The following narrative is an analysis of the three months ended
March 31, 2014compared to the three months ended March 31, 2013. The discussion is provided to increase the understanding of, and should be read in conjunction with, the unaudited condensed consolidated financial statements and accompanying notes included in this document as well as the audited consolidated financial statements, related notes thereto and management's discussion and analysis of financial condition and results of operations, including management's discussion and analysis regarding the application of critical accounting policies as well as the risk factors, included in our 2013 Annual Report on Form 10-K.
We are a global provider of essential infrastructure solutions for wireless, business enterprise and residential broadband networks. Our solutions and services for wired and wireless networks enable high-bandwidth data, video and voice applications. Our global position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions and global manufacturing and distribution scale.
CRITICAL ACCOUNTING POLICIES
There have been no changes in our critical accounting policies or significant accounting estimates as disclosed in our 2013 Annual Report on Form 10-K.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Three Months Ended March 31, 2014 2013 % of Net % of Net Dollar % Amount Sales Amount Sales Change Change (dollars in millions, except per share amounts) Net sales
$ 935.0100.0 % $ 804.7100.0 % $ 130.316.2 % Gross profit 337.7 36.1 265.1 32.9 72.6 27.4 SG&A expense 113.0 12.1 109.0 13.5 4.0 3.7 R&D expense 31.9 3.4 30.0 3.7 1.9 6.3 Amortization of purchased intangible assets 44.3 4.7 43.3 5.4 1.0 2.3 Restructuring costs, net 2.0 0.2 1.8 0.2 0.2 11.1 Asset impairments - - 5.6 0.7 (5.6 ) (100.0 ) Net interest expense 41.2 4.4 45.1 5.6 (3.9 ) (8.6 ) Other expense, net 3.2 0.3 3.4 0.4 (0.2 ) (5.9 ) Income tax expense 37.7 4.0 11.0 1.4 26.7 242.7 Net income $ 64.56.9 % $ 15.92.0 % $ 48.6305.7 % Earnings per diluted share $ 0.34 $ 0.10Net sales The year-over-year increase in net sales for the three months ended March 31, 2014was due to substantially higher net sales in our Wireless segment and modestly higher net sales in our Enterprise segment. This sales growth was partially offset by lower net sales in our Broadband segment. As compared to the first quarter of 2013, net sales for the first quarter of 2014 were higher in most geographic regions, with particular strength in the U.S. and Europe, Middle Eastand Africa(EMEA) region. The increases in these regions were somewhat offset by lower net sales in the Central and Latin America(CALA) region. Foreign exchange rate changes had a slightly negative impact on net sales for the three months ended March 31, 2014as compared to the same 2013 period. For further details by segment, see the section titled "Segment Results" below.
Gross profit (net sales less cost of sales)
The improvement in gross profit and gross profit margin for the three months ended
March 31, 2014as compared to the comparable prior year period was primarily due to higher sales volumes, a favorable change in the mix of products sold and benefits from cost savings initiatives. 18
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Selling, general and administrative expense
Selling, general and administrative (SG&A) expense increased for the three months ended
March 31, 2014as compared to the corresponding 2013 period due to increases in cash incentive compensation expense and incremental costs from iTRACS Corporation (iTRACS) and Redwood Systems, Inc.(Redwood) which were acquired in 2013. In addition, we incurred $0.9 millionof transaction costs during the first quarter of 2014, related to the secondary offering of our common stock held by affiliates of The Carlyle Group (Carlyle). Offsetting these higher costs was a $5.4 millionreduction of SG&A expense resulting from an adjustment to the estimated fair value of contingent consideration payable related to the Redwood acquisition.
Research and development
Research and development (R&D) expense was higher for the three months ended
March 31, 2014as compared to the comparable prior year period. The increase in R&D expense for the three months ended March 31, 2014was primarily due to incremental costs from iTRACS and Redwood. R&D expense as a percentage of net sales for the three months ended March 31, 2014was lower than the prior year period, mainly as a result of higher net sales. R&D activities generally relate to ensuring that our products are capable of meeting the developing technological needs of our customers, bringing new products to market and modifying existing products to better serve our customers.
