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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, 2020

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)

 

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

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  

As of April 27, 2020 there were 195,874,638 shares of Common Stock outstanding.

 

 

 


CommScope Holding Company, Inc.

Form 10-Q

March 31, 2020

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 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

 

26

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

Item 4. Controls and Procedures

 

41

 

 

 

Part II—Other Information:

 

 

 

 

 

Item 1. Legal Proceedings

 

42

 

 

 

Item 1A. Risk Factors

 

42

 

 

 

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

 

43

 

 

 

Item 3. Defaults Upon Senior Securities

 

43

 

 

 

Item 4. Mine Safety Disclosures

 

43

 

 

 

Item 5. Other Information

 

44

 

 

 

Item 6. Exhibits

 

45

 

 

 

Signatures

 

46

 

 

 

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,

 

 

2020

 

 

2019

 

Net sales

$

2,033.2

 

 

$

1,099.5

 

Cost of sales

 

1,392.0

 

 

 

701.5

 

Gross profit

 

641.2

 

 

 

398.0

 

Operating expenses:

 

 

 

 

 

 

 

Selling, general and administrative

 

311.1

 

 

 

185.4

 

Research and development

 

180.4

 

 

 

50.2

 

Amortization of purchased intangible assets

 

157.8

 

 

 

59.3

 

Restructuring costs, net

 

23.7

 

 

 

12.4

 

Total operating expenses

 

673.0

 

 

 

307.3

 

Operating income (loss)

 

(31.8

)

 

 

90.7

 

Other expense, net

 

(12.5

)

 

 

(5.7

)

Interest expense

 

(149.1

)

 

 

(97.5

)

Interest income

 

2.1

 

 

 

11.8

 

Loss before income taxes

 

(191.3

)

 

 

(0.7

)

Income tax (expense) benefit

 

31.4

 

 

 

(1.6

)

Net loss

 

(159.9

)

 

 

(2.3

)

Series A convertible preferred stock dividend

 

(13.8

)

 

 

 

Net loss attributable to common stockholders

$

(173.7

)

 

$

(2.3

)

 

 

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

 

 

Basic

$

(0.89

)

 

$

(0.01

)

Diluted

$

(0.89

)

 

$

(0.01

)

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Basic

 

194.9

 

 

 

192.8

 

Diluted

 

194.9

 

 

 

192.8

 

 

See notes to unaudited condensed consolidated financial statements.

2

 


CommScope Holding Company, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited – In millions)

 

 

Three Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

Comprehensive loss:

 

 

 

 

 

 

 

Net loss

$

(159.9

)

 

$

(2.3

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

Foreign currency translation loss

 

(99.6

)

 

 

(9.7

)

Pension and other postretirement benefit activity

 

(0.5

)

 

 

(0.1

)

Loss on hedging instruments

 

(7.6

)

 

 

(1.5

)

Total other comprehensive loss, net of tax

 

(107.7

)

 

 

(11.3

)

Total comprehensive loss

$

(267.6

)

 

$

(13.6

)

 

See notes to unaudited condensed consolidated financial statements.

3

 


CommScope Holding Company, Inc.

Condensed Consolidated Balance Sheets

(In millions, except share amounts)

 

 

 

Unaudited

 

 

 

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

394.3

 

 

$

598.2

 

Accounts receivable, less allowance for doubtful accounts of

   $40.0 and $35.4, respectively

 

 

1,604.0

 

 

 

1,698.8

 

Inventories, net

 

 

909.4

 

 

 

975.9

 

Prepaid expenses and other current assets

 

 

238.1

 

 

 

238.9

 

Total current assets

 

 

3,145.8

 

 

 

3,511.8

 

Property, plant and equipment, net of accumulated depreciation

   of $585.0 and $553.8, respectively

 

 

693.5

 

 

 

723.8

 

Goodwill

 

 

5,424.6

 

 

 

5,471.7

 

Other intangible assets, net

 

 

4,096.4

 

 

 

4,263.6

 

Other noncurrent assets

 

 

512.5

 

 

 

460.7

 

Total assets

 

$

13,872.8

 

 

$

14,431.6

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

974.0

 

 

$

1,148.0

 

Accrued and other liabilities

 

 

846.9

 

 

 

862.0

 

Current portion of long-term debt

 

 

32.0

 

 

 

32.0

 

Total current liabilities

 

 

1,852.9

 

 

 

2,042.0

 

Long-term debt

 

 

9,698.7

 

 

 

9,800.4

 

Deferred income taxes

 

 

206.9

 

 

 

215.1

 

