, 2006, the aggregate market value of Common Stock of Belden CDT Inc. held by non-affiliates was $1,303,721,667 based on the closing price ($30.24) of such stock on such date.

 

There were 44,609,213 shares of registrant’s Common Stock outstanding on February 22, 2007.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrant intends to file a definitive proxy statement for its annual meeting of stockholders within 120 days of the end of the fiscal year ended December 31, 2006 (the “Proxy Statement”). Portions of such proxy statement are incorporated by reference into Part III.

 

 

TABLE OF CONTENTS

 

 

General

 

Belden CDT Inc. (Belden) designs, manufactures and markets signal transmission products for data networking and a wide range of specialty electronics markets. We focus on segments of the worldwide cable and connectivity market that require highly differentiated, high-performance products. We add value through design, engineering, excellence in manufacturing, product quality, and customer service.

 

On July 15, 2004, Belden Inc. and Cable Design Technologies Corporation (CDT) completed a merger transaction pursuant to which Belden Inc. became a wholly owned subsidiary of CDT and CDT (as the surviving parent) changed its name to Belden CDT Inc. Due in part to Belden Inc.’s shareholders as a group having received a larger portion of the voting rights in the combined entity, Belden Inc. was considered the acquirer for accounting purposes. As a result, the transaction was accounted for as a reverse acquisition under the purchase method of accounting for business combinations under accounting principles generally accepted in the United States. For financial reporting purposes, Belden Inc.’s historical financial statements and fiscal year are used for reporting following the merger. For federal securities law purposes, CDT (now Belden CDT Inc.) remains the reporting entity following the merger. For more information about the merger, see Note 4 to the Consolidated Financial Statements.

 

Belden CDT Inc. is a Delaware corporation incorporated in 1988. Its affiliated company, Intercole Inc., began a series of more than 20 acquisitions in the wire and cable industry in 1985. In 1993, CDT completed an initial public offering of its stock.

 

Belden Manufacturing Company originated in Chicago in 1902 and began by manufacturing silk insulated wire and insulated magnet wire. In 1980, the business was acquired by Crouse-Hinds Company and, in 1981, by Cooper Industries, Inc. (Cooper) as part of Cooper’s acquisition of Crouse-Hinds Company. In 1993, the business was transferred to Belden Wire & Cable Company, a wholly owned subsidiary of Belden Inc., in connection with the October 6, 1993 initial public offering by Cooper of the common stock of Belden Inc.

 

The Company reports in four segments: the Belden Americas segment, the Specialty Products segment, the Europe segment and the Asia Pacific segment. Financial information about the Company’s four operating segments appears in Note 3 to the Consolidated Financial Statements.

 

As used herein, unless an operating segment is identified or the context otherwise requires, “Belden,” the “Company” and “we” refer to Belden CDT Inc. and its subsidiaries as a whole.

 

Products

 

Belden produces and sells cable and wire products, connectivity products, and other products. In each of the last three years, cable and wire products accounted for more than 90 percent of our revenues.

 

Our various cable and wire configurations are sold by all segments and are manufactured by all segments except the Asia Pacific segment. These configurations include:

 

 

 

Our connectivity products are produced and sold primarily for data networking applications. Connectivity products include connectors, patch panels, and interconnect hardware and other components. They are typically sold as part of an end-to-end structured cabling solution.

 

Our other products include cabinets, enclosures, racks, raceways and ties for organizing and managing cable; tubing and sleeving products to protect and organize wire and cable; wireless networking access points and switches; and passive components such as Power Over Ethernet modules.

 

Markets and Products, Belden Americas Segment

 

The Belden Americas segment designs, manufactures and markets all of our cable, connectivity and other product types (as described above under “Products”) for use in the following principal markets: industrial; audio and video; security; networking; and communications. This segment contributed approximately 54%, 50%, and 60% of our consolidated revenues in 2006, 2005, and 2004, respectively.

 

We define the industrial market broadly to include applications ranging from advanced industrial networking and robotics to traditional instrumentation and control systems. Our cable products are used in discrete manufacturing and process operations involving the connection of computers, programmable controllers, robots, operator interfaces, motor drives, sensors, printers and other devices. Many industrial environments, such as petrochemical and other harsh-environment operations, require cables with exterior armor or jacketing that can endure physical abuse and exposure to chemicals, extreme temperatures and outside elements. Other applications require conductors, insulating, and jacketing materials that can withstand repeated flexing. In addition to cable product configurations for these applications, we supply heat-shrinkable tubing and wire management products to protect and organize wire and cable assemblies. We sell our industrial products primarily through wire specialist distributors, industrial distributors and re-distributors, and directly to original equipment manufacturers ( OEMs ).

 

We manufacture a variety of multiconductor and coaxial products which distribute audio and video signals for use in broadcast television (including digital television and high definition television), broadcast radio, pre- and post-production facilities, recording studios and public facilities such as casinos, arenas and stadiums. Our audio/video cables are also used in connection with microphones, musical instruments, audio mixing consoles, effects equipment, speakers, paging systems and consumer audio products. We offer a complete line of composite cables for the emerging market in home networking. Our primary market channels for these broadcast, music and entertainment products are broadcast specialty distributors and audio systems installers. The Belden Americas segment also sells directly to music OEMs and the major networks including NBC, CBS, ABC and Fox.

 

We provide specialized cables for security applications such as video surveillance systems, airport baggage screening, building access control, motion detection, public address systems, and advanced fire alarm systems. These products are sold primarily through distributors and also directly to specialty system integrators.

 

In the networking market, we supply structured cabling solutions for the electronic and optical transmission of data, voice, and video over local and wide area networks. End-use applications are hospitals, financial institutions, government, service providers, transportation, data centers, manufacturing, industrial and enterprise customers. Products for this market include high-performance copper cables (including 10-gigabit Ethernet technologies over copper), fiber optic cables, connectors, wiring racks, panels, interconnecting hardware, intelligent patching devices, wireless networking access points and switches, Power over Ethernet panels, and cable management solutions for complete end-to-end network structured wiring systems. Our systems are installed through a network of highly trained system integrators and are supplied through authorized distributors.

 

In the communications market, we manufacture flexible, copper-clad coaxial cable for high-speed transmission of voice, data and video (broadband), used for the “drop” section of cable television ( CATV ) systems and satellite direct broadcast systems. We also sell coaxial cables used in connection with wireless applications, such as cellular, Personal Communications Service, Personal Communications Network, and Global Positioning System. These broadband, CATV and wireless communication cables are sold primarily through distributors.

 

Except for central office cable for telephone networks, we exited the North American telecommunications market in 2004.

 

Markets and Products, Specialty Products Segment

 

The Specialty Products segment designs, manufactures and markets a wide variety of our cable products for use principally in the networking, transportation and defense, sound and security, and industrial markets. This segment contributed approximately 18%, 20%, and 11% of our consolidated revenues in 2006, 2005, and 2004, respectively.

 

In the networking market (as described with respect to the Belden Americas segment above), the Specialty Products segment supplies high-performance copper and fiber optic data cable for users preferring an open architecture where integrators specify our copper and fiber cables for use with the connectivity components of other suppliers. These systems are installed through a network of highly trained system integrators/contractors and are supplied locally by authorized distributors.

 

In the transportation and defense market, we provide specialized cables for use in commercial and military aircraft, including cables for fly-by-wire systems, fuel systems, and in-flight entertainment systems. Some of these products withstand extreme temperatures (up to 2000º F), are highly flexible, or are highly resistant to abrasion. We work with OEMs to have our products specified on aircraft systems and sell either directly to the OEMs or to specialized distributors or subassemblers. For the automotive market, we supply specialized cables for oxygen sensors in catalytic converters, for air-bag actuators, and for satellite radio receivers. Other high-temperature cable products are applied in industrial sensors and communication technology. These automotive and other cables are sold primarily through distributors.

 

The Specialty Products segment also designs, manufactures and markets a wide range of sound and security cables that are sold directly to system integrators and contractors, as well as a variety of industrial coaxial and control cables that are used in monitoring and control of industrial equipment and systems, and are sold through industrial distributors and re-distributors and directly to OEMs.

 

Markets and Products, Europe Segment

 

The Europe segment designs, manufacturers and markets our cable, connectivity, and other products, primarily to customers in Europe, the Middle East, and Africa for use in the industrial, networking, communications, audio and video, and security markets (as such markets are described with respect to the Belden Americas segment above), through distributors and to OEMs. This segment contributed approximately 24%, 26%, and 24% of our consolidated revenues in 2006, 2005, and 2004, respectively.

 

In 2006 we exited the copper telecom cable business in the United Kingdom. Elsewhere in Europe, we continue to provide certain telecommunications wire and cable products, selling directly to service providers and, to a lesser extent, through distributors. We also manufacture copper-based CATV trunk distribution cables that meet local specifications and are widely used throughout the region, which are sold to cable TV system operators and through distribution.

 

Markets and Products, Asia Pacific Segment

 

The Asia Pacific segment markets our full range of products to our customers operating in Asia, Australia and New Zealand. These customers include a mix of local as well as global customers from North America or Europe, in the industrial, networking, communications, audio and video, and security markets. We pursue both direct sales as well as channel sales depending upon the nature and size of the market opportunities. This segment contributed approximately 4%, 4%, and 5% of our consolidated revenues in 2006, 2005, and 2004, respectively.

 

Customers

 

We sell to distributors and directly to OEMs and installers of equipment and systems. Sales to the distributor Anixter International Inc. represented approximately 21% of our revenues in 2006.

 

We have supply agreements with distributors and with OEM customers in the United States, Canada, Europe, and elsewhere. In general, our customers are not contractually obligated to buy our products exclusively, in minimum amounts or for a significant period of time. The loss of one or more large customers or distributors could result in lower total revenues and profits. However, we believe that our relationships with our customers and distributors are satisfactory and that they choose Belden products due to, among other reasons, the breadth of our product offering and the quality and performance characteristics of our products.

 

There are potential risks in our relationships with distributors. For example, adjustments to inventory levels maintained by distributors (which adjustments may be accelerated through consolidation among distributors) may adversely affect sales. Further, in each segment of our business certain distributors are allowed to return certain inventory in exchange for an order of equal or greater value. We have recorded a liability for the estimated impact of this return policy.

 

If the costs of materials used in our products falls and competitive conditions make it necessary for us to reduce our list prices, we may be required, according to the terms of contracts with certain of our distributors, to reimburse them for a portion of the price they paid for our products in their inventory.

 

International Operations

 

We have manufacturing facilities in Canada, Mexico and Europe, and during 2006, approximately 43% of Belden’s sales were for locations outside the United States. Our primary channels to international markets include both distributors and direct sales to end users and OEMs.

