comm-10q_20170331.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 March 31, 2017

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 small reporting company)

  

Small 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 April 27, 2017 there were 192,893,254 shares of Common Stock outstanding.

 

 

 


CommScope Holding Company, Inc.

Form 10-Q

March 31, 2017

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

24

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

36

 

 

Item 4. Controls and Procedures

37

 

 

Part II—Other Information:

 

 

 

Item 1. Legal Proceedings

38

 

 

Item 1A. Risk Factors

38

 

 

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

38

 

 

Item 3. Defaults Upon Senior Securities

38

 

 

Item 4. Mine Safety Disclosures

38

 

 

Item 5. Other Information

38

 

 

Item 6. Exhibits

39

 

 

Signatures

40

 

 

 

1

 


Part 1 -- Financial Information (Unaudited)

ITEM 1.  Condensed Consolidated Financial Statements

 

CommScope Holding Company, Inc.

 

Condensed Consolidated Statements of Operations

 

and Comprehensive Income

 

(Unaudited -- In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net sales

 

$

1,137,285

 

 

$

1,143,979

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

Cost of sales

 

 

682,459

 

 

 

696,888

 

Selling, general and administrative

 

 

211,554

 

 

 

209,197

 

Research and development

 

 

48,895

 

 

 

52,190

 

Amortization of purchased intangible assets

 

 

67,638

 

 

 

73,616

 

Restructuring costs, net

 

 

5,388

 

 

 

6,072

 

Asset impairments

 

 

 

 

 

15,293

 

Total operating costs and expenses

 

 

1,015,934

 

 

 

1,053,256

 

Operating income

 

 

121,351

 

 

 

90,723

 

Other income (expense), net

 

 

(16,736

)

 

 

301

 

Interest expense

 

 

(69,554

)

 

 

(72,562

)

Interest income

 

 

874

 

 

 

2,579

 

Income before income taxes

 

 

35,935

 

 

 

21,041

 

Income tax expense

 

 

(2,373

)

 

 

(8,461

)

Net income

 

$

33,562

 

 

$

12,580

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

 

$

0.07

 

Diluted

 

$

0.17

 

 

$

0.06

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

194,068

 

 

 

191,642

 

Diluted

 

 

199,140

 

 

 

195,456

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

Net income

 

$

33,562

 

 

$

12,580

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation gain

 

 

40,351

 

 

 

46,284

 

Pension and other postretirement benefit activity

 

 

(369

)

 

 

(731

)

Loss on net investment hedge

 

 

(355

)

 

 

 

Available-for-sale securities

 

 

1,309

 

 

 

(723

)

Total other comprehensive income, net of tax

 

 

40,936

 

 

 

44,830

 

Total comprehensive income

 

$

74,498

 

 

$

57,410

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

2

 


CommScope Holding Company, Inc.

Condensed Consolidated Balance Sheets

(Unaudited - In thousands, except share amounts)

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

437,637

 

 

$

428,228

 

Accounts receivable, less allowance for doubtful accounts of

   $18,103 and $17,211, respectively

 

 

941,274

 

 

 

952,367

 

Inventories, net

 

 

498,087

 

 

 

473,267

 

Prepaid expenses and other current assets

 

 

155,165

 

 

 

139,902

 

Total current assets

 

 

2,032,163

 

 

 

1,993,764

 

Property, plant and equipment, net of accumulated depreciation

   of $322,903 and $303,734, respectively

 

 

474,066

 

 

 

474,990

 

Goodwill

 

 

2,779,416

 

 

 

2,768,304

 

Other intangible assets, net

 

 

1,740,199

 

 

 

1,799,065

 

Other noncurrent assets

 

 

106,980

 

 

 

105,863

 

Total assets

 

$

7,132,824

 

 

$

7,141,986

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

453,339

 

 

$

415,921

 

Other accrued liabilities

 

 

380,924

 

 

 

429,397

 

Current portion of long-term debt

 

 

 

 

 

12,500

 

Total current liabilities

 

 

834,263

 

 

 

857,818

 

Long-term debt

 

 

