UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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 25, 2022, there were
CommScope Holding Company, Inc.
Form 10-Q
March 31, 2022
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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2022 |
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2021 |
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Net sales |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Research and development |
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Amortization of purchased intangible assets |
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Restructuring costs, net |
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Total operating expenses |
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Operating income |
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Other income, net |
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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 (expense) benefit |
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( |
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Net loss |
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( |
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( |
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Series A convertible preferred stock dividends |
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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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2022 |
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2021 |
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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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( |
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Pension and other postretirement benefit activity |
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( |
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Gain on hedging instruments |
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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 |
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December 31, 2021 |
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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 |
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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 |
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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' Deficit |
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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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Series A convertible preferred stock, $ |
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Stockholders' deficit: |
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Preferred stock, $ |
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Issued and outstanding shares: |
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Common stock, $ |
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Additional paid-in capital |
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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' deficit |
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( |
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Total liabilities and stockholders' deficit |
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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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2022 |
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2021 |
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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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Changes in assets and liabilities: |
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Accounts receivable |
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( |
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( |
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Inventories |
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( |
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( |
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Prepaid expenses and other assets |
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Accounts payable and other liabilities |
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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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( |
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Proceeds from sale of property, plant and equipment |
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Other |
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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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Dividends paid on Series A convertible preferred stock |
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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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Other |
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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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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 (Deficit)
(Unaudited - In millions, except share amounts)
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Three Months Ended |
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March 31, |
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2022 |
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2021 |
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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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Dividends 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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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 (deficit) |
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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.
As of January 1, 2022, the Company reorganized its internal management and reporting structure to align its portfolio of products and solutions more closely with the markets it serves and bring better performance clarity with its competitive peer set. 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 now reporting financial performance based on the following operating segments: Connectivity and Cable Solutions (CCS), Outdoor Wireless Networks (OWN), Networking, Intelligent Cellular and Security Solutions (NICS), Access Network Solutions (ANS) and Home Networks (Home). These five segments represent non-aggregated reportable operating segments. Prior to this change, the Company operated and reported four operating segments: Broadband Networks (Broadband), Outdoor Wireless Networks (OWN), Venue and Campus Networks (VCN) and Home Networks (Home). 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 generally accepted accounting principles (GAAP) in the United States (U.S.) 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, 2021 (the 2021 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 2021 Annual Report. There were no material changes in the Company’s significant accounting policies during the three months ended March 31, 2022.
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.
7
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
Commitments and Contingencies
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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2022 |
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2021 |
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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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Product warranty accrual, end of period |
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$ |
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$ |
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Third Party Guarantees
The Company was contingently liable under open standby letters of credit issued by its banks in favor of third parties that totaled $
Legal Proceedings
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, incur 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. The outcome of these claims and notices is uncertain and a reasonable estimate of the loss from unfavorable outcomes in certain of these matters either cannot be determined or is estimated at the minimum amount of a range of estimates. The actual loss could be material and may vary significantly from the Company's estimates. Gain contingencies, if any, are recognized when they are realized.
The Company had liabilities 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.
8
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
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. The Company assessed goodwill for impairment due to a change in the composition of certain reporting units resulting from the new segment structure as of January 1, 2022. The Company performed impairment testing immediately before and after the change and determined that no goodwill impairment existed. See Note 2 for further discussion. There were
Property, plant and equipment, intangible assets with finite lives and right of use assets 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, 2022, the Company recognized $
For the three months ended March 31, 2021, the Company’s effective 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, 2022 and 2021,
For the three months ended March 31, 2022 and 2021,
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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March 31, |
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2022 |
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2021 |
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Numerator: |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
Dividends on Series A convertible preferred stock |
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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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— |
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— |
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Weighted average common shares outstanding – diluted |
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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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$ |
( |
) |
Recent Accounting Pronouncements
Adopted During the Three Months Ended March 31, 2022
On January 1, 2022, the Company adopted 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. The impact of adopting this new guidance was not material to the consolidated financial statements.
On January 1, 2022, the Company early adopted ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance is expected to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability, as well as payment terms which affect subsequent revenue recognized by the acquirer. According to the guidance, at the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if the acquirer had originated the contracts. The impact of this guidance will depend on future business combinations and will be applied prospectively to business combinations occurring on or after the adoption date. The adoption of this new guidance had no impact to the consolidated financial statements as of March 31, 2022.
Issued but Not Adopted
In March 2020 and January 2021, the Financial Accounting Standards Board 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. As of March 31, 2022, the Company had not utilized any of the expedients discussed within this ASU; however, management continues to assess the Company's agreements to determine whether the expedients would be utilized through the remainder of 2022.
10
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
2. GOODWILL
The following table presents the activity in goodwill by new reportable segment.
|
|
December 31, 2021 |
|
|
Activity |
|
|
March 31, 2022 |
|
|||||||||||||||||||
|
|
Goodwill |
|
|
Accumulated Impairment Losses |
|
|
Total |
|
|
Foreign Exchange and Other |
|
|
Goodwill |
|
|
Accumulated Impairment Losses |
|
|
Total |
|
|||||||
CCS |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
OWN |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||||
NICS |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||||
ANS |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||||
Home |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Goodwill at December 31, 2021 reflects the reorganization of the Company's segment structure, as disclosed in Note 1, resulting in the reallocation of goodwill from the previous segments to the new segments.
As a result of the new segment structure, as of January 1, 2022, the Company assessed goodwill for impairment due to changes in the composition of certain reporting units. The Company performed impairment testing immediately before the change and after the change once goodwill was reallocated and determined that
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregated Net Sales
See Note 7 for the presentation of net sales by segment and geographic region.
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
|
Three Months Ended |
|
|
|||||
|
|
March 31, |
|
|
|||||
|
|
2022 |
|
|
2021 |
|
|
||
Allowance for doubtful accounts, beginning of period |
|
$ |
|
|
$ |
|
|
||
Provision (benefit) |
|
|
|
|
|
( |
) |
|
|
Write-offs |
|
|
( |
) |
|
|
( |
) |
|
Foreign exchange and other |
|
|
( |
) |
|
|
( |
) |
|
Allowance for doubtful accounts, end of period |
|
$ |
|
|
$ |
|
|
||
Customer Contract Balances
The following table provides the balance sheet location and amounts of contract assets, or unbilled accounts receivable, and contract liabilities, or deferred revenue, from contracts with customers as of March 31, 2022 and December 31, 2021.
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
||
Contract Balance Type |
|
Balance Sheet Location |
|
March 31, |
|
|
December 31, |
|
||
Unbilled accounts receivable |
|
Accounts receivable, less allowance for doubtful accounts |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
||
Deferred revenue - current |
|
Accrued and other liabilities |
|
|
|
|
|
|
||
Deferred revenue - noncurrent |
|
Other noncurrent liabilities |
|
|
|
|
|
|
||
Total contract liabilities |
|
|
|
$ |
|
|
$ |
|
||
11
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
There were no material changes to contract asset balances for the three months ended March 31, 2022 as a result of changes in estimates or impairments. The change in the contract liability balance from December 31, 2021 to March 31, 2022 was primarily due to upfront support billings to be recognized over the support term. During the three months ended March 31, 2022, the Company recognized $
4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Inventories
|
|
|
|
|||||
|
|
March 31, |
|
|
December 31, |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Accrued and Other Liabilities
|
|
March 31, |
|
|
December 31, |
|
||
Compensation and employee benefit liabilities |
|
$ |
|
|
$ |
|
||
Deferred revenue |
|
|
|
|
|
|
||
Accrued interest |
|
|
|
|
|
|
||
Product warranty accrual |
|
|
|
|
|
|
||
Restructuring liabilities |
|
|
|
|
|
|
||
Operating lease liabilities |
|
|
|
|
|
|
||
Patent claims and litigation settlements |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Operating Lease Information
|
|
|
|
|
|||||
|
Balance Sheet Location |
|
March 31, |
|
|
December 31, |
|
||
Other noncurrent assets |
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
||
Accrued and other liabilities |
|
$ |
|
|
$ |
|
|||
Other noncurrent liabilities |
|
|
|
|
|
|
|||
Total lease liabilities |
|
|
$ |
|
|
$ |
|
||
12
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
Accumulated Other Comprehensive Loss
The following table presents changes in accumulated other comprehensive loss (AOCL), net of tax:
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Foreign currency translation |
|
|
|
|
|
|
||
Balance at beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
Amounts reclassified from AOCL |
|
|
|
|
|
|
||
Balance at end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
||
Defined benefit plan activity |
|
|
|
|
|
|
||
Balance at beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive loss |
|
|
(1.6 |
) |
|
|
— |
|
Amounts reclassified from AOCL |
|
|
|
|
|
|
||
Balance at end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
||
Hedging instruments |
|
|
|
|
|
|
||
Balance at beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income |
|
|
|
|
|
|
||
Balance at end of period |
|
$ |
( |
) |
|
$ |
( |
) |
Net AOCL at end of period |
|
$ |
( |
) |
|
$ |
( |
) |
Amounts reclassified from net AOCL related to foreign currency translation and defined benefit plans are recorded in other income, net in the Condensed Consolidated Statements of Operations.
Cash Flow Information
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash paid during the period for: |
|
|
|
|
|
|
||
Income taxes, net of refunds |
|
$ |
|
|
$ |
|
||
Interest |
|
|
|
|
|
|
||
13
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
5. FINANCING
|
|
|
|
|||||
|
|
March 31, |
|
|
December 31, |
|
||
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
Senior secured term loan due |
|
|
|
|
|
|
||
Senior secured revolving credit facility |
|
|
|
|
|
|
||
Total principal amount of debt |
|
$ |
|
|
$ |
|
||
Less: Original issue discount, net of amortization |
|
|
( |
) |
|
|
( |
) |
Less: Debt issuance costs, net of amortization |
|
|
( |
) |
|
|
( |
) |
Less: Current portion |
|
|
( |
) |
|
|
( |
) |
Total long-term debt |
|
$ |
|
|
$ |
|
||
See Note 7 in the Notes to Consolidated Financial Statements in the 2021 Annual Report for additional information on the terms and conditions of the Company’s debt obligations.
Senior Secured Credit Facilities
During the three months ended March 31, 2022, the Company borrowed and repaid $
During the three months ended March 31, 2022, the Company made quarterly scheduled amortization payments totaling $
The Company did not reflect any portion of the 2026 Term Loan as a current portion of long-term debt as of March 31, 2022 related to the potentially required excess cash flow payment because the amount that may be payable in 2023, if any, cannot currently be reliably estimated. There is no excess cash flow payment required in 2022 related to 2021.
Other Matters
The Company’s non-guarantor subsidiaries held $
The weighted average effective interest rate on outstanding borrowings, including the impact of the interest rate swap, and the amortization of debt issuance costs and original issue discount, was
14
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
6. FAIR VALUE MEASUREMENTS
The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, debt instruments, interest rate derivatives and foreign currency contracts. For cash and cash equivalents, trade receivables and trade payables, the carrying amounts of these financial instruments as of March 31, 2022 and December 31, 2021 were considered representative of their fair values due to their short terms to maturity. The fair values of the Company’s debt instruments, interest rate derivatives and foreign currency contracts were based on indicative quotes.
Fair value measurements using quoted prices in active markets for identical assets and liabilities fall within Level 1 of the fair value hierarchy, measurements using significant other observable inputs fall within Level 2, and measurements using significant unobservable inputs fall within Level 3.
The carrying amounts, estimated fair values and valuation input levels of the Company’s debt instruments, interest rate derivatives and foreign currency contracts as of March 31, 2022 and December 31, 2021, are as follows:
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
|
||||||||||
|
|
Carrying |
|
|
Fair Value |
|
|
Carrying |
|
|
Fair Value |
|
|
Valuation |
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency contracts |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Level 2 |
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
7.125% senior notes due 2028 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Level 2 |
||||
5.00% senior notes due 2027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
8.25% senior notes due 2027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
6.00% senior notes due 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
4.75% senior secured notes due 2029 |
|
|
|
|
|
1,153.1 |
|
|
|
|
|
|
|
|
Level 2 |
|||
6.00% senior secured notes due 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
Senior secured term loan due 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
Interest rate swap contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
These fair value estimates are based on pertinent information available to management as of the valuation date. Although management is not aware of any factors that would significantly affect these fair value estimates, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from the amounts presented.
7. SEGMENTS AND GEOGRAPHIC INFORMATION
As of January 1, 2022, the Company reorganized its internal management and reporting structure to align its portfolio of products and solutions more closely with the markets it serves and bring better performance clarity with its competitive peer set. 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 now reporting financial performance based on the following operating segments: CCS, OWN, NICS, ANS and Home. All prior period amounts below have been recast to reflect these operating segment changes.
The Connectivity and Cable Solutions (CCS) segment provides fiber optic and copper connectivity and cable solutions for use in telecommunications, cable television, residential broadband networks, data centers and business enterprises. The CCS portfolio includes network solutions for indoor and outdoor network applications. Indoor network solutions include optical fiber and twisted pair structured cable solutions, intelligent infrastructure management hardware and software and network rack and cabinet enclosures. Outdoor network solutions are used in both local-area and wide-area networks and “last mile” fiber-to-the-home installations, including deployments of fiber-to-the-node, fiber-to-the-premises and fiber-to-the-distribution point to homes, businesses and cell sites.
The Outdoor Wireless Networks (OWN) segment focuses on the macro and metro cell markets. The segment includes base station antennas, RF filters, tower connectivity, microwave antennas, metro cell products, cabinets, steel, accessories and Comsearch.
15
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
The Networking, Intelligent Cellular and Security Solutions (NICS) segment provides wireless networks for enterprises and service providers. Product offerings include indoor and outdoor Wi-Fi and LTE access points, access and aggregation switches; an Internet of Things suite, on-premises and cloud-based control and management systems; and software and software-as-a-service applications addressing security, location, reporting and analytics.
The Access Network Solutions (ANS) segment’s product solutions include cable modem termination systems, video infrastructure, distribution and transmission equipment and cloud solutions that enable facility-based service providers to construct a state-of-the-art residential and metro distribution network. The portfolio also includes a full suite of global services that offer technical support, professional services and system integration to enable solutions sales of the Company’s end-to-end product portfolio.
The Home Networks (Home) segment includes subscriber-based solutions that support broadband and video applications. The broadband offerings in the Home segment include devices that provide residential connectivity to a service provider’s network, such as digital subscriber line and cable modems and telephony and data gateways which incorporate routing and Wi-Fi functionality. Video offerings include set top boxes that support cable, satellite and IP television content delivery and include products such as digital video recorders, high definition set top boxes and hybrid set top devices.
The following table provides summary financial information by reportable segment:
|
|
March 31, |
|
|
December 31, |
|
||
Identifiable segment-related assets: |
|
|
|
|
|
|
||
CCS |
|
$ |
|
|
$ |
|
||
OWN |
|
|
|
|
|
|
||
NICS |
|
|
|
|
|
|
||
ANS |
|
|
|
|
|
|
||
Home |
|
|
|
|
|
|
||
Total identifiable segment-related assets |
|
|
|
|
|
|
||
Reconciliation to total assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
|
|
|
|
|
||
Deferred income tax assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
16
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
The Company’s measurement of segment performance is adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization). The Company defines adjusted EBITDA as operating income (loss), adjusted to exclude depreciation, amortization of intangible assets, restructuring costs, asset impairments, equity-based compensation, transaction, transformation and integration costs and other items that the Company believes are useful to exclude in the evaluation of operating performance from period to period because these items are not representative of the Company’s core business.
The following table provides net sales, adjusted EBITDA, depreciation expense and additions to property, plant and equipment by reportable segment:
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net sales: |
|
|
|
|
|
|
||
CCS |
|
$ |
|
|
$ |
|
||
OWN |
|
|
|
|
|
|
||
NICS |
|
|
|
|
|
|
||
ANS |
|
|
|
|
|
|
||
Home |
|
|
|
|
|
|
||
Consolidated net sales |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Segment adjusted EBITDA: |
|
|
|
|
|
|
||
CCS |
|
$ |
|
|
$ |
|
||
OWN |
|
|
|
|
|
|
||
NICS |
|
|
( |
) |
|
|
( |
) |
ANS |
|
|
|
|
|
|
||
Home |
|
|
|
|
|
|
||
Total segment adjusted EBITDA |
|
|
|
|
|
|
||
Amortization of intangible assets |
|
|
( |
) |
|
|
( |
) |
Restructuring costs, net |
|
|
( |
) |
|
|
( |
) |
Equity-based compensation |
|
|
( |
) |
|
|
( |
) |
Transaction, transformation and integration costs |
|
|
( |
) |
|
|
( |
) |
Acquisition accounting adjustments |
|
|
( |
) |
|
|
( |
) |
Patent claims and litigation settlements |
|
|
( |
) |
|
|
( |
) |
Reserve for Russian accounts receivable |
|
|
( |
) |
|
|
— |
|
Depreciation |
|
|
( |
) |
|
|
( |
) |
Consolidated operating income |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Depreciation expense: |
|
|
|
|
|
|
||
CCS |
|
$ |
|
|
$ |
|
||
OWN |
|
|
|
|
|
|
||
NICS |
|
|
|
|
|
|
||
ANS |
|
|
|
|
|
|
||
Home |
|
|
|
|
|
|
||
Consolidated depreciation expense |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Additions to property, plant and equipment: |
|
|
|
|
|
|
||
CCS |
|
$ |
|
|
$ |
|
||
OWN |
|
|
|
|
|
|
||
NICS |
|
|
|
|
|
|
||
ANS |
|
|
|
|
|
|
||
Home |
|
|
|
|
|
|
||
Consolidated additions to property, plant and equipment |
|
$ |
|
|
$ |
|
||
17
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
Sales to customers located outside of the U.S. comprised
|
|
Three Months Ended March 31, 2022 |
|
|||||||||||||||||||||
|
|
CCS |
|
|
OWN |
|
|
NICS |
|
|
ANS |
|
|
Home |
|
|
Total |
|
||||||
Geographic Region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Europe, Middle East and Africa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Caribbean and Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Consolidated net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
Three Months Ended March 31, 2021 |
|
|||||||||||||||||||||
|
|
CCS |
|
|
OWN |
|
|
NICS |
|
|
ANS |
|
|
Home |
|
|
Total |
|
||||||
Geographic Region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Europe, Middle East and Africa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Asia Pacific |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Caribbean and Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Consolidated net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
8. RESTRUCTURING COSTS, NET
The Company incurs costs associated with restructuring initiatives intended to improve overall operating performance and profitability. The costs related to restructuring actions are generally cash-based and primarily consist of employee-related costs, which include severance and other one-time termination benefits.
In addition to the employee-related costs, the Company also records other costs associated with restructuring actions such as the gain or loss on the sale of facilities and impairment costs arising from unutilized real estate or equipment. The Company attempts to sell or lease this unutilized space but additional impairment charges may be incurred related to these or other excess assets.
The Company’s net pretax restructuring activity included in restructuring costs, net on the Condensed Consolidated Statements of Operations, by segment, were as follows:
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
CCS |
|
$ |
|
|
$ |
|
||
OWN |
|
|
|
|
|
|
||
NICS |
|
|
|
|
|
|
||
ANS |
|
|
|
|
|
|
||
Home |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Restructuring liabilities were included in the Company’s Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|||||
|
|
March 31, |
|
|
December 31, |
|
||
Accrued and other liabilities |
|
$ |
|
|
|
|
||
Other noncurrent liabilities |
|
|
|
|
|
|
||
Total restructuring liabilities |
|
$ |
|
|
$ |
|
||
18
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
CommScope NEXT Restructuring Actions
In 2021, the Company announced and began implementing a business transformation initiative called CommScope NEXT. This initiative is designed to drive shareholder value through three pillars: profitable growth, operational efficiency and portfolio optimization.
|
|
Employee- |
|
|
Other |
|
|
Total |
|
|||
Balance at December 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Additional expense, net |
|
|
|
|
|
|
|
|
|
|||
Cash paid |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Foreign exchange and other non-cash items |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at March 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
CommScope NEXT actions to date have included employee costs related to the planned closure of an international manufacturing facility as well as headcount reductions in manufacturing, engineering, marketing, sales and administrative functions. Asset impairment charges related to real estate that is affected by restructuring actions are included in the other category in the table above and in restructuring costs, net on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2022.
The Company has recognized restructuring charges of $
ARRIS Integration Restructuring Actions
In anticipation of and following the acquisition of ARRIS, the Company initiated a series of restructuring actions to integrate and streamline operations and achieve cost synergies.
|
|
Employee- |
|
|
Other |
|
|
Total |
|
|||
Balance at December 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Additional expense (reversals), net |
|
|
( |
) |
|
|
|
|
|
|
||
Cash paid |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Foreign exchange and other non-cash items |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance at March 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The ARRIS integration actions included headcount reductions in manufacturing, sales, engineering, marketing and administrative functions. The Company has recognized restructuring charges of $
The Company expects to make cash payments of $
19
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
9. SERIES A CONVERTIBLE PREFERRED STOCK
On April 4, 2019, the Company issued and sold
10. STOCKHOLDERS’ EQUITY
Equity-Based Compensation Plans
As of March 31, 2022, $
The following table shows a summary of the equity-based compensation expense included in the Condensed Consolidated Statements of Operations:
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Selling, general and administrative |
|
$ |
|
|
$ |
|
||
Research and development |
|
|
|
|
|
|
||
Cost of sales |
|
|
|
|
|
|
||
Total equity-based compensation expense |
|
$ |
|
|
$ |
|
||
Stock Options
Stock options are awards that allow the recipient to purchase shares of the Company’s common stock at a fixed price. Stock options are granted at an exercise price equal to the Company’s stock price at the date of grant. These awards generally vest over
|
|
Shares |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
||||
Options outstanding at December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Expired |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Options outstanding at March 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Options vested at March 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Options unvested at March 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
20
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
The exercise prices of outstanding options at March 31, 2022 were in the following ranges (in millions, except per share data and years):
|
|
Options Outstanding |
|
|
Options Exercisable |
|
||||||||||||||
Range of Exercise Prices |
|
Shares |
|
|
Weighted Average |
|
|
Weighted |
|
|
Shares |
|
|
Weighted |
|
|||||
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
$ |
|
|
|
|
|
4.2 |
|
|
$ |
24.77 |
|
|
|
|
|
$ |
25.70 |
|
||
The Company uses the Black-Scholes model to estimate the fair value of stock option awards at the date of grant. Key inputs and assumptions used in the model include the exercise price of the award, the expected option term, the risk-free interest rate, stock price volatility and the Company’s projected dividend yield. The expected term represents the period over which the Company’s employees are expected to hold their options. The risk-free interest rate reflects the yield on zero-coupon U.S. treasury securities with a term equal to the option’s expected term. Expected volatility is derived based on the historical volatility of the Company’s stock. The Company’s projected dividend yield is
Restricted Stock Units
RSUs entitle the holder to shares of common stock after a vesting period that generally ranges from to
The following table summarizes the RSU activity (in millions, except per share data):
|
|
Restricted |
|
|
Weighted |
|
||
Non-vested share units at December 31, 2021 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Vested and shares issued |
|
|
( |
) |
|
$ |
|
|
Forfeited |
|
|
( |
) |
|
$ |
|
|
Non-vested share units at March 31, 2022 |
|
|
|
|
$ |
|
||
Performance Share Units
PSUs are stock awards in which the number of shares ultimately received by the employee depends on achievement against a performance measure. Certain of CommScope’s PSUs have an internal performance measure vesting at the end of three years. The number of shares issued under these awards can vary between
CommScope also has PSUs with a market condition performance measure based on stock price milestones over a three-year period. The number of shares issued under these awards can vary between
21
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In millions, unless otherwise noted)
The following table presents the weighted average assumptions used to estimate the fair value of these awards granted during the three months ended March 31, 2022 and 2021.
|
|
Three Months Ended March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Risk-free interest rate |
|
|
% |
|
|
% |
||
Expected volatility |
|
|
% |
|
|
% |
||
Weighted average fair value at grant date |
|
$ |
|
|
$ |
|
||
The following table summarizes the PSU activity (in millions, except per share data):
|
|
Performance |
|
|
Weighted |
|
||
Non-vested share units at December 31, 2021 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Non-vested share units at March 31, 2022 |
|
|
|
|
$ |
|
||
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following narrative is an analysis of the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The discussion is provided to increase the understanding of, and should be read in conjunction with, the unaudited condensed consolidated financial statements and accompanying notes included in this report as well as the audited consolidated financial statements, related notes thereto and management’s discussion and analysis of financial condition and results of operations, including management’s discussion and analysis regarding the application of critical accounting policies and the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2021 (2021 Annual Report).
We discuss certain financial measures in management’s discussion and analysis of financial condition and results of operations, including adjusted EBITDA, that differ from measures calculated in accordance with generally accepted accounting principles (GAAP) in the United States (U.S.). See "Reconciliation of Non-GAAP Measures" included elsewhere in this quarterly report for more information about these non-GAAP financial measures, including our reasons for including the measures and material limitations with respect to the usefulness of the measures.
Overview
We are a global provider of infrastructure solutions for communication and entertainment networks. Our 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. Our solutions are complemented by a broad array of services including technical support, systems design and integration. We are a leader in digital video and IP television distribution systems, broadband access infrastructure platforms and equipment that delivers data and voice networks to homes. Our global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale.
In 2021, we announced a transformation initiative called CommScope NEXT designed to drive shareholder value through three pillars: profitable growth, operational efficiency and portfolio optimization. We believe these efforts are critical to making us more competitive and allowing us to invest in growth and maximize stockholder and stakeholder value. We incurred $12.1 million and $44.4 million of restructuring costs and $15.6 million and $15.7 million of transaction, transformation and integration costs during the three months ended March 31, 2022 and 2021, respectively, both primarily related to CommScope NEXT. We expect to continue to incur restructuring costs and transaction, transformation and integration costs related to CommScope NEXT and such costs could be material.
As a step to optimize our portfolio through CommScope NEXT, as of January 1, 2022, we reorganized our internal management and reporting structure to align our portfolio of products and solutions more closely with the markets we serve and bring better performance clarity with our competitive peer set. The reorganization changed the information regularly reviewed by our chief operating decision maker for purposes of allocating resources and assessing performance. As a result, we are now reporting financial performance based on the following operating segments: Connectivity and Cable Solutions (CCS), Outdoor Wireless Networks (OWN), Networking, Intelligent Cellular and Security Solutions (NICS), Access Network Solutions (ANS) and Home Networks (Home). Prior to this change, we operated and reported four operating segments: Broadband Networks (Broadband), Outdoor Wireless Networks (OWN), Venue and Campus Networks (VCN) and Home Networks (Home). The Home segment was unchanged in this realignment. All prior period amounts have been recast to reflect these operating segment changes.
Also as a step in our CommScope NEXT transformation plan, in 2021, we announced a plan to separate the Home Networks business via a spin-off transaction. Due to the impact of the uncertain supply chain environment on the Home Networks business, we have delayed our separation plan, but we continue to analyze the financial results of our "Core" business separately from Home. As such, below we refer to certain supplementary Core financial measures, which reflect the results of our CCS, OWN, NICS and ANS segments in the aggregate. See the Segment Results section below for the aggregation of our Core financial measures.
23
Impacts of COVID-19 and Supply Chain Constraints
The impact of the COVID-19 pandemic and measures taken to contain its spread remain dynamic. We continue to monitor the situation, particularly the new lock-downs and restrictions in parts of China that have recently been imposed, and actively assess further implications for our business, supply chain and customer demand. In the second quarter of 2022, we reopened most of our offices across the globe, but we continue to take meaningful precautions in accordance with relevant guidelines to protect the health and safety of our employees. Variants continue to emerge, efforts to mitigate or contain the impacts of the pandemic continue to evolve and the duration and severity of the impact of the pandemic on our business and results of operations in future periods remain uncertain.
As in many industries, we have seen the negative impacts of COVID-19 recede and a recovery in demand for our products over the past year, but this has created negative indirect consequences such as inflation, shortages in materials and components and increased logistics costs. Prices for certain commodities that we use such as aluminum, copper, steel, silicon, fluoropolymers and certain other polymers have experienced significant volatility as a result of changes in the levels of global demand, supply disruptions, including port, transportation and distribution delays or interruptions, and other factors. As a result, we have seen a significant increase in costs that has negatively impacted our results of operations. We are also experiencing limited supply of memory devices, capacitors and silicon chips, which has increased our costs and has impacted our ability to deliver on a timely basis due to extended lead times. We are trying to mitigate our increasing component and logistics costs by implementing higher prices on our products and services. We are also mitigating certain shortages by purchasing components in advance and maintaining higher levels of inventory or finding alternate vendors for some components.
We believe the global supply chain challenges and their adverse impact on our business and financial results will persist, at least through the remainder of 2022, and may extend into periods thereafter. We expect these constrained supply conditions to increase our costs and impact our ability to deliver products to our customers in a timely manner.
For more discussion of the risks related to COVID-19 and the supply chain environment, see Part I, Item 1A, “Risk Factors” in our 2021 Annual Report.
24
CRITICAL ACCOUNTING POLICIES
There have been no changes in our critical accounting policies as disclosed in our 2021 Annual Report.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2022 WITH THE THREE MONTHS ENDED MARCH 31, 2021
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||||||||||
|
|
March 31, |
|
|
|
|
|
|
|
|||||||||||||||
|
|
2022 |
|
|
2021 |
|
|
|
|
|||||||||||||||
|
|
Amount |
|
|
% of Net |
|
|
Amount |
|
|
% of Net |
|
|
Change |
|
|
% |
|
||||||
|
|
(dollars in millions, except per share amounts) |
|
|||||||||||||||||||||
Net sales |
|
$ |
2,228.6 |
|
|
|
100.0 |
% |
|
$ |
2,072.0 |
|
|
|
100.0 |
% |
|
$ |
156.6 |
|
|
|
7.6 |
% |
Core net sales (1) |
|
|
1,732.9 |
|
|
|
77.8 |
|
|
|
1,571.0 |
|
|
|
75.8 |
|
|
|
161.9 |
|
|
|
10.3 |
|
Gross profit |
|
|
636.3 |
|
|
|
28.6 |
|
|
|
672.2 |
|
|
|
32.4 |
|
|
|
(35.9 |
) |
|
|
(5.3 |
) |
Operating income |
|
|
26.8 |
|
|
|
1.2 |
|
|
|
8.9 |
|
|
|
0.4 |
|
|
|
17.9 |
|
|
|
201.1 |
|
Core operating income (1) |
|
|
40.6 |
|
|
|
2.3 |
|
|
|
40.4 |
|
|
|
2.6 |
|
|
|
0.2 |
|
|
|
0.5 |
|
Non-GAAP adjusted EBITDA (2) |
|
|
253.3 |
|
|
|
11.4 |
|
|
|
289.7 |
|
|
|
14.0 |
|
|
|
(36.4 |
) |
|
|
(12.6 |
) |
Core adjusted EBITDA (1) |
|
|
230.0 |
|
|
|
13.3 |
|
|
|
270.3 |
|
|
|
17.2 |
|
|
|
(40.3 |
) |
|
|
(14.9 |
) |
Net loss |
|
|
(139.9 |
) |
|
|
(6.3 |
) |
|
|
(97.6 |
) |
|
|
(4.7 |
) |
|
|
(42.3 |
) |
|
|
43.3 |
|
Diluted loss per share |
|
$ |
(0.75 |
) |
|
|
|
|
$ |
(0.55 |
) |
|
|
|
|
$ |
(0.20 |
) |
|
|
35.5 |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Net sales
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
March 31, |
|
|
|
|
|
% |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Net sales |
|
$ |
2,228.6 |
|
|
$ |
2,072.0 |
|
|
$ |
156.6 |
|
|
|
7.6 |
% |
Domestic |
|
|
1,347.1 |
|
|
|
1,191.9 |
|
|
|
155.2 |
|
|
|
13.0 |
|
International |
|
|
881.5 |
|
|
|
880.1 |
|
|
|
1.4 |
|
|
|
0.2 |
|
Net sales for the three months ended March 31, 2022 increased $156.6 million, or 7.6%, compared to the prior year period primarily driven by higher pricing and increased volume. Core net sales increased $161.9 million, or 10.3%, compared to the prior year period with increases in the CCS segment of $161.1 million and the OWN segment of $65.9 million, partially offset by decreases in the ANS segment of $61.9 million and the NICS segment of $3.2 million. For the three months ended March 31, 2022, net sales in the Home segment decreased $5.3 million compared to the prior year period. We continued to experience supply shortages and extended lead times for certain materials that negatively affected our ability to meet customer demand for certain of our products during the three months ended March 31, 2022. We expect these shortages and delays to persist for the remainder of 2022 and into 2023. For further details by segment, see the discussion of Segment Results below.
From a regional perspective, for the three months ended March 31, 2022 compared to the prior year period, net sales increased in the U.S. by $155.2 million, Canada by $32.5 million and the Europe, Middle East and Africa (EMEA) region by $20.7 million. These increases in net sales were partially offset by decreases in the Caribbean and Latin American (CALA) region of $29.8 million and the Asia Pacific (APAC) region of $22.0 million. Net sales to customers located outside of the U.S. comprised 39.6% of total net sales for the three months ended March 31, 2022 compared to 42.5% for the three months ended March 31, 2021. Foreign exchange rate changes impacted net sales unfavorably by approximately 1% for the three months ended March 31, 2022 compared to the prior year period. For additional information on regional sales by segment, see the discussion of Segment Results below and Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements included herein.
25
Gross profit, SG&A expense and R&D expense
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
March 31, |
|
|
|
|
|
% |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Gross profit |
|
$ |
636.3 |
|
|
$ |
672.2 |
|
|
$ |
(35.9 |
) |
|
|
(5.3 |
)% |
As a percent of sales |
|
|
28.6 |
% |
|
|
32.4 |
% |
|
|
|
|
|
|
||
SG&A expense |
|
|
286.0 |
|
|
|
292.7 |
|
|
|
(6.7 |
) |
|
|
(2.3 |
) |
As a percent of sales |
|
|
12.8 |
% |
|
|
14.1 |
% |
|
|
|
|
|
|
||
R&D expense |
|
|
170.7 |
|
|
|
171.5 |
|
|
|
(0.8 |
) |
|
|
(0.5 |
) |
As a percent of sales |
|
|
7.7 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
||
Gross profit (net sales less cost of sales)
Despite higher consolidated net sales, gross profit decreased for the three months ended March 31, 2022 compared to the prior year period primarily due to significantly higher material and freight costs.
Selling, general and administrative expense
For the three months ended March 31, 2022, SG&A expense decreased by $6.7 million compared to the prior year period. The decrease was primarily due to cost savings initiatives, partially offset by higher bad debt expense of $9.4 million, $5.4 million of which was driven by a reassessment of the collectability of our outstanding accounts receivable from Russian customers in light of the ongoing Russia/Ukraine conflict.
Research and development expense
Research and development (R&D) expense was relatively unchanged for the three months ended March 31, 2022 compared to the prior year period. R&D activities generally relate to ensuring that our products are capable of meeting the evolving technological needs of our customers, bringing new products to market and modifying existing products to better serve our customers.
Amortization of purchased intangible assets, Restructuring costs, net
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
March 31, |
|
|
|
|
|
% |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Amortization of purchased intangible assets |
|
$ |
140.7 |
|
|
$ |
154.7 |
|
|
$ |
(14.0 |
) |
|
|
(9.0 |
)% |
Restructuring costs, net |
|
|
12.1 |
|
|
|
44.4 |
|
|
|
(32.3 |
) |
|
|
(72.7 |
) |
Amortization of purchased intangible assets
For the three months ended March 31, 2022, amortization of purchased intangible assets was lower compared to the prior year period because certain of our intangible assets became fully amortized.
Restructuring costs, net
The net restructuring costs recorded during the three months ended March 31, 2022 and 2021 included $8.4 million and $33.3 million, respectively, related to CommScope NEXT and $3.7 million and $11.1 million, respectively, related to integrating the ARRIS business. From a cash perspective, we paid $7.8 million to settle restructuring liabilities during the three months ended March 31, 2022 and expect to pay an additional $37.3 million by the end of 2022 and $27.2 million during 2023 related to restructuring actions that have been initiated. Additional restructuring actions related to CommScope NEXT are expected to be identified and the resulting charges and cash requirements could be material. We do not expect to identify significant additional restructuring actions related to the ARRIS integration.
26
Other income, net
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
March 31, |
|
|
|
|
|
% |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Foreign currency gain (loss) |
|
$ |
(0.2 |
) |
|
$ |
0.3 |
|
|
$ |
(0.5 |
) |
|
|
(166.7 |
)% |
Other income |
|
|
0.2 |
|
|
|
0.7 |
|
|
|
(0.5 |
) |
|
|
(71.4 |
) |
Foreign currency gain (loss)
Foreign currency gain includes the net foreign currency gains and losses resulting from the settlement of receivables and payables, foreign currency contracts and short-term intercompany advances in a currency other than the subsidiary’s functional currency. The change in foreign currency loss for the three months ended March 31, 2022 was not significant compared to the prior year period.
Other income, net
The change in other income, net for the three months ended March 31, 2022 was not significant compared to the prior year period.
Interest expense, Interest income and Income taxes
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
March 31, |
|
|
|
|
|
% |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Interest expense |
|
$ |
(136.5 |
) |
|
$ |
(137.5 |
) |
|
$ |
1.0 |
|
|
|
(0.7 |
)% |
Interest income |
|
|
0.7 |
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
40.0 |
|
Income tax (expense) benefit |
|
|
(30.9 |
) |
|
|
29.5 |
|
|
|
(60.4 |
) |
|
|
(204.7 |
) |
Interest expense and interest income
Interest expense was relatively unchanged for the three months ended March 31, 2022 compared to the prior year period. Our weighted average effective interest rate on outstanding borrowings, including the impact of the interest rate swap and the amortization of debt issuance costs and original issue discount, was 5.77% at March 31, 2022, 5.74% at December 31, 2021 and 5.85% at March 31, 2021.
Income tax (expense) benefit
For the three months ended March 31, 2022, we recognized $30.9 million of income tax expense on a pretax loss of $109.0 million. Our tax expense was driven by the unfavorable impacts of U.S. anti-deferral provisions and non-creditable withholding taxes.
Our effective income tax rate was 23.2% for the three months ended March 31, 2021. We recognized a tax benefit of $29.5 million on a pretax loss of $127.1 million. Our tax benefit was higher than the statutory rate and was impacted favorably by decreases in prior year uncertain tax positions and adjustments related to the finalization of prior year’s tax returns, offset partially by the unfavorable impacts of earnings in foreign jurisdictions that are taxed at rates higher than the U.S. statutory rate, foreign withholding taxes and U.S. anti-deferral provisions.
27
Segment Results
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
March 31, |
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
|
|||||||||||||||||
|
|
Amount |
|
|
% of Net |
|
|
|
Amount |
|
|
% of Net |
|
|
|
Change |
|
|
% |
|
|
||||||
|
|
(dollars in millions) |
|
|
|||||||||||||||||||||||
Net sales by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
CCS |
|
$ |
838.0 |
|
|
|
37.6 |
|
% |
|
$ |
676.9 |
|
|
|
32.7 |
|
% |
|
$ |
161.1 |
|
|
|
23.8 |
|
% |
OWN |
|
|
390.1 |
|
|
|
17.5 |
|
|
|
|
324.2 |
|
|
|
15.6 |
|
|
|
|
65.9 |
|
|
|
20.3 |
|
|
NICS |
|
|
188.0 |
|
|
|
8.4 |
|
|
|
|
191.2 |
|
|
|
9.2 |
|
|
|
|
(3.2 |
) |
|
|
(1.7 |
) |
|
ANS |
|
|
316.8 |
|
|
|
14.2 |
|
|
|
|
378.7 |
|
|
|
18.3 |
|
|
|
|
(61.9 |
) |
|
|
(16.3 |
) |
|
Core net sales (1) |
|
|
1,732.9 |
|
|
|
77.8 |
|
|
|
|
1,571.0 |
|
|
|
75.8 |
|
|
|
|
161.9 |
|
|
|
10.3 |
|
|
Home |
|
|
495.7 |
|
|
|
22.2 |
|
|
|
|
501.0 |
|
|
|
24.2 |
|
|
|
|
(5.3 |
) |
|
|
(1.1 |
) |
|
Consolidated net sales |
|
$ |
2,228.6 |
|
|
|
100.0 |
|
% |
|
$ |
2,072.0 |
|
|
|
100.0 |
|
% |
|
$ |
156.6 |
|
|
|
7.6 |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Operating income (loss) by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
CCS |
|
$ |
37.3 |
|
|
|
4.5 |
|
% |
|
$ |
26.1 |
|
|
|
3.9 |
|
% |
|
$ |
11.2 |
|
|
|
42.9 |
|
% |
OWN |
|
|
52.9 |
|
|
|
13.6 |
|
|
|
|
50.8 |
|
|
|
15.7 |
|
|
|
|
2.1 |
|
|
|
4.1 |
|
|
NICS |
|
|
(43.0 |
) |
|
|
(22.9 |
) |
|
|
|
(60.4 |
) |
|
|
(31.6 |
) |
|
|
|
17.4 |
|
|
|
(28.8 |
) |
|
ANS |
|
|
(6.6 |
) |
|
|
(2.1 |
) |
|
|
|
23.9 |
|
|
|
6.3 |
|
|
|
|
(30.5 |
) |
|
|
(127.6 |
) |
|
Core operating income (1) |
|
|
40.6 |
|
|
|
2.3 |
|
|
|
|
40.4 |
|
|
|
2.6 |
|
|
|
|
0.2 |
|
|
|
0.5 |
|
|
Home |
|
|
(13.8 |
) |
|
|
(2.8 |
) |
|
|
|
(31.5 |
) |
|
|
(6.3 |
) |
|
|
|
17.7 |
|
|
|
(56.2 |
) |
|
Consolidated operating income |
|
$ |
26.8 |
|
|
|
1.2 |
|
% |
|
$ |
8.9 |
|
|
|
0.4 |
|
% |
|
$ |
17.9 |
|
|
|
201.1 |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Adjusted EBITDA by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
CCS |
|
$ |
98.6 |
|
|
|
11.8 |
|
% |
|
$ |
106.0 |
|
|
|
15.7 |
|
% |
|
$ |
(7.4 |
) |
|
|
(7.0 |
) |
% |
OWN |
|
|
71.0 |
|
|
|
18.2 |
|
|
|
|
73.7 |
|
|
|
22.7 |
|
|
|
|
(2.7 |
) |
|
|
(3.7 |
) |
|
NICS |
|
|
(13.8 |
) |
|
|
(7.3 |
) |
|
|
|
(17.4 |
) |
|
|
(9.1 |
) |
|
|
|
3.6 |
|
|
|
(20.7 |
) |
|
ANS |
|
|
74.2 |
|
|
|
23.4 |
|
|
|
|
108.0 |
|
|
|
28.5 |
|
|
|
|
(33.8 |
) |
|
|
(31.3 |
) |
|
Core adjusted EBITDA (1) |
|
|
230.0 |
|
|
|
13.3 |
|
|
|
|
270.3 |
|
|
|
17.2 |
|
|
|
|
(40.3 |
) |
|
|
(14.9 |
) |
|
Home |
|
|
23.3 |
|
|
|
4.7 |
|
|
|
|
19.4 |
|
|
|
3.9 |
|
|
|
|
3.9 |
|
|
|
20.1 |
|
|
Non-GAAP consolidated adjusted |
|
$ |
253.3 |
|
|
|
11.4 |
|
% |
|
$ |
289.7 |
|
|
|
14.0 |
|
% |
|
$ |
(36.4 |
) |
|
|
(12.6 |
) |
% |
Note: Components may not sum to total due to rounding.
Connectivity and Cable Solutions Segment
Net sales for the CCS segment increased for the three months ended March 31, 2022 compared to the prior year period due to increased demand for our products and services as service providers continued to enhance their networks to keep pace with increasing broadband demand. CCS segment net sales also benefitted from pricing increases as well as additional production enabled by our capacity expansion. We continue to experience supply shortages with certain of our network cable products, which hindered our ability to meet customer demand for our CCS segment products during the three months ended March 31, 2022, and these shortages could extend into the remainder of 2022. From a regional perspective, for the three months ended March 31, 2022, net sales increased in the U.S. by $139.8 million, the EMEA region by $9.9 million, the CALA region by $7.8 million and Canada by $7.5 million but decreased in the APAC region by $3.9 million. Foreign exchange rate changes impacted CCS segment net sales unfavorably by approximately 1% during the three months ended March 31, 2022 compared to the prior year period.
28
For the three months ended March 31, 2022, CCS segment operating income and adjusted EBITDA both benefitted from pricing increases and higher sales volumes. However, these benefits were more than offset by higher material and freight costs and increases in SG&A and R&D costs. Compared to the prior year period, CCS segment operating income for the three months ended March 31, 2022 was favorably impacted by a $13.8 million reduction in restructuring expense and a $10.8 million reduction in amortization expense but was unfavorably impacted by a $4.9 million charge to establish an allowance against certain accounts receivable determined to be uncollectible as a result of the Russia/Ukraine conflict. Restructuring expense, amortization expense and the charge related to certain uncollectible accounts receivable resulting from the Russia/Ukraine conflict are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” below.
Outdoor Wireless Networks Segment
For the three months ended March 31, 2022, OWN segment net sales increased compared to the prior year period primarily due to an increase in customer demand for both metro and macro cell solutions and favorable pricing impacts. From a regional perspective, for the three months ended March 31, 2022, OWN segment net sales increased in the U.S. by $80.5 million and the EMEA region by $8.0 million but decreased in the APAC region by $13.9 million, Canada by $6.3 million and the CALA region by $2.4 million compared to the prior year period. Foreign exchange rate changes impacted OWN segment net sales unfavorably by approximately 1% during the three months ended March 31, 2022 compared to the same prior year period.
For the three months ended March 31, 2022, OWN segment operating income and adjusted EBITDA both benefitted from increased sales volumes and favorable pricing impacts, but these benefits were more than offset by higher material and freight costs. Compared to the prior year period, OWN segment operating income for the three months ended March 31, 2022 was favorably impacted by a $3.6 million reduction in restructuring expense which is not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” below.
Networking, Intelligent Cellular and Security Solutions Segment
For the three months ended March 31, 2022, NICS segment net sales decreased slightly compared to the prior year period. Sales of our Ruckus products were unfavorably impacted by material shortages, but the decrease was partially offset by the favorable impacts of pricing. NICS segment net sales also benefitted from increased demand for our distributed antenna systems and small cell products. We believe the material shortages experienced by our Ruckus business could continue for the remainder of 2022 and into 2023. From a regional perspective, for the three months ended March 31, 2022, net sales decreased in Canada by $4.5 million, the U.S. by $1.1 million and the CALA region by $1.1 million but increased in the EMEA region by $2.8 million and the APAC region by $0.7 million compared to the prior year period. Foreign exchange rate changes impacted NICS segment net sales unfavorably by approximately 1% during the three months ended March 31, 2022 compared to the prior year period.
For the three months ended March 31, 2022, NICS segment operating loss decreased and adjusted EBITDA increased compared to the prior year period primarily due to favorable pricing impacts on certain products, favorable product mix and lower selling expenses, partially offset by lower sales volumes, higher material costs and higher R&D costs. Compared to the prior year period, NICS segment operating loss was favorably impacted by a $7.6 million reduction in restructuring expense and a $2.5 million reduction in amortization expense which are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” below.
Access Network Solutions Segment
For the three months ended March 31, 2022, net sales decreased in the ANS segment due to the negative impact of supply shortages resulting in delays on our ability to meet customer demand. These shortages could continue for the remainder of 2022. From a regional perspective, for the three months ended March 31, 2022, net sales decreased in the U.S. by $57.5 million, the APAC region by $7.4 million and the CALA region by $6.0 million but increased in the EMEA region by $5.4 million and Canada by $3.6 million compared to the prior year period. Foreign exchange rate changes had no significant impact on ANS segment net sales during the three months ended March 31, 2022 compared to the prior year period.
For the three months ended March 31, 2022, ANS segment operating loss increased and adjusted EBITDA decreased compared to the prior year period primarily due to lower sales volumes and unfavorable geographic and product mix, partially offset by lower material and freight costs and lower SG&A and R&D costs. Compared to the prior year period, ANS segment operating loss was unfavorably impacted by a $3.8 million transformation cost related to the termination of a supply agreement as part of CommScope NEXT but was favorably impacted by a $2.2 million reduction in restructuring expense. Neither of these items is reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” below.
29
Home Networks Segment
Net sales for the Home segment decreased slightly for the three months ended March 31, 2022 compared to the prior year period. While net sales of broadband solution products benefitted from favorable pricing impacts, these increases were more than offset by lower net sales volumes of our other Home products due to continued supply shortages, which delayed our ability to meet customer demand. Although we are working to secure components from key suppliers, we still expect to experience supply chain challenges through 2022 and into 2023. From a regional perspective, for the three months ended March 31, 2022, net sales decreased in the CALA region by $29.8 million, the U.S. by $6.5 million and the EMEA region by $5.4 million but increased in Canada by $32.2 million and the APAC region by $2.5 million compared to the prior year period. Foreign exchange rate changes impacted Home segment net sales unfavorably by less than 1% during the three months ended March 31, 2022 compared to the prior year period.
For the three months ended March 31, 2022, Home segment operating loss decreased and adjusted EBITDA increased compared to the prior year period primarily due to favorable pricing impacts, benefits from cost savings initiatives, lower warranty costs and favorable product mix. These benefits were partially offset by higher component and freight costs and lower sales volumes. Compared to the prior year period, Home segment operating loss for the three months ended March 31, 2022 was favorably impacted by a reduction of $5.1 million in restructuring expense and a $3.4 million reduction in transaction, transformation and integration costs which are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” below.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes certain key measures of our liquidity and capital resources (in millions, except percentage data).
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
March 31, |
|
|
December 31, |
|
|
Change |
|
|
% Change |
|
|
||||
|
|
(dollars in millions) |
|
|
|||||||||||||
Cash and cash equivalents |
|
$ |
314.7 |
|
|
$ |
360.3 |
|
|
$ |
(45.6 |
) |
|
|
(12.7 |
) |
% |
Working capital (1), excluding cash and cash |
|
|
1,138.8 |
|
|
|
1,068.9 |
|
|
|
69.9 |
|
|
|
6.5 |
|
|
Availability under revolving credit facility |
|
|
715.6 |
|
|
|
684.1 |
|
|
|
31.5 |
|
|
|
4.6 |
|
|
Long-term debt, including current portion |
|
|
9,508.3 |
|
|
|
9,510.5 |
|
|
|
(2.2 |
) |
|
|
— |
|
|
Total capitalization (2) |
|
|
10,264.8 |
|
|
|
10,410.0 |
|
|
|
(145.2 |
) |
|
|
(1.4 |
) |
|
Long-term debt as a percentage of total capitalization |
|
|
92.6 |
% |
|
|
91.4 |
% |
|
|
|
|
|
|
|
||
(1) Working capital consisted of current assets of $3,643.4 million less current liabilities of $2,221.9 million at March 31, 2022. Working capital consisted of current assets of $3,579.7 million less current liabilities of $2,182.5 million at December 31, 2021.
(2) Total capitalization includes long-term debt, including the current portion, Series A convertible preferred stock (the Convertible Preferred Stock) and stockholders’ equity (deficit).
Our principal sources of liquidity on a short-term basis are cash and cash equivalents, cash flows provided by operations and availability under our credit facilities. On a long-term basis, our potential sources of liquidity also include raising capital through the issuance of additional equity and/or debt.
The primary uses of liquidity include debt service requirements, voluntary debt repayments or redemptions, working capital requirements, capital expenditures, business separation transaction costs, transformation costs, acquisition integration costs, dividends related to the Convertible Preferred Stock if we elect to pay such dividends in cash, litigation settlements, income tax payments and other contractual obligations. We expect the interest payments on our senior secured term loan due in 2026 (2026 Term Loan) and our senior secured asset-based revolving credit facility (Revolving Credit Facility) to increase in 2022 as a result of the Federal Reserve’s increase in interest rates in March 2022 and the expectation that they will continue to raise interest rates further in 2022. See Part II, Item 7A, “Quantitative and Qualitative Disclosure About Market Risk” in our 2021 Annual Report for further discussion of our interest rate risk. We believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our Revolving Credit Facility, will be sufficient to meet our presently anticipated future cash needs. We may experience volatility in cash flows between periods due to, among other reasons, variability in the timing of vendor payments and customer receipts. We may, from time to time, borrow additional amounts under our Revolving Credit Facility or issue debt or equity securities, if market conditions are favorable, to meet future cash needs or to reduce our borrowing costs.
30
Although there are no financial maintenance covenants under the terms of our senior notes, there is a limitation, among other limitations, on certain future borrowings based on an adjusted leverage ratio or a fixed charge coverage ratio. These ratios are based on financial measures similar to non-GAAP adjusted EBITDA as presented in the “Reconciliation of Non-GAAP Measures” section below, but also give pro forma effect to certain events, including acquisitions, synergies and savings from cost reduction initiatives such as facility closures and headcount reductions. For the twelve months ended March 31, 2022, our non-GAAP pro forma adjusted EBITDA, as measured pursuant to the indentures governing our notes, was $1,132.6 million, which included annualized savings expected from cost reduction initiatives ($52.0 million) so that the impact of cost reduction initiatives is fully reflected in the twelve-month period used in the calculation of the ratios. In addition to limitations under these indentures, our senior secured credit facilities contain customary negative covenants based on similar financial measures. We believe we are in compliance with the covenants under our indentures and senior secured credit facilities at March 31, 2022.
Cash and cash equivalents decreased during the three months ended March 31, 2022 primarily driven by cash used for operating activities of $14.6 million, capital expenditures of $27.4 million and tax withholding payments for vested equity-based compensation awards of $10.6 million. As of March 31, 2022, approximately 71% of our cash and cash equivalents were held outside the U.S.
Working capital, excluding cash and cash equivalents and the current portion of long-term debt, increased during the three months ended March 31, 2022 primarily due to higher inventory balances as a result of rising material costs and increases in stock as we build inventory waiting for certain materials or components to complete our products for sale. Offsetting the increase in inventory was an increase in accounts payable mainly driven by higher inventory balances and a shift in payments timing. In the first quarter of 2022, we sold approximately $82 million of accounts receivable under customer-sponsored supplier financing agreements. Approximately $60 million of that amount impacted working capital, excluding cash and cash equivalents and the current portion of long-term debt, as of March 31, 2022. Under these agreements, we are able to sell certain accounts receivable to a bank, and we retain no interest in and have no servicing responsibilities for the accounts receivable sold.
The net reduction in total capitalization during the three months ended March 31, 2022 reflected the net loss for the period.
Cash Flow Overview
|
|
Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
March 31, |
|
|
|
|
|
% |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Net cash used in operating activities |
|
$ |
(14.6 |
) |
|
$ |
(124.0 |
) |
|
$ |
109.4 |
|
|
|
(88.2 |
)% |
Net cash used in investing activities |
|
|
(16.0 |
) |
|
|
(25.4 |
) |
|
|
9.4 |
|
|
|
(37.0 |
) |
Net cash used in financing activities |
|
|
(17.2 |
) |
|
|
(42.7 |
) |
|
|
25.5 |
|
|
|
(59.7 |
) |
Operating Activities
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
Net loss |
|
$ |
(139.9 |
) |
|
$ |
(97.6 |
) |
Adjustments to reconcile net loss to net cash generated by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
180.2 |
|
|
|
199.2 |
|
Equity-based compensation |
|
|
16.5 |
|
|
|
23.5 |
|
Deferred income taxes |
|
|
2.3 |
|
|
|
(53.4 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
(60.5 |
) |
|
|
(164.2 |
) |
Inventories |
|
|
(73.7 |
) |
|
|
(10.7 |
) |
Prepaid expenses and other assets |
|
|
29.6 |
|
|
|
4.1 |
|
Accounts payable and other liabilities |
|
|
23.5 |
|
|
|
(23.9 |
) |
Other |
|
|
7.4 |
|
|
|
(1.0 |
) |
Net cash used in operating activities |
|
$ |
(14.6 |
) |
|
$ |
(124.0 |
) |
During the three months ended March 31, 2022, cash used for operating activities decreased compared to the prior year period primarily as a result of higher collections of accounts receivable and a shift in the timing of certain variable incentive compensation payments, partially offset by higher inventory costs.
31
Investing Activities
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
Additions to property, plant and equipment |
|
$ |
(27.4 |
) |
|
$ |
(26.4 |
) |
Proceeds from sale of property, plant and equipment |
|
|
— |
|
|
|
1.0 |
|
Other |
|
|
11.4 |
|
|
|
— |
|
Net cash used in investing activities |
|
$ |
(16.0 |
) |
|
$ |
(25.4 |
) |
During the three months ended March 31, 2022, the decrease in cash used in investing activities compared to the prior year period was primarily driven by proceeds of $6.9 million on the sale of an equity method investment and a return of $4.5 million on equity method investments.
Financing Activities
|
|
Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
Long-term debt repaid |
|
$ |
(93.0 |
) |
|
$ |
(8.0 |
) |
Long-term debt proceeds |
|
|
85.0 |
|
|
|
— |
|
Dividends paid on Series A convertible preferred stock |
|
|
— |
|
|
|
(14.3 |
) |
Proceeds from the issuance of common shares under equity-based compensation plans |
|
|
0.1 |
|
|
|
3.9 |
|
Tax withholding payments for vested equity-based compensation awards |
|
|
(10.6 |
) |
|
|
(24.3 |
) |
Other |
|
|
1.3 |
|
|
|
— |
|
Net cash used in financing activities |
|
$ |
(17.2 |
) |
|
$ |
(42.7 |
) |
During the three months ended March 31, 2022, we borrowed and repaid $85.0 million under the Revolving Credit Facility. We also paid the quarterly scheduled amortization payment of $8.0 million on the senior secured term loan due in 2026 during the three months ended March 31, 2022.
As of March 31, 2022, we had no outstanding borrowings under the Revolving Credit Facility and the remaining availability was $715.6 million, reflecting a borrowing base of $807.5 million reduced by $91.9 million of letters of credit issued under the Revolving Credit Facility.
During the three months ended March 31, 2022, we received proceeds of $0.1 million related to the exercise of stock options compared to $3.9 million in the prior year period. Also during the three months ended March 31, 2022, employees surrendered shares of our common stock to satisfy their tax withholding requirements on vested restricted stock units and performance share units, which reduced cash flows by $10.6 million compared to $24.3 million in the prior year period.
32
Reconciliation of Non-GAAP Measures
We believe that presenting certain non-GAAP financial measures enhances an investor’s understanding of our financial performance. We further believe that these financial measures are useful in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business. We also use certain of these financial measures for business planning purposes and in measuring our performance relative to that of our competitors.
We believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the term non-GAAP adjusted EBITDA may vary from that of others in our industry. These financial measures should not be considered as alternatives to operating income (loss), net income (loss) or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance, operating cash flows or liquidity.
We also believe presenting these non-GAAP results for the twelve months ended March 31, 2022 provides an additional tool for assessing our recent performance. Such amounts are unaudited and are derived by subtracting the data for the three months ended March 31, 2021 from the data for the year ended December 31, 2021 and then adding the data for the three months ended March 31, 2022.
Although there are no financial maintenance covenants under the terms of our senior notes, there is a limitation, among other limitations, on certain future borrowings based on an adjusted leverage ratio or a fixed charge coverage ratio. These ratios are based on financial measures similar to non-GAAP adjusted EBITDA as presented in this section, but also give pro forma effect to certain events, including acquisitions and savings from cost reduction initiatives such as facility closures and headcount reductions.
Consolidated
|
|
Three Months |
|
|
Year |
|
|
Twelve Months |
|
|||||||
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|||||||
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|||||||
|
|
2022 |
|
|
2021 |
|
|
2021 |
|
|
2022 |
|
||||
|
|
(in millions) |
|
|||||||||||||
Net loss |
|
$ |
(139.9 |
) |
|
$ |
(97.6 |
) |
|
$ |
(462.6 |
) |
|
$ |
(504.9 |
) |
Income tax expense (benefit) |
|
|
30.9 |
|
|
|
(29.5 |
) |
|
|
(71.9 |
) |
|
|
(11.5 |
) |
Interest income |
|
|
(0.7 |
) |
|
|
(0.5 |
) |
|
|
(1.9 |
) |
|
|
(2.1 |
) |
Interest expense |
|
|
136.5 |
|
|
|
137.5 |
|
|
|
561.2 |
|
|
|
560.2 |
|
Other (income) expense, net |
|
|
— |
|
|
|
(1.0 |
) |
|
|
23.8 |
|
|
|
24.8 |
|
Operating income |
|
$ |
26.8 |
|
|
$ |
8.9 |
|
|
$ |
48.6 |
|
|
$ |
66.5 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Amortization of purchased intangible assets |
|
|
140.7 |
|
|
|
154.7 |
|
|
|
613.0 |
|
|
|
599.0 |
|
Restructuring costs, net |
|
|
12.1 |
|
|
|
44.4 |
|
|
|
91.9 |
|
|
|
59.6 |
|
Equity-based compensation |
|
|
16.5 |
|
|
|
23.5 |
|
|
|
79.6 |
|
|
|
72.6 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
13.7 |
|
|
|
13.7 |
|
Transaction, transformation and integration costs (1) |
|
|
15.6 |
|
|
|
15.7 |
|
|
|
90.3 |
|
|
|
90.2 |
|
Acquisition accounting adjustments (2) |
|
|
2.0 |
|
|
|
3.3 |
|
|
|
11.5 |
|
|
|
10.2 |
|
Patent claims and litigation settlements |
|
|
1.2 |
|
|
|
1.5 |
|
|
|
31.7 |
|
|
|
31.4 |
|
Reserve for Russian accounts receivable |
|
|
5.4 |
|
|
|
— |
|
|
|
— |
|
|
|
5.4 |
|
Depreciation |
|
|
33.0 |
|
|
|
37.7 |
|
|
|
136.7 |
|
|
|
132.0 |
|
Non-GAAP adjusted EBITDA |
|
$ |
253.3 |
|
|
$ |
289.7 |
|
|
$ |
1,117.0 |
|
|
$ |
1,080.6 |
|
Note: Components may not sum to total due to rounding.
33
Reconciliation of Segment Adjusted EBITDA
Segment adjusted EBITDA is provided as a performance measure in Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements included herein. Below we reconcile segment adjusted EBITDA for each segment individually to operating income (loss) for that segment to supplement the reconciliation of the total segment adjusted EBITDA to consolidated operating loss in that footnote.
Connectivity and Cable Solutions Segment
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
Operating income |
|
$ |
37.3 |
|
|
$ |
26.1 |
|
Adjustments: |
|
|
|
|
|
|
||
Amortization of purchased intangible assets |
|
|
29.4 |
|
|
|
40.2 |
|
Restructuring costs, net |
|
|
2.9 |
|
|
|
16.7 |
|
Equity-based compensation |
|
|
4.0 |
|
|
|
5.7 |
|
Transaction, transformation and integration costs |
|
|
4.4 |
|
|
|
4.2 |
|
Patent claims and litigation settlements |
|
|
1.6 |
|
|
|
— |
|
Reserve for Russian accounts receivable |
|
|
4.9 |
|
|
|
— |
|
Depreciation |
|
|
14.0 |
|
|
|
13.0 |
|
Adjusted EBITDA |
|
$ |
98.6 |
|
|
$ |
106.0 |
|
Outdoor Wireless Networks Segment
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
Operating income |
|
$ |
52.9 |
|
|
$ |
50.8 |
|
Adjustments: |
|
|
|
|
|
|
||
Amortization of purchased intangible assets |
|
|
8.1 |
|
|
|
8.8 |
|
Restructuring costs, net |
|
|
2.2 |
|
|
|
5.8 |
|
Equity-based compensation |
|
|
1.9 |
|
|
|
2.5 |
|
Transaction, transformation and integration costs |
|
|
1.8 |
|
|
|
1.9 |
|
Reserve for Russian accounts receivable |
|
|
0.1 |
|
|
|
— |
|
Depreciation |
|
|
3.8 |
|
|
|
3.9 |
|
Adjusted EBITDA |
|
$ |
71.0 |
|
|
$ |
73.7 |
|
Networking Intelligent Cellular and Security Solutions Segment
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
Operating loss |
|
$ |
(43.0 |
) |
|
$ |
(60.4 |
) |
Adjustments: |
|
|
|
|
|
|
||
Amortization of purchased intangible assets |
|
|
15.5 |
|
|
|
18.0 |
|
Restructuring costs, net |
|
|
3.6 |
|
|
|
11.2 |
|
Equity-based compensation |
|
|
3.6 |
|
|
|
5.1 |
|
Transaction, transformation and integration costs |
|
|
1.2 |
|
|
|
1.4 |
|
Acquisition accounting adjustments |
|
|
0.6 |
|
|
|
1.5 |
|
Patent claims and litigation settlements |
|
|
— |
|
|
|
0.3 |
|
Reserve for Russian accounts receivable |
|
|
0.4 |
|
|
|
— |
|
Depreciation |
|
|
4.4 |
|
|
|
5.5 |
|
Adjusted EBITDA |
|
$ |
(13.8 |
) |
|
$ |
(17.4 |
) |
34
Access Network Solutions Segment
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
Operating income (loss) |
|
$ |
(6.6 |
) |
|
$ |
23.9 |
|
Adjustments: |
|
|
|
|
|
|
||
Amortization of purchased intangible assets |
|
|
61.7 |
|
|
|
61.7 |
|
Restructuring costs, net |
|
|
2.6 |
|
|
|
4.8 |
|
Equity-based compensation |
|
|
4.2 |
|
|
|
6.3 |
|
Transaction, transformation and integration costs |
|
|
5.5 |
|
|
|
2.2 |
|
Acquisition accounting adjustments |
|
|
0.8 |
|
|
|
1.2 |
|
Depreciation |
|
|
6.0 |
|
|
|
7.8 |
|
Adjusted EBITDA |
|
$ |
74.2 |
|
|
$ |
108.0 |
|
Home Networks Segment
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(in millions) |
|
|||||
Operating loss |
|
$ |
(13.8 |
) |
|
$ |
(31.5 |
) |
Adjustments: |
|
|
|
|
|
|
||
Amortization of purchased intangible assets |
|
|
26.0 |
|
|
|
26.0 |
|
Restructuring costs, net |
|
|
0.8 |
|
|
|
5.9 |
|
Equity-based compensation |
|
|
2.9 |
|
|
|
3.9 |
|
Transaction, transformation and integration costs |
|
|
2.6 |
|
|
|
6.0 |
|
Acquisition accounting adjustments |
|
|
0.4 |
|
|
|
0.5 |
|
Patent claims and litigation settlements |
|
|
(0.4 |
) |
|
|
1.2 |
|
Depreciation |
|
|
4.8 |
|
|
|
7.5 |
|
Adjusted EBITDA |
|
$ |
23.3 |
|
|
$ |
19.4 |
|
Note: Components may not sum to total due to rounding.
35
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q or any other oral or written statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These statements may discuss goals, intentions or expectations as to future plans, trends, events, results of operations or financial condition or otherwise, in each case, based on current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. These forward-looking statements are generally identified by their use of such terms and phrases as “intend,” “goal,” “estimate,” “expect,” “project,” “projections,” “plans,” “potential,” “anticipate,” “should,” “could,” “designed to,” “foreseeable future,” “believe,” “think,” “scheduled,” “outlook,” “target,” “guidance” and similar expressions, although not all forward-looking statements contain such terms. This list of indicative terms and phrases is not intended to be all-inclusive.
These forward-looking statements are subject to various risks and uncertainties, many of which are outside our control, including, without limitation, risks related to the successful execution of CommScope NEXT; changes in cost and availability of key raw materials, components and commodities and the potential effect on customer pricing and timing of delivery of products to customers; risks associated with our dependence on a limited number of key suppliers for certain raw materials and components; potential difficulties in realigning global manufacturing capacity and capabilities among our global manufacturing facilities or those of our contract manufacturers that may affect our ability to meet customer demands for products; possible future restructuring actions; the risk that our manufacturing operations, including our contract manufacturers that we rely on, encounter capacity, production, quality, financial or other difficulties causing difficulty in meeting customer demands; substantial indebtedness and restrictive debt covenants; our ability to incur additional indebtedness; our ability to generate cash to service our indebtedness; the potential separation of the Home Networks business or any other potential separation, divestiture or discontinuance of a business or product line, including uncertainty regarding the timing of the separation, achieving the expected benefits and the potential disruption to the business; our ability to integrate and fully realize anticipated benefits from prior or future divestitures, acquisitions or equity investments; our dependence on customers’ capital spending on data and communication systems; concentration of sales among a limited number of customers and channel partners; risks associated with our sales through channel partners; changes to the regulatory environment in which we and our customers operate; changes in technology; industry competition and the ability to retain customers through product innovation, introduction, and marketing; possible future impairment charges for fixed or intangible assets, including goodwill; our ability to attract and retain qualified key employees; labor unrest; product quality or performance issues, including those associated with our suppliers or contract manufacturers, and associated warranty claims; our ability to maintain effective management information technology systems and to successfully implement major systems initiatives; cyber-security incidents, including data security breaches, ransomware or computer viruses; the use of open standards; the long-term impact of climate change; significant international operations exposing us to economic risks like variability in foreign exchange rates and inflation as well as political and other risks, including the impact of wars, regional conflicts and terrorism; the potential impact of higher than normal inflation; our ability to comply with governmental anti-corruption laws and regulations and export and import controls and sanctions worldwide; our ability to compete in international markets due to export and import controls to which we may be subject; changes in the laws and policies in the United States affecting trade, including the risk and uncertainty related to tariffs or potential trade wars and potential changes to laws and policies, that may impact our products; cost of protecting or defending intellectual property; costs and challenges of compliance with domestic and foreign environmental laws; the impact of litigation and similar regulatory proceedings that we are involved in or may become involved in, including the costs of such litigation; the scope, duration and impact of disease outbreaks and pandemics, such as COVID-19, on our business including employees, sites, operations, customers, supply chain and the global economy; income tax rate variability and ability to recover amounts recorded as deferred tax assets; and other factors beyond our control. These and other factors are discussed in greater detail in our 2021 Annual Report, and may be updated from time to time in our annual reports, quarterly reports, current reports and other filings we make with the Securities and Exchange Commission. Although the information contained in this Quarterly Report on Form 10-Q represents our best judgment as of the date of this report based on information currently available and reasonable assumptions, we can give no assurance that the expectations will be attained or that any deviation will not be material. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date made. We are not undertaking any duty or obligation to update this information to reflect developments or information obtained after the date of this report, except as otherwise may be required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the interest rate risk, commodity price risk or foreign currency exchange rate risk information previously reported under Item 7A of our 2021 Annual Report, as filed with the SEC on February 17, 2022.
36
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
Reference should be made to our 2021 Annual Report for additional information regarding discussion of the effectiveness of the Company’s controls and procedures. There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
37
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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, incur 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. The outcome of these claims and notices is uncertain and a reasonable estimate of the loss from unfavorable outcomes in certain of these matters either cannot be determined or is estimated at the minimum amount of a range of estimates. The actual loss could be material and may vary significantly from our estimates.
The Company is also either a plaintiff or a defendant in certain other pending legal matters in the normal course of business. Management believes none of these 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.
ITEM 1A. RISK FACTORS
The Company’s business, financial condition, results of operations and cash flows are subject to various risks which could cause actual results to vary from recent results or from anticipated future results. There have been no material changes to our risk factors disclosed in Part I - Item 1A, Risk Factors, of our Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities:
None.
Issuer Purchases of Equity Securities:
The following table summarizes the stock purchase activity for the three months ended March 31, 2022:
Period |
|
Total Number |
|
|
Average |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
Maximum Value of Shares that May Yet be Purchased Under the Plans or Programs |
|
||||
January 1, 2022 - January 31, 2022 |
|
|
10,504 |
|
|
$ |
11.44 |
|
|
|
— |
|
|
$ |
— |
|
February 1, 2022 - February 28, 2022 |
|
|
3,981 |
|
|
$ |
9.20 |
|
|
|
— |
|
|
$ |
— |
|
March 1, 2022 - March 31, 2022 |
|
|
1,216,754 |
|
|
$ |
8.62 |
|
|
|
— |
|
|
$ |
— |
|
Total |
|
|
1,231,239 |
|
|
$ |
8.65 |
|
|
|
— |
|
|
|
|
|
(1) The shares purchased were withheld to satisfy the withholding tax obligations related to restricted stock units and performance share units that vested during the period.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
38
ITEM 6. EXHIBITS
10.1 ** |
|
31.1 ** |
Certification of Principal Executive Officer pursuant to Rule 13a-14(a). |
31.2 ** |
Certification of Principal Financial Officer pursuant to Rule 13a-14(a). |
32.1 ** |
|
101.INS |
Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
101.SCH |
Inline XBRL Schema Document, furnished herewith. |
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document). |
** |
Filed herewith. |
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
COMMSCOPE HOLDING COMPANY, INC. |
|
|
May 4, 2022 |
/s/ Kyle D. Lorentzen |
Date |
Kyle D. Lorentzen |
|
Executive Vice President and Chief Financial Officer |
|
(Principal Financial Officer and duly authorized officer) |
|
|
|
|
40
Exhibit 10.1
P E R F O R M A N C E S H A R E U N I T A W A R D C E R T I F I C A T E
Non-transferable
G R A N T T O
_____________________________
(“Grantee”)
by CommScope Holding Company, Inc. (the “Company”) of
[________] performance share units convertible, on a one-for-one basis, into shares of Stock (the “Units”).
The Units are granted pursuant to and subject to the provisions of the CommScope Holding Company, Inc. Amended and Restated 2019 Long-Term Incentive Plan (the “Plan”) and to the terms and conditions set forth on the following pages (the “Terms and Conditions”). By accepting the Units, Grantee shall be deemed to have agreed to the Terms and Conditions and the Plan. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Plan.
Grantee will have the right to earn between 0% and [___]% of the Units based on the Company’s achievement of performance goals relating to [________] for the [________] period covering [________] (the “Performance Period”), as set forth on Appendix A.
Within [__] days after the Performance Period ends, the Committee will determine and certify the Company’s performance against the performance goals and will determine the number of Units eligible for vesting (the “Confirmed Units”). The date such certification occurs is referred to in this certificate as the “Certification Date.” Unless vesting is accelerated as provided in the Plan or Section 2 of the Terms and Conditions, the Confirmed Units shall vest (become non-forfeitable) on [________], subject to Grantee’s Continuous Service on such date.
IN WITNESS WHEREOF, CommScope Holding Company, Inc., acting by and through its duly authorized officers, has caused this Award Certificate to be duly executed.
COMMSCOPE HOLDING COMPANY, INC.
By:
Its:
Grant Date:
TERMS AND CONDITIONS
1. Performance and Certification. The Units will become eligible for vesting based upon the Company’s performance against the performance goals specified in Appendix A. Except as provided in Section 2(c) and (d), no Units will become Confirmed Units unless and until the Committee determines and certifies the performance following the Performance Period. To the extent the Company fails to achieve 100% of the performance conditions, Grantee shall forfeit all right, title and interest in and to the Units that do not become Confirmed Units as of the Certification Date and the non-Confirmed Units will be reconveyed to the Company without further consideration or any act or action by Grantee.
2. Vesting of Confirmed Units The Confirmed Units will vest and become non-forfeitable on the earliest to occur of the following (each, a “Vesting Date”):
(a) The Confirmed Units will vest on [________], provided Grantee is then still providing Continuous Service to the Company.
(b) If Grantee’s Continuous Service is terminated by the Company due to the elimination of Grantee’s position or a reduction in force, or due to death or Disability, then:
(i) if such termination occurs during the Performance Period, the Units shall not expire on account of Grantee’s termination and shall remain eligible to vest based upon actual performance over the Performance Period. To the extent the performance goals are met for the Performance Period, then the “Pro Rata Confirmed Units” (as defined herein) will vest on the Certification Date, and any non-Pro Rata Confirmed Units will be forfeited,
(ii) if such termination occurs after the end of the Performance Period but prior to the Certification Date, then all of the Confirmed Units will vest on the Certification Date, and
(iii) if such termination occurs after the Certification Date but prior to [________], then all of the Confirmed Units will vest on the date of such termination.
For purposes of this Award Certificate, the “Pro Rata Confirmed Units” shall be equal to the product of (x) the total number of Confirmed Units and (y) a fraction, the numerator of which is the number of full calendar months that elapsed from the start of the Performance Period, until the date of the termination of Grantee’s Continuous Service due to the elimination of Grantee’s position, reduction in force, death or Disability, as the case may be, and the denominator of which is 36.
(c) If a Change in Control occurs and the Units are not assumed by the surviving entity or otherwise equitably converted or substituted in connection with the Change in Control, then:
(i) if such Change in Control occurs during the first year of the Performance Period, then (A) the Performance Period shall end, (B) the number of Units shall be prorated by multiplying it by a fraction, the numerator of which is the number of full calendar months that elapsed from the start of the Performance Period through the date of the Change in Control, and the denominator of which is 36, (C) such prorated portion of the Units shall vest immediately prior to the Change in Control based upon deemed performance at the “target” level, and (D) the remaining unvested portion of the Units shall be forfeited and cancelled as of the Change in Control, and
(ii) if such Change in Control occurs during the second or third year of the Performance Period, then (A) the Performance Period shall end, (B) the Committee shall determine the number of Confirmed Units taking into consideration actual performance through [________] (or using another methodology, in the Committee’s discretion), (C) the number of such Confirmed Units shall be prorated by multiplying it by a fraction, the numerator of which is the number of full calendar months that elapsed from the start of the Performance Period through the date of the Change in Control, and the denominator of which is 36, (D) such prorated portion of the Confirmed Units shall vest immediately prior to the Change in Control, and (E) the remaining unvested portion of the Units shall be forfeited and cancelled as of the Change in Control, and
(iii) if such Change in Control occurs after the Performance Period but prior to [________], then the Committee will determine the Confirmed Units and all of the Confirmed Units will vest immediately prior to the Change in Control.
(d) If a Change in Control occurs and the Units are assumed by the surviving entity or otherwise equitably converted or substituted in connection with the Change in Control, then the Performance Period shall end and (i) if such Change in Control occurs during the first year of the Performance Period, the Units shall become Confirmed Units at the time of the Change in Control based upon deemed performance at the “target” level, (ii) if such Change in Control occurs during the second or third year of the Performance Period, the Committee shall determine the number of Confirmed Units taking into consideration actual performance through [________] (or using another methodology, in the Committee’s discretion), and (iii) if such Change in Control occurs after the Performance Period but prior to [________], then the Committee will determine the Confirmed Units; and in any such case the Confirmed Units will vest and become non-forfeitable on the earliest to occur of the following Vesting Dates:
(A) the Confirmed Units will vest on [________], provided Grantee is then still providing Continuous Service to the Company, and
(B) if Grantee’s Continuous Service is terminated by the Company without Cause or by Grantee for Good Reason within two years after the effective date of the Change in Control; or due to death or Disability, then the Confirmed Units will vest on the date of such termination.
If Grantee’s Continuous Service terminates prior to a Vesting Date for any reason other than as described in (b) or (d) above, Grantee shall forfeit all right, title and interest in and to the then unvested Units as of the date of such termination and the unvested Units will be reconveyed to the Company without further consideration or any act or action by Grantee.
3. Conversion to Stock. The Confirmed Units that vest upon a Vesting Date will be converted to shares of Stock on the earliest of (i) [________], (ii) the effective date of a Change in Control if the Units are not assumed by the surviving entity or otherwise equitably converted or substituted in connection with the Change in Control, and (iii) the date of Grantee’s termination of employment under Section 2(d)(ii) (or, if required by Section 409A of the Code, the six-month anniversary of such termination). The shares of Stock will be registered in the name of Grantee as of the Vesting Date, and certificates for the shares of Stock (or, at the option of the Company, statements of book entry notation of the shares of Stock in the name of Grantee in lieu thereof) shall be delivered to Grantee or Grantee’s designee upon request of Grantee as soon as practicable after the conversion date.
4. Dividend Rights. If any dividends or other distributions are paid with respect to the Stock while the Units are outstanding, the dollar amount or fair market value of such dividends or distributions with respect to the number of shares of Stock then underlying the Units shall be credited to a bookkeeping account and held (without interest) by the Company for the account of Grantee. Such amounts shall be subject to the same vesting and forfeiture provisions as the Units to which they relate and, except as may be otherwise determined by the Committee, shall be paid by the Company in the form of a cash payment to Grantee as soon as reasonably practicable following the applicable Vesting Date.
5. Voting Rights. Grantee shall not have voting rights with respect to the Units. Upon conversion of the Units into shares of Stock, Grantee will obtain full voting rights and other rights as a stockholder of the Company.
6. Restrictions on Transfer and Pledge. No right or interest of Grantee in the Units may be pledged, encumbered, or hypothecated to or in favor of any party other than the Company or an Affiliate, or shall be subject to any lien, obligation, or liability of Grantee to any other party other than the Company or an Affiliate. The Units are not assignable or transferable by Grantee other than to a beneficiary or by will or the laws of descent and distribution.
7. Restrictions on Issuance of Shares. If at any time the Committee shall determine, in its discretion, that registration, listing or qualification of the Shares underlying the Units upon any Exchange or under any foreign, federal, or local law or practice, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition to the settlement of the Units, the Units will not be converted to Shares in whole or in part unless and until such registration, listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee.
8. No Right of Continued Service. Nothing in this Award Certificate shall interfere with or limit in any way the right of the Company or any Affiliate to terminate Grantee’s service at any time, nor confer upon Grantee any right to continue to provide services to, the Company or any Affiliate.
9. Payment of Taxes. The Company or any employer Affiliate has the authority and the right to deduct or withhold, from Grantee’s paycheck or otherwise, or require Grantee to remit to the employer, an amount sufficient to satisfy federal, state, and local taxes (including Grantee’s FICA obligation) required by law to be withheld with respect to any taxable event arising in connection with the Units. The withholding requirement may be satisfied, in whole or in part, by withholding from the settlement of the Units Shares having a Fair Market Value on the date of withholding equal to the amount required to be withheld for tax purposes, all in accordance with such procedures as the Committee approves.
10. Stockholders Agreement; Registration Rights Agreement. As a condition to the issuance of Shares of Stock hereunder, Grantee agrees that such Shares shall be subject to all of the terms, conditions and restrictions contained in any Stockholders Agreement by and among the Company and the Company’s stockholders and in any Registration Rights Agreement by and among the Company and the Company’s stockholders and that Grantee will become a party to and subject to such Stockholders Agreement and such Registration Rights Agreement.
11. Plan Controls. The terms contained in the Plan are incorporated into and made a part of this Award Certificate, and this Award Certificate shall be governed by and construed in accordance with the Plan. In the event of any actual or alleged conflict between the provisions of the Plan and the provisions of this Award Certificate, the provisions of the Plan shall be controlling and determinative.
12. Successors. This Award Certificate shall be binding upon any successor of the Company, in accordance with the terms of this Award Certificate and the Plan.
13. Severability. If any one or more of the provisions contained in this Award Certificate are invalid, illegal or unenforceable, the other provisions of this Award Certificate will be construed and enforced as if the invalid, illegal or unenforceable provision had never been included.
14. Notice. Notices hereunder must be in writing, delivered personally or sent by registered or certified U.S. mail, return receipt requested, postage prepaid. Notices to the Company must be addressed to CommScope Holding Company, Inc., 1100 CommScope
Place, SE, Hickory, North Carolina 28602, Attn: Corporate Secretary, or any other address designated by the Company in a written notice to Grantee. Notices to Grantee will be directed to the address of Grantee then currently on file with the Company, or at any other address given by Grantee in a written notice to the Company.
15. Compensation Recoupment Policy. The Units and any Stock issued thereunder shall be subject to any compensation recoupment policy of the Company that is applicable by its terms to Grantee and to awards of this type.
16. Sell to Cover Policy. By accepting the Units, (i) Grantee agrees that he or she shall be subject to, and consents to the application of, any policy adopted by the Company that requires Grantee to sell Shares to satisfy his or her federal, state, and local tax withholding obligations (including Grantee’s FICA obligation) that arise with respect to this Award (a “sell to cover” policy), and (ii) in connection with any such “sell to cover” policy, Grantee hereby authorizes the plan administrator or other entity designated by the Company in its sole discretion to sell a number of Shares issued in connection with the vesting of the Units, which the Company determines, in its sole discretion, is sufficient to generate an amount to satisfy such tax withholding obligations, and to pay such amounts to the Company.
Exhibit 31.1
MANAGEMENT CERTIFICATION
I, Charles L. Treadway, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of CommScope Holding Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: May 4, 2022 |
|
|
|
/s/ Charles L. Treadway
|
|
Name: |
Charles L. Treadway |
Title: |
President, Chief Executive Officer and Director (Principal Executive Officer) |
Exhibit 31.2
MANAGEMENT CERTIFICATION
I, Kyle D. Lorentzen, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of CommScope Holding Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: May 4, 2022 |
|
|
|
/s/ Kyle D. Lorentzen
|
|
Name: |
Kyle D. Lorentzen |
Title: |
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CommScope Holding Company, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Charles L. Treadway, President, Chief Executive Officer and Director of the Company, and Kyle D. Lorentzen, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350 as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 4, 2022 |
|
/s/ Charles L. Treadway |
Charles L. Treadway |
President, Chief Executive Officer and Director |
(Principal Executive Officer) |
/s/ Kyle D. Lorentzen |
Kyle D. Lorentzen |
Executive Vice President and Chief Financial Officer |
(Principal Financial Officer) |