 

Changes in the relative value of currencies take place from time to time and their effects on the Company’s results of operations may be favorable or unfavorable. On rare occasions, we engage in foreign currency hedging transactions to mitigate these effects. Much of the material we sell in Europe is made in Europe, reducing our currency risk for that region.

 

The past few years have been characterized by consolidation of manufacturing operations in our industry worldwide in response to both changes in demand and improvements in productivity. A risk associated with our European manufacturing operations is the higher relative expense and length of time required to reduce manufacturing employment in European operations if needed.

 

The Company’s foreign operations are subject to economic and political risks inherent in maintaining operations abroad such as economic and political destabilization, international conflicts, restrictive actions by foreign governments, and adverse foreign tax laws.

 

Financial information for Belden by geographic area is shown in Note 3 to the Consolidated Financial Statements.

 

Competition

 

Belden faces substantial competition in its major markets. The number and size of our competitors varies depending on the product line and operating segment.

 

For each of our operating segments, the market can be generally categorized as highly competitive with many players. Some multinational competitors have greater financial, engineering, manufacturing and marketing resources than we have. There are also many regional competitors that have more limited product offerings.

 

The principal competitive factors in all our product markets are product features, availability, price, customer support and distribution coverage. The relative importance of each of these factors varies depending on the customer. Some products are manufactured to meet published industry specifications and cannot be differentiated on the basis of product characteristics. We believe, however, that Belden stands out in many of its markets on the basis of its customer service, delivery, product quality, and breadth of product line.

 

Although we believe that we have certain technological and other advantages over our competitors, realizing and maintaining such advantages will require continued investment in engineering, research and development, marketing and customer service and support. There can be no assurance that we will continue to make such investments or that we will be successful in maintaining such advantages.

 

Research and Development

 

Belden engages in continuing research and development programs, including new and existing product development, testing and analysis, process and equipment development and testing, and compound materials development and testing. For information about the amount spent on research and development, see Note 2 to the Consolidated Financial Statements.

 

Patents and Trademarks

 

Belden has a policy of seeking patents when appropriate on inventions concerning new products, product improvements and advances in equipment and processes as part of our ongoing research, development, and manufacturing activities. We own many patents and registered trademarks worldwide, with numerous others for which applications are pending. Although in the aggregate our patents and trademarks are of considerable importance to the manufacturing and marketing of many of our products, we do not consider any single patent or trademark or group of patents or trademarks to be material to the business as a whole, except for the Belden ^® trademark. Belden’s patents and trademarks are used by all operating segments.

 

Raw Materials

 

The principal raw material used in many of our products, for all operating segments, is copper. Other materials that we purchase in large quantities include fluorinated ethylene-propylene (both Teflon ^® and other FEP) and polyvinyl chloride ( PVC ). We also use polyethylene, color chips, insulating materials such as plastic and rubber, shielding tape, plywood and plastic reels, corrugated cartons, aluminum clad steel and copper clad steel conductors, other metals, and optical fiber. With respect to all major raw materials used by the Company, we generally have either alternative sources of supply or access to alternative materials. Supplies of these materials are generally adequate and are expected to remain so for the foreseeable future.

 

Over the past three years, the prices of metals, particularly copper, have been highly volatile. Copper rose rapidly in price for much of this period and remains a volatile commodity. Materials such as PVC and other plastics derived from petrochemical feedstocks have also risen in price. Generally, we have recovered much of the higher cost of raw materials through higher pricing of our finished products. The majority of our products are sold through distribution, and we manage the pricing of these products through published price lists which we update from time to time, with new prices taking effect a few weeks after they are announced. Some OEM and telecom customer contracts have provisions for passing through raw material cost changes, generally with a lag of a few weeks to three months.

 

Belden sources a minor percentage of its finished products from a network of manufacturers under private label agreements.

 

Backlog

 

Our business is characterized generally by short-term order and shipment schedules, and many orders are shipped from inventory. Accordingly, we do not consider backlog at any given date to be indicative of future sales. Our backlog consists of product orders for which we have received a customer purchase order or purchase commitment and which are scheduled for shipment within six months. Orders are subject to cancellation or rescheduling by the customer, generally with a cancellation charge. At December 31, 2006, the Company’s backlog of orders believed to be firm was $84.5 million compared with $97.3 million at December 31, 2005. The Company believes that all such backlog will be filled in 2007.

 

Environmental Matters

 

The Company is subject to numerous federal, state, provincial, local and foreign laws and regulations relating to the storage, handling, emission and discharge of materials into the environment, including the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), the Clean Water Act, the Clean Air Act, the Emergency Planning and Community Right-To-Know Act and the Resource Conservation and Recovery Act. We believe that our existing environmental control procedures are adequate and we have no current plans for substantial capital expenditures in this area.

 

Our facility in Venlo, The Netherlands, was acquired in 1995 from Philips Electronics N.V. Soil and groundwater contamination was identified on the site as a result of material handling and past storage practices. Various soil and groundwater assessments are being performed, the government authorities have advised that some form of remediation will be necessary, and we plan to install a groundwater remediation system in 2007. We have recorded a liability for the estimated costs.

 

We are named as a defendant in the City of Lodi, California’s federal lawsuit along with over 100 other defendants. The complaint, brought under federal, state and local statutory provisions, alleges that property previously owned by our predecessor contributed to groundwater pollution in Lodi. There has been no validation or investigation to demonstrate or deny the City’s claim that the property allegedly owned by our predecessor is a potential pollution site. We are currently negotiating a settlement with the City, and we have recorded a liability for the estimated costs related to resolution of this matter.

 

The Company has been identified as a potentially responsible party ( PRP ) with respect to two sites designated for cleanup under CERCLA or similar state laws, which impose liability for cleanup of certain waste sites and for related natural resource damages without regard to fault or the legality of waste generation or disposal. Persons liable for such costs and damages generally include the site owner or operator and persons that disposed or arranged for the disposal of hazardous substances found at those sites. Although CERCLA imposes joint and several liability on all PRPs, in application, the PRPs typically allocate the investigation and cleanup costs based upon the volume of waste contributed by each PRP. Settlements can often be achieved through negotiations with the appropriate environmental agency or the other PRPs. PRPs that contributed less than 1% of the waste are often given the opportunity to settle as “de minimis” parties, resolving their liability for a particular site. The number of sites with respect to which the Company has been identified as a PRP has decreased in part as a result of “de minimis” settlements.

 

Belden does not own or operate either waste site with respect to which it has been identified as a PRP. In each case, Belden is identified as a party that disposed of waste at the site. With respect to one of the sites, Belden’s share of the waste volume is estimated to be less than 1%. At the other site, Belden contributed less than 10% of the waste. Although no estimates of cleanup costs have yet been completed for these sites, we believe, based on our preliminary review and other factors, including Belden’s estimated share of the waste volume at the sites, that the costs relating to these sites will not have a material adverse effect on our results of operations, financial condition or cash flow. We have recorded a liability to the extent such costs are probable and estimable for such sites.

 

We do not currently anticipate any material adverse effect on our results of operations, financial condition, cash flow or competitive position as a result of compliance with federal, state, provincial, local or foreign environmental laws or regulations, or cleanup costs at the facilities and sites discussed above. However, some risk of environmental liability and other costs is inherent in the nature of our business, and there can be no assurance that material environmental costs will not arise. Moreover, it is possible that future developments, such as increasingly strict requirements of environmental laws and enforcement policies thereunder, could lead to material costs of environmental compliance and cleanup by the Company.

 

Employees

 

As of December 31, 2006, we had approximately 4,650 employees worldwide. We also utilized about 750 workers under contract manufacturing arrangements in Mexico. Approximately 1,900 employees are covered by collective bargaining agreements at various locations around the world. The Company believes that its relationship with its employees is good.

 

Importance of New Products and Product Improvements;
Impact of Technological Change; Impact of Acquisitions

 

Many of the markets that we serve are characterized by advances in information processing and communications capabilities, including advances driven by the expansion of digital technology, which require increased transmission speeds and greater bandwidth. Our markets are also subject to increasing requirements for mobility and information security. The relative costs and merits of copper cable solutions, fiber optic cable solutions, and wireless solutions could change in the future as various competing technologies address the market opportunities. We believe that our future success will depend in part upon our ability to enhance existing products and to develop and manufacture new products that meet or anticipate such changes. An important element of our business strategy is to increase our capabilities in the different modes of signal transmission technology, specifically copper cable, optical fiber and wireless.

 

Fiber optic technology presents a potential substitute for certain of the copper-based products that comprise the majority of Belden’s sales. Fiber optic cables have certain advantages over copper-based cables in applications where large amounts of information must travel great distances and where high levels of information security are required. While the cost to interface electronic and light signals and to terminate and connect optical fiber remains high, we expect that in future years these disadvantages will diminish. We produce and market fiber optic cables and many customers specify these products in combination with copper cables.

 

Advances in copper cable technologies and data transmission equipment have increased the relative performance of copper solutions. For example, in early 2005 we introduced the Belden System 10-GX for the data networking or enterprise market, providing reliable 10 gigabits-per-second performance over copper conductors. Belden’s System 10-GX accomplishes this using unshielded twisted pair cables and patented connector technology. The planned finalization in early 2007 of the industry’s 10-gig-over-copper technical standards will, we expect, accelerate the adoption of these higher-capacity copper network solutions.

 

The final stage of most networks remains almost exclusively copper-based and we expect that it will continue to be copper for some time. However, if a significant decrease in the cost of fiber optic systems relative to the cost of copper-based systems were to occur, such systems could become superior on a price/performance basis to copper systems. We do not control our own source of optical fiber production and, although we cable optical fiber, we could be at a cost disadvantage to competitors who both produce and cable optical fiber.

 

The installation of wireless devices has required the development of new wired platforms and infrastructure. In the future, we expect that wireless communications technology will be an increasingly viable alternative technology to both copper and fiber optic-based systems for certain applications. We believe that problems such as insufficient signal security, susceptibility to interference and jamming, and relatively slow transmission speeds of current systems will gradually be overcome, making the use of wireless technology more acceptable in many markets, including not only office LANs but also industrial and broadcast installations. In 2006 Belden introduced wireless networking products and acquired a minority interest in a wireless technology company, Extricom Ltd.

 

Continued strategic acquisitions are part of Belden’s strategy. In January 2007, Belden announced a definitive agreement to acquire Hirschmann Automation and Control (HAC), a Germany-based company that designs, manufactures and markets industrial connectors, industrial ethernet switches, electronic control systems, and related products. In February 2007, Belden announced a definitive agreement to purchase LTK Wiring Co. Ltd. (LTK), a Hong Kong-based cable manufacturer. Completion of each of these acquisitions is subject to the fulfillment of certain conditions. There can be no assurance that future acquisitions will occur or that those that do occur will be successful.