Amortization of purchased intangible assets
The amortization of purchased intangible assets was
We recognized net restructuring costs of
$2.0 millionduring the three months ended March 31, 2014compared with $1.8 millionduring the three months ended March 31, 2013. The restructuring costs recognized in 2014 were primarily related to consolidating operations following the announced closings of manufacturing operations at two locations in the U.S. and continued efforts to realign and lower our cost structure. The 2013 restructuring costs were primarily related to workforce reductions and other cost reduction initiatives at various U.S. and international facilities. We expect to incur additional pretax costs of $2.0 millionto $3.0 millionin 2014 related to completing actions announced to date. We expect to recognize an additional restructuring charge in the second half of 2014 related to the lease agreement at our Joliet, Illinoisfacility once operations cease at that facility and that charge may be material. However, we cannot currently estimate the charge. Additional restructuring actions may be identified and resulting charges and cash requirements could be material.
We recognized impairment charges of
Net interest expense
We incurred net interest expense of
$41.2 millionduring the three months ended March 31, 2014compared to $45.1 millionfor the three months ended March 31, 2013. Net interest expense for the first quarter of 2014 included $9.5 millionof interest related to the 6.625%/7.375% senior payment-in-kind toggle notes (the senior PIK toggle notes) issued in May 2013. Net interest expense for the first quarter of 2013 included a $0.5 millionwrite-off of deferred financing costs and original issue discount that resulted from amending our senior secured term loan facility primarily to lower the interest rate. Excluding the charges related to last year's refinancing, net interest expense decreased in the current year quarter as compared to the corresponding prior year period, primarily due to a favorable shift to lower rate debt, slightly lower debt balances and interest savings resulting from the amendments to the senior secured term loan facility.
Our weighted average effective interest rate on outstanding borrowings, including the amortization of deferred financing costs and original issue discount, was 6.73% as of
Other expense, net
Foreign exchange losses of
$2.3 millionwere included in other expense, net for the three months ended March 31, 2014compared to $0.3 millionfor the three months ended March 31, 2013. Other expense, net for the three months ended March 31, 2014included our share of losses in our equity investments of $0.6 millioncompared to $0.9 millionfor the 19
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three months ended
March 31, 2013. Also included in other expense, net for the three months ended March 31, 2013was the write-off of one such equity investment of $0.8 million. Additionally, we incurred costs of $1.9 millionthat were included in net other expense for the first quarter of 2013 related to amending our senior secured term loan facility.
Our effective income tax rate of 36.9% for the first quarter of 2014 was higher than the statutory rate of 35% primarily due to losses in certain jurisdictions where we did not recognize tax benefits due to the likelihood of them not being realizable, increases in valuation allowances on certain tax attributes, the provision for state income taxes and certain tax costs associated with repatriation of foreign earnings. These items were partially offset by benefits related to uncertain tax positions for which the statutes had lapsed and the
$5.4 millionpretax reduction in the estimated fair value of contingent consideration payable, which is not subject to tax. Our effective income tax rate of 40.9% for the three months ended March 31, 2013was higher than the statutory rate and did not reflect benefits for losses in certain foreign jurisdictions where we did not recognize tax benefits due to the likelihood of them not being realizable. The effective tax rate for the first quarter of 2013 included a benefit for 2012 research and development tax credits as a result of legislation enacted early in 2013. This benefit was offset by additional expense related to uncertain tax positions and certain tax costs associated with repatriation of foreign earnings. Excluding these items, the effective tax rate was comparable to the statutory rate of 35%. We expect to continue to provide for U.S. taxes on a substantial portion of our current year foreign earnings in anticipation that such earnings will be repatriated to the U.S. Segment Results Three Months Ended March 31, 2014 2013 % of Net % of Net Dollar % Amount Sales Amount Sales Change Change (dollars in millions) Net sales by segment: Wireless $ 627.267.1 % $ 496.561.7 % $ 130.726.3 % Enterprise 201.5 21.5 191.8 23.8 9.7 5.1 Broadband 107.5 11.5 118.1 14.7 (10.6 ) (9.0 ) Inter-segment eliminations (1.2 ) (0.1 ) (1.7 ) (0.2 ) 0.5 Consolidated net sales $ 935.0100.0 % $ 804.7100.0 % $ 130.316.2 % Total domestic sales $ 562.960.2 % $ 453.556.4 % $ 109.424.1 % Total international sales 372.1 39.8 351.2 43.6 20.9 6.0 Total worldwide sales $ 935.0100.0 % $ 804.7100.0 % $ 130.316.2 % Operating income (loss) by segment: Wireless $ 127.620.3 % $ 62.412.6 % $ 65.2104.5 % Enterprise 22.6 11.2 15.4 8.0 7.2 46.8 Broadband (3.7 ) (3.4 ) (2.4 ) (2.0 ) (1.3 ) NM Consolidated operating income $ 146.515.7 % $ 75.49.4 % $ 71.194.3 % NM - Not meaningful Wireless Segment We provide merchant RF wireless network connectivity solutions and small cell distributed antenna systems (DAS) solutions. Our solutions, marketed primarily under the Andrew brand, enable wireless operators to deploy both macro cell sites and small cell DAS solutions to meet 2G, 3G and 4G cellular coverage and capacity requirements. Our macro cell site solutions can be found at wireless tower sites and on rooftops and include base station antennas, microwave antennas, hybrid fiber-feeder and power cables, coaxial cables, connectors, amplifiers, filters and backup power solutions. Our small cell DAS solutions are primarily composed of distributed antenna systems that allow wireless operators to increase spectral efficiency and thereby extend and enhance cellular coverage and capacity in challenging network conditions such as commercial buildings, urban areas, stadiums and transportation systems. 20
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The Wireless segment experienced a substantial increase in net sales for the three months ended
March 31, 2014as compared to the comparable period in the prior year primarily as a result of higher capital spending by U.S. wireless operators, including 4G deployments. The Wireless segment recorded higher sales in all major geographic regions except the CALA region in the first quarter of 2014 as compared to the first quarter of 2013. Foreign exchange rate changes had a negligible negative impact on Wireless segment net sales for the three months ended March 31, 2014as compared to the same period in 2013. We expect demand for our Wireless products to be positively affected by wireless coverage and capacity expansion in emerging markets and growth in mobile data services (including 4G deployments) in developed markets. Uncertainty in the global economy or a particular region may slow the growth or cause a decline in capital spending by wireless operators and negatively impact our net sales. Wireless segment operating income increased $65.2 millionfor the three months ended March 31, 2014as compared to the comparable period in the prior year primarily due to the higher level of net sales, with additional benefit from favorable mix of products sold and the benefit of cost reduction initiatives. These benefits were partially offset by higher cash incentive compensation expense. In addition, the Wireless segment recorded asset impairment charges of $5.6 millionin the first quarter of 2013 and no such charges were recorded in 2014. Enterprise Segment We provide enterprise connectivity solutions for data centers and commercial buildings. Our offerings include voice, video, data and converged solutions that support mission-critical, high-bandwidth applications including storage area networks, streaming media, data backhaul, cloud applications and grid computing. These comprehensive solutions, sold primarily under the SYSTIMAX and Uniprise brands, include optical fiber and twisted pair structured cabling solutions, intelligent infrastructure software, network rack and cabinet enclosures, intelligent building sensors, advanced LED lighting control systems and network design services. Enterprise segment net sales increased for the three months ended March 31, 2014in the U.S., CALA and the Asia Pacific(APAC) region as compared to the comparable prior year period. Enterprise segment net sales were essentially unchanged in the EMEA region for the first quarter of 2014 as compared to the first quarter of 2013. The iTRACS and Redwood acquisitions had an immaterial impact on sales in the first quarter of 2014. Foreign exchange rate changes had a negligible negative impact on Enterprise segment net sales for the three months ended March 31, 2014as compared to the comparable 2013 period. We expect long-term demand for Enterprise products to be driven by global information technology and data center spending as the ongoing need for bandwidth and intelligence in the network continues to create demand for high-performance structured connectivity solutions in the enterprise market. Uncertain global economic conditions, an ongoing slowdown in commercial construction activity, uncertain levels of information technology spending and reductions in the levels of distributor inventories may negatively affect demand for our products. The increase in Enterprise segment operating income for the three months ended March 31, 2014as compared to the prior year period was primarily attributable to higher net sales, a favorable shift in mix, the positive impact of cost reduction initiatives and a $5.4 millionreduction in expense related to the adjustment of the estimated fair value of contingent consideration payable from the Redwood acquisition. Excluding the positive impact of this adjustment to contingent consideration payable, iTRACS and Redwood decreased operating income for the first quarter of 2014 by $4.5 million, as investments are made to develop product offerings and integrate the acquired businesses.
