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
(Exact name of registrant as specified in its charter)
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(I.R.S. Employer Identification No.) |
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(Registrant’s telephone number, including area code)
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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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
As of April 26, 2021 there were
CommScope Holding Company, Inc.
Form 10-Q
March 31, 2021
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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2021 |
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2020 |
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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 (loss) |
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( |
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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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Loss before income taxes |
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( |
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( |
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Income tax benefit |
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Net loss |
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( |
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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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$ |
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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. |
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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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2021 |
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2020 |
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Comprehensive loss: |
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Net loss |
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$ |
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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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Pension and other postretirement benefit activity |
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( |
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Gain (loss) on hedging instruments |
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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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$ |
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See notes to unaudited condensed consolidated financial statements. |
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3
CommScope Holding Company, Inc.
Condensed Consolidated Balance Sheets
(In millions, except share amounts)
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Unaudited March 31, 2021 |
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December 31, 2020 |
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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: preferred stock |
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Common stock, $ |
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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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( |
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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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2021 |
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2020 |
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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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Accounts payable and other liabilities |
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( |
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( |
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Other |
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( |
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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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Proceeds from sale of property, plant and equipment |
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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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Dividends paid on Series A convertible preferred stock |
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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 used in financing activities |
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( |
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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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( |
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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. |
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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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2021 |
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2020 |
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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. |
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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.
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, 2020 (the 2020 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 2020 Annual Report. There were no material changes in the Company’s significant accounting policies during the three months ended March 31, 2021.
Concentrations of Risk and Related Party Transactions
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, 2021, funds affiliated with Carlyle Partners VII S1 Holdings, L.P. (Carlyle) owned
7
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
Product Warranties
The Company recognizes a liability for the estimated claims that may be paid under its customer warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products.
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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2021 |
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2020 |
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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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Warranty claims paid |
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( |
) |
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( |
) |
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Foreign exchange |
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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 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.
As of March 31, 2021, the Company had a 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
8
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
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
Income Taxes
For the three months ended March 31, 2021, the Company’s effective tax rate was
For the three months ended March 31, 2020, 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, 2021 and 2020,
For the three months ended March 31, 2021 and 2020,
9
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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|||||
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March 31, |
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|||||
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2021 |
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2020 |
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Numerator: |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
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Dividends on Series A convertible preferred stock |
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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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$ |
( |
) |
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Denominator: |
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Weighted average common shares outstanding - basic |
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Dilutive effect of as-if converted Series A convertible preferred stock |
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— |
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— |
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Dilutive effect of equity-based awards |
|
|
— |
|
|
|
— |
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|
Weighted average common shares outstanding - diluted |
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|
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Loss per share: |
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|
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|
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
Recent Accounting Pronouncements
Adopted During the Three Months Ended March 31, 2021
On January 1, 2021, the Company adopted Accounting Standards Update (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. The impact of adopting this new guidance was not material to the consolidated financial statements.
On January 1, 2021, the Company adopted ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance. The impact of adopting this new guidance was not material to the consolidated financial statements.
10
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
Issued but Not Adopted
In August 2020, the Financial Accounting Standards Board (FASB) issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The new guidance simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share, along with expanded disclosures. ASU No. 2020-06 is effective for the Company as of January 1, 2022 and early adoption is permitted beginning January 1, 2021. The Company is currently evaluating the impact of the new guidance on the consolidated financial statements.
In March 2020 and January 2021, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, respectively. Together, the ASUs provide 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 through December 31, 2022. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
2. GOODWILL
The following table presents the activity in goodwill by reportable segment.
|
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|
December 31, 2020 |
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Activity |
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March 31, 2021 |
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Goodwill |
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|
Accumulated Impairment Losses |
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Total |
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|
Foreign Exchange and Other |
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Goodwill |
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|
Accumulated Impairment Losses |
|
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Total |
|
|||||||
|
Broadband |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
OWN |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
VCN |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Home |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
Total |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregated Net Sales
The majority of the Company’s net sales are product sales that are recognized at a point in time. The Company does have some customer arrangements where net sales are recognized over time, but this does not represent a significant portion of consolidated net sales. Contracts with net sales recognized over time are primarily concentrated in the Broadband Networks and Venue and Campus Networks segments. In the first quarter of 2021, the Company determined that the geographic disaggregation of net sales by segment is a more meaningful disaggregation of net sales than net sales disaggregated based on the timing of the transfer of goods, given the relatively low level of net sales recognized over time. Therefore, the presentation of net sales by geographic region in Note 7 has been expanded to include segments and the presentation of net sales based on the timing of the transfer of goods has been eliminated.
11
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
Allowance for Doubtful Accounts
|
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|
March 31, |
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Allowance for doubtful accounts, beginning of period |
|
$ |
|
|
|
$ |
|
|
|
Provision (benefit) |
|
|
( |
) |
|
|
|
|
|
Write-offs |
|
|
( |
) |
|
|
( |
) |
|
Recoveries |
|
|
— |
|
|
|
— |
|