 

Available Information

 

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (SEC). These reports, proxy statements and other information contain additional information about us. You may read and copy these materials at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the Public Reference Room. The SEC also maintains a web site that contains reports, proxy and information statements,

and other information about issuers who file electronically with the SEC. The Internet address of the site is http://www.sec.gov.

 

Belden maintains an Internet website at www.belden.com where our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with or furnished to the SEC.

 

We will provide upon written request and without charge a printed copy of our Annual Report on Form 10-K. To obtain such a copy, please write to the Corporate Secretary, Belden CDT Inc., 7701 Forsyth Boulevard, Suite 800, St. Louis, MO 63105.

 

New York Stock Exchange Matters

 

Pursuant to the New York Stock Exchange (NYSE) listing standards, the Company submitted a Section 12(a) CEO Certification to the NYSE in 2006. Further, the Company is herewith filing with the Securities and Exchange Commission (as exhibits hereto), the Chief Executive Officer and Chief Financial Officer certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

John S. Stroup was appointed President, Chief Executive Officer and member of the Board effective October 31, 2005. From 2000 to the date of his appointment with the Company, he was employed by Danaher Corporation, a manufacturer of professional instrumentation, industrial technologies, and tools and components. At Danaher, he initially served as Vice President, Business Development. He was promoted to President of a division of Danaher’s Motion Group and later to Group Executive of the Motion Group. Earlier, he was Vice President of Marketing and General Manager with Scientific Technologies Inc. He has a B.S. in mechanical engineering from Northwestern University and an M.B.A. from the University of California at Berkeley Haas School of Business.

 

Gray G. Benoist was appointed Vice President, Finance and Chief Financial Officer effective August 24, 2006. Mr. Benoist was most recently Senior Vice President, Director of Finance of the Networks Segment of Motorola Inc., a $6.3 billion business unit responsible for the global design, manufacturing, and distribution of wireless and wired telecom system solutions. During more than 25 years with Motorola, Mr. Benoist served in senior financial and general management roles across Motorola’s portfolio of businesses, including the Personal Communications Sector, Integrated and Electronic Systems Sector, Multimedia Group, Wireless Data Group, and Cellular

Infrastructure Group. He has a B.S. in Finance & Accounting from Southern Illinois University and an M.B.A. from the University of Chicago.

 

Kevin L. Bloomfield has been Vice President, Secretary and General Counsel of the Company since July 16, 2004. From August 1, 1993 until July 2004, Mr. Bloomfield was Vice President, Secretary and General Counsel of Belden Inc. He was Senior Counsel for Cooper from February 1987 to July 1993, and had been in Cooper’s Law Department from 1981 to 1993. He has a B.A. degree in economics, a J.D. degree from the University of Cincinnati and an M.B.A. from The Ohio State University.

 

Robert Canny has been Vice President, Operations and President, Specialty Products, since July 16, 2004. He previously held the position of Group Vice President, Specialty Products for Cable Design Technologies Corp. and was Vice President and General Manager of CDT’s Thermax operation. Prior to joining Thermax, Mr. Canny held management and technical positions at Rockbestos, Times Fiber and RFS Cablewave Systems. He holds a B.S. in physics from Southern Connecticut State University and a M.S. in industrial engineering from the University of New Haven.

 

Stephen H. Johnson has been Treasurer of the Company since July 2004, and was Treasurer of Belden Inc. from July 2000 to July 2004. From November 2005 until August 2006 he served in the additional capacity of Interim Chief Financial Officer of the Company. He was Vice President, Finance of Belden Electronics from September 1998 through June 2000 and Director, Tax and Assistant Treasurer of Belden Inc. from October 1993 through August 1998. He was associated with the public accounting firm of Ernst & Young LLP from 1980 through September 1993 and was a partner with that firm since 1989. Mr. Johnson has a B.A. in history from Austin College and a Ph.D. in philosophy from the University of Texas at Austin. He is a Certified Public Accountant.

 

Naresh Kumra joined Belden in March 2006 as Vice President of Business Development, and was named President, Asia Pacific Operations in June 2006. From 1999 to 2006, he worked for McKinsey & Company, Inc., a global management consulting firm, and his last position was Associate Principal in the New York area, where he was responsible for co-leadership of private equity and growth/innovation practices. From 1991 to 1997, he worked for industrial and electronics businesses of Schlumberger Industries in New Delhi, India, and Poitiers, France, initially as a software engineer, and subsequently as manufacturing manager and product line manager. He graduated from the Indian Institute of Technology in Delhi with a bachelor’s degree in computer science and has an M.B.A. from the Darden School at the University of Virginia in Charlottesville, Virginia.

 

John S. Norman joined Belden in May 2005 as Controller and was named Chief Accounting Officer in November 2005. He was vice president and controller of Graphic Packaging International Corporation, a paperboard packaging manufacturing company, from 1999 to 2003 and has 17 years experience in public accounting with PricewaterhouseCoopers LLP. Mr. Norman has a B.S. in accounting from the University of Missouri and is a Certified Public Accountant.

 

Louis Pace was appointed Vice President, Business Development effective June 2, 2006. He joined the Company in May 2006 as Vice President, Marketing, in the Specialty Division. He was previously a consultant with AEA Investors, Inc. where he advised senior leadership on various aspects of prospective transactions as well as strategic and operational issues. Prior to that, Mr. Pace worked for Sovereign Specialty Chemicals in progressively responsible positions, most recently as the Vice President of Product Development and Commercialization. He has an A.B. in economics from Harvard University and an M.B.A. from the Kellogg Graduate School of Management at Northwestern University.

 

D. Larrie Rose has been Vice President, Operations and President, European Operations, since July 16, 2004. He was Vice President, Operations of Belden Inc. and President, Belden Holdings Inc., from April 2002 until July 2004. He served as Vice President, Sales & Marketing for Belden Electronics from 1998 until 2002. From 1981 until 1998, Mr. Rose held various European management positions for Belden Inc. including Vice President, International Operations from 1995 until 1998. He has been with Belden since 1972. Mr. Rose has a B.S. in social science and industrial arts from Ball State University.

 

Peter Sheehan has been Vice President, Operations since July 16, 2004, and President, Belden Americas, since February 7, 2006. From July 2004 to February 2006, he was President, Electronic Products. From December 1995 until July 2004 he was Executive Vice President of Cable Design Technologies Corp. From 1990 to 1995 he was

Senior Vice President, Sales and Marketing, for Berk-Tek, an Alcatel Company. Mr. Sheehan has a Bachelor of Arts and Science degree from Boston College.

 

Cathy Odom Staples has been Vice President, Human Resources of the Company since July 16, 2004, and held the same position with Belden Inc. from May 1997 through July 2004. She was Vice President, Human Resources for Belden’s Electronic Products Division from May 1992 to May 1997. Ms. Staples has a B.S.B.A. degree in human resources from Drake University.

 

We make forward-looking statements in this Annual Report on Form 10-K, in other materials we file with the SEC or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in the “Outlook” section and other portions of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that are not historical facts, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions. You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. These factors include, among others, those set forth below and in the other documents that we file with the SEC. There also are other factors that we may not describe, generally because we currently do not perceive them to be material, which could cause actual results to differ materially from our expectations.

 

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Following is a discussion of some of the more significant risks that could materially impact our financial condition, results of operations and cash flows.

 

Any change in the level of economic activity in North America and Europe, our major geographical markets, may have an impact on the level of demand for our products and our resulting revenue and earnings.

 

The demand for many of our products is economically sensitive and will vary with general economic activity, trends in nonresidential construction, investment in manufacturing facilities and automation, demand for information technology equipment, and other economic factors.

 

Changes in the price and availability of raw materials we use could be detrimental to our profitability.

 

Copper is a significant component of the cost of most of our products. Over the past three years, the prices of metals, particularly copper, have been highly volatile. Copper rose rapidly in price for much of this period and remains a volatile commodity. Other materials we use, such as PVC and other plastics derived from petrochemical feedstocks, have also risen in price. Generally, we have recovered much of the higher cost of raw materials through higher pricing of our finished products. The majority of our products are sold through distribution, and we manage the pricing of these products through published price lists which we update from time to time, with new prices taking effect a few weeks after they are announced. Some OEM and telecom customer contracts have provisions for passing through raw material cost changes, generally with a lag of a few weeks to three months. If we are unable to raise prices sufficiently to recover our material costs, our earnings will be reduced. If we raise our prices but competitors raise their prices less, we may lose sales, and our earnings will be reduced. In recent months, the price of copper has significantly declined. If this decline continues, we may be forced to decrease prices, which could have a negative effect on revenue, and we may be required, according to the terms of contracts with certain of our distributors, to reimburse them for a portion of the price they paid for our products in their inventory. We believe the

supply of raw materials (copper, plastics, and other materials) is adequate and we do not expect any substantial interruption of supply or shortage of materials. If such a supply interruption or shortage were to occur, however, this could have a negative effect on revenue and earnings.

 

The global wire and cable industry is highly competitive.

 

We compete with other manufacturers of cable, wire, connectivity and related products based in North America, Europe and Asia. These companies compete on price, reputation and quality, product characteristics, and terms. Actions that may be taken by competitors, including pricing, business alliances, new product introductions, and other actions, could have a negative effect on our revenue and profitability.

 

We rely on several key distributors in marketing our product.

 

The majority of our sales are through distributors. These distributors carry the products of competitors along with our products. Our largest distributor customer, Anixter International Inc., accounted for 21% of our revenue in 2006. If we were to lose a key distributor, our revenue and profits would likely be reduced, at least temporarily.

 

In the past, we have seen a few distributors acquired and consolidated. If there were further consolidation of the electronics and cable distributors, this could have an effect on our relationships with these distributors. It could also result in consolidation of distributor inventory, which would temporarily depress our revenue. We have also experienced financial failure of distributors from time to time, resulting in our inability to collect accounts receivable in full.

 

Our effective income tax rate may vary from year to year because of the mix of income and losses among various tax jurisdictions in which we do business.

 

Our effective income tax rate is the result of the income tax rates in the various countries in which we do business. Our mix of income and losses in these jurisdictions determines our effective tax rate. More income in higher tax rate jurisdictions or more losses in lower tax rate jurisdictions would increase our effective tax rate and thus lower our net income. If we generate losses in tax jurisdictions for which no benefits are available, our effective income tax rate will increase.

 

We might be unable to achieve planned cost savings.

 

The plans for our business include both revenue improvement and cost saving initiatives. For example, the Company has undertaken restructuring programs concerning manufacturing operations in both North America and Europe. The restructuring programs are expected to reduce manufacturing costs. We have also announced plans to implement lean enterprise practices throughout our organization, which are expected to reduce inventory and manufacturing costs. If we do not achieve all the planned savings, we might not achieve expected levels of profitability.