Other noncurrent liabilities

 

 

527.1

 

 

 

537.8

 

Total liabilities

 

 

12,285.6

 

 

 

12,595.3

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Series A convertible preferred stock, $0.01 par value

 

 

1,013.8

 

 

 

1,000.0

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: Authorized shares: 200,000,000;

 

 

 

 

 

 

 

 

Issued and outstanding shares: 1,013,750 Series A convertible preferred stock

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Issued and outstanding shares: 195,807,913 and 194,563,530,

 

 

 

 

 

 

 

 

respectively

 

 

2.0

 

 

 

2.0

 

Additional paid-in capital

 

 

2,455.7

 

 

 

2,445.1

 

Retained earnings (accumulated deficit)

 

 

(1,339.2

)

 

 

(1,179.3

)

Accumulated other comprehensive loss

 

 

(304.7

)

 

 

(197.0

)

Treasury stock, at cost: 7,981,297 shares and 7,411,382 shares,

 

 

 

 

 

 

 

 

respectively

 

 

(240.4

)

 

 

(234.5

)

Total stockholders' equity

 

 

573.4

 

 

 

836.3

 

Total liabilities and stockholders' equity

 

$

13,872.8

 

 

$

14,431.6

 

 

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,

 

 

 

2020

 

 

2019

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(159.9

)

 

$

(2.3

)

Adjustments to reconcile net loss to net cash used in

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

205.4

 

 

 

83.7

 

Equity-based compensation

 

 

23.5

 

 

 

7.5

 

Deferred income taxes

 

 

(38.3

)

 

 

(1.4

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

69.0

 

 

 

(150.7

)

Inventories

 

 

50.6

 

 

 

(62.4

)

Prepaid expenses and other assets

 

 

15.2

 

 

 

(24.5

)

Accounts payable and other liabilities

 

 

(217.2

)

 

 

136.8

 

Other

 

 

9.0

 

 

 

3.3

 

Net cash used in operating activities

 

 

(42.7

)

 

 

(10.0

)

Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(23.9

)

 

 

(21.4

)

Proceeds from sale of property, plant and equipment

 

 

0.1

 

 

 

0.6

 

Acquisition funds held in escrow

 

 

 

 

 

(3,750.0

)

Cash paid for Cable Exchange acquisition

 

 

 

 

 

(11.0

)

Net cash used in investing activities

 

 

(23.8

)

 

 

(3,781.8

)

Financing Activities:

 

 

 

 

 

 

 

 

Long-term debt repaid

 

 

(108.0

)

 

 

(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

 

 

0.9

 

 

 

1.3

 

Tax withholding payments for vested equity-based compensation

  awards

 

 

(5.9

)

 

 

(7.5

)

Net cash generated by (used in) financing activities

 

 

(113.0

)

 

 

3,509.5

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(24.4

)

 

 

0.5

 

Change in cash and cash equivalents

 

 

(203.9

)

 

 

(281.8

)

Cash and cash equivalent at beginning of period

 

 

598.2

 

 

 

458.2

 

Cash and cash equivalents at end of period

 

$

394.3

 

 

$

176.4

 

 

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,

 

 

 

2020

 

 

2019

 

Number of common shares outstanding:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

194,563,530

 

 

 

192,376,255

 

Issuance of shares under equity-based compensation plans

 

 

1,814,298

 

 

 

1,396,633

 

Shares surrendered under equity-based compensation plans

 

 

(569,915

)

 

 

(316,681

)

Balance at end of period

 

 

195,807,913

 

 

 

193,456,207

 

Common stock:

 

 

 

 

 

 

 

 

Balance at beginning and end of period

 

$

2.0

 

 

$

2.0

 

Additional paid-in capital:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

2,445.1

 

 

$

2,385.1

 

Issuance of shares under equity-based compensation plans

 

 

0.9

 

 

 

1.3

 

Equity-based compensation

 

 

23.5

 

 

 

7.5

 

Dividend on Series A convertible preferred stock

 

 

(13.8

)

 

 

 

Balance at end of period

 

$

2,455.7

 

 

$

2,393.9

 

Retained earnings (accumulated deficit):

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(1,179.3

)

 

$

(249.8

)

Net loss

 

 

(159.9

)

 

 

(2.3

)

Balance at end of period

 

$

(1,339.2

)

 

$

(252.1

)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(197.0

)

 

$

(159.2

)

Other comprehensive loss, net of tax

 

 

(107.7

)

 

 

(11.3

)

Balance at end of period

 

$

(304.7

)

 

$

(170.5

)

