comm-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission file number 001 - 36146

 

CommScope Holding Company, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

27-4332098

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

1100 CommScope Place, SE

Hickory, North Carolina

(Address of principal executive offices)

28602

(Zip Code)

(828) 324-2200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of July 13, 2018 there were 192,215,154 shares of Common Stock outstanding.

 

 

 


CommScope Holding Company, Inc.

Form 10-Q

June 30, 2018

Table of Contents

 

Part I—Financial Information (Unaudited):

 

 

 

Item 1. Condensed Consolidated Financial Statements:

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income

2

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Cash Flows

4

 

 

Condensed Consolidated Statements of Stockholders’ Equity

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

40

 

 

Item 4. Controls and Procedures

40

 

 

Part II—Other Information:

 

 

 

Item 1. Legal Proceedings

41

 

 

Item 1A. Risk Factors

41

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

41

 

 

Item 3. Defaults Upon Senior Securities

42

 

 

Item 4. Mine Safety Disclosures

42

 

 

Item 5. Other Information

42

 

 

Item 6. Exhibits

43

 

 

Signatures

44

 

 

 

1

 


PART 1 -- FINANCIAL INFORMATION (UNAUDITED)

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CommScope Holding Company, Inc.

Condensed Consolidated Statements of Operations

and Comprehensive Income (Loss)

(Unaudited – In thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

 

$

1,239,856

 

 

$

1,174,090

 

 

$

2,360,373

 

 

$

2,311,375

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

768,546

 

 

 

702,325

 

 

 

1,477,663

 

 

 

1,385,803

 

Selling, general and administrative

 

 

185,197

 

 

 

207,640

 

 

 

370,328

 

 

 

419,461

 

Research and development

 

 

47,765

 

 

 

46,982

 

 

 

97,629

 

 

 

95,970

 

Amortization of purchased intangible assets

 

 

66,442

 

 

 

66,981

 

 

 

133,671

 

 

 

134,619

 

Restructuring costs, net

 

 

7,218

 

 

 

13,773

 

 

 

12,668

 

 

 

19,161

 

Total operating costs and expenses

 

 

1,075,168

 

 

 

1,037,701

 

 

 

2,091,959

 

 

 

2,055,014

 

Operating income

 

 

164,688

 

 

 

136,389

 

 

 

268,414

 

 

 

256,361

 

Other income (expense), net

 

 

(3,094

)

 

 

2,900

 

 

 

(2,111

)

 

 

(12,457

)

Interest expense

 

 

(60,726

)

 

 

(61,417

)

 

 

(120,533

)

 

 

(130,971

)

Interest income

 

 

2,057

 

 

 

1,730

 

 

 

3,491

 

 

 

2,604

 

Income before income taxes

 

 

102,925

 

 

 

79,602

 

 

 

149,261

 

 

 

115,537

 

Income tax expense

 

 

(37,003

)

 

 

(24,138

)

 

 

(49,604

)

 

 

(26,511

)

Net income

 

$

65,922

 

 

$

55,464

 

 

$

99,657

 

 

$

89,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

 

$

0.29

 

 

$

0.52

 

 

$

0.46

 

Diluted

 

$

0.34

 

 

$

0.28

 

 

$

0.51

 

 

$

0.45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

192,162

 

 

 

193,092

 

 

 

191,767

 

 

 

193,555

 

Diluted

 

 

195,186

 

 

 

197,218

 

 

 

195,346

 

 

 

198,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

65,922

 

 

$

55,464

 

 

$

99,657

 

 

$

89,026

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(108,544

)

 

 

86,749

 

 

 

(61,759

)

 

 

127,100

 

Pension and other postretirement benefit activity

 

 

(1,291

)

 

 

(360

)

 

 

(2,723

)

 

 

(729

)

Gain (loss) on net investment hedge

 

 

3,051

 

 

 

(2,996

)

 

 

2,453

 

 

 

(3,351

)

Available-for-sale securities

 

 

 

 

 

(2,132

)

 

 

 

 

 

(823

)

Total other comprehensive income (loss), net of tax

 

 

(106,784

)

 

 

81,261

 

 

 

(62,029

)

 

 

122,197

 

Total comprehensive income (loss)

 

$

(40,862

)

 

$

136,725

 

 

$

37,628

 

 

$

211,223

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

2

 


CommScope Holding Company, Inc.