 

We are subject to current environmental and other laws and regulations.

 

We are subject to the environmental laws and regulations in each jurisdiction where we do business. We are currently, and may in the future be, held responsible for remedial investigations and clean-up costs of certain sites damaged by the discharge of hazardous substances, including sites that have never been owned or operated by us but at which we have been identified as a potentially responsible party under federal and state environmental laws. Changes in environmental and other laws and regulations in both domestic and foreign jurisdictions could adversely affect our operations due to increased costs of compliance and potential liability for noncompliance.

 

If our goodwill or other intangible assets become impaired, we may be required to recognize charges that would reduce our income.

 

Under accounting principles generally accepted in the United States, goodwill and certain other intangible assets are not amortized but must be reviewed for possible impairment annually, or more often in certain circumstances if events indicate that the asset values are not recoverable. We have incurred charges in the past

for the impairment of goodwill and other intangible assets, and we may be required to do so again in future periods. Such a charge would reduce our income without any change to our underlying cash flow.

 

Changes in accounting rules and interpretation of these rules may affect our reported earnings.

 

Accounting principles generally accepted in the United States are complex and require interpretation. These principles change from time to time, and such changes may result in changes to our reported income without any change in our underlying cash flow.

 

Because we do business in many countries, our results of operations are affected by changes in currency exchange rates and are subject to political and economic uncertainties.

 

A significant proportion of our sales are outside the United States. Other than the United States dollar, the principal currencies to which we are exposed through our manufacturing operations and sales are the euro, the Canadian dollar and the British pound. Most of our products sold in Europe are manufactured there, resulting in a natural hedge, to some degree. Most of our products sold in Asia are priced in U.S. dollars. When the U.S. dollar strengthens against other currencies, the results of our non-U.S. operations are translated at a lower exchange rate and thus into lower reported earnings.

 

We have manufacturing facilities in Canada, Mexico and several European countries. We rely on suppliers in many countries, including China. Our foreign operations are subject to economic and political risks inherent in maintaining operations abroad such as economic and political destabilization, international conflicts, restrictive actions by foreign governments, and adverse foreign tax laws.

 

Our future success depends on our ability to develop and introduce new products.

 

Our markets are characterized by the introduction of increasingly capable products, including fiber optic and wireless signal transmission solutions that compete with the copper cable solutions that comprise the majority of our revenue. The relative costs and merits of copper cable solutions, fiber optic cable solutions, and wireless solutions could change in the future as various competing technologies address the market opportunities. We believe that our future success will depend in part upon our ability to enhance existing products and to develop and manufacture new products that meet or anticipate such changes. We have long been successful in introducing successive generations of more capable products, but if we were to fail to keep pace with technology or with the products of competitors, we might lose market share and harm our reputation and position as a technology leader in our markets. Competing technologies could cause the obsolescence of many of our products. See the discussion above in Part I, Item 1, under Importance of New Products.

 

We have defined benefit pension plans that are not fully funded.

 

We have defined benefit pension plans in the United States, the United Kingdom, Canada and Germany. The cash funding requirements for these plans depends on the financial performance of the funds’ assets, actuarial life expectancies, discount rates and other factors. The fair value of the assets in the plans is often less than the projected benefit owed by the Company. In most years, we are required to contribute cash to fund the pension plans and other postretirement benefit plans, and the amount of funding required may vary significantly.

 

Some of our employees are members of collective bargaining groups, and we might be subject to labor actions that would interrupt our business.

 

Some of our employees, primarily outside the United States, are members of collective bargaining units. We believe that the Company’s relations with employees are generally good. However, if there were a dispute with one of these bargaining units, the affected operations could be interrupted resulting in lost revenues, lost profit contribution, and customer dissatisfaction.

 

We might have difficulty protecting our intellectual property from use by competitors, or competitors might accuse us of violating their intellectual property rights.

 

Disagreements about patents and intellectual property rights occur in our industry. Sometimes these disagreements are settled through an agreement for one party to pay royalties to another. The unfavorable resolution of an intellectual property dispute could preclude us from manufacturing and selling certain products, could require us to pay a royalty on the sale of certain products, or could impair our competitive advantage if a competitor wins the right to sell products we believe we invented. Intellectual property disputes could result in legal fees and other costs.

 

We have in the past closed plants and reduced the size of our workforce, and we might elect to do so again in the future.

 

Much of our manufacturing capacity is in North America and Western Europe, which are relatively high-cost regions. Over the past few years, as a result of the 2004 merger and in furtherance of our regional manufacturing strategy, we consolidated our capacity by closing several manufacturing plants and we reduced the number of people we employ. We incurred asset impairment charges, severance charges and other costs in relation to these plant closures. If we decide to close additional facilities, we could incur significant cash and non-cash charges in connection with these actions.

 

If we are unable to retain senior management and key employees, our business operations could be adversely affected.

 

Our success has been largely dependent on the skills, experience and efforts of our senior management and key employees. The loss of any of our senior management or other key employees could have an adverse effect on us. There can be no assurance that we would be able to find qualified replacements for these individuals if their services were no longer available, or if we do identify replacements, that the integration of those replacements will not be disruptive to our business.

 

We may have difficulty integrating the operations of LTK and HAC. Should we fail to integrate their operations, our results of operations and profitability could be negatively impacted.

 

We might not be successful in integrating the operations of LTK and HAC with Belden, and we might not perform as we expect. Some of the integration challenges we face include differences in corporate culture and management styles, additional or conflicting governmental regulations, preparation of the operations of LTK and HAC for compliance with the Sarbanes-Oxley Act of 2002, financial reporting that is not in compliance with U.S. generally accepted accounting principles, disparate company policies and practices, customer relationship issues and retention of key officers and personnel. In addition, management may be required to devote a considerable amount of time to the integration process, which could decrease the amount of time they have to manage Belden. HAC’s business involves products with shorter life cycles than Belden, which might cause more rapid shifts in market share, for better or worse. LTK has greater customer concentration than Belden and shorter product life cycles. We cannot make assurances that we will successfully or cost-effectively integrate operations. The failure to do so could have a negative effect on results of operations or profitability. The process of integrating operations could cause some interruption of, or the loss of momentum in, the activities of one or more of our or LTK’s or HAC’s businesses.

 

Belden’s strategic plan includes is likely to include further acquisitions.

 

The number of suitable acquisition candidates may decline if the competition for acquisition candidates increases or the cost of acquiring suitable businesses becomes too expensive. As a result, we may be unable to make acquisitions or be forced to pay more or agree to less advantageous acquisition terms for the companies that we are able to acquire. Alternatively, at the time an acquisition opportunity presents itself, internal and external pressures, including, but not limited to, our borrowing capacity or the availability of alternative financing, may cause us to be unable to pursue or complete an acquisition. Our ability to implement our business strategy and grow our business, particularly through acquisitions, may depend on our ability to raise capital by selling equity or debt securities or

obtaining additional debt financing. We cannot make assurances that we will be able to obtain financing when we need it or on terms acceptable to us.

 

One aspect of Belden’s strategic plan is further expansion into connectivity.

 

Belden’s expansion of its connectivity product portfolio will most likely take place through acquisitions. Connectivity products are generally more complex and involve more research and development spending, relative to sales, than cable products. If we do not adequately invest in research and development or if our efforts to introduce new products are not successful, our revenue from the acquired businesses might not meet our expectations. The customers for connectivity products include OEMs with whom Belden has relatively little experience, and the channel structure for these products might be different from our traditional channels. We cannot make assurances that we will successfully manage the commercial integration of connectivity and other more highly engineered products with Belden’s existing business.

 

This list of risk factors is not exhaustive. Other considerations besides those mentioned above might cause our actual results to differ from expectations expressed in any forward-looking statement.

 

None.

 

Belden has an executive office that it leases in St. Louis, Missouri, and various manufacturing facilities, warehouses and sales and administration offices. The significant facilities as of December 31, 2006 are as follows:

 

Used by the Belden Americas operating segment:

 

 

Used by the Specialty Products operating segment:

 

Note: The Asia Pacific operating segment locations are of a warehouse nature and operate under third party contractual arrangements rather than being owned or leased.

 

The total size of all Belden Americas operating segment locations is approximately 2.3 million square feet; the total size of all Specialty Products operating segment locations is approximately 0.8 million square feet; and the total size of all Europe operating segment locations is approximately 1.9 million square feet. The Company believes its physical facilities are suitable for their present and intended purposes and adequate for the Company’s current level of operations.

 

We are a party to various legal proceedings and administrative actions that are incidental to our operations. These proceedings include personal injury cases, about 151 of which we were aware at February 8, 2007, in which we are one of many defendants, 24 of which are scheduled for trial during 2007. Electricians have filed a majority of these cases, primarily in New Jersey and Pennsylvania, generally seeking compensatory, special and punitive damages. Typically in these cases, the claimant alleges injury from alleged exposure to heat-resistant asbestos fiber. Our alleged predecessors had a small number of products that contained the fiber, but ceased production of such products more than 15 years ago. Through February 8, 2007, we have been dismissed, or reached agreement to be dismissed, in approximately 180 similar cases without any going to trial, and with only 11 of these involving any payment to the claimant. We have insurance that we believe should cover a significant portion of any defense or settlement costs borne by us in these types of cases. In our opinion, the proceedings and actions in which we are involved should not, individually or in the aggregate, have a material adverse effect on our financial condition, operating results, or cash flows.

 

See “Item 1. Business — Environmental Matters” regarding certain proceedings arising under environmental laws.

 

During the fourth quarter of the fiscal year covered by this report, no matters were submitted to a vote of security holders of the Company.

PART II

 

Our common stock is traded on the New York Stock Exchange under the symbol “BDC.”

 

As of February 22, 2007, there were approximately 671 record holders of common stock of Belden CDT Inc.

 

We paid a dividend of $.05 per share in each quarter of 2005 and 2006. We anticipate that comparable cash dividends will continue to be paid quarterly in the foreseeable future.

 

 

 

 

In 2006, we recognized severance expense of $20.4 million, asset impairment expense of $11.1 million, and adjusted depreciation expense of $2.0 million related to our decisions to restructure our European and North American manufacturing operations and to eliminate positions worldwide to reduce production, selling, and administrative costs. We also recognized a $4.7 million favorable settlement of a prior-period tax contingency.

 

In 2005, we recognized asset impairment expense of $8.0 million, severance expense of $7.7 million, and adjusted depreciation expense of $1.2 million related to our decisions to exit the United Kingdom communications cable market and to restructure our European manufacturing operations. We also recognized executive succession expense of $7.0 million during 2005.