We provide cable and communications products that support the multi-channel video, voice and high-speed data services provided by multi-system operators (MSOs). We are a global manufacturer of coaxial cable for hybrid fiber coaxial networks and a supplier of fiber optic cable for North American MSOs. Broadband segment net sales decreased for the three months ended
March 31, 2014as compared to the comparable prior year period in the CALA and EMEA regions while net sales were essentially unchanged in the U.S. and the APAC region. Foreign exchange rate changes had a negligible negative impact on Broadband segment net sales for the three months ended March 31, 2014as compared to the prior year period. We expect demand for Broadband products to continue to be influenced by ongoing maintenance requirements of cable networks, cable providers' competition with telecommunication service providers and activity in the residential construction market. Spending by our Broadband customers on maintaining and upgrading networks is expected to continue to be influenced by uncertain regional and global economic conditions. 21
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The Broadband segment recorded a larger operating loss during the three months ended
March 31, 2014than the prior year period primarily due to the impact of lower net sales and incremental costs associated with the closure of our Statesville, North Carolinafacility. These unfavorable impacts were partially offset by benefits from cost reduction initiatives. We continue to evaluate alternatives to improve the performance of the Broadband segment. Future actions taken to improve performance could result in charges that may be material.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes certain key measures of our liquidity and capital resources. % March 31, 2014 December 31, 2013 Dollar Change Change (dollars in millions) Cash and cash equivalents $ 305.2 $ 346.3 $ (41.1 ) (11.9 )% Working capital (1), excluding cash and cash equivalents and current portion of long-term debt 673.0 523.2 149.8 28.6 Availability under revolving credit facility 345.0 308.7 36.3 11.8 Long-term debt, including current portion 2,512.6 2,514.6 (2.0 ) (0.1 ) Total capitalization (2) 3,671.3 3,602.6 68.7 1.9 Long-term debt, including current portion, as a percentage of total capitalization 68.4 % 69.8 %
(1) Working capital consists of current assets of
of current assets of
million as of
(2) Total capitalization includes long-term debt, including the current portion,
and stockholders' equity.
Our principal sources of liquidity on a short-term basis are cash and cash equivalents, cash flows provided by operations and availability under credit facilities. On a long-term basis, our potential sources of liquidity also include raising capital through the issuance of debt and/or equity. The primary uses of liquidity include funding working capital requirements (primarily inventory and accounts receivable, net of accounts payable and other accrued liabilities), debt service requirements (including voluntary debt payments), capital expenditures, acquisitions, payment of certain restructuring costs, and pension and other postretirement obligations. The decrease in cash and cash equivalents during the first three months of 2014 was primarily driven by the use of cash to fund operations. The increase in working capital, excluding cash and cash equivalents and current portion of long-term debt is primarily due to the increase in the levels of accounts receivable resulting from higher net sales in the first quarter of 2014 as compared with the fourth quarter of 2013 and higher inventory expected to be needed to meet demand in the second and third quarters. The slight decrease in long-term debt as compared to
December 31, 2013was primarily the result of mandatory payments under our senior secured term loan facility. The net change in total capitalization during the first three months of 2014 primarily reflects current year earnings. Cash Flow Overview Three Months Ended March 31, Dollar 2014 2013 Change (dollars in millions)
Net cash used in operating activities
$ (35.5 ) $ (52.9 ) $ 17.4Net cash used in investing activities $ (5.4 ) $ (37.9 ) $ 32.5Net cash generated by financing activities $ 0.9 $ 95.2 $ (94.3 )Operating Activities During the three months ended March 31, 2014, $35.5 millionof cash was used in operating activities compared to $52.9 millionduring the three months ended March 31, 2013. Less cash was used to fund operations during the first quarter of 2014 as compared to the first quarter of 2013 due to improved operating performance partially offset by higher working capital requirements. In particular, accounts receivable increased period over period as a result of higher net sales. This use of cash was partially offset by lower cash paid for interest, which reflects a favorable shift to lower rate debt and changes in the timing of certain interest payments. 22
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We expect to generate net cash from operating activities during the remainder of 2014. The first quarter is generally the weakest cash generation quarter of the year. Investing Activities Investment in property, plant and equipment during the first quarter of 2014 was
$6.7 millionand primarily related to supporting improvements to manufacturing operations as well as investments in information technology (including internally developed software). We currently expect total capital expenditures of $40 millionto $45 millionin 2014.
During the first quarter of 2013, we paid
During the three months ended
March 31, 2014, we made a required payment of $2.2 millionunder our senior secured term loans. We also borrowed and repaid $15.0 millionunder our $400 millionrevolving credit facility. As of March 31, 2014, availability under our revolving credit facility was approximately $345.0 million, reflecting a borrowing base of $400.0 millionreduced by $55.0 millionof letters of credit issued under the revolving credit facility. During the first quarter of 2014, we received proceeds of $2.0 millionand recognized $1.5 millionof excess tax benefits related to the exercise of stock options. During the first quarter of 2013, we amended our senior secured term loan primarily to lower the interest rate. The amendment resulted in the repayment of $32.0 millionto certain lenders who exited the senior secured term loan and the receipt of $32.0 millionin proceeds from new lenders and existing lenders who increased their positions. We also borrowed $135.0 millionand repaid $35.0 millionunder the revolving credit facility and repaid $2.5 millionof our senior secured term loan during the three months ended March 31, 2013.
We expect that our primary future cash needs will be debt service, funding working capital requirements, capital expenditures, paying certain restructuring costs, tax payments (including the cost of repatriation), and funding pension and other postretirement benefit obligations. We paid
$6.8 millionof restructuring costs during the first three months of 2014 and expect to pay an additional $15.0 millionto $17.0 millionby 2015 related to restructuring actions that have been initiated. Any future restructuring actions would likely require additional cash expenditures and such requirements may be material. As of March 31, 2014, we have an unfunded obligation related to pension and other postretirement benefits of $36.6 million. We made contributions of $1.0 millionto our pension and other postretirement benefit plans during the three months ended March 31, 2014and currently expect to make additional contributions of $18.3 millionduring the balance of 2014. These contributions include those required to comply with an agreement with the Pension Benefit Guaranty Corporation. We expect that our noncurrent employee benefit liabilities will be funded from existing cash balances and cash flow from future operations. In addition to the $9.8 millionwe paid in July 2013for the acquisition of Redwood, we may be required to pay up to an additional $49.0 millionof additional consideration and retention payments in 2015 if certain net sales targets are met. We expect to pay the interest on the senior PIK toggle notes in cash during 2014. We may also pay existing debt or repurchase our remaining 8.25% senior notes or our senior PIK toggle notes, if market conditions are favorable and the applicable indenture permits such repayment or repurchase. We may also pursue additional strategic acquisition opportunities, which may impact our future cash requirements. Although there are no financial maintenance covenants under the terms of our 8.25% senior notes and senior PIK toggle notes, there is a limitation, among other limitations, on certain future borrowings based on an adjusted leverage ratio or a fixed charge coverage ratio. See Part II, Item 7 of our 2013 Annual Report on Form 10-K for further discussion of these limitations and ratios. These ratios are based on pro forma adjusted EBITDA for the trailing twelve months, which is calculated as earnings ( $68.0 million) before interest ( $201.6 million, net), taxes ( $83.5 million), depreciation ( $53.2 million), amortization ( $175.9 million), asset impairment charges ( $39.9 million), net restructuring costs ( $22.3 million), equity-based compensation ( $15.3 million), other special items ( $73.3 million) and adjustments to reflect the impact of cost reduction initiatives ( $24.5 million) and acquisitions (a loss of $1.6 million) so that their impacts are fully reflected in the twelve-month period used in the calculation of the ratios. For the twelve months ended March 31, 2014, our pro forma adjusted EBITDA as measured pursuant to our notes indentures was $755.9 million. In addition to limitations under our notes indentures, our senior secured credit facilities contain customary negative covenants. We are currently in compliance with the covenants under our senior secured credit facilities. As of March 31, 2014, approximately 73% of our cash and cash equivalents was held outside the United States. Income taxes have been provided on foreign earnings to repatriate substantially all of this cash. We do not anticipate significant incremental income tax expense related to repatriating existing cash balances. However, the cash tax requirements to repatriate existing funds may vary from year to year. 23
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We believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our revolving credit facility, will be sufficient to meet our presently anticipated future cash needs. We currently hold 2.2 million shares of Hydrogenics Corporation and we may sell a substantial portion of that investment. We may, from time to time, increase borrowings under our revolving credit facility or issue securities, if market conditions are favorable, to meet our future cash needs or to reduce our borrowing costs.
This Quarterly Report on Form 10-Q or any other oral or written statements made by us or on our behalf may include forward-looking statements which reflect our current views with respect to future events and financial performance. These forward-looking statements are identified by their use of such terms and phrases as "intend," "goal," "estimate," "expect," "project," "projections," "plans," "anticipate," "should," "designed to," "foreseeable future," "believe," "think," "scheduled," "outlook," "guidance" and similar expressions. This list of indicative terms and phrases is not intended to be all-inclusive. These statements are subject to various risks and uncertainties, many of which are outside our control, including, without limitation, our dependence on customers' capital spending on communication systems; concentration of sales among a limited number of customers or distributors; changes in technology; our ability to fully realize anticipated benefits from prior or future acquisitions or equity investments; industry competition and the ability to retain customers through product innovation, introduction and marketing; risks associated with our sales through channel partners; possible production disruptions due to supplier or contract manufacturer bankruptcy, reorganization or restructuring; the risk our global manufacturing operations suffer production or shipping delays causing difficulty in meeting customer demands; the risk that internal production capacity and that of contract manufacturers may be insufficient to meet customer demand or quality standards for our products; our ability to maintain effective information management systems and to successfully implement major systems initiatives; cyber-security incidents, including data security breaches or computer viruses; product performance issues and associated warranty claims; significant international operations and the impact of variability in foreign exchange rates; our ability to comply with governmental anti-corruption laws and regulations and export and import controls worldwide; risks associated with currency fluctuations and currency exchange; the divestiture of one or more product lines; political and economic instability, both in the U.S. and internationally; potential difficulties in realigning global manufacturing capacity and capabilities among our global manufacturing facilities, including delays or challenges related to removing, transporting or reinstalling equipment, that may affect ability to meet customer demands for products; possible future restructuring actions; possible future impairment charges for fixed or intangible assets, including goodwill; increased obligations under employee benefit plans; cost of protecting or defending intellectual property; changes in laws or regulations affecting us or the industries we serve; costs and challenges of compliance with domestic and foreign environmental laws and the effects of climate change; changes in cost and availability of key raw materials, components and commodities and the potential effect on customer pricing; risks associated with our dependence on a limited number of key suppliers; our ability to attract and retain qualified key employees; allegations of health risks from wireless equipment; availability and adequacy of insurance; natural or man-made disasters or other disruptions; income tax rate variability and ability to recover amounts recorded as value-added tax receivables; labor unrest; risks associated with future research and development projects; increased costs as a result of operating as a public company; our ability to comply with new regulations related to conflict minerals; risks associated with the seasonality of our business; substantial indebtedness and maintaining compliance with debt covenants; our ability to incur additional indebtedness; cash requirements to service indebtedness; ability of our lenders to fund borrowings under their credit commitments; changes in capital availability or costs, such as changes in interest rates, security ratings and market perceptions of the businesses in which we operate, or the ability to obtain capital on commercially reasonable terms or at all; continued global economic weakness and uncertainties and disruption in the capital, credit and commodities markets; any statements of belief and any statements of assumptions underlying any of the foregoing; and other factors beyond our control. These and other factors are discussed in greater detail in our 2013 Annual Report on Form 10-K. The information contained in this Quarterly Report on Form 10-Q represents our best judgment at the date of this report based on information currently available. However, we are not undertaking any duty or obligation to update this information to reflect developments or information obtained after the date of this report. 24
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