Treasury stock, at cost:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(234.5

)

 

$

(221.3

)

Net shares surrendered under equity-based compensation plans

 

 

(5.9

)

 

 

(7.5

)

Balance at end of period

 

$

(240.4

)

 

$

(228.8

)

Total stockholders' equity

 

$

573.4

 

 

$

1,744.5

 

 

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 and entertainment networks. The Company’s solutions for wired and wireless networks enable service providers including cable, telephone and digital broadcast satellite operators and media programmers to deliver media, voice, Internet Protocol (IP) data services and Wi-Fi to their subscribers and allow enterprises to experience constant, wireless and wired connectivity across complex and varied networking environments. The Company’s solutions are complemented by a broad array of services including technical support, systems design and integration. CommScope is a leader in digital video and IP television distribution systems, broadband access infrastructure platforms and equipment that delivers data and voice networks to homes. 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.

On April 4, 2019, the Company completed the acquisition of ARRIS International plc (ARRIS) (the Acquisition) in an all-cash transaction with a total purchase price of approximately $7.7 billion, including debt assumed. See Note 2 for additional discussion of the Acquisition.

As of January 1, 2020, the Company reorganized its internal management and reporting structure as part of the integration of the Acquisition. The reorganization changed the information regularly reviewed by the Company’s chief operating decision maker for purposes of allocating resources and assessing performance. As a result, the Company is reporting financial performance for the 2020 year based on four new operating segments: Broadband Networks (Broadband), Home Networks (Home), Outdoor Wireless Networks (OWN) and Venue and Campus Networks (VCN). These four segments represent non-aggregated reportable operating segments. Prior to this change, the Company operated and reported five operating segments: Connectivity Solutions, Mobility Solutions, Customer Premises Equipment, Network and Cloud and Ruckus Networks. All prior period amounts in these condensed consolidated financial statements have been recast to reflect these operating segment changes.

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. Certain prior year amounts have been reclassified to conform to the current year presentation.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and are presented in accordance with the applicable requirements of Regulation S-X. Accordingly, these financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. 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, 2019 (the 2019 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 2019 Annual Report. Other than the enhancements described below to the allowance for doubtful accounts policy as a result of the adoption of Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments, there were no material changes in the Company’s significant accounting policies during the three months ended March 31, 2020.

7

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, unless otherwise noted)

 

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable and contract assets for unbilled receivables are stated at the amount owed by the customer, net of allowances for estimated doubtful accounts, discounts, returns and rebates. The Company measures the allowance for doubtful accounts using an expected credit loss model, which uses a lifetime expected loss allowance for all trade accounts receivable and contract assets. To measure the expected credit losses, trade accounts receivable and contract assets are grouped based on shared credit risk characteristics and the days past due. Contract assets relate to unbilled work in progress and have substantially the same risk characteristics as trade accounts receivable for the same types of contracts. Therefore, the Company has concluded that the expected loss rates for trade accounts receivables are a reasonable approximation of the loss rates for the contract assets.

In calculating an allowance for doubtful accounts, the Company uses its historical experience, external indicators and forward-looking information to calculate expected credit losses using an aging method. The Company assesses impairment of trade accounts receivable on a collective basis as they possess shared credit risk characteristics which have been grouped based on the days past due.

The expected loss rates are based on the payment profiles of sales over the preceding thirty-six months and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle their trade accounts receivable.

Concentrations of Risk and Related Party Transactions

No direct customer accounted for 10% or more of the Company’s total net sales during the three months ended March 31, 2020. No direct customer accounted for 10% or more of the Company’s accounts receivable as of March 31, 2020.

Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 10% of the Company’s total net sales during the three months ended March 31, 2019. Other than Anixter, no direct customer accounted for 10% or more of the Company’s total net sales for the three months ended March 31, 2019.

The Company relies on sole suppliers or a limited group of suppliers for certain key components, subassemblies and modules and a limited group of contract manufacturers to manufacture a significant portion of its products. Any disruption or termination of these arrangements could have a material adverse impact on the Company’s results of operations.

As of March 31, 2020, funds affiliated with Carlyle Partners VII S1 Holdings, L.P. (Carlyle) owned 100% of the Series A Convertible Preferred Stock (the Convertible Preferred Stock), which was issued to Carlyle to fund the Acquisition. See Note 11 for further discussion of the Convertible Preferred Stock. Other than transactions related to the Convertible Preferred Stock, there were no material related party transactions for the three months ended March 31, 2020.

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.