Condensed Consolidated Balance Sheets

(Unaudited - In thousands, except share amounts)

 

 

 

June 30, 2018

 

 

December 31, 2017

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

545,701

 

 

$

453,977

 

Accounts receivable, less allowance for doubtful accounts of

   $19,123 and $13,976, respectively

 

 

1,023,716

 

 

 

898,829

 

Inventories, net

 

 

479,468

 

 

 

444,941

 

Prepaid expenses and other current assets

 

 

123,371

 

 

 

146,112

 

Total current assets

 

 

2,172,256

 

 

 

1,943,859

 

Property, plant and equipment, net of accumulated depreciation

   of $413,832 and $390,389, respectively

 

 

446,954

 

 

 

467,289

 

Goodwill

 

 

2,866,319

 

 

 

2,886,630

 

Other intangible assets, net

 

 

1,491,007

 

 

 

1,636,084

 

Other noncurrent assets

 

 

129,344

 

 

 

107,804

 

Total assets

 

$

7,105,880

 

 

$

7,041,666

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

487,521

 

 

$

436,737

 

Other accrued liabilities

 

 

297,755

 

 

 

286,980

 

Total current liabilities

 

 

785,276

 

 

 

723,717

 

Long-term debt

 

 

4,374,209

 

 

 

4,369,401

 

Deferred income taxes

 

 

108,529

 

 

 

134,241

 

Pension and other postretirement benefit liabilities

 

 

23,006

 

 

 

25,140

 

Other noncurrent liabilities

 

 

111,591

 

 

 

141,341

 

Total liabilities

 

 

5,402,611

 

 

 

5,393,840

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $.01 par value: Authorized shares: 200,000,000;

 

 

 

 

 

 

 

 

Issued and outstanding shares: None

 

 

 

 

 

 

Common stock, $0.01 par value: Authorized shares: 1,300,000,000;

 

 

 

 

 

 

 

 

Issued and outstanding shares: 192,214,497 and 190,906,110,

 

 

 

 

 

 

 

 

respectively

 

 

1,989

 

 

 

1,972

 

Additional paid-in capital

 

 

2,361,365

 

 

 

2,334,071

 

Retained earnings (accumulated deficit)

 

 

(290,337

)

 

 

(395,998

)

Accumulated other comprehensive loss

 

 

(148,632

)

 

 

(86,603

)

Treasury stock, at cost: 6,735,330 shares and 6,336,144 shares,

 

 

 

 

 

 

 

 

respectively

 

 

(221,116

)

 

 

(205,616

)

Total stockholders' equity

 

 

1,703,269

 

 

 

1,647,826

 

Total liabilities and stockholders' equity

 

$

7,105,880

 

 

$

7,041,666

 

 

See notes to unaudited condensed consolidated financial statements.

 

3

 


CommScope Holding Company, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited - In thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

99,657

 

 

$

89,026

 

Adjustments to reconcile net income to net cash generated by

  operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

178,349

 

 

 

190,453

 

Equity-based compensation

 

 

22,396

 

 

 

20,598

 

Deferred income taxes

 

 

(24,610

)

 

 

(14,073

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(137,023

)

 

 

43,975

 

Inventories

 

 

(47,993

)

 

 

(42,243

)

Prepaid expenses and other assets

 

 

(608

)

 

 

(1,773

)

Accounts payable and other liabilities

 

 

40,881

 

 

 

(120,777

)

Other

 

 

4,014

 

 

 

24,847

 

Net cash generated by operating activities

 

 

135,063

 

 

 

190,033

 

Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(30,844

)

 

 

(30,577

)

Proceeds from sale of property, plant and equipment

 

 

6,225

 

 

 

4,978

 

Proceeds upon settlement of net investment hedge

 

 

1,331

 

 

 

 

Other

 

 

 

 

 

6,778

 

Net cash used in investing activities

 

 

(23,288

)

 

 

(18,821

)

Financing Activities:

 

 

 

 

 

 

 

 

Long-term debt repaid

 

 

 

 

 

(780,379

)

Long-term debt proceeds

 

 

 

 

 

780,379

 

Debt issuance and modification costs

 

 

 

 

 

(8,363

)

Debt extinguishment costs

 

 

 

 

 

(14,800

)

Cash paid for repurchase of common stock

 

 

 

 

 

(100,000

)

Proceeds from the issuance of common shares under equity-based

   compensation plans

 

 

4,915

 

 

 

8,506

 

Tax withholding payments for vested equity-based compensation

  awards

 

 

(15,500

)

 

 

(14,858

)

Net cash used in financing activities

 

 

(10,585

)

 

 

(129,515

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(9,466

)

 

 

14,566

 

Change in cash and cash equivalents

 

 

91,724

 

 

 

56,263

 

Cash and cash equivalent at beginning of period

 

 

453,977

 

 

 

428,228

 

Cash and cash equivalents at end of period

 

$

545,701

 

 

$

484,491

 

 

See notes to unaudited condensed consolidated financial statements.

 

4

 


CommScope Holding Company, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited - In thousands, except share amounts)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Number of common shares outstanding:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

190,906,110

 

 

 

193,837,437

 

Issuance of shares under equity-based compensation plans

 

 

1,707,573

 

 

 

2,073,565

 

Shares surrendered under equity-based compensation plans

 

 

(399,186

)

 

 

(396,010

)

Repurchase of common stock

 

 

 

 

 

(2,485,520

)

Balance at end of period

 

 

192,214,497

 

 

 

193,029,472

 

Common stock:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,972

 

 

$

1,950

 

Issuance of shares under equity-based compensation plans

 

 

17

 

 

 

20

 

Balance at end of period

 

$

1,989

 

 

$

1,970

 

Additional paid-in capital:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

2,334,071

 

 

$

2,282,014

 

Issuance of shares under equity-based compensation plans

 

 

4,898

 

 

 

8,486

 

Equity-based compensation

 

 

22,396

 

 

 

20,579

 

Cumulative effect of change in accounting principle

 

 

 

 

 

295

 

Balance at end of period

 

$

2,361,365

 

 

$

2,311,374

 

Retained earnings (accumulated deficit):

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(395,998

)

 

$

(589,556

)

Net income

 

 

99,657

 

 

 

89,026

 

Cumulative effect of change in accounting principle

 

 

6,004

 

 

 

(206

)

Balance at end of period

 

$

(290,337

)

 

$

(500,736

)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(86,603

)

 

$

(285,113

)

Other comprehensive income (loss), net of tax

 

 

(62,029

)

 

 

122,197

 

Balance at end of period

 

$

(148,632

)

 

$

(162,916

)

Treasury stock, at cost:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(205,616

)

 

$

(15,211

)

Net shares surrendered under equity-based compensation plans

 

 

(15,500

)

 

 

(14,858

)

Repurchase of common stock

 

 

 

 

 

(100,000

)

Balance at end of period

 

$

(221,116

)

 

$

(130,069

)

Total stockholders' equity

 

$

1,703,269

 

 

$

1,519,623

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

5

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

 

 

1. BACKGROUND AND BASIS OF PRESENTATION

Background

CommScope Holding Company, Inc., along with its direct and indirect subsidiaries (CommScope or the Company), is a global provider of infrastructure solutions for the core, access and edge layers of communication networks. The Company’s solutions and services for wired and wireless networks enable high-bandwidth data, video and voice applications. CommScope’s global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale.

Basis of Presentation

The Condensed Consolidated Balance Sheet as of June 30, 2018, the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2018 and 2017, and the Condensed Consolidated Statements of Cash Flows and Stockholders’ Equity for the six months ended June 30, 2018 and 2017 are unaudited and reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The results of operations for these interim periods are not necessarily indicative of the results of operations to be expected for any future period or the full fiscal year. Certain prior year amounts have been reclassified to conform to the current year presentation.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and are presented in accordance with the applicable requirements of Regulation S-X. Accordingly, these financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. The significant accounting policies followed by the Company are set forth in Note 2 within the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the 2017 Annual Report). Other than the changes described below to revenue recognition policies as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, there were no material changes in the Company’s significant accounting policies during the three or six months ended June 30, 2018. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements in the 2017 Annual Report.

Revenue Recognition

The Company recognizes revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. The majority of the Company’s revenue is from product sales. Revenue from product sales is recognized when control is transferred to the customer, typically upon either shipment or delivery. A minor portion of the Company’s revenue is derived from project contracts containing a combination of product and service obligations. Revenue from project contracts is recognized either at a point in time or over time using cost input methods, based on the specific terms of each contract.

For project contracts containing multiple distinct performance obligations, the transaction price is allocated based on the relative standalone estimated selling price of each performance obligation. The relative standalone selling price is determined using current price lists and observable pricing in separate contracts with similar customers. For performance obligations recognized over-time, judgment is required to evaluate assumptions, including the total estimated costs to determine progress towards completion of the performance obligation and to calculate the corresponding amount of revenue to recognize. If estimated total costs on any contract are greater than the net contract revenues, the entire estimated loss is recognized in the period the loss becomes known. The cumulative effects on revenue from revisions to total estimated costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.

6

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

The Company also recognizes revenue from other customer contract types, including licensing of intellectual property, software licensing and post-contract support (PCS) which may be sold as part of a bundled product offering or as a separate contract. For bundled product arrangements, the transaction price is allocated based on the relative standalone estimated selling price of each performance obligation. Distinct intellectual property obligations, including software, are considered functional in nature and are recognized as revenue at the point in time the customer receives the rights to use and benefit from the intellectual property or are determined using a usage-based royalty. PCS obligations are typically recognized over the term of the contract.

Revenue is measured based on the consideration to which the Company expects to be entitled, based on customer contracts. For sales to distributors, system integrators and value-added resellers (primarily for the CommScope Connectivity Solutions (CCS) segment), revenue is adjusted for variable consideration amounts, including estimated discounts, returns, rebates and distributor price protection programs. These estimates are determined based upon historical experience, contract terms, inventory levels in the distributor channel and other related factors. Adjustments to variable consideration estimates are recorded when circumstances indicate revisions may be necessary.  

The Company records a contract asset for unbilled accounts receivable related to revenue that has been recognized in advance of consideration being unconditionally due from the customer, which is common for certain project contract performance obligations. Contract asset amounts are transferred to accounts receivable when the Company’s right to the consideration becomes unconditional, which varies by contract, but is generally based on achieving certain acceptance milestones.

A contract liability for deferred revenue is recorded when consideration is received or is unconditionally due from a customer prior to transferring control of goods or services to the customer under the terms of a contract. Deferred revenue balances typically result from advance payments received from customers for product contracts or from billings in excess of revenue recognized on project or services arrangements.

Concentrations of Risk and Related Party Transactions

Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 11% of the Company’s total net sales during both the three and six months ended June 30, 2018. Net sales to Anixter accounted for 12% and 11% of the Company’s total net sales during the three and six months ended June 30, 2017, respectively. Sales to Anixter primarily originate within the CCS segment. Net sales to KGP Companies (KGPCo) accounted for 10% of the Company’s net sales during the three months ended June 30, 2018 but did not exceed 10% for the six months ended June 30, 2018 or the three or six months ended June 30, 2017. KGPCo provides supply chain management to operators deploying wired and wireless networks in the United States (U.S.) and services end-users of both of the Company’s segments. Other than Anixter and KGPCo, no direct customer accounted for 10% or more of the Company’s total net sales for the three or six months ended June 30, 2018 or 2017.

Accounts receivable from Anixter accounted for 10% of the Company’s accounts receivable as of June 30, 2018. Other than Anixter, no direct customer accounted for 10% or more of the Company’s accounts receivable as of June 30, 2018.

Product Warranties

The Company recognizes a liability for the estimated claims that may be paid under its customer warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products. These product warranties extend over periods ranging from one to twenty-five years from the date of sale, depending upon the product subject to the warranty. The Company records a provision for estimated future warranty claims as cost of sales based upon the historical relationship of warranty claims to sales and specifically identified warranty issues. The Company bases its estimates on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Such revisions may be material.

7

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

The following table summarizes the activity in the product warranty accrual, included in other accrued liabilities:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Product warranty accrual, beginning of period

 

$

16,150

 

 

$

20,180

 

 

$

16,928

 

 

$

21,631

 

Provision for warranty claims

 

 

458

 

 

 

2,028

 

 

 

1,878

 

 

 

4,231

 

Warranty claims paid

 

 

(1,697

)

 

 

(2,029

)

 

 

(3,913

)

 

 

(5,718

)

Foreign exchange

 

 

(65

)

 

 

104

 

 

 

(47

)

 

 

139

 

Product warranty accrual, end of period

 

$

14,846

 

 

$

20,283

 

 

$

14,846

 

 

$

20,283

 

Commitments and Contingencies

The Company is either a plaintiff or a defendant in certain pending legal matters in the normal course of business. The Company may also be called upon to indemnify certain customers for costs related to products or services sold to such customers. Management believes none of these legal matters will have a material adverse effect on the Company’s business or financial condition upon final disposition.

In addition, the Company is subject to various federal, state, local and foreign laws and regulations governing the use, discharge, disposal and remediation of hazardous materials. Compliance with current laws and regulations has not had, and is not expected to have, a materially adverse effect on the Company’s financial condition or results of operations.

Asset Impairments

Goodwill is tested for impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of the reporting unit may exceed its fair value. There were no goodwill impairments identified during the three or six months ended June 30, 2018 or 2017.

Property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable, based on the undiscounted cash flows expected to be derived from the use and ultimate disposition of the assets. Assets identified as impaired are carried at estimated fair value. Equity investments without readily determinable fair values are evaluated each reporting period for impairment based on a qualitative assessment and are then measured at fair value if an impairment is determined to exist. Other than certain assets impaired as a result of restructuring actions, there were no definite-lived intangible or other long-lived asset impairments identified during the three or six months ended June 30, 2018 or 2017.

8

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

Income Taxes

On December 22, 2017, the U.S. government enacted tax reform legislation that reduced the corporate income tax rate from 35% to 21% and included a broad range of complex provisions affecting the taxation of businesses. Generally, financial statement recognition of the new legislation would be required to be completed in the period of enactment; however, in response to the complexities of this new legislation, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118 to provide companies with transitional relief. Specifically, when the initial accounting for items under the new legislation is incomplete, the guidance allows the recognition of provisional amounts when reasonable estimates can be made or the continued application of the prior tax law if a reasonable estimate of the effect cannot be made. The SEC staff has provided up to one year from the date of enactment for companies to finalize the accounting for the effects of this new legislation. Although no changes were made to the provisional amounts during the three months or six months ended June 30, 2018, the Company expects to refine the calculations as additional analysis is completed and as a more thorough understanding of the new tax law is reached. The changes made could be material to income tax expense.

The effective income tax rate of 36.0% and 33.2% for the three and six months ended June 30, 2018, respectively, was higher than the statutory rate of 21.0% primarily due to the effect of the provision for state income taxes, the impact of earnings in foreign jurisdictions that are taxed at rates higher than the U.S. statutory rate, the impact of the new U.S. anti-deferral provisions and the impact of repatriation taxes. These increases to the effective tax rate were partially offset by the favorable impact of $0.4 million and $4.7 million of excess tax benefits related to equity-based compensation awards for the three and six months ended June 30, 2018, respectively.

The effective income tax rate of 30.3% and 22.9% for the three and six months ended June 30, 2017, respectively, was lower than the statutory rate of 35.0% primarily due to the favorable impact of $4.4 million and $13.1 million of excess tax benefits related to equity-based compensation awards for the three and six months ended June 30, 2017, respectively. The effective income tax rate was also favorably affected by the impact of earnings in foreign jurisdictions that the Company did not plan to repatriate. These earnings were generally taxed at rates lower than the U.S. statutory rate. Offsetting these decreases for the three and six months ended June 30, 2017 was the effect of the provision for state income taxes.

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on net income divided by the weighted average number of common shares outstanding plus the effect of potentially dilutive common shares using the treasury stock method. Potentially dilutive common shares include outstanding equity-based awards (stock options, restricted stock units and performance share units). Certain outstanding equity-based awards were not included in the computation of diluted earnings per share because the effect was either antidilutive or the performance conditions were not met (2.2 million shares and 1.7 million shares for the three and six months ended June 30, 2018, respectively, and 0.7 million shares and 0.5 million shares for the three and six months ended June 30, 2017, respectively).

The following table presents the basis for the earnings per share computations (in thousands, except per share data):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for basic and diluted earnings per share

 

$

65,922

 

 

$

55,464

 

 

$

99,657

 

 

$

89,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

192,162

 

 

 

193,092

 

 

 

191,767

 

 

 

193,555

 

Dilutive effect of equity-based awards

 

 

3,024

 

 

 

4,126

 

 

 

3,579

 

 

 

4,618

 

Weighted average common shares outstanding - diluted

 

 

195,186

 

 

 

197,218

 

 

 

195,346

 

 

 

198,173

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

 

$

0.29

 

 

$

0.52

 

 

$

0.46

 

Diluted

 

$

0.34

 

 

$

0.28

 

 

$

0.51

 

 

$

0.45

 

9

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

Recent Accounting Pronouncements

Adopted During the Six Months Ended June 30, 2018

The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, including all subsequently issued clarifying guidance, on January 1, 2018. The core principle of the new guidance is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The Company adopted the standard using the modified retrospective approach with the cumulative effect of applying the standard on the date of adoption recognized in retained earnings (accumulated deficit).

Revenue recognition for the Company’s product sales remained generally consistent with historical practice. However, the adoption of ASU No. 2014-09 resulted in acceleration of revenue recognition for certain project contracts containing integrated product and service obligations, primarily within the CommScope Mobility Solutions (CMS) segment. These multi-element contracts represented less than 2.0% of total net sales for the three and six months ended June 30, 2018 and 2017. For these contracts, certain performance obligations are recognized over time using cost-based input methods, which recognize revenue and cost of sales based on the relationship between actual costs incurred compared to the total estimated cost for the performance obligation. Based on contracts in effect at January 1, 2018, the Company recorded a cumulative effect adjustment, net of tax, of $3.4 million, which reduced the accumulated deficit on the Condensed Consolidated Balance Sheets. This adjustment reflects an acceleration of revenues of $8.0 million.

The impact of adoption of the new revenue recognition standard on our condensed consolidated financial statements was as follows:

 

Three Months Ended June 30, 2018

 

 

Six Months Ended June 30, 2018

 

 

As Reported

 

 

Amounts Without Adoption of

ASU No. 2014-09

 

 

Effect of Change

Increase / (Decrease)

 

 

As Reported

 

 

Amounts Without Adoption of

ASU No. 2014-09

 

 

Effect of Change

Increase / (Decrease)

 

Net sales

$

1,239,856

 

 

$

1,239,800

 

 

$

56

 

 

$

2,360,373

 

 

$

2,362,057

 

 

$

(1,684

)

Cost of sales

 

768,546

 

 

 

768,288

 

 

 

258

 

 

 

1,477,663

 

 

 

1,477,185

 

 

 

478

 

Operating income

 

164,688

 

 

 

164,890

 

 

 

(202

)

 

 

268,414

 

 

 

270,576

 

 

 

(2,162

)

Income tax expense

 

37,003

 

 

 

37,028

 

 

 

(25

)

 

 

49,604

 

 

 

50,142

 

 

 

(538

)

Net income

 

65,922

 

 

 

66,099

 

 

 

(177

)

 

 

99,657

 

 

 

101,281

 

 

 

(1,624

)

 

 

As of June 30, 2018

 

 

As Reported

 

 

Amounts Without Adoption of

ASU No. 2014-09

 

 

Effect of Change

Increase / (Decrease)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, less allowance

     for doubtful accounts

$

1,023,716

 

 

$

1,020,404

 

 

$

3,312

 

Inventories, net

 

479,468

 

 

 

483,275

 

 

 

(3,807

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Other accrued liabilities

 

297,755

 

 

 

300,040

 

 

 

(2,285

)

Equity:

 

 

 

 

 

 

 

 

 

 

 

Retained earnings (accumulated deficit)

 

(290,337

)

 

 

(292,127

)

 

 

1,790

 

The Company adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, on January 1, 2018. This new guidance modifies how entities measure equity investments (except those accounted for under the equity method of accounting) and present changes in the fair value of financial liabilities; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; changes presentation and disclosure requirements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. Adoption of this new guidance did not have a material impact on the consolidated financial statements.

10

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

The Company adopted ASU No. 2016-16, Accounting for Income Taxes, Intra-Entity Asset Transfers of Assets Other than Inventory, on January 1, 2018. Under previous guidance, the tax effects of intra-entity asset transfers were deferred until the transferred asset was sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. As a result, the tax effect of an intra-entity asset sale would be recognized when the transfer occurs. The Company recorded a cumulative effect adjustment of $2.6 million as of January 1, 2018 that decreased the accumulated deficit on the Condensed Consolidated Balance Sheets as a result of this new guidance.

The Company adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on January 1, 2018. The new standard requires an employer to report the service cost component of net periodic benefit cost in the same line item as other compensation costs arising from services rendered by the employee and requires the other components of net periodic benefit cost to be reported outside the subtotal of operating income. Of the total $1.3 million of net periodic benefit income for the three months ended June 30, 2018, $2.3 million of net periodic benefit income was recorded in other income (expense), net, and $1.0 million of net periodic benefit cost was recorded within operating income. Of the total $2.4 million of net periodic benefit income for the six months ended June 30, 2018, $4.6 million of net periodic benefit income was recorded in other income (expense), net, and $2.2 million of net periodic benefit cost was recorded within operating income. The Company utilized the practical expedient and used the amounts disclosed in its employee benefit plans note for the three and six months ended June 30, 2017 as the basis for applying the retrospective presentation requirements. The Company reclassified $1.4 million and $2.8 million of net periodic benefit income from operating income to other income (expense), net for the three and six months ended June 30, 2017, respectively. The adoption of this guidance had no impact on the previously reported income before income taxes or net income for the three or six months ended June 30, 2017.

The Company adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, on January 1, 2018. The new guidance provides targeted improvements to the hedge accounting model intended to allow financial reporting to more closely reflect an entity’s risk management activities and to simplify the application of hedge accounting. Beginning January 1, 2018, the Company has elected to assess the effectiveness of its net investment hedges using the spot rate method. As a result, differences between the spot rate and the forward rate will be amortized on a straight-line basis to other income (expense), net over the life of the contract. See Note 6 for the details on the impact of this change to the financial statements.

Issued but Not Adopted

In February 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to elect reclassification from accumulated other comprehensive income to retained earnings for certain tax effects resulting from the U.S. tax legislation enacted in 2017. ASU No. 2018-02 is effective for the Company as of January 1, 2019 and early adoption is permitted. The Company does not expect to elect the permitted reclassification and therefore does not expect the new guidance to have an impact on the consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test of Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under the new guidance, an entity will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize a goodwill impairment charge for the excess of the reporting unit’s carrying amount over its fair value, up to the amount of goodwill allocated to that reporting unit. ASU No. 2017-04 is effective for the Company as of January 1, 2020 and early adoption is permitted. The Company is evaluating the impact of the new guidance on the consolidated financial statements and when it may be adopted.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The new guidance replaces the current incurred loss method used for determining credit losses on financial assets, including trade receivables, with an expected credit loss method. ASU No. 2016-13 is effective for the Company as of January 1, 2020 and early adoption is permitted. The Company is evaluating the impact of the new guidance on the consolidated financial statements and when it may be adopted.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which supersedes the current leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize assets and lease liabilities for the rights and obligations created by leased assets previously classified as operating leases. ASU No. 2016-02 is effective for the Company as of January 1, 2019. The Company continues to evaluate the impact of adoption on the consolidated financial statements but expects the only significant impact of the ASU to be the recognition of right-of-use assets and lease liabilities.

11

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

2. ACQUISITIONS

On August 1, 2017, the Company acquired Cable Exchange in an all cash transaction. The Company paid $108.7 million ($105.2 million net of cash acquired) and recorded a $14.5 million liability for the remaining payments due. Cable Exchange is a quick-turn supplier of fiber optic and copper assemblies for data, voice and video communications. Net sales of Cable Exchange products are reflected in the CCS segment for the three and six months ended June 30, 2018 and were not material.  

The preliminary allocation of the purchase price, based on estimates of the fair values of the assets acquired and liabilities assumed, is as follows (in millions):

 

 

Estimated Fair

Value

 

Cash and cash equivalents

 

$

3.5

 

Accounts receivable

 

 

6.4

 

Inventory

 

 

4.4

 

Property, plant and equipment

 

 

0.9

 

Goodwill

 

 

49.6

 

Identifiable intangible assets

 

 

61.1

 

Less: Liabilities assumed

 

 

(2.7

)

Net acquisition cost

 

$

123.2

 

The goodwill arising from the purchase price allocation of the Cable Exchange acquisition is believed to result from the Company’s reputation in the marketplace and assembled workforce and is expected to be deductible for income tax purposes.

As additional information is obtained, adjustments may be made to the preliminary purchase price allocation. The Company is still finalizing the estimated fair value of certain liabilities assumed.

3. GOODWILL

The following table presents goodwill by reportable segment (in millions):

 

 

 

CCS

 

 

CMS

 

 

Total

 

Goodwill, gross at December 31, 2017

 

$

2,193.2

 

 

$

904.4

 

 

$

3,097.6

 

Foreign exchange

 

 

(18.9

)

 

 

(1.4

)

 

 

(20.3

)

Goodwill, gross at June 30, 2018

 

 

2,174.3

 

 

 

903.0

 

 

 

3,077.3

 

Accumulated impairment charges at December 31, 2017

   and June 30, 2018

 

 

(51.5

)

 

 

(159.5

)

 

 

(211.0

)

Goodwill, net at June 30, 2018

 

$

2,122.8

 

 

$

743.5

 

 

$

2,866.3

 

 

4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Disaggregated Net Sales

The following table presents net sales by reportable segment, disaggregated based on contract type (in millions):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2018

 

 

 

CCS

 

 

CMS

 

 

Total

 

 

CCS

 

 

CMS

 

 

Total

 

Contract type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product contracts

 

$

738.4

 

 

$

474.5

 

 

$

1,212.9

 

 

$

1,410.0

 

 

$

899.8

 

 

$

2,309.8

 

Project contracts

 

 

0.1

 

 

 

13.5

 

 

 

13.6

 

 

 

0.1

 

 

 

24.0

 

 

 

24.1

 

Other contracts

 

 

2.0

 

 

 

11.4

 

 

 

13.4

 

 

 

4.0

 

 

 

22.5

 

 

 

26.5

 

Consolidated net sales

 

$

740.5

 

 

$

499.4

 

 

$

1,239.9