4,567,418

 

 

 

4,549,510

 

Deferred income taxes

 

 

184,504

 

 

 

199,121

 

Pension and other postretirement benefit liabilities

 

 

30,501

 

 

 

31,671

 

Other noncurrent liabilities

 

 

112,115

 

 

 

109,782

 

Total liabilities

 

 

5,728,801

 

 

 

5,747,902

 

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: 193,466,488 and 193,837,437,

 

 

 

 

 

 

 

 

respectively

 

 

1,966

 

 

 

1,950

 

Additional paid-in capital

 

 

2,297,414

 

 

 

2,282,014

 

Retained earnings (accumulated deficit)

 

 

(556,200

)

 

 

(589,556

)

Accumulated other comprehensive loss

 

 

(244,177

)

 

 

(285,113

)

Treasury stock, at cost: 3,155,802 shares and 1,129,222 shares,

 

 

 

 

 

 

 

 

respectively

 

 

(94,980

)

 

 

(15,211

)

Total stockholders' equity

 

 

1,404,023

 

 

 

1,394,084

 

Total liabilities and stockholders' equity

 

$

7,132,824

 

 

$

7,141,986

 

 

See notes to unaudited condensed consolidated financial statements.

 

3

 


CommScope Holding Company, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited - In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

33,562

 

 

$

12,580

 

Adjustments to reconcile net income to net cash generated by

  operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

100,401

 

 

 

96,938

 

Equity-based compensation

 

 

9,412

 

 

 

8,835

 

Deferred income taxes

 

 

(16,444

)

 

 

(10,440

)

Asset impairments

 

 

 

 

 

15,293

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

19,683

 

 

 

(58,760

)

Inventories

 

 

(19,132

)

 

 

(9,863

)

Prepaid expenses and other assets

 

 

(12,314

)

 

 

(6,378

)

Accounts payable and other liabilities

 

 

(28,032

)

 

 

73,019

 

Other

 

 

15,653

 

 

 

(1,751

)

Net cash generated by operating activities

 

 

102,789

 

 

 

119,473

 

Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(12,910

)

 

 

(14,472

)

Proceeds from sale of property, plant and equipment

 

 

355

 

 

 

3,684

 

Cash paid for acquisitions including purchase price adjustments, net of

   cash acquired

 

 

 

 

 

15,355

 

Other

 

 

639

 

 

 

474

 

Net cash generated by (used in) investing activities

 

 

(11,916

)

 

 

5,041

 

Financing Activities:

 

 

 

 

 

 

 

 

Long-term debt repaid

 

 

(750,000

)

 

 

(3,146

)

Long-term debt proceeds

 

 

750,000

 

 

 

 

Debt issuance costs

 

 

(6,115

)

 

 

 

Debt extinguishment costs

 

 

(14,800

)

 

 

 

Cash paid for repurchase of common stock

 

 

(58,770

)

 

 

 

Proceeds from the issuance of common shares under equity-based

   compensation plans

 

 

5,805

 

 

 

1,490

 

Tax withholding payments for vested equity-based compensation

  awards

 

 

(14,758

)

 

 

(2,721

)

Net cash used in financing activities

 

 

(88,638

)

 

 

(4,377

)

Effect of exchange rate changes on cash and cash equivalents

 

 

7,174

 

 

 

5,347

 

Change in cash and cash equivalents

 

 

9,409

 

 

 

125,484

 

Cash and cash equivalent at beginning of period

 

 

428,228

 

 

 

562,884

 

Cash and cash equivalents at end of period

 

$

437,637

 

 

$

688,368

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Number of common shares outstanding:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

193,837,437

 

 

 

191,368,727

 

Issuance of shares under equity-based compensation plans

 

 

1,655,631

 

 

 

602,628

 

Shares surrendered under equity-based compensation plans

 

 

(393,594

)

 

 

(107,809

)

Repurchase of common stock

 

 

(1,632,986

)

 

 

 

Balance at end of period

 

 

193,466,488

 

 

 

191,863,546

 

Common stock:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,950

 

 

$

1,923

 

Issuance of shares under equity-based compensation plans

 

 

16

 

 

 

6

 

Balance at end of period

 

$

1,966

 

 

$

1,929

 

Additional paid-in capital:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

2,282,014

 

 

$

2,216,202

 

Issuance of shares under equity-based compensation plans

 

 

5,789

 

 

 

1,483

 

Equity-based compensation

 

 

9,316

 

 

 

8,792

 

Cumulative effect of change in accounting principle

 

 

295

 

 

 

 

Tax benefit from shares issued under equity-based compensation plans

 

 

 

 

 

764

 

Balance at end of period

 

$

2,297,414

 

 

$

2,227,241

 

Retained earnings (accumulated deficit):

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(589,556

)

 

$

(812,394

)

Net income

 

 

33,562

 

 

 

12,580

 

Cumulative effect of change in accounting principle

 

 

(206

)

 

 

 

Balance at end of period

 

$

(556,200

)

 

$

(799,814

)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(285,113

)

 

$

(171,678

)

Other comprehensive income, net of tax

 

 

40,936

 

 

 

44,830

 

Balance at end of period

 

$

(244,177

)

 

$

(126,848

)

Treasury stock, at cost:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(15,211

)

 

$

(11,333

)

Net shares surrendered under equity-based compensation plans

 

 

(14,758

)

 

 

(2,721

)

Repurchase of common stock

 

 

(65,011

)

 

 

 

Balance at end of period

 

$

(94,980

)

 

$

(14,054

)

Total stockholders' equity

 

$

1,404,023

 

 

$

1,288,454

 

 

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 March 31, 2017 and the Condensed Consolidated Statements of Operations and Comprehensive Income, Cash Flows and Stockholders’ Equity for the three months ended March 31, 2017 and 2016 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. 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, 2016 (the 2016 Annual Report). There were no changes in the Company’s significant accounting policies during the three months ended March 31, 2017. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements.

Prior to January 1, 2017, the Company consolidated the operating results of the acquired BNS business based on the BNS fiscal reporting calendar that resulted in a reporting lag of one day for the year ended December 31, 2016. Effective January 1, 2017, the reporting lag was eliminated as a result of system conversions that were part of the BNS integration. The elimination of the reporting lag represents a change in accounting principle which the Company believes to be preferable because it provides more current information to the users of its financial statements. The Company determined that it was impracticable to apply the effects of the lag elimination to financial reporting periods prior to January 1, 2017. The cumulative effect of not retroactively applying this change in accounting, however, was immaterial as of January 1, 2017. Therefore, the Company reported the cumulative effect of the change in accounting principle in net income for the three months ended March 31, 2017 and did not retrospectively apply the effects of this change to prior periods.

Concentrations of Risk and Related Party Transactions

Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 10% and 11% of the Company’s total net sales during the three months ended March 31, 2017 and 2016, respectively. Sales to Anixter primarily originate within the CommScope Connectivity Solutions (CCS) segment. Other than Anixter, no other direct customer accounted for 10% or more of the Company’s total net sales for the three months ended March 31, 2017 or 2016.

Accounts receivable from Verizon Communications Inc. (Verizon) represented approximately 10% of accounts receivable as of March 31, 2017. Other than Verizon, no direct customer accounted for 10% or more of the Company’s accounts receivable as of March 31, 2017.

 

6

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

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.

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Product warranty accrual, beginning of period

 

$

21,631

 

 

$

17,964

 

Provision for warranty claims

 

 

2,202

 

 

 

2,051

 

Warranty claims paid

 

 

(3,618

)

 

 

(2,104

)

Foreign exchange

 

 

(35

)

 

 

(222

)

Product warranty accrual, end of period

 

$

20,180

 

 

$

17,689

 

Commitments and Contingencies

The Company is either a plaintiff or a defendant in certain pending legal matters in the normal course of business. 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 first quarter of 2016, the Company recorded a $15.3 million goodwill impairment charge as a result of the change in its reportable segments. The impairment was recorded in the CCS segment.

