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
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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
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Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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.
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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
As of April 27, 2020 there were
CommScope Holding Company, Inc.
Form 10-Q
March 31, 2020
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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2020 |
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2019 |
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Net sales |
$ |
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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 (loss) |
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Other expense, net |
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( |
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Interest expense |
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Interest income |
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Loss before income taxes |
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Income tax (expense) benefit |
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( |
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Net loss |
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( |
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Series A convertible preferred stock dividend |
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( |
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— |
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Net loss attributable to common stockholders |
$ |
( |
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$ |
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Loss per share: |
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Basic |
$ |
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$ |
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Diluted |
$ |
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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 Loss
(Unaudited – In millions)
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Three Months Ended |
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March 31, |
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2020 |
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2019 |
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Comprehensive loss: |
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Net loss |
$ |
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$ |
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Other comprehensive loss, net of tax: |
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Foreign currency translation loss |
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( |
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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 loss, net of tax |
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( |
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( |
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Total comprehensive loss |
$ |
( |
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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
(In millions, except share amounts)
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Unaudited |
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March 31, 2020 |
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December 31, 2019 |
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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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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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Current portion of long-term debt |
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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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Series A convertible preferred stock, $ |
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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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2020 |
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2019 |
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Operating Activities: |
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Net loss |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash 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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Inventories |
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( |
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Prepaid expenses and other assets |
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( |
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Accounts payable and other liabilities |
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( |
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Other |
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Net cash used in operating activities |
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( |
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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 Cable Exchange acquisition |
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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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( |
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Change in cash and cash equivalents |
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( |
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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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2020 |
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2019 |
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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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Dividend on Series A convertible preferred stock |
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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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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 loss |
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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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Accumulated other comprehensive loss: |
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Balance at beginning of period |
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$ |
( |
) |
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$ |
( |
) |
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Other comprehensive loss, net of tax |
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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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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 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 $
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
Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for
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
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.
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:
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Three Months Ended |
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March 31, |
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2020 |
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2019 |
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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 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 $
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
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
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
The Company’s effective income tax rate was (
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,
For the three months ended March 31, 2020,
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):
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Three Months Ended |
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March 31, |
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2020 |
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2019 |
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|
Numerator: |
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|
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Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
Dividends on Series A convertible preferred stock |
|
|
( |
) |
|
|
— |
|
|
Net loss attributable to common stockholders |
|
$ |
( |
) |
|
$ |
( |
) |
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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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|
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|
|
|
|
Dilutive effect of as-if converted Series A convertible preferred stock |
|
|
— |
|
|
|
— |
|
|
Dilutive effect of equity-based awards |
|
|
— |
|
|
|
— |
|
|
Weighted average common shares outstanding - diluted |
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Loss per share: |
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|
|
|
|
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
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 $
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:
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• |
An increase of $ |
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|
• |
An increase in deferred tax assets of $ |
|
|
• |
A decrease in deferred tax liabilities of approximately $ |
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:
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Broadband |
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Home |
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OWN |
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VCN |
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Total |
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|||||
|
Goodwill, gross at December 31, 2019 |
|
$ |
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|
$ |
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|
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$ |
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|
|
$ |
|
|
|
$ |
|
|
|
Adjustments to preliminary purchase price |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Foreign exchange and other |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Goodwill, gross at March 31, 2020 |
|
|
|
|
|
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|
|
|
|
|
|
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|
|
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|
|
Accumulated impairment charges at December 31, 2019 and March 31, 2020 |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Goodwill, net at March 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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:
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Three Months Ended March 31, |
|
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Broadband |
|
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Home |
|
|
OWN |
|
|
VCN |
|
|
Total |
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2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
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Contract type: |
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Product contracts |
|
$ |
|
|
|
$ |
|
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|
$ |
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