8

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, unless otherwise noted)

 

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

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Product warranty accrual, beginning of period

 

$

61.0

 

 

$

15.6

 

Provision for warranty claims

 

 

4.1

 

 

 

(0.5

)

Warranty claims paid

 

 

(7.8

)

 

 

(1.0

)

Product warranty accrual, end of period

 

$

57.3

 

 

$

14.1

 

Commitments and Contingencies

The Company is party to certain intellectual property claims and also periodically receives notices asserting that its products infringe on another party’s patents and other intellectual property rights. These claims and assertions, whether against the Company directly or against its customers, could require the Company to pay damages, royalties, stop offering the relevant products and/or cease other activities. The Company may also be called upon to indemnify certain customers for costs related to products sold to such customers. While the outcome of the claims and notices is uncertain and a reasonable estimate of the loss from unfavorable outcomes in certain of these matters cannot be determined, an adverse outcome could result in a material loss.

 

During the three months ended March 31, 2020, the Company recorded an estimated liability of $17.5 million, which is reflected in accrued and other liabilities, related to certain intellectual property assertions that existed at the Acquisition date. Of the total estimated liability recorded, $12.25 million was attributed to periods prior to the Acquisition and was recorded as a liability on the opening balance sheet. The remaining $5.25 million was recorded as a charge to cost of sales in the Home segment during the three months ended March 31, 2020. These estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events. It is reasonably possible these estimates may ultimately differ materially from actual results.

The Company is either a plaintiff or a defendant in certain other pending legal matters in the normal course of business. Management believes none of these other pending legal matters will have a material adverse effect on the Company’s business or financial condition upon final disposition.

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

Asset Impairments

Goodwill is tested for impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of the reporting unit may exceed its fair value. There were no goodwill impairments identified during the three months ended March 31, 2020 or 2019.

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 adjusted to 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, 2020 or 2019.

9

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, unless otherwise noted)

 

Income Taxes

For the three months ended March 31, 2020, the Company’s effective tax rate was 16.4%, and the Company recognized a tax benefit of $31.4 million on a pretax loss of $191.3 million. The Company’s tax benefit was less than the statutory rate of 21.0% primarily due to the impacts of U.S. anti-deferral provisions, changes in uncertain tax positions, withholding taxes and earnings in foreign jurisdictions that are taxed at rates higher than the U.S. This unfavorable impact was offset partially by the favorable impacts of certain federal tax credits.

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. 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.

Earnings (Loss) Per Share

Basic earnings (loss) per share (EPS) is computed by dividing net income (loss), less any dividends and deemed dividends related to the Convertible Preferred Stock, by the weighted average number of common shares outstanding during the period. The numerator in diluted EPS is based on the basic EPS numerator adjusted to add back any dividends and deemed dividends related to the Convertible Preferred Stock, subject to antidilution requirements. The denominator used in diluted EPS is based on the basic EPS computation plus the effect of potentially dilutive common shares related to the Convertible Preferred Stock and equity-based compensation plans, subject to antidilution requirements.

For the three months ended March 31, 2020, 16.1 million shares of outstanding equity-based compensation awards were not included in the computation of diluted EPS because the effect was either antidilutive or the performance conditions were not met. Of those amounts, for the three months ended March 31, 2020, 4.3 million shares would have been considered dilutive if the Company had not been in a net loss position. For the three months ended March 31, 2019, 5.7 million shares were not included in the computation of diluted EPS because the effect was either antidilutive or the performance conditions were not met.

For the three months ended March 31, 2020, 36.4 million of as-if converted shares related to the Convertible Preferred Stock were excluded from the diluted share count because they were anti-dilutive; however, they would have been considered dilutive if the Company had not been in a net loss position.

10

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, unless otherwise noted)

 

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

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(159.9

)

 

$

(2.3

)

Dividends on Series A convertible preferred stock

 

 

(13.8

)

 

 

 

Net loss attributable to common stockholders

 

$

(173.7

)

 

$

(2.3

)

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

194.9

 

 

 

192.8

 

Dilutive effect of as-if converted Series A

   convertible preferred stock

 

 

 

 

 

 

Dilutive effect of equity-based awards

 

 

 

 

 

 

Weighted average common shares outstanding - diluted

 

 

194.9

 

 

 

192.8

 

 

 

 

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.89

)

 

$

(0.01

)

Diluted

 

$

(0.89

)

 

$

(0.01

)

Recent Accounting Pronouncements

Adopted During the Three Months Ended March 31, 2020

On January 1, 2020, the Company adopted ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2020-02 (collectively, Topic 326). The new guidance replaces the incurred loss methodology with the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including trade accounts receivable. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842.

The Company adopted Topic 326 using the modified retrospective method for all financial assets measured at amortized cost, which are primarily trade accounts receivable and contract assets for the Company. Results for reporting periods beginning after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP.

Prior to the adoption of Topic 326, the Company utilized an expected loss model for assessing its allowance for doubtful accounts receivable. Upon adoption, the Company considered and applied the new guidance provided under Topic 326. The impact of adopting Topic 326 as of January 1, 2020 was not material to the consolidated financial statements.

Issued but Not Adopted

In March 2020, the Financial Accounting Standards Board (FASB) issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. The Company can elect to apply the amendments as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.

11

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, unless otherwise noted)

 

In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The new guidance is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. The amendments in this guidance clarify the interaction of accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU No. 2020-01 is effective for the Company as of January 1, 2021 and early adoption is permitted. The Company is evaluating the impact of the new guidance on the consolidated financial statements. 

2. ACQUISITIONS

On April 4, 2019, the Company acquired all of the issued ordinary shares of ARRIS in an all cash transaction with a total consideration of approximately $7.7 billion, including debt assumed. ARRIS is a global leader in entertainment, communications and networking technology. The combined company is expected to drive profitable growth in new markets, shape the future of wired and wireless communications, and position the Company to benefit from key industry trends, including network convergence, fiber and mobility everywhere, 5G, Internet of Things and rapidly changing network and technology architectures. For the three months ended March 31, 2020, net sales of $1,030.1 million and operating losses of $(100.0) million were included in the Condensed Consolidated Statements of Operations related to the ARRIS business.

During the three months ended March 31, 2020, the Company completed its acquisition accounting and made the following adjustments to the provisional amounts that were previously recorded:

 

An increase of $13.1 million in accrued liabilities and an increase of $3.2 million in deferred tax assets due to an adjustment of certain pre-acquisition contingencies with a corresponding $9.9 million increase to goodwill.

 

An increase in deferred tax assets of $20.8 million related to the release of valuation allowances for certain state income tax credits with a corresponding decrease to goodwill.

 

A decrease in deferred tax liabilities of approximately $4.7 million, an increase in income tax payable of $6.7 million and a decrease in unrecognized tax benefits of approximately $0.9 million with a corresponding $1.1 million increase to goodwill.

The Company recorded these amounts as measurement period adjustments because the information was known as of the acquisition date but the analysis was finalized in the first quarter of 2020.

3. GOODWILL

As a result of the change in segments as discussed in Note 1, goodwill was reallocated from the previous segments to the new segments. The following table presents goodwill after the reallocation by new reportable segment:

 

 

 

Broadband

 

 

Home

 

 

OWN

 

 

VCN

 

 

Total

 

Goodwill, gross at December 31, 2019

 

$

3,355.1

 

 

$

402.1

 

 

$

666.0

 

 

$

1,635.6

 

 

$

6,058.8

 

Adjustments to preliminary purchase price

 

 

(7.1

)

 

 

(1.3

)

 

 

 

 

 

(1.4

)

 

 

(9.8

)

Foreign exchange and other

 

 

(21.6

)

 

 

(1.4

)

 

 

(3.5

)

 

 

(10.8

)

 

 

(37.3

)

Goodwill, gross at March 31, 2020

 

 

3,326.4

 

 

 

399.4

 

 

 

662.5

 

 

 

1,623.4

 

 

 

6,011.7

 

Accumulated impairment charges at

   December 31, 2019 and March 31, 2020

 

 

(193.6

)

 

 

(192.8

)

 

 

(159.5

)

 

 

(41.2

)

 

 

(587.1

)

Goodwill, net at March 31, 2020

 

$

3,132.8

 

 

$

206.6

 

 

$

503.0

 

 

$

1,582.2

 

 

$

5,424.6

 

 

12

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In millions, unless otherwise noted)

 

The Company’s change in segments as of January 1, 2020 resulted in a realignment of its existing reporting units. Although the reporting units were realigned, the Company’s reporting units remained the same except for where two reporting units have been combined into a new reporting unit. In this case, goodwill was simply combined in the new reporting units. Since the composition of the reporting units and the assignment of goodwill to the reporting units were unaffected, an interim goodwill impairment test was not performed during the three months ended March 31, 2020.

4. REVENUE FROM CONTRACTS WITH CUSTOMERS

Disaggregated Net Sales

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

 

 

Three Months Ended March 31,

 

 

 

Broadband

 

 

Home

 

 

OWN

 

 

VCN

 

 

Total

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Contract type: