UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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
(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 |
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Smaller reporting company |
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Emerging growth company |
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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 |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common Stock, par value $0.01 per share |
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The NASDAQ Stock Market |
As of May 2, 2019 there were
CommScope Holding Company, Inc.
Form 10-Q
March 31, 2019
Table of Contents
1
PART 1 -- FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CommScope Holding Company, Inc.
Condensed Consolidated Statements of Operations
(Unaudited – In millions, except per share amounts)
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Three Months Ended |
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March 31, |
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2019 |
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2018 |
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Net sales |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Research and development |
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Amortization of purchased intangible assets |
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Restructuring costs, net |
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Total operating expenses |
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Operating income |
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Other income (expense), net |
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( |
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Interest expense |
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( |
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( |
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Interest income |
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Income (loss) before income taxes |
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Income tax expense |
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Net income (loss) |
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$ |
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$ |
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Earnings (loss) per share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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See notes to unaudited condensed consolidated financial statements.
2
CommScope Holding Company, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited – In millions)
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Three Months Ended |
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March 31, |
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2019 |
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2018 |
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Comprehensive income (loss): |
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Net income (loss) |
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$ |
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$ |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation gain (loss) |
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( |
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Pension and other postretirement benefit activity |
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( |
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( |
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Loss on hedging instruments |
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( |
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( |
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Total other comprehensive income (loss), net of tax |
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( |
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Total comprehensive income (loss) |
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$ |
( |
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$ |
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See notes to unaudited condensed consolidated financial statements.
3
CommScope Holding Company, Inc.
Condensed Consolidated Balance Sheets
(Unaudited - In millions, except share amounts)
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March 31, 2019 |
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December 31, 2018 |
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Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, less allowance for doubtful accounts of $ |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net of accumulated depreciation of $ |
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Goodwill |
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Other intangible assets, net |
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Funds restricted for acquisition |
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— |
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Other noncurrent assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders' Equity |
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Accounts payable |
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$ |
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$ |
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Accrued and other liabilities |
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Total current liabilities |
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Long-term debt |
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Deferred income taxes |
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Other noncurrent liabilities |
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Total liabilities |
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Commitments and contingencies |
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Stockholders' equity: |
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Preferred stock, $ |
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Issued and outstanding shares: |
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Common stock, $ |
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Issued and outstanding shares: |
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respectively |
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Additional paid-in capital |
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Retained earnings (accumulated deficit) |
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( |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
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Treasury stock, at cost: |
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respectively |
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( |
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( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See notes to unaudited condensed consolidated financial statements.
4
CommScope Holding Company, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In millions)
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Three Months Ended |
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March 31, |
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2019 |
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2018 |
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Operating Activities: |
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Net income (loss) |
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$ |
( |
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$ |
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Adjustments to reconcile net income (loss) to net cash generated by (used in) operating activities: |
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Depreciation and amortization |
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Equity-based compensation |
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Deferred income taxes |
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( |
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( |
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Changes in assets and liabilities: |
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Accounts receivable |
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( |
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( |
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Inventories |
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( |
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( |
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Prepaid expenses and other assets |
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( |
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( |
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Accounts payable and other liabilities |
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Other |
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Net cash generated by (used in) operating activities |
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( |
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Investing Activities: |
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Additions to property, plant and equipment |
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( |
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( |
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Proceeds from sale of property, plant and equipment |
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Acquisition funds held in escrow |
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( |
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— |
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Cash paid for acquisitions, including purchase price adjustments, net of cash acquired |
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( |
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— |
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Net cash used in investing activities |
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( |
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( |
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Financing Activities: |
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Long-term debt repaid |
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( |
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— |
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Long-term debt proceeds |
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— |
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Debt issuance costs |
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( |
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— |
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Proceeds from the issuance of common shares under equity-based compensation plans |
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Tax withholding payments for vested equity-based compensation awards |
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( |
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( |
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Net cash generated by (used in) financing activities |
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( |
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Effect of exchange rate changes on cash and cash equivalents |
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Change in cash and cash equivalents |
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( |
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Cash and cash equivalent at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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$ |
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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)
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Three Months Ended |
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March 31, |
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2019 |
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2018 |
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Number of common shares outstanding: |
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Balance at beginning of period |
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Issuance of shares under equity-based compensation plans |
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Shares surrendered under equity-based compensation plans |
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( |
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( |
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Balance at end of period |
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Common stock: |
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Balance at beginning and end of period |
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$ |
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$ |
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Additional paid-in capital: |
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Balance at beginning of period |
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$ |
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$ |
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Issuance of shares under equity-based compensation plans |
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Equity-based compensation |
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Balance at end of period |
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$ |
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$ |
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Retained earnings (accumulated deficit): |
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Balance at beginning of period |
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$ |
( |
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$ |
( |
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Net income (loss) |
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( |
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Cumulative effect of change in accounting principle |
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— |
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Balance at end of period |
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$ |
( |
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$ |
( |
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Accumulated other comprehensive income (loss): |
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Balance at beginning of period |
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$ |
( |
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$ |
( |
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Other comprehensive income (loss), net of tax |
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( |
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Balance at end of period |
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$ |
( |
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$ |
( |
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Treasury stock, at cost: |
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Balance at beginning of period |
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$ |
( |
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$ |
( |
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Net shares surrendered under equity-based compensation plans |
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( |
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( |
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Balance at end of period |
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$ |
( |
) |
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$ |
( |
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Total stockholders' equity |
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$ |
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$ |
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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
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.
The following table summarizes the activity in the product warranty accrual, included in other accrued liabilities:
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Three Months Ended |
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March 31, |
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2019 |
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2018 |
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Product warranty accrual, beginning of period |
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$ |
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$ |
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Provision for warranty claims |
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( |
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Warranty claims paid |
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( |
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( |
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Product warranty accrual, end of period |
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$ |
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$ |
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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
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
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 (
The effective income tax rate of
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 (
The following table presents the basis for the earnings (loss) per share computations (in millions, except per share data):
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Three Months Ended |
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March 31, |
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2019 |
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2018 |
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Numerator: |
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Net income (loss) |
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$ |
( |
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$ |
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Denominator: |
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Weighted average common shares outstanding - basic |
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Dilutive effect of equity-based awards |
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— |
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Weighted average common shares outstanding - diluted |
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Earnings (loss) per share: |
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Basic |
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$ |
( |
) |
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$ |
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Diluted |
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$ |
( |
) |
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$ |
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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 $
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 $
3. GOODWILL
The following table presents goodwill by reportable segment:
|
|
CCS |
|
|
CMS |
|
|
Total |
|
|||
Goodwill, gross at December 31, 2018 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Foreign exchange and other |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross at March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated impairment charges at December 31, 2018 and March 31, 2019 |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Goodwill, net at March 31, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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
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 |
$ |
|
|
Right of use asset additions in exchange for lease liabilities |
|
|
|
Supplemental balance sheet information related to operating leases:
|
|
|
|
|||
|
Balance Sheet Location |
|
March 31, 2019 |
|
|
|
Right of use assets |
Other noncurrent assets |
|
$ |
|
|
|
|
|
|
|
|
|
|
Lease liabilities |
Accrued and other liabilities |
|
$ |
|
|
|
Lease liabilities |
Other noncurrent liabilities |
|
|
|
|
|
Total lease liabilities |
|
|
$ |
|
|
|
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 |
|
|
% |
Future minimum lease payments under non-cancellable leases as of March 31, 2019:
|
Operating Leases |
|
|
Remainder of 2019 |
$ |
|
|
2020 |
|
|
|
2021 |
|
|
|
2022 |
|
|
|
2023 |
|
|
|
Thereafter |
|
|
|
Total minimum lease payments |
$ |
|
|
Less: imputed interest |
|
( |
) |
Total |
$ |
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product contracts |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|