 

In 2004, Belden Inc. merged with and became a wholly owned subsidiary of Cable Design Technologies Corporation (CDT), which then changed its name to Belden CDT Inc. For financial reporting purposes, the results of operations of CDT are included in our operating results from July 2004. We recognized $21.7 million in restructuring and merger-related expenses during 2004. We also recognized asset impairment expense of $8.9 million related to the discontinuance of certain product lines in Europe and excess capacity in the United States resulting from the combined capacity after the merger.

 

In 2002, we recognized asset impairment expense of $18.0 million, severance expense of $8.3 million, and inventory obsolescence expense of $3.6 million related to the discontinuance of certain product lines and manufacturing facility closures in Europe and Australia.

 

Overview

 

We design, manufacture, and market signal transmission products for data networking and a wide range of specialty electronics markets including entertainment, industrial, security, and aerospace applications. We strive to create shareholder value by:

 

 

To accomplish these goals, we use a set of tools and processes that are designed to continuously improve business performance in the critical areas of quality, delivery, cost, and innovation. We consider revenue growth, operating margin, cash flows, and working capital management metrics to be our key operating performance indicators. We also desire to acquire businesses that we believe can help us achieve the objectives described above. The extent to which appropriate acquisitions are made and integrated can affect our overall growth, operating results, financial condition and cash flows.

 

We are a multinational corporation with global operations. Approximately 43% of our sales were derived outside the United States in 2006. As a global business, our operations are affected by worldwide, regional, and industry economic and political factors. Our market and geographic diversity has helped limit the impact of any one market or the economy of any single country on our consolidated operating results. Given the broad range of products manufactured and geographies served, we use indices concerning general economic trends to predict our outlook for the future. Our individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and the outlook for the future.

 

While differences exist among our businesses, we generally continued to see broad-based market expansion during 2006, but at lower rates than in 2005 and 2004. We believe that this moderation in growth rates reflects slower growth in certain end markets and current global economic conditions. Consolidated revenues for 2006 increased 20.1% over 2005. Revenues derived from existing businesses for the year (references to “revenues derived from existing businesses” in this report include revenues derived from acquired businesses starting from and after the first anniversary of the acquisition, but exclude currency effect) contributed 18.9% growth. The impact of currency translation on revenues contributed the additional 1.2% growth. Consolidated revenues for 2005 increased 44.1% over 2004. Revenues derived from existing businesses for the year contributed 8.7% growth. Acquisitions accounted for approximately 35.0% growth. The impact of currency translation on revenues contributed the additional 0.4% growth.

 

In July 2004, Belden Inc. merged with and became a wholly owned subsidiary of Cable Design Technologies Corporation (CDT), and CDT changed its name to Belden CDT Inc. (the Merger). The Merger was treated as a reverse acquisition under the purchase method of accounting. For financial reporting purposes, the operating results and cash flows of CDT are included in our Consolidated Financial Statements from July 2004. CDT was a leading supplier of both connectivity products and electronic data and signal transmission products and had annual revenues of approximately $443.6 million in 2003, excluding the approximately $57.9 million of revenues attributable to discontinued operations that have since been divested. We recognized $4.5 million and $30.6 million of asset impairment, restructuring, and incentive compensation expenses in 2005 and 2004, respectively, related to the Merger.

 

In January 2007, we announced the pending acquisition of Germany-based Hirschmann Automation and Control GmbH (HAC). HAC is a leading supplier of Industrial Ethernet solutions and industrial connectors and had annual revenues of approximately $250.0 million in 2006. If completed, this acquisition will help us (1) expand our

overall connectivity portfolio, (2) improve our market access in Europe, (3) provide additional solutions for our industrial customers, and (4) provide additional opportunities for the introduction of wireless and fiber optic solutions to the industrial space.

 

In February 2007, we announced the pending acquisition of Hong Kong-based LTK Wiring Co. Ltd. (LTK). LTK is a leading supplier of electronic cable for the China market and had annual revenues of approximately $220.0 million in 2006. If completed, this acquisition will (1) allow us to grow our business in China, (2) help us meet the demands of our current customers in Asia through regional product development, manufacturing, and sourcing, (3) provide us with a premium brand and a leading position in a new market for us, consumer electronics, and, (4) provide us with a depth of experience in working directly with original equipment manufacturers.

 

We continue to operate in a highly competitive business environment in the markets and geographies served. Our performance will be impacted by our ability to address a variety of challenges and opportunities in these markets and geographies, including trends toward increased utilization of the global labor force, expansion of market opportunities in emerging markets such as China and India, migration away from a fragmented, sub-scale, high-cost manufacturing footprint, and recent volatility in raw material costs.

 

To address certain of these challenges and opportunities, we implemented restructuring actions during 2005-2006 in both Europe and North America and initiated worldwide position eliminations in 2006. In Europe, we exited the United Kingdom communications cable market, ceased the manufacture of certain products in Hungary and the Netherlands, and sold both our discontinued communications cable operation in the United Kingdom and a manufacturing facility in Sweden in an effort to reduce manufacturing floor space and overhead and to streamline administrative processes. In North America, we announced the construction of a new manufacturing facility in Mexico and the pending closure of three manufacturing facilities in the United States and the cessation of manufacturing at a facility in Canada in an effort to increase our manufacturing presence in low-cost regions near our major markets. We have initiated worldwide position eliminations in an effort to streamline production support, sales, and administrative operations. As a result of these actions, we recognized severance, asset impairment, and adjusted depreciation costs in 2005 and 2006. We may recognize additional severance and adjusted depreciation costs during 2007. We may also recognize additional asset impairment expenses or gains (losses) on the disposal of assets during the restructuring periods.

 

Although we use the United States dollar as our functional currency for reporting purposes, a substantial portion of our assets, liabilities, operating results, and cash flows reside in or are derived from countries other than the United States. These assets, liabilities, operating results, and cash flows are translated from local currencies into the United States dollar using exchange rates effective during the respective period. We have generally accepted the exposure to currency exchange rate movements without using derivative financial instruments to manage this risk. Both positive and negative movements in currency exchange rates against the United States dollar will continue to affect the reported amount of assets, liabilities, operating results, and cash flows in our consolidated financial statements.

 

 

The following table is derived from our Consolidated Cash Flow Statements:

 

 

Net cash provided by operating activities, a key source of our liquidity, increased by $92.0 million in 2006 as compared to 2005 primarily because of a favorable change in operating assets and liabilities totaling $57.1 million, net income growth totaling $18.4 million, and an increase in non-cash charges totaling $29.6 million. Operating cash flow was negatively impacted in 2006 by a $13.1 million increase in the amount by which pension funding exceeded pension expense.

 

Cash provided by inventory reductions increased by $83.8 million in 2006 as compared to 2005 because certain of our businesses outperformed our strategic objective to improve inventory turns by a least one full turn each year beginning in 2006. Inventory turns (defined as annual cost of sales divided by inventories) increased from 3.94 at December 31, 2005 to 5.75 at December 31, 2006. Cash used for accounts payable and accrued liabilities activity increased by $31.2 million in 2006 as compared to 2005. This fluctuation was triggered primarily by accounts payable, accrued value-added taxes, and other miscellaneous accruals. The amounts outstanding for these liabilities either stabilized or decreased in 2006 following significant merger-related increases in 2005. Days payables outstanding (defined as accounts payable and accrued liabilities divided by the average daily cost of sales and selling, general and administrative expenses recognized during the year) decreased from 67.5 at December 31, 2005 to 53.4 at December 31, 2006 for this same reason. Cash used for receivables activity increased by $6.5 million in 2006 as compared to 2005 because of the greater unit sales volume and increased sales prices experienced in 2006. Days sales outstanding in receivables (defined as receivables divided by average daily revenues recognized during the year) decreased from 57.1 at December 31, 2005 to 53.2 at December 31, 2006 for this same reason.

 

Net cash used for investing activities totaled $1.5 million in 2006 as compared to net cash provided by investing activities of $27.8 million in 2005. This decline in the cash flow impact of investing activities resulted from a $17.5 million decrease in proceeds generated from the disposal of tangible assets in 2006 as compared to 2005 and an $11.7 million increase in funds used to invest in or acquire businesses in 2006 as compared to 2005. In 2006, we received proceeds totaling $34.1 million related primarily to the disposal of tangible assets at our discontinued Manchester, United Kingdom business. In 2005, we received proceeds totaling $51.5 million related primarily to the disposal of tangible assets at our discontinued Phoenix, Arizona business. In 2006, we used $6.7 million to buy out the outstanding minority interest in one of our German subsidiaries and we used $5.0 million to purchase approximately 1.7 million shares of convertible preferred stock issued by Israel-based Extricom, Ltd.

 

In January 2007, we announced the pending acquisition of HAC for approximately $260.0 million in cash. In February 2007, we announced the pending acquisition of LTK for approximately $195.0 million in cash. We anticipate that these and any other acquisitions consummated in 2007 will be funded with available cash, internally-generated funds, and cash obtained through external borrowings.

 

Planned capital expenditures for 2007 are approximately $60.0 million, which includes the construction of new manufacturing facilities in Mexico and China. We anticipate that these capital expenditures will be funded with

available cash, internally-generated funds, and cash obtained through external borrowings. We have the ability to revise and reschedule the anticipated capital expenditure program should our financial position require it.

 

Net cash used for financing activities in 2006 totaled $22.7 million as compared to $129.1 million in 2005. This improvement in the cash flow impact of financing activities primarily resulted from a $109.4 million decrease in funds used to repurchase our common stock, a $31.9 million increase in proceeds received from the exercise of stock options, and a $7.4 million increase in excess tax benefits recognized on share-based payments. A $41.6 million increase in funds used to repay outstanding debt obligations partially offset the positive impact that the nonrecurring purchase of common stock, the exercise of stock options, and the recognition of excess tax benefits on share-based payments had on the financing cash flows comparison. During 2005, we repurchased approximately 5.2 million shares of our common stock in open market transactions at an aggregate cost of $109.4 million. We received approximately $38.8 million and $6.9 million in proceeds during 2006 and 2005, respectively, from the exercise of stock options granted under our share-based compensation plans. An increase in our average stock price from $21.28 per share in 2005 to $32.70 per share in 2006 triggered an increase in the number of stock option exercises initiated in 2006 as compared to 2005. In 2006, we recognized excess tax benefits on share-based payments totaling $7.4 million in connection with the adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment. During 2006, we repaid outstanding medium-term notes totaling $59.0 million. During 2005, we repaid outstanding medium-term notes totaling $15.0 million and other borrowings totaling $2.5 million.