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. Other than the goodwill impairment described above, there were no asset impairments identified during the three months ended March 31, 2017 or 2016.

7

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

Income Taxes

The effective income tax rate of 6.6% for the three months ended March 31, 2017 was significantly lower than the statutory rate of 35.0% primarily due to the favorable impact of $8.7 million of excess tax benefits related to equity-based compensation awards. Such benefits, which were previously reflected in additional paid-in capital, are now recognized in income tax expense as a result of the adoption of Accounting Standards Update (ASU) No. 2016-09. See the discussion under Recent Accounting Pronouncements for further information regarding the adoption of this new accounting guidance. The effective income tax rate was also favorably affected by the impact of earnings in foreign jurisdictions that the Company does not plan to repatriate. These earnings are generally taxed at rates lower than the United States (U.S.) statutory rate. Offsetting these decreases for the three months ended March 31, 2017 was the effect of the provision for state income taxes.

The effective income tax rate of 40.2% for the three months ended March 31, 2016 was higher than the statutory rate of 35.0% primarily due to the impact of the goodwill impairment charge for which only partial tax benefits were recorded. In addition, the effective income tax rate was also affected by the provision for state income taxes as well as losses in certain jurisdictions where the Company did not recognize tax benefits due to the likelihood of them not being realizable. These increases to the effective income tax rate were partially offset by the impact of earnings in foreign jurisdictions that the Company does not plan to repatriate, which are generally taxed at rates lower than the U.S. statutory rate.

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 (0.4 million shares and 2.2 million shares for the three months ended March 31, 2017 and 2016, respectively). During the three months ended March 31, 2017, the Company repurchased 1.6 million shares of its common stock to reduce dilution from grants under its equity-based award programs. See Note 11 for more information on the share repurchase program.

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

Net income for basic and diluted earnings per share

 

$

33,562

 

 

$

12,580

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

194,068

 

 

 

191,642

 

Dilutive effect of equity-based awards

 

 

5,072

 

 

 

3,814

 

Weighted average common shares outstanding - diluted

 

 

199,140

 

 

 

195,456

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

 

$

0.07

 

Diluted

 

$

0.17

 

 

$

0.06

 

 

 

8

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

Recent Accounting Pronouncements

Adopted During the Three Months Ended March 31, 2017

The Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting on January 1, 2017. The new standard simplifies several aspects of the accounting for employee equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Beginning January 1, 2017, the Company recognized all excess tax benefits in income tax expense. An income tax benefit of $8.7 million was recognized for the three months ended March 31, 2017 under ASU No. 2016-09. The Company recognized a $0.2 million, net of tax, cumulative effect adjustment to retained earnings as a result of its election to change its accounting policy to account for forfeitures as they occur. The impact of the adoption of ASU No. 2016-09 to the Condensed Consolidated Statements of Cash Flows was to present excess tax benefits or deficiencies as an operating activity rather than as a financing activity. The Company elected to present the impact on the Condensed Consolidated Statements of Cash Flows retrospectively; therefore, the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2016 reflects an increase to both net cash generated by operating activities and net cash used in financing activities of $1.4 million.

The Company also adopted ASU No. 2016-15, Cash Flow Classification of Certain Cash Receipts and Cash Payments, as of January 1, 2017. This guidance amends or clarifies guidance on classification of certain transactions in the statement of cash flows, including classification of debt extinguishment costs and contingent consideration payments after a business combination. During the three months ended March 31, 2017, the impact of adoption on the Company’s Condensed Consolidated Statements of Cash Flows was to present $14.8 million of debt redemption premium paid as a financing activity. The provisions of this new standard are required to be applied retrospectively; however, there were no impacted cash flow items during the three months ended March 31, 2016.

Issued but Not Adopted

In March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an employer to report the service cost component in the same line item as other compensation costs arising from services rendered by the employee and requires the other components of net benefit cost to be reported outside the subtotal of operating income. ASU No. 2017-07 is effective for the Company as of January 1, 2018 and must be applied retrospectively. While the Company is evaluating the impact of the new guidance on the consolidated financial statements, it expects the application of this new guidance to decrease operating income. For details on the components of the Company’s annual net periodic benefit cost, see Note 10 to the Company’s audited consolidated financial statements included in the Company’s 2016 Annual Report.

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 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.

9

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which 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. The guidance is effective for the Company as of January 1, 2018 and, with the exception of certain provisions, early adoption is not permitted. The Company is evaluating the impact of the new guidance on the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The new accounting standard defines a single comprehensive model in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the ASU is to recognize revenues 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 will be required to adopt the new standard, including subsequently issued clarifying guidance, as of January 1, 2018 using either: (i) full retrospective application to each prior reporting period presented; or (ii) modified retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional required disclosures. The Company plans to adopt the new accounting model as of January 1, 2018 using the modified retrospective method.

The Company has completed an impact assessment and determined that adoption of the standard will likely result in changes to revenue recognition related to the timing of when revenues are recognized for contracts containing multiple performance obligations. These contract revenues are currently accounted for using the multi-element guidance and are primarily for metro cell, DAS and small cell solutions within the CommScope Mobility Solutions (CMS) segment. Due to the short-term nature of most of the contracts, the ultimate impact to the Company’s consolidated financial statements will be based on customer-specific contract terms in effect at adoption and could be material.

The Company is in the process of implementing the necessary changes to its accounting policies, processes, internal controls and information systems that will be required to meet the new standard’s reporting and disclosure requirements.

2. ACQUISITIONS

On August 28, 2015, the Company acquired TE Connectivity’s BNS business for approximately $3.0 billion in an all-cash transaction. During the three months ended March 31, 2016, the Company received $15.4 million in net settlements for certain adjustments related to the BNS acquisition. Also during the three months ended March 31, 2016, the Company recorded measurement period adjustments primarily related to the finalization of the valuation of inventory, intangible assets, plant and equipment, pension liabilities and deferred taxes. The impact of these measurement period adjustments were not material to the Company’s results.

3. GOODWILL

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

 

 

 

CCS

 

 

CMS

 

 

Total

 

Goodwill, gross at December 31, 2016

 

$

2,077.5

 

 

$

901.8

 

 

$

2,979.3

 

Foreign exchange

 

 

9.8

 

 

 

1.3

 

 

 

11.1

 

Goodwill, gross at March 31, 2017

 

 

2,087.3

 

 

 

903.1

 

 

 

2,990.4

 

Accumulated impairment charges at December 31, 2016

   and March 31, 2017

 

 

(51.5

)

 

 

(159.5

)

 

 

(211.0

)

Goodwill, net at March 31, 2017

 

$

2,035.8

 

 

$

743.6

 

 

$

2,779.4

 

 

10

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Inventories

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Raw materials

 

$

124,639

 

 

$

126,027

 

Work in process

 

 

124,519

 

 

 

135,848

 

Finished goods

 

 

248,929

 

 

 

211,392

 

 

 

$

498,087

 

 

$

473,267

 

 

Other Accrued Liabilities

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Compensation and employee benefit liabilities

 

$

98,428

 

 

$

169,923

 

Deferred revenue

 

 

29,517

 

 

 

25,859

 

Product warranty accrual

 

 

20,180

 

 

 

21,631

 

Accrued interest

 

 

48,903

 

 

 

8,586

 

Restructuring reserve

 

 

27,098

 

 

 

30,438

 

Income taxes payable

 

 

52,962

 

 

 

49,984

 

Value-added taxes payable

 

 

13,691

 

 

 

14,885

 

Accrued professional fees

 

 

11,300

 

 

 

10,621

 

Other

 

 

78,845

 

 

 

97,470

 

 

 

$

380,924

 

 

$

429,397

 

11

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

Accumulated Other Comprehensive Loss

The following table presents changes in accumulated other comprehensive income (AOCI), net of tax, and accumulated other comprehensive loss (AOCL), net of tax:

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Foreign currency translation

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(254,148

)

 

$

(160,620

)

Other comprehensive income

 

 

40,084

 

 

 

46,284

 

Amounts reclassified from AOCL

 

 

267

 

 

 

 

Balance at end of period

 

$

(213,797

)

 

$

(114,336

)

 

 

 

 

 

 

 

 

 

Defined benefit plan activity

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(33,473

)

 

$

(17,567

)

Amounts reclassified from AOCL

 

 

(369

)

 

 

(731

)

Balance at end of period

 

$

(33,842

)

 

$

(18,298

)

 

 

 

 

 

 

 

 

 

Net investment hedge

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

 

 

$

 

Other comprehensive loss

 

 

(355

)

 

 

 

Balance at end of period

 

$

(355

)

 

$

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

2,508

 

 

$

6,509

 

Other comprehensive income (loss)

 

 

1,698

 

 

 

(494

)

Amounts reclassified from AOCI

 

 

(389

)

 

 

(229

)

Balance at end of period

 

$

3,817

 

 

$

5,786

 

Net AOCL at end of period

 

$

(244,177

)

 

$

(126,848

)

Amounts reclassified from net AOCL related to foreign currency translation and available-for-sale securities are recorded in other income (expense), net in the Condensed Consolidated Statements of Operations and Comprehensive Income. Defined benefit plan amounts reclassified from net AOCL are included in the computation of net periodic benefit cost (income) and are primarily recorded in cost of sales and selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.

Cash Flow Information

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes, net of refunds

 

$

17,006

 

 

$

15,087

 

Interest

 

$

16,643

 

 

$

16,057

 

 

12

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

5. FINANCING

 

 

 

March 31, 2017

 

 

December 31, 2016

 

5.00% senior notes due March 2027

 

$

750,000

 

 

$

 

6.00% senior notes due June 2025

 

 

1,500,000

 

 

 

1,500,000

 

5.50% senior notes due June 2024

 

 

650,000

 

 

 

650,000

 

5.00% senior notes due June 2021

 

 

650,000

 

 

 

650,000

 

4.375% senior secured notes due June 2020

 

 

 

 

 

500,000

 

Senior secured term loan due December 2022

 

 

1,096,250

 

 

 

1,234,375

 

Senior secured term loan due January 2018

 

 

 

 

 

111,875

 

Senior secured revolving credit facility expires May 2020

 

 

 

 

 

 

Total principal amount of debt

 

$

4,646,250

 

 

$

4,646,250

 

Less: Original issue discount, net of amortization

 

 

(4,756

)

 

 

(5,857

)

Less: Debt issuance costs, net of amortization

 

 

(74,076

)

 

 

(78,383

)

Less: Current portion

 

 

 

 

 

(12,500

)

Total long-term debt

 

$

4,567,418

 

 

$

4,549,510

 

 

See Note 6 in the Notes to Consolidated Financial Statements in the 2016 Annual Report for additional information on the terms and conditions of the 6.00% senior notes (the 2025 Notes), the 5.50% senior notes (the 2024 Notes), the 5.00% senior notes (the 2021 Notes), the 4.375% senior secured notes (the 2020 Notes) and the senior secured term loans and credit facility.

5.00% Senior Notes Due 2027

In March 2017, CommScope Technologies LLC (CommScope Technologies), a wholly owned subsidiary of the Company, issued $750.0 million of 5.00% Senior Notes due March 15, 2027 (the 2027 Notes). Interest is payable on the 2027 Notes semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2017. The Company used the proceeds of the issuance of the 2027 Notes, together with cash on hand, to (i) redeem all of the 2020 Notes, (ii) repay a portion of the outstanding borrowings under its senior secured term loans, including all $111.9 million of outstanding principal on the senior secured term loan due 2018 and $138.1 million of outstanding principal on the senior secured term loan due 2022, and (iii) pay related fees and expenses. The redemption of the 2020 Notes resulted in a $14.8 million charge which is reflected in other income (expense), net. In connection with the redemption of the 2020 Notes and prepayments of the senior secured term loans, $9.6 million of debt issuance costs and original issue discount were written off and included in interest expense.

CommScope, Inc., a wholly owned subsidiary of the Company, and each of CommScope, Inc.’s existing and future domestic subsidiaries (other than CommScope Technologies) that guarantee the senior secured credit facilities also guarantees the 2027 Notes on a senior unsecured basis, subject to certain exceptions. The 2027 Notes rank senior in right of payment with all of CommScope Technologies’ and the guarantors’ future subordinated indebtedness and equally in right of payment with all of CommScope Technologies’ and the guarantors’ existing and future senior indebtedness, including the senior secured credit facilities, the 2025 Notes, the 2024 Notes and the 2021 Notes. The 2027 Notes and guarantees are effectively junior to all of CommScope Technologies’ and the guarantors’ existing and future secured indebtedness, including the senior secured credit facilities, to the extent of the value of the assets securing such secured indebtedness. In addition, the 2027 Notes are structurally subordinated to all existing and future liabilities (including trade payables) of CommScope, Inc.’s subsidiaries that do not guarantee the 2027 Notes, including indebtedness incurred by certain of CommScope, Inc.’s non-U.S. subsidiaries under the revolving credit facility.

The 2027 Notes may be redeemed prior to maturity under certain circumstances. Upon certain change of control events, the 2027 Notes may be redeemed at the option of the holders at 101% of their principal amount, plus accrued and unpaid interest. The 2027 Notes may be redeemed on or after March 15, 2022 at the redemption prices specified in the indenture governing the 2027 Notes. Prior to March 15, 2022, the 2027 Notes may be redeemed at a redemption price equal to 100% of the aggregate principal amount of the 2027 Notes to be redeemed, plus a make-whole premium (as specified in the indenture governing the 2027 Notes), plus accrued and unpaid interest. At any time prior to March 15, 2020, CommScope Technologies may also redeem up to 40% of the aggregate principal amount of the 2027 Notes at a redemption price of 105%, plus accrued and unpaid interest, using the proceeds of certain equity offerings.

13

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

In connection with issuing the 2027 Notes, the Company paid $6.1 million of debt issuance costs during the three months ended March 31, 2017, which was recorded as a reduction of the carrying amount of the debt and is being amortized over the term of the notes. 

Senior Secured Credit Facilities

No portion of the senior secured term loan was reflected as a current portion of long-term debt as of March 31, 2017 related to the potentially required excess cash flow payment because the amount that may be payable in 2018, if any, cannot currently be reliably estimated. There was no excess cash flow payment required in 2017 related to 2016.

During the three months ended March 31, 2017, the Company did not borrow under its revolving credit facility. As of March 31, 2017, the Company had availability of approximately $409.4 million under the asset-based revolving credit facility, after giving effect to borrowing base limitations and outstanding letters of credit.

Other Matters

The following table summarizes scheduled maturities of long-term debt as of March 31, 2017 (in millions):

 

 

Remainder

of 2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

Scheduled maturities of long-term debt

 

$

 

 

$

 

 

$

 

 

$

 

 

$

650.0

 

 

$

3,996.3

 

The Company’s non-guarantor subsidiaries held $2,641 million, or 37%, of total assets and $603 million, or 11%, of total liabilities as of March 31, 2017 and accounted for $440 million, or 39%, of net sales for the three months ended March 31, 2017. As of December 31, 2016, the non-guarantor subsidiaries held $2,211 million, or 31%, of total assets and $615 million, or 11%, of total liabilities. For the three months ended March 31, 2016, the non-guarantor subsidiaries accounted for approximately $500 million, or 44%, of net sales. All amounts presented exclude intercompany balances.

The weighted average effective interest rate on outstanding borrowings, including the amortization of debt issuance costs and original issue discount, was 5.39% and 5.24% at March 31, 2017 and December 31, 2016, respectively.

 

6. DERIVATIVES AND HEDGING ACTIVITIES

Derivatives Not Designated As Hedging Instruments

The Company uses forward contracts to hedge a portion of its balance sheet foreign exchange re-measurement risk and to hedge certain planned foreign currency expenditures. As of March 31, 2017, the Company had foreign exchange contracts outstanding with maturities of up to twelve months and aggregate notional values of $455 million (based on exchange rates as of March 31, 2017). Unrealized gains and losses resulting from these contracts are recognized in other income (expense), net and partially offset corresponding foreign exchange gains and losses on the balances and expenditures being hedged. These instruments are not held for speculative or trading purposes and are not designated as hedges for hedge accounting and are marked to market each period through earnings.

The following table presents the balance sheet location and fair value of the Company’s derivatives not designated as hedging instruments:

 

 

 

 

Fair Value of Asset (Liability)

 

 

 

Balance Sheet Location

 

March 31,

2017

 

 

December 31,

2016

 

Foreign currency contracts

 

Prepaid expenses and other current assets

 

$

733

 

 

$

289

 

Foreign currency contracts

 

Other accrued liabilities

 

 

(2,567

)

 

 

(8,349

)

Total derivatives not designated as

   hedging instruments

 

 

 

$

(1,834

)

 

$

(8,060

)

14

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

 

The pretax impact of these foreign currency forward contracts, both matured and outstanding, on the Condensed Consolidated Statements of Operations and Comprehensive Income is as follows:

Foreign Currency Forward Contracts

 

Location of Gain

 

Gain

Recognized

 

Three Months Ended March 31, 2017

 

Other income (expense), net

 

$

1,855

 

Three Months Ended March 31, 2016

 

Other income (expense), net

 

$

1,163

 

Derivative Instruments Designated As Net Investment Hedge

During the three months ended March 31, 2017, the Company entered into foreign exchange forward contracts that are designated as net investment hedges and are intended to mitigate a portion of the foreign currency risk on the Euro net investment in a foreign subsidiary. As of March 31, 2017, the Company had designated forward contracts with outstanding maturities of nine months and aggregate notional values of $74.5 million (based on exchange rates as of March 31, 2017).

Hedge effectiveness is assessed each quarter based on the net investment in the foreign subsidiary designated as the hedged item and the overall changes in the fair value of the forward contracts. For hedges that meet the effectiveness requirements, changes in fair value are recorded as a component of other comprehensive income, net of tax. Any change in fair value that is the result of ineffectiveness is recognized immediately in earnings. As of March 31, 2017, there was no ineffectiveness on the instruments designated as net investment hedges.

The following table presents the balance sheet location and fair value of the derivatives designated as net investment hedges:

 

 

 

 

Fair Value of Asset (Liability)

 

 

 

Balance Sheet Location

 

March 31,

2017

 

 

December 31,

2016

 

Foreign currency contracts

 

Prepaid expenses and other current assets

 

$

23

 

 

$

 

Foreign currency contracts

 

Other accrued liabilities

 

 

(595

)

 

 

 

Total derivatives designated as net

   investment hedging instruments

 

 

 

$

(572

)

 

$

 

 

The after tax impact of the effective portion of the foreign currency forward contracts designated as net investment hedging instruments on the Condensed Consolidated Statements of Operations and Comprehensive Income is as follows:

Foreign Currency Forward Contracts

 

Location of Loss

 

Effective Portion

of Loss

Recognized

 

Three Months Ended March 31, 2017

 

Other comprehensive income, net of tax

 

$

(355

)

Three Months Ended March 31, 2016

 

Other comprehensive income, net of tax

 

 

 

 

15

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

7. FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, available-for-sale securities, debt instruments and foreign currency contracts. For cash and cash equivalents, trade receivables and trade payables, the carrying amounts of these financial instruments as of March 31, 2017 and December 31, 2016 were considered representative of their fair values due to their short terms to maturity. The fair value of the Company’s available-for-sale securities was based on quoted market prices. The fair values of the Company’s debt instruments and foreign currency contracts were based on indicative quotes.

Fair value measurements using quoted prices in active markets for identical assets and liabilities fall within Level 1 of the fair value hierarchy, measurements using significant other observable inputs fall within Level 2, and measurements using significant unobservable inputs fall within Level 3.

The carrying amounts, estimated fair values and valuation input levels of the Company’s available-for-sale securities, foreign currency contracts and debt instruments as of March 31, 2017 and December 31, 2016, are as follows: