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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 March 31, 2019

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 every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

 

 

  

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  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

COMM

 

The NASDAQ Stock Market

 

As of May 2, 2019 there were 193,523,693 shares of Common Stock outstanding.

 

 


 

CommScope Holding Company, Inc.

Form 10-Q

March 31, 2019

Table of Contents

 

Part I—Financial Information (Unaudited):

 

 

 

 

 

Item 1. Condensed Consolidated Financial Statements:

 

 

 

 

 

Condensed Consolidated Statements of Operations

 

2

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

3

 

 

 

Condensed Consolidated Balance Sheets

 

4

 

 

 

Condensed Consolidated Statements of Cash Flows

 

5

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

6

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

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

 

29

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

 

Item 4. Controls and Procedures

 

43

 

 

 

Part II—Other Information:

 

 

 

 

 

Item 1. Legal Proceedings

 

44

 

 

 

Item 1A. Risk Factors

 

44

 

 

 

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

 

62

 

 

 

Item 3. Defaults Upon Senior Securities

 

62

 

 

 

Item 4. Mine Safety Disclosures

 

63

 

 

 

Item 5. Other Information

 

63

 

 

 

Item 6. Exhibits

 

64

 

 

 

Signatures

 

65

 

 

 

1

 


PART 1 -- FINANCIAL INFORMATION (UNAUDITED)

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CommScope Holding Company, Inc.

Condensed Consolidated Statements of Operations

(Unaudited – In millions, except per share amounts)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Net sales

 

$

1,099.5

 

 

$

1,120.5

 

Cost of sales

 

 

687.7

 

 

 

709.1

 

Gross profit

 

 

411.8

 

 

 

411.4

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

199.2

 

 

 

185.1

 

Research and development

 

 

50.2

 

 

 

49.9

 

Amortization of purchased intangible assets

 

 

59.3

 

 

 

67.2

 

Restructuring costs, net

 

 

12.4

 

 

 

5.5

 

Total operating expenses

 

 

321.1

 

 

 

307.7

 

Operating income

 

 

90.7

 

 

 

103.7

 

Other income (expense), net

 

 

(5.7

)

 

 

1.0

 

Interest expense

 

 

(97.5

)

 

 

(59.8

)

Interest income

 

 

11.8

 

 

 

1.4

 

Income (loss) before income taxes

 

 

(0.7

)

 

 

46.3

 

Income tax expense

 

 

(1.6

)

 

 

(12.6

)

Net income (loss)

 

$

(2.3

)

 

$

33.7

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

 

$

0.18

 

Diluted

 

$

(0.01

)

 

$

0.17

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

192.8

 

 

 

191.4

 

Diluted

 

 

192.8

 

 

 

195.5

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 


CommScope Holding Company, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited – In millions)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2.3

)

 

$

33.7

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

(9.7

)

 

 

46.8

 

Pension and other postretirement benefit activity

 

 

(0.1

)

 

 

(1.4

)

Loss on hedging instruments

 

 

(1.5

)

 

 

(0.6

)

Total other comprehensive income (loss), net of tax

 

 

(11.3

)

 

 

44.8

 

Total comprehensive income (loss)

 

$

(13.6

)

 

$

78.5

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 


CommScope Holding Company, Inc.

Condensed Consolidated Balance Sheets

(Unaudited - In millions, except share amounts)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

176.4

 

 

$

458.2

 

Accounts receivable, less allowance for doubtful accounts of

   $19.5 and $17.4, respectively

 

 

957.6

 

 

 

810.4

 

Inventories, net

 

 

535.5

 

 

 

473.3

 

Prepaid expenses and other current assets

 

 

151.5

 

 

 

135.9

 

Total current assets

 

 

1,821.0

 

 

 

1,877.8

 

Property, plant and equipment, net of accumulated depreciation

   of $449.2 and $437.7, respectively

 

 

453.8

 

 

 

450.9

 

Goodwill

 

 

2,859.9

 

 

 

2,852.3

 

Other intangible assets, net

 

 

1,290.0

 

 

 

1,352.0

 

Funds restricted for acquisition

 

 

3,760.1

 

 

 

 

Other noncurrent assets

 

 

189.5

 

 

 

97.5

 

Total assets

 

$

10,374.3

 

 

$

6,630.5

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

475.3

 

 

$

399.2

 

Accrued and other liabilities

 

 

429.6

 

 

 

291.4

 

Total current liabilities

 

 

904.9

 

 

 

690.6

 

Long-term debt

 

 

7,459.6

 

 

 

3,985.9

 

Deferred income taxes

 

 

79.9

 

 

 

83.3

 

Other noncurrent liabilities

 

 

185.4

 

 

 

113.9

 

Total liabilities

 

 

8,629.8

 

 

 

4,873.7

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 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: 193,456,207 and 192,376,255,

 

 

 

 

 

 

 

 

respectively

 

 

2.0

 

 

 

2.0

 

Additional paid-in capital

 

 

2,393.9

 

 

 

2,385.1

 

Retained earnings (accumulated deficit)

 

 

(252.1

)

 

 

(249.8

)

Accumulated other comprehensive loss

 

 

(170.5

)

 

 

(159.2

)

Treasury stock, at cost: 7,060,763 shares and 6,744,082 shares,

 

 

 

 

 

 

 

 

respectively

 

 

(228.8

)

 

 

(221.3

)

Total stockholders' equity

 

 

1,744.5

 

 

 

1,756.8

 

Total liabilities and stockholders' equity

 

$

10,374.3

 

 

$

6,630.5

 

 

See notes to unaudited condensed consolidated financial statements.

4

 


CommScope Holding Company, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited - In millions)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2.3

)

 

$

33.7

 

Adjustments to reconcile net income (loss) to net cash generated by (used in)

  operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

83.7

 

 

 

89.4

 

Equity-based compensation

 

 

7.5

 

 

 

10.5

 

Deferred income taxes

 

 

(1.4

)

 

 

(5.4

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(150.7

)

 

 

(71.1

)

Inventories

 

 

(62.4

)

 

 

(25.2

)

Prepaid expenses and other assets

 

 

(24.5

)

 

 

(24.5

)

Accounts payable and other liabilities

 

 

136.8

 

 

 

15.4

 

Other

 

 

3.3

 

 

 

12.4

 

Net cash generated by (used in) operating activities

 

 

(10.0

)

 

 

35.2

 

Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(21.4

)

 

 

(13.6

)

Proceeds from sale of property, plant and equipment

 

 

0.6

 

 

 

3.0

 

Acquisition funds held in escrow

 

 

(3,750.0

)

 

 

 

Cash paid for acquisitions, including purchase price adjustments, net of

   cash acquired

 

 

(11.0

)

 

 

 

Net cash used in investing activities

 

 

(3,781.8

)

 

 

(10.6

)

Financing Activities:

 

 

 

 

 

 

 

 

Long-term debt repaid

 

 

(225.0

)

 

 

 

Long-term debt proceeds

 

 

3,750.0

 

 

 

 

Debt issuance costs

 

 

(9.3

)

 

 

 

Proceeds from the issuance of common shares under equity-based

   compensation plans

 

 

1.3

 

 

 

3.9

 

Tax withholding payments for vested equity-based compensation

  awards

 

 

(7.5

)

 

 

(15.4

)

Net cash generated by (used in) financing activities

 

 

3,509.5

 

 

 

(11.5

)

Effect of exchange rate changes on cash and cash equivalents

 

 

0.5

 

 

 

5.6

 

Change in cash and cash equivalents

 

 

(281.8

)

 

 

18.7

 

Cash and cash equivalent at beginning of period

 

 

458.2

 

 

 

454.0

 

Cash and cash equivalents at end of period

 

$

176.4

 

 

$

472.7

 

 

See notes to unaudited condensed consolidated financial statements.