 

Our outstanding debt obligations as of December 31, 2006 consisted of $110.0 million of 4.00% convertible subordinated debentures due in 2023 and $62.0 million of medium-term notes. In January 2007, we discovered that we were in technical default of a covenant in each of our two medium-term note agreements. Rather than request a waiver for these covenant violations, we elected to redeem our outstanding notes. In February 2007, we redeemed the notes in the aggregate principal amount of $62.0 million and, in connection therewith, we paid a make-whole premium of approximately $2.0 million. The redemption was made with cash on hand.

 

During 2006, we maintained a revolving senior credit facility totaling $165.0 million that was secured by our overall cash flow and our tangible assets (other than real property) in the United States. The facility had a fixed term expiring in January 2011. There were no borrowings outstanding under this facility at any time during 2006. In February 2007, we entered into an amendment to our existing revolving senior credit facility, which provides that the amount of the revolver commitment be increased from $165.0 million to $225.0 million as well as amends certain restrictive covenants governing affiliate indebtedness and asset sales. The agreement for our revolving credit facility contains various customary affirmative and negative covenants and other provisions, including restrictions on the incurrence of debt, maintenance of a maximum leverage ratio, maintenance of a fixed charge coverage ratio, and minimum net worth.

 

Additional discussion regarding our various borrowing arrangements is included in Note 11 to the Consolidated Financial Statements.

 

Contractual obligations outstanding at December 31, 2006 have the following scheduled maturities:

 

 

 

Our commercial commitments expire or mature as follows:

 

 

Standby financial letters of credit, guarantees, and surety bonds are generally issued to secure obligations we have for a variety of commercial reasons such as risk self-insurance programs, unfunded retirement plans, and the importation and exportation of product.

 

applications, but still contributed approximately 1.0 percentage point of revenue increase. Unit sales of products with industrial, VSS, and TD applications improved during 2006 because of increased demand from customers in the fossil fuels, power generation, and broadcast industries and facilities manufacturing these products improved their order fill rates and reduced their backlog. Unit sales of products with CN applications declined in 2006 as a result of our product portfolio management initiatives. Although unit sales of products with CN applications decreased from 2005 to 2006, gross margins improved as a result of our product portfolio management actions.

 

Gross profit increased in 2006 from the prior year primarily because of the revenue increase discussed above. Higher cost of sales in the current year resulted from (1) increased variable production costs necessary to support improved unit sales, (2) the increase in copper and certain other raw materials costs, (3) excess and obsolete inventory charges resulting primarily from a change in the parameters we used to identify such inventories that exceeded those recognized in 2005 by $14.8 million, (4) severance costs that exceeded those recognized in 2005 by $9.3 million, and (5) adjusted depreciation costs that exceeded those recognized in 2005 by $0.9 million. In 2006, we recognized severance expense totaling $17.2 million related primarily to the restructuring actions in Europe and North America and worldwide position eliminations. We also recognized adjusted depreciation costs totaling $2.0 million in 2006 related to the restructuring actions in Europe and North America. These negative factors impacting the gross profit comparison were partially offset by the positive impact of manufacturing cost reduction actions (including the closures of 2 manufacturing facilities in the United States and Sweden during 2005-2006).

 

Selling, general and administrative (SG&A) expenses recognized in 2006 were relatively unchanged from those recognized in 2005. In 2006, we recognized (1) share-based compensation costs that exceeded those recognized in the prior year by $2.2 million primarily because of the 2006 adoption of SFAS No. 123(R), (2) severance costs that exceeded those recognized in 2005 by $3.7 million, and (3) travel costs that exceeded those recognized in the prior year by $1.7 million because of increased travel related to our various strategic initiatives. These increased costs were offset by (1) salary costs recognized in 2005 that exceeded those recognized in the current year by $6.4 million primarily because of 2006 employee terminations related to the restructuring actions in Europe and North America, (2) gains recognized on the disposals of tangible assets in 2006 that exceeded those recognized in the prior year by $2.3 million, and (3) other SG&A expenses recognized in 2005 that exceeded those recognized in the current year by $0.6 million. In 2006, we recognized severance expense totaling $5.1 million related primarily to the restructuring actions in Europe and North America and worldwide position eliminations. In the current year, we also recognized gains on disposals of tangible assets primarily in our Netherlands, Czech Republic, and Sweden manufacturing facilities totaling $2.5 million related to the restructuring actions in Europe.

 

Operating income increased in 2006 from the prior year because of the favorable gross profit comparison partially offset by asset impairment charges recognized in 2006 that exceeded those recognized in the prior year by $3.1 million and $3.0 million in nonrecurring minimum requirements contract income recognized in 2005. In 2006, we recognized asset impairment expenses totaling $11.1 million related to the restructuring actions in Europe and North America.

 

Income from continuing operations before taxes increased in 2006 from 2005 because of higher operating income, lower interest expense, and higher interest income. Interest expense recognized in 2006 decreased by $1.9 million from that recognized in 2005 because we repaid medium-term notes totaling $15.0 million, $15.0 million, and $44.0 million in August 2005, August 2006, and September 2006, respectively. Interest income earned on cash equivalents in 2006 increased by $2.3 million from 2005 because of higher cash equivalents and increased interest rates.

 

Our effective annual tax rate changed from 41.7% in 2005 to 36.3% in 2006. This change is primarily attributable to a decrease in deferred tax asset valuation allowances recognized as a percentage of pretax income and to a decrease in goodwill impairment charges on which no tax benefit was recognized. Incremental deferred tax asset valuation allowances recognized against foreign net operating loss carryforwards decreased from $5.0 million in 2005 to $3.7 million in 2006. Goodwill impairment charges decreased from $6.9 million in 2005 to $0 in 2006.

 

Income from continuing operations increased in 2006 from the prior year because of higher operating income partially offset by higher income tax expense.

 

Revenues generated in 2005 increased from revenues generated in 2004 because of the impact of the Merger, increased selling prices, increased unit sales volume, and favorable foreign currency translation on international revenues. Incremental revenues generated by the CDT operations during 2005 totaled approximately $302.3 million and contributed 35.0 percentage points of revenue increase. Price improvement resulted primarily from the impact of selling price increases we implemented during 2004-2005 across most product lines in response to increases in the costs of copper and commodities derived from petrochemical feedstocks. Sales price increases contributed approximately 5.0 percentage points of the revenue increase. Higher unit sales of products with CN, industrial, TD, and VSS applications contributed approximately 3.7 percentage points of revenue increase. Unit sales of products with CN applications improved in 2005 as compared to 2004 because of stronger demand from several large telecommunications customers and increased sales to channel partners anticipating repairs to the damage that resulted from the severe 2005 hurricane season in the United States. Unit sales of products with industrial applications improved in 2005 as compared to the prior year because of increased capital project activity within the industrial sector (primarily at utilities and petrochemical refining companies) driven by rising petroleum prices and sales of product for the 2006 Torino Olympic Games. Favorable currency translation contributed 0.4 percentage points of revenue increase in 2005.

 

Gross profit increased in 2005 from the prior year primarily because of the incremental gross profit generated by the CDT operations during the year, the impact of selling price increases we implemented during 2004-2005, and the favorable impact of currency translation on the gross profit generated by our international operations. The gross profit comparison was also favorably impacted by manufacturing cost reduction actions (including the 2005 closure of a manufacturing facility in the United States) and severance costs recognized in 2004 that exceeded those recognized in 2005 by $2.7 million. Severance costs recognized in 2005 totaled $7.9 million and related primarily to the restructuring actions in Europe. Severance costs recognized in 2004 totaled $10.6 million and related primarily to personnel reductions in North America and Europe. The positive effect that the Merger, selling prices, currency translation, and the cost reduction actions had on the gross profit comparison were partially offset by increases in the costs of copper and commodities derived from petrochemical feedstocks and adjusted depreciation costs recognized in 2005 that exceeded those recognized in the prior year by $1.2 million because of the restructuring actions in Europe.

 

SG&A expenses recognized in 2005 increased from those recognized in 2004 primarily because of the addition of incremental SG&A expenses related to the CDT operations and executive succession costs totaling $7.0 million recognized during 2005. These negative factors were partially offset by severance costs recognized in 2004 that exceeded those recognized in 2005 by $0.7 million and by both increased incentive compensation costs and professional services costs recognized in 2004 related to the Merger. Severance costs recognized in 2005 totaled $1.4 million and related primarily to the restructuring actions in Europe. Severance costs recognized in 2004 totaled $2.1 million and related primarily to personnel reductions in North America, Europe, and Australia.

 

Operating income increased in 2005 from the prior year because of the favorable gross profit comparison and asset impairment charges recognized in 2004 that exceeded those recognized in 2005 by $0.9 million partially offset by the increase in SG&A expenses. In 2005, we recognized goodwill impairment charges totaling $6.9 million and tangible asset impairment charges totaling $1.1 million related to the restructuring actions in Europe. In 2004, we recognized tangible asset impairment charges totaling $8.9 million related to product line pruning in Europe and the disposal of excess equipment in North America that resulted from the Merger.

 

Income from continuing operations before taxes increased in 2005 from 2004 because of higher operating income largely attributable to the Merger and higher interest income partially offset by higher interest expense. Interest income earned on cash equivalents in 2005 increased by $3.2 million from 2004. Interest expense recognized in 2005 increased by $0.3 million from that recognized in 2004. In July 2004, we assumed convertible subordinated debentures totaling $110.0 million from the CDT operations. We also repaid medium-term notes totaling $64.0 million and $15.0 million in September 2004 and August 2005, respectively.

 

Our effective annual tax rate changed from 56.5% in 2004 to 41.7% in 2005. This change is primarily attributable to a $4.4 million decrease in deferred tax asset valuation allowances recognized against foreign net operating loss carryforwards between 2004 and 2005.

 

Income from continuing operations increased in 2005 from the prior year because of higher operating income resulting largely from the Merger partially offset by higher income tax expense.

 

 

Belden Americas total revenues, which includes affiliate revenues, increased in 2006 from 2005 primarily because of increased selling prices, favorable product mix, increased unit sales volume, and favorable foreign currency translation on international revenues. Price improvement resulted primarily from the impact of price increases we implemented during 2005-2006 across most product lines in response to increased raw materials costs and to improved pricing practices at certain of our operations. Higher unit sales resulted from increased demand from customers in the fossil fuels, power generation, and broadcast industries coupled with improved order fill rates and reduced backlog at plants manufacturing these products. Operating income increased in 2006 from the prior year primarily because of the favorable product mix, improved unit sales volume, improved factory utilization that resulted from a 2005 restructuring action, and the impact of 2005 cost reduction actions, including the closure of our manufacturing facility in Vermont in June 2005. These positive factors affecting the operating income comparison were partially offset primarily by increased variable production costs necessary to support improved unit sales, rising copper and certain other raw materials costs, severance costs recognized in 2006 that exceeded those recognized in 2005 by $9.9 million, and asset impairment costs recognized in the current year that exceeded those recognized in 2005 by $8.6 million. In 2006, we recognized severance costs totaling $10.6 million related primarily to the restructuring actions in North America and worldwide position eliminations. Asset impairment costs recognized in 2006 on tangible assets in our manufacturing facilities in Illinois, South Carolina, and Quebec were also the result of the North American restructuring actions.

 

Belden Americas total revenues increased in 2005 from 2004 primarily because of the impact of the Merger, increased selling prices, increase unit sales volume, and favorable foreign currency translation on international revenues. Price improvement resulted primarily from the impact of selling price increases we implemented during 2004-2005 across most product lines in response to increases in the costs of copper and commodities derived from petrochemical feedstocks. Higher unit sales resulted from increased demand from customers in the telecommunications, fossil fuels, and power generation industries coupled with increased demand from channel partners anticipating repairs to the damage that resulted from the severe 2005 hurricane season in the United States. Operating income increased in 2005 from the prior year primarily because of incremental operating income generated by the merged CDT operations, severance costs recognized in 2004 that exceeded those recognized in 2005 by $0.3 million and asset impairment charges recognized in 2004 that exceeded those recognized in 2005 by $3.2 million. In 2005, we recognized severance costs totaling $1.5 million related to personnel reductions and a manufacturing facility closure in Vermont. Asset impairment costs recognized in 2004 related to excess equipment that resulted from the Merger.

 

 

Specialty Products total revenues increased in 2006 from 2005 primarily because of increased selling prices and favorable product mix partially offset by decreased unit sales volume. Price improvement resulted primarily

from the impact of price increases we implemented during 2005-2006 across most product lines in response to increased raw materials costs and to improved pricing practices at certain of our operations manufacturing networking products. Decreased unit sales volume resulted from our product portfolio management actions. Although unit sales volume decreased from 2005 to 2006, gross margins improved as a result of our product portfolio management actions. Operating income increased in 2006 from the prior year primarily because of improved revenues partially offset by rising raw material costs, increased excess and obsolete inventory charges, and severance costs totaling $0.5 million recognized in the current year because of worldwide position eliminations.

 

Specialty Products total revenues increased in 2005 from 2004 because of the incremental revenues generated by the merged CDT operations and increased selling prices. Price improvement resulted primarily from the impact of price increases we implemented during 2004-2005 across most product lines in response to increased raw materials costs. Operating income increased in 2005 from the prior year primarily because of improved revenues partially offset by rising raw material costs.

 

 

Europe total revenues increased in 2006 from the prior year primarily because of increased selling prices, favorable product mix, and favorable foreign currency translation partially offset by decreased unit sales volume. Price improvement resulted primarily from the impact of price increases we implemented during 2005-2006 across most product lines in response to increased raw materials costs. Decreased unit sales volume resulted from our product portfolio management actions. Although unit sales volume decreased from 2005 to 2006, gross margins improved as a result of both product portfolio management and cost reduction actions. Europe operating results improved from an operating loss in 2005 to operating income in 2006 primarily because of improved revenues, asset impairment charges recognized in 2005 that exceeded those recognized in 2006 by $3.1 million, and a 2006 gain recognized on the disposal of tangible assets primarily in our Netherlands, Czech Republic, and Sweden manufacturing facilities totaling $2.5 million. These positive factors affecting the operating results comparison were partially offset by rising raw materials costs and severance costs recognized in 2006 that exceeded those recognized in 2005 by $1.3 million. In 2006, we recognized severance costs totaling $9.3 million related primarily to the restructuring actions and worldwide position eliminations.

 

Europe total revenues increased in 2005 from 2004 primarily because of the incremental revenues generated by the merged CDT operations and increased selling prices partially offset by decreased unit sales volume and unfavorable foreign currency translation. Price improvement resulted primarily from the impact of price increases we implemented during 2004-2005 across most product lines in response to increased raw materials costs. Decreased unit sales volume resulted from product portfolio management actions. Europe operating results improved from 2004 to 2005 primarily because of improved revenues and severance costs recognized in 2004 that exceeded those recognized in 2005 by $1.6 million. These positive factors on the operating results comparison were partially offset by adjusted depreciation costs recognized in 2005 that exceed those recognized in 2004 by $1.2 million. In 2005, we recognized severance costs totaling $8.0 million in the Netherlands, Germany, and the Czech Republic related primarily to the restructuring actions. In 2004, we recognized severance costs totaling $9.6 million related primarily to personnel reductions resulting from product portfolio management actions.

 

 

Asia Pacific total revenues increased in 2006 from 2005 primarily because of increased unit sales volume and increased selling prices. Higher unit sales resulted from increased demand for products in all our served markets primarily because of improvement in sales representation over the past year and several large casino and hotel construction projects. Price increases were implemented during 2005-2006 in response to rising raw material costs. Operating income increased during 2006 from the prior year primarily because of the favorable revenue comparison.

 

Asia Pacific total revenues increased in 2005 from 2004 primarily because of incremental revenues generated by the merged CDT operations and increased selling prices partially offset by a decrease in unit sales volume. Price increases were implemented during 2004-2005 in response to rising raw material costs. Unit sales volume decreased primarily because of turnover in our sales representation in China and the closure of a distribution facility in Australia. Operating income increased during 2005 from 2004 primarily because of the favorable revenue comparison partially offset by severance costs recognized in 2005 that exceeded those recognized in 2004 by $0.2 million. In 2005, we recognized severance costs of $0.2 million related to the closure of a distribution facility in Australia.

 

 

We recognized a loss on the disposal of discontinued operations during 2006 related to the sale of our communications cable operation in Manchester, United Kingdom. We recognized gains on the disposal of discontinued operations during both 2005 and 2004 related to the sale of our communications cable operation in Phoenix, Arizona.

 

At December 31, 2006, there were no remaining assets or liabilities belonging to the discontinued operations.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows that are or would be considered material to investors.

 

Current-Year Adoption of Recent Accounting Pronouncements

 

Discussion regarding our adoption of SFAS No. 123(R), Share-Based Payment , is included in Notes 2 and 14 to the Consolidated Financial Statements. Discussion regarding our adoption of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R) , is included in Notes 2 and 13 to the Consolidated Financial Statements.

 

Pending Adoption of Recent Accounting Pronouncements

 

Discussion regarding our pending adoption of both Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 , and SFAS No. 157, Fair Value Measurements , is included in Note 2 to the Consolidated Financial Statements.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (GAAP) requires us to make estimates and judgments that affect the amounts reported in our Consolidated Financial Statements. We base our estimates and judgments on historical experience or various assumptions that are believed to be reasonable under the circumstances, and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following critical accounting policies affect our more significant estimates and judgments used in the preparation of the Consolidated Financial Statements. We provide a detailed discussion on the application of these and other accounting policies in Note 2 to the Consolidated Financial Statements.

 

Revenue Recognition

 

We recognize revenue when all of the following circumstances are satisfied: (1) persuasive evidence of an arrangement exists, (2) price is fixed or determinable, (3) collectibility is reasonably assured, and (4) delivery has occurred. Delivery occurs in the period in which the customer takes title and assumes the risks and rewards of ownership of the products specified in the customer’s purchase order or sales agreement.

 

Receivables Allowances

 

We sometimes grant trade, promotion, and other special price reductions such as meet competition pricing, price protection, contract pricing, and on-time payment discounts to certain of our customers. We also adjust receivables balances for, among other things, correction of billing errors, incorrect shipments, and settlement of customer disputes. Customers are allowed to return inventory if and when certain conditions regarding the physical state of the inventory and our approval of the return are met. Certain distribution customers are allowed to return inventory at original cost, in an amount not to exceed three percent of the prior year’s purchases, in exchange for an order of equal or greater value. Until we can process these reductions, corrections, and returns (together, the Adjustments) through individual customer records, we estimate the amount of outstanding Adjustments and recognize them as allowances against our gross accounts receivable and gross revenues. We base these estimates on historical and anticipated sales demand, trends in product pricing, and historical and anticipated Adjustments patterns. We charge revisions to these estimates back to accounts receivable and revenues in the period in which the facts that give rise to each revision become known. Future market conditions and product transitions might require us to take actions to increase price allowance and customer return authorizations, possibly resulting in an incremental reduction of accounts receivable and revenues at the time the allowance or return is authorized.

 

We evaluate the collectibility of accounts receivable based on the specific identification method. A considerable amount of judgment is required in assessing the realization of accounts receivable, including the current creditworthiness of each customer and related aging of the past due balances. We perform ongoing credit evaluations of our customers’ financial condition. Through these evaluations, we may become aware of a situation where a customer may not be able to meet its financial obligations due to deterioration of its financial viability, credit ratings or bankruptcy. In circumstances where we are aware of a customer’s inability or unwillingness to pay outstanding amounts, we record a specific reserve for bad debts against amounts due to reduce the receivable to its

estimated collectible balance. There have been occasions in the past where we recognized an expense associated with the rapid collapse of a distributor for which no specific reserve had been previously established. The reserve requirements are based on the best facts available to us and are reevaluated and adjusted as additional information is received.

 

Inventories

 

We evaluate the realizability of our inventory on a product-by-product basis in light of historical and anticipated sales demand, technological changes, product life cycle, component cost trends, product pricing and inventory condition. In circumstances where inventory levels are in excess of historical and anticipated market demand, where inventory is deemed technologically obsolete or not saleable due to condition or where inventory cost exceeds net realizable value, we record a charge to cost of goods sold and reduce the inventory to its net realizable value. In 2006, we changed the parameters we apply to calculate our allowance for excess and obsolete inventories to conform to our goal to better manage our working capital and reduce our reliance on finished goods inventory. Revisions to these inventory adjustments would be required if any of the factors mentioned above differed from our estimates.

 

Deferred Tax Assets

 

We recognize deferred tax assets resulting from tax credit carryforwards, net operating loss carryforwards, and deductible temporary differences between taxable income on our income tax returns and income before taxes under GAAP. Deferred tax assets generally represent future tax benefits to be received when these carryforwards can be applied against future taxable income or when expenses previously reported in our Consolidated Financial Statements become deductible for income tax purposes. A deferred tax asset valuation allowance is required when some portion or all of the deferred tax assets will not be realized. We are required to estimate taxable income in future years or develop tax strategies that would enable tax asset realization in each taxing jurisdiction and use judgment to determine whether or not to record a deferred tax asset valuation allowance for part or all of a deferred tax asset.

 

Income Tax Contingencies

 

Our effective tax rate is based on expected income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. We establish accruals for certain tax contingencies when, despite our belief that our tax return positions are fully supported, a possibility exists that certain positions are likely to be challenged and may not be fully sustained. To the extent we were to prevail in matters for which accruals have been established or be required to pay amounts in excess of reserves, there could be a material effect on our income tax provisions in the period in which each such determination is made.

 

Long-Lived Assets

 

The valuation and classification of long-lived assets and the assignment of useful depreciation and amortization lives and salvage values involve significant judgments and the use of estimates. The testing of these long-lived assets under established accounting guidelines for impairment also requires significant use of judgment and assumptions, particularly as it relates to the identification of asset groups and reporting units and the determination of fair market value. We test our tangible long-lived assets and intangible long-lived assets subject to amortization for impairment when indicators of impairment exist. We test our goodwill and intangible long-lived assets not subject to amortization for impairment on an annual basis during the fourth quarter or when indicators of impairment exist. We base our estimates on assumptions we believe to be reasonable, but which are not predictable with precision and therefore are inherently uncertain. Actual future results could differ from these estimates.

 

Accrued Sales Rebates

 

We grant incentive rebates to selected customers as part of our sales programs. The rebates are determined based on certain targeted sales volumes. Rebates are paid quarterly or annually in either cash or receivables credits.

Until we can process these rebates through individual customer records, we estimate the amount of outstanding rebates and recognize them as accrued liabilities and reductions in our gross revenues. We base our estimates on both historical and anticipated sales demand and rebate program participation. We charge revisions to these estimates back to accrued liabilities and revenues in the period in which the facts that give rise to each revision become known. Future market conditions and product transitions might require us to take actions to increase sales rebates offered, possibly resulting in an incremental increase in accrued liabilities and an incremental reduction in revenues at the time the rebate is offered.

 

Contingent Liabilities

 

We have established liabilities for environmental and legal contingencies that are probable of occurrence and reasonably estimable. A significant amount of judgment and use of estimates is required to quantify our ultimate exposure in these matters. We review the valuation of these liabilities on a quarterly basis and adjust the balances to account for changes in circumstances for ongoing issues and establish additional liabilities for emerging issues. While we believe that the current level of liabilities is adequate, future changes in circumstances could impact these determinations.

 

Pension and Other Postretirement Benefits

 

Our pension and other postretirement benefit costs and obligations are dependent on the various actuarial assumptions used in calculating such amounts. These assumptions relate to discount rates, salary growth, long-term return on plan assets, health care cost trend rates and other factors. We base the discount rate assumptions on current investment yields on high-quality corporate long-term bonds. The salary growth assumptions reflect our long-term actual experience and future or near-term outlook. Long-term return on plan assets is determined based on historical portfolio results and management’s expectation of the future economic environment. Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. Our key assumptions are described in further detail in Note 13 to the Consolidated Financial Statements. Actual results that differ from our assumptions are accumulated and, if in excess of the lesser of 10% of the projected benefit obligation or the fair market value of plan assets, amortized over the estimated future working life of the plan participants.

 

Share-Based Compensation

 

We compensate certain employees with various forms of share-based payment awards and recognize compensation costs for these awards based on their fair values. The fair values of certain awards are estimated on the grant date using the Black-Scholes-Merton option-pricing formula, which incorporates certain assumptions regarding the expected term of an award and expected stock price volatility. We develop the expected term assumption based on the vesting period and contractual term of an award, our historical exercise and post-vesting cancellation experience, our stock price history, plan provisions that require exercise or cancellation of awards after employees terminate, and the extent to which currently available information indicates that the future is reasonably expected to differ from past experience. We develop the expected volatility assumption based on monthly historical price data for our common stock and other economic data trended into future years. After calculating the aggregate fair value of an award, we use an estimated forfeiture rate to discount the amount of share-based compensation cost to be recognized in our operating results over the service period of the award. We develop the forfeiture assumption based on our historical pre-vesting cancellation experience. Our key assumptions are described in further detail in Note 14 to the Consolidated Financial Statements.

 

Business Combination Accounting

 

We allocate the cost of an acquired entity to the assets and liabilities acquired based upon their estimated fair values at the business combination date. We also identify and estimate the fair values of intangible assets that should be recognized as assets apart from goodwill. We have historically relied upon the use of third-party valuation specialists to assist in the estimation of fair values for tangible long-lived assets and intangible assets other than goodwill. The carrying values of acquired receivables, inventories, and accounts payable have historically approximated their fair values at the business combination date. With respect to accrued liabilities acquired,

we use all available information to make our best estimates of their fair values at the business combination date. When necessary, we rely upon the use of third-party actuaries to assist in the estimation of fair value for certain liabilities.

 

Outlook

 

Recently announced pending acquisitions are expected to add significantly to our 2007 revenue. Full-year revenue for HAC in 2006 was approximately $250.0 million and for LTK approximately $220.0 million. Each of these businesses is expected to grow faster than our historical core business. If the acquisitions are completed at or near the end of our first quarter as planned, these businesses will contribute to our revenue for approximately three quarters in 2007.

 

Progress made in 2006 with many of our strategic initiatives, including product portfolio management and regional manufacturing, together with the expected faster growth rate of the pending acquisitions, positions us to profitably grow the business 5 to 7 percent over the medium term, excluding the effects of materials prices and currency exchange rates. Including the additional revenue from the pending HAC and LTK acquisitions, if completed, our outlook for 2007 consolidated revenues is $1.9 to $2.0 billion.

 

Our outlook for operating profit in 2007 is in the range of 10.8% to 11.5%, inclusively for the whole portfolio. We expect our effective tax rate to be approximately 37.0% in 2007. We expect earnings per diluted share to be between $2.40 and $2.65 for the year, excluding any future charges for severance and asset impairment that may result from restructuring actions already announced.

 

With the two acquisitions, we will make some changes to our capital structure. We expect that, after these changes, the ratio of debt to total capitalization (debt plus stockholders’ equity) will be in the range of 30 to 35 percent.

 

Market risks relating to our operations result primarily from currency exchange rates, certain commodity prices, interest rates and credit extended to customers. To manage the volatility relating to exposures, we net the exposures on a consolidated basis to take advantage of natural offsets. For residual exposures, we sometimes use derivative financial instruments pursuant to our policies in areas such as counterparty exposure and hedging practices. We do not hold or issue derivative financial instruments for trading purposes. The terms of such instruments and the transactions to which they relate generally do not exceed twelve months. Each of these risks is discussed below.

 

Currency Exchange Rate Risk

 

We manufacture and sell our products in a number of countries throughout the world, and, as a result, are exposed to movements in foreign currency exchange rates. The primary purpose of our currency exchange rate management activities is to manage the volatility associated with foreign currency purchases of materials or sales of finished product and other assets and liabilities created in the normal course of business. Our currency exchange rate management strategy involves the use of natural techniques, where possible, such as the offsetting or netting of like-currency cash flows. Where natural techniques are not possible, we will sometimes use foreign currency derivatives, typically foreign currency forward contracts, with durations of generally 12 months or less. We had no foreign currency derivatives outstanding at December 31, 2006 and did not employ any foreign currency derivatives during the year then ended.

 

We generally view as long-term our investments in international subsidiaries with functional currencies other than the United States dollar. As a result, we do not generally use derivatives to manage these net investments. In terms of foreign currency translation risk, we are exposed primarily to exchange rate movements between the United States dollar and the euro, Canadian dollar, and British pound. Our net foreign currency investment in foreign subsidiaries and affiliates translated into United States dollars using year-end exchange rates was $302.3 million and $238.1 million at December 31, 2006 and 2005, respectively. If completed, the pending acquisitions of German-based HAC and Hong Kong-based LTK will increase our foreign currency translation risk.

We would expect to incur increased exposure to exchange rate movements between the United States dollar and the euro, Hong Kong dollar, and Chinese renminbi.

 

Commodity Price Risk

 

Certain raw materials used by us are subject to price volatility caused by supply conditions, political and economic variables and other unpredictable factors. The primary purpose of our commodity price management activities is to manage the volatility associated with purchases of commodities in the normal course of business. We do not speculate on commodity prices.

 

We are exposed to price risk related to our purchase of copper used in the manufacture of our products. Our copper price management strategy involves the use of natural techniques, where possible, such as purchasing copper for future delivery at fixed prices. Where natural techniques are not possible, we will sometimes use commodity price derivatives, typically exchange-traded forward contracts, with durations of generally twelve months or less. We did not have any commodity price derivatives outstanding at December 31, 2006 and did not employ any commodity price derivatives during the year then ended. The following table presents both unconditional copper purchase obligations outstanding and our physical inventory of copper on-hand at December 31, 2006. The unconditional copper purchase obligations settle during 2007.

 

 

We are also exposed to price risk related to our purchase of selected commodities derived from petrochemical feedstocks used in the manufacture of our products. We generally purchase these commodities based upon market prices established with the vendors as part of the purchase process. Recent trends indicate that pricing of these commodities may become more volatile due to the increased prices of petrochemical feedstocks. Historically, we have not used commodity financial instruments to hedge prices for commodities derived from petrochemical feedstocks.

 

Interest Rate Risk

 

We have occasionally managed our debt portfolio by using interest rate derivative instruments, such as swap agreements, to achieve an overall desired position of fixed and floating rates; however we were not a party to any interest rate derivative instruments at December 31, 2006 or during the year then ended.

 

We will use proceeds from external borrowings to fund the pending acquisitions of HAC and LTK, if and when completed. Such actions would expose us to additional interest rate risks.

 

The following table provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and average interest rates by expected maturity dates. The table also presents fair values as of December 31, 2006.

 

 

Our convertible subordinated debentures traded at an average market price of 226.33% per $100 in face value on December 31, 2006. We believe the premium associated with these notes is attributable to factors such as changes in the price of our common stock rather than changes in interest rate.

 

The fair value of our fixed-rate financial instruments at December 31, 2006 represented 104% of the carrying value of our fixed-rate financial instruments.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject us to significant concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. We are exposed to credit losses in the event of nonperformance by counterparties to these financial instruments. We anticipate, however, that counterparties will be able to fully satisfy their obligations under these financial instruments. We place cash and cash equivalents with various high-quality financial institutions throughout the world, and exposure is limited at any one financial institution. Although we do not obtain collateral or other security to support these financial instruments, we do periodically evaluate the credit standing of the counterparty financial institutions. At December 31, 2006, we had $25.5 million in trade accounts receivable outstanding from Anixter International Inc. (Anixter). This represented approximately 12% of our total trade accounts receivable outstanding at December 31, 2006. Historically, Anixter generally pays all outstanding receivables within thirty to sixty days of invoice receipt.

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements

 

The accompanying notes are an integral part of these Consolidated Financial Statements