5

 


CommScope Holding Company, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited - In millions, except share amounts)

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Number of common shares outstanding:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

192,376,255

 

 

 

190,906,110

 

Issuance of shares under equity-based compensation plans

 

 

1,396,633

 

 

 

1,568,709

 

Shares surrendered under equity-based compensation plans

 

 

(316,681

)

 

 

(397,141

)

Balance at end of period

 

 

193,456,207

 

 

 

192,077,678

 

Common stock:

 

 

 

 

 

 

 

 

Balance at beginning and end of period

 

$

2.0

 

 

$

2.0

 

Additional paid-in capital:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

2,385.1

 

 

$

2,334.1

 

Issuance of shares under equity-based compensation plans

 

 

1.3

 

 

 

3.9

 

Equity-based compensation

 

 

7.5

 

 

 

10.5

 

Balance at end of period

 

$

2,393.9

 

 

$

2,348.5

 

Retained earnings (accumulated deficit):

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(249.8

)

 

$

(396.0

)

Net income (loss)

 

 

(2.3

)

 

 

33.7

 

Cumulative effect of change in accounting principle

 

 

 

 

 

6.0

 

Balance at end of period

 

$

(252.1

)

 

$

(356.3

)

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(159.2

)

 

$

(86.6

)

Other comprehensive income (loss), net of tax

 

 

(11.3

)

 

 

44.8

 

Balance at end of period

 

$

(170.5

)

 

$

(41.8

)

Treasury stock, at cost:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(221.3

)

 

$

(205.6

)

Net shares surrendered under equity-based compensation plans

 

 

(7.5

)

 

 

(15.4

)

Balance at end of period

 

$

(228.8

)

 

$

(221.0

)

Total stockholders' equity

 

$

1,744.5

 

 

$

1,731.4

 

 

See notes to unaudited condensed consolidated financial statements.

 

6

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, 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 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 accompanying condensed consolidated financial statements 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.

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. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the 2018 Annual Report).

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 2018 Annual Report. Other than the changes described below to lease policies as a result of the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases, there were no material changes in the Company’s significant accounting policies during the three months ended March 31, 2019.

Leases

The Company determines if a contract is a lease or contains a lease at inception. Right of use assets related to operating type leases are reported in other noncurrent assets and the present value of remaining lease obligations is reported in accrued and other liabilities and other noncurrent liabilities on the Consolidated Balance Sheets. CommScope does not currently have any financing type leases.  

Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The majority of the Company’s leases do not provide an implicit rate; therefore, the Company uses the incremental borrowing rates applicable to the economic environment and the duration of the lease, based on the information available at commencement date, in determining the present value of future payments. The right of use asset for operating leases is measured using the lease liability adjusted for the impact of lease payments made prior to commencement, lease incentives received, initial direct costs incurred and any asset impairments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company remeasures and reallocates the consideration in a contract when there is a modification of the lease that is not accounted for as a separate contract. The lease liability is remeasured when there is a change in the lease term or a change in the assessment of whether the Company will exercise a lease option. The Company assesses right of use assets for impairment in accordance with its long-lived asset impairment policy.

The Company accounts for lease agreements with contractually required lease and non-lease components on a combined basis.  Lease payments made for cancellable leases, variable amounts that are not based on an observable index and lease agreements with an original duration of less than twelve months are recorded directly to lease expense.

7

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, unless otherwise noted)

 

Concentrations of Risk and Related Party Transactions

Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 10% of the Company’s total net sales during both the three months ended March 31, 2019 and 2018. Sales to Anixter primarily originate within the CommScope Connectivity Solutions (CCS) segment. No direct customer accounted for 10% or more of the Company’s accounts receivable as of March 31, 2019.

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 various periods, depending upon the product subject to the warranty and the terms of the individual agreements. 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.

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Product warranty accrual, beginning of period

 

$

15.6

 

 

$

16.9

 

Provision for warranty claims

 

 

(0.5

)

 

 

1.4

 

Warranty claims paid

 

 

(1.0

)

 

 

(2.2

)

Product warranty accrual, end of period

 

$

14.1

 

 

$

16.1

 

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. During the three months ended March 31, 2019, the Company assessed goodwill for impairment due to a change in reporting units in the CCS segment. As a result, the Company performed impairment testing for goodwill under the CCS segment reporting unit structure immediately before the change and determined that no impairment existed. The Company reallocated goodwill to the new reporting units and performed impairment testing for goodwill immediately after the change and determined no impairment existed. There were no goodwill impairments identified during the three months ended March 31, 2019 or 2018.

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 months ended March 31, 2019 or 2018.

8

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, unless otherwise noted)

 

Income Taxes

The Company’s effective income tax rate was (242.6)% for the three months ended March 31, 2019. The Company recorded $1.6 million of income tax expense related to a $0.7 million pre-tax net loss for the period. The pre-tax net loss was driven by interest expense, restructuring costs and transaction and integration costs related to the acquisition of ARRIS International plc (ARRIS) (the Acquisition). Additional income tax expense was recorded as a result of final transition tax regulations issued in the United States (U.S.) during the quarter. The effective income tax rate was also unfavorably affected by losses in certain jurisdictions where the Company did not recognize tax benefits due to the likelihood of those benefits not being realizable. See Notes 2 and 12 for further discussion of the Acquisition and Note 6 for further discussion of the related financing. The impact of excess tax costs related to equity-based compensation awards was not material for the three months ended March 31, 2019.

The effective income tax rate of 27.2% for the three months ended March 31, 2018 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 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 $4.3 million of excess tax benefits related to equity-based compensation awards.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is based on net income (loss) 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 compensation awards were not included in the computation of diluted earnings (loss) per share because the effect was either antidilutive or the performance conditions were not met (5.7 million shares and 0.5 million shares for the three months ended March 31, 2019 and 2018, respectively). Antidilutive securities for the three months ended March 31, 2019 included 2.7 million shares of equity-based awards which would have been considered dilutive if the Company had not been in a net loss position.

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2.3

)

 

$

33.7

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

192.8

 

 

 

191.4

 

Dilutive effect of equity-based awards

 

 

 

 

 

4.1

 

Weighted average common shares outstanding - diluted

 

 

192.8

 

 

 

195.5

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.01

)

 

$

0.18

 

Diluted

 

$

(0.01

)

 

$

0.17

 

9

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, unless otherwise noted)

 

Recent Accounting Pronouncements

Adopted During the Three Months Ended March 31, 2019

On January 1, 2019, the Company adopted ASU No. 2016-02, Leases, and all subsequently issued clarifying guidance. The Company finalized the necessary changes to its accounting policies, processes, internal controls and information systems that were required to meet the new standard’s reporting and disclosure requirements. 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. In July 2018, the FASB issued ASU No. 2018-11, which permitted entities to record the impact of adoption using a modified retrospective method with any cumulative-effect as an adjustment to retained earnings (accumulated deficit) as opposed to restating comparative periods for the effects of applying the new standard. The Company elected this transition approach; therefore, the Company’s prior period reported results are not restated to include the impact of this adoption. In addition, the Company elected the package of three transition practical expedients which alleviate the requirement to reassess embedded leases, lease classification and initial direct costs for leases commencing prior to the adoption date.

The adoption effect of the new guidance increased total assets and total liabilities in the Condensed Consolidated Balance Sheets by $98.8 million as of January 1, 2019 due to the addition of right-of-use assets and lease obligations for operating type leases, net of the elimination of existing prepaid rent, deferred rent and lease termination cost amounts. The adoption of the new standard did not materially affect the Condensed Consolidated Statements of Operations; and therefore, no cumulative effect adjustment was recorded. Adoption of the new standard also did not materially affect the Condensed Consolidated Statements of Cash Flows. See Note 4 for further discussion of the Company’s leasing activities.

On January 1, 2019, the Company adopted ASU No. 2017-04, Simplifying the Test of Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under the new guidance, the Company will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and 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. Adoption of the new standard did not materially affect the Company’s consolidated financial statements.

On January 1, 2019, the Company adopted ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement (CCA) that is a Service Contract. The new guidance aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Adoption of the new standard did not materially impact the Company’s consolidated financial statements.

Issued but Not 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 plans to adopt this guidance as of January 1, 2020 and is evaluating the impact of the new guidance on the consolidated financial statements.

10

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, unless otherwise noted)

 

2. ACQUISITIONS

Pending Acquisition as of March 31, 2019

On November 8, 2018, the Company announced an agreement to acquire ARRIS in an all cash transaction for $31.75 per share. To fund the Acquisition, on February 19, 2019, CommScope Finance LLC, a wholly owned subsidiary of the Company, issued $1.25 billion of 5.50% senior secured notes due 2024 (the 2024 Secured Notes), $1.5 billion of 6.00% senior secured notes due 2026 (the 2026 Secured Notes) and $1.0 billion of 8.25% senior unsecured notes due 2027 (the New Unsecured Notes and, together with the 2024 Secured Notes and the 2026 Secured Notes, the New Notes) and priced the borrowing of $3.2 billion under a new senior secured term loan due 2026 (the 2026 Term Loan) with an interest rate of LIBOR plus 3.25%. The proceeds of the New Notes were held in escrow as of March 31, 2019. See Note 12 for further update on the Acquisition.

3. GOODWILL

The following table presents goodwill by reportable segment:

 

 

 

CCS

 

 

CMS

 

 

Total

 

Goodwill, gross at December 31, 2018

 

$

2,161.6

 

 

$

901.7

 

 

$

3,063.3

 

Foreign exchange and other

 

 

5.8

 

 

 

1.8

 

 

 

7.6

 

Goodwill, gross at March 31, 2019

 

 

2,167.4

 

 

 

903.5

 

 

 

3,070.9

 

Accumulated impairment charges at

   December 31, 2018 and March 31, 2019

 

 

(51.5

)

 

 

(159.5

)

 

 

(211.0

)

Goodwill, net at March 31, 2019

 

$

2,115.9

 

 

$

744.0

 

 

$

2,859.9

 

 

4. LEASES

The Company has operating type leases for real estate, equipment and vehicles in both the U.S. and internationally. As of March 31, 2019, the Company had no finance type leases. The Company’s leases have remaining lease terms of 1 year to 10 years, some of which may include options to extend the leases for up to 5 years or options to terminate the leases within 1 year. Operating lease expense was $12.8 million for the three months ended March 31, 2019 inclusive of period cost for short-term, cancellable and variable leases, not included in lease liabilities, of $3.6 million.

The Company occasionally subleases all or a portion of certain unutilized real estate facilities.  As of March 31, 2019, the Company’s sublease arrangements were classified as operating type leases and the income amounts were not material for the three months ending March 31, 2019.

Supplemental cash flow information related to operating leases:

 

Three Months Ended

 

 

March 31, 2019

 

Operating cash paid to settle lease liabilities

$

9.6

 

Right of use asset additions in exchange for lease liabilities

 

2.4

 

Supplemental balance sheet information related to operating leases:

 

 

 

 

 

Balance Sheet Location

 

March 31,

2019

 

 

Right of use assets

Other noncurrent assets

 

$

97.4

 

 

 

 

 

 

 

 

 

Lease liabilities

Accrued and other liabilities

 

$

29.3

 

 

Lease liabilities

Other noncurrent liabilities

 

 

75.2

 

 

Total lease liabilities

 

 

$

104.5

 

 

11

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, unless otherwise noted)

 

 

Weighted average remaining lease term (in years)

 

4.4

 

Weighted average discount rate

 

5.8

%

Future minimum lease payments under non-cancellable leases as of March 31, 2019:

 

Operating Leases

 

Remainder of 2019

$

27.0

 

2020

 

31.2

 

2021

 

26.5

 

2022

 

14.4

 

2023

 

9.0

 

Thereafter

 

15.1

 

Total minimum lease payments

$

123.2

 

Less: imputed interest

 

(18.7

)

Total

$

104.5

 

 

5. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Disaggregated Net Sales

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

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

CCS

 

 

CMS

 

 

Total

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Contract type: