0001564590-16-027071.txt : 20161103 0001564590-16-027071.hdr.sgml : 20161103 20161102182614 ACCESSION NUMBER: 0001564590-16-027071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 86 CONFORMED PERIOD OF REPORT: 20160930 FILED AS OF DATE: 20161103 DATE AS OF CHANGE: 20161102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CommScope Holding Company, Inc. CENTRAL INDEX KEY: 0001517228 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 274332098 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36146 FILM NUMBER: 161969340 BUSINESS ADDRESS: STREET 1: 1100 COMMSCOPE PLACE, SE CITY: HICKORY STATE: NC ZIP: 28602 BUSINESS PHONE: 828-324-2200 MAIL ADDRESS: STREET 1: 1100 COMMSCOPE PLACE, SE CITY: HICKORY STATE: NC ZIP: 28602 10-Q 1 comm-10q_20160930.htm FORM 10-Q comm-10q_20160930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission file number 001 - 36146

 

CommScope Holding Company, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

27-4332098

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

1100 CommScope Place, SE

Hickory, North Carolina

(Address of principal executive offices)

28602

(Zip Code)

(828) 324-2200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of October 17, 2016 there were 192,929,959 shares of Common Stock outstanding.

 

 

 

 

 


CommScope Holding Company, Inc.

Form 10-Q

September 30, 2016

Table of Contents

 

Part I—Financial Information (Unaudited):

 

 

 

Item 1. Condensed Consolidated Financial Statements:

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

2

 

 

Condensed Consolidated Balance Sheets

3

 

 

Condensed Consolidated Statements of Cash Flows

4

 

 

Condensed Consolidated Statements of Stockholders’ Equity

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

38

 

 

Item 4. Controls and Procedures

39

 

 

Part II—Other Information:

 

 

 

Item 1. Legal Proceedings

40

 

 

Item 1A. Risk Factors

40

 

 

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

40

 

 

Item 3. Defaults Upon Senior Securities

40

 

 

Item 4. Mine Safety Disclosures

40

 

 

Item 5. Other Information

40

 

 

Item 6. Exhibits

40

 

 

Signatures

41

 

 

 

1


Part 1 -- Financial Information (Unaudited)

ITEM 1.  Condensed Consolidated Financial Statements

 

CommScope Holding Company, Inc.

 

Condensed Consolidated Statements of Operations

 

and Comprehensive Income (Loss)

 

(Unaudited -- In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net sales

 

$

1,293,948

 

 

$

972,597

 

 

$

3,744,715

 

 

$

2,665,287

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

751,097

 

 

 

633,706

 

 

 

2,201,014

 

 

 

1,718,497

 

Selling, general and administrative

 

 

220,835

 

 

 

203,820

 

 

 

664,365

 

 

 

460,288

 

Research and development

 

 

48,430

 

 

 

31,100

 

 

 

152,554

 

 

 

86,818

 

Amortization of purchased intangible assets

 

 

74,639

 

 

 

54,287

 

 

 

224,270

 

 

 

143,697

 

Restructuring costs, net

 

 

10,826

 

 

 

6,868

 

 

 

24,503

 

 

 

10,633

 

Asset impairments

 

 

7,375

 

 

 

85,334

 

 

 

22,668

 

 

 

85,334

 

Total operating costs and expenses

 

 

1,113,202

 

 

 

1,015,115

 

 

 

3,289,374

 

 

 

2,505,267

 

Operating income (loss)

 

 

180,746

 

 

 

(42,518

)

 

 

455,341

 

 

 

160,020

 

Other expense, net

 

 

(7,546

)

 

 

(8,269

)

 

 

(21,898

)

 

 

(5,556

)

Interest expense

 

 

(68,349

)

 

 

(73,387

)

 

 

(215,024

)

 

 

(158,752

)

Interest income

 

 

1,023

 

 

 

1,276

 

 

 

4,750

 

 

 

3,336

 

Income (loss) before income taxes

 

 

105,874

 

 

 

(122,898

)

 

 

223,169

 

 

 

(952

)

Income tax (expense) benefit

 

 

(12,043

)

 

 

42,102

 

 

 

(54,797

)

 

 

5,224

 

Net income (loss)

 

$

93,831

 

 

$

(80,796

)

 

$

168,372

 

 

$

4,272

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.49

 

 

$

(0.42

)

 

$

0.88

 

 

$

0.02

 

Diluted

 

$

0.48

 

 

$

(0.42

)

 

$

0.86

 

 

$

0.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

192,719

 

 

 

190,269

 

 

 

192,275

 

 

 

189,483

 

Diluted

 

 

196,598

 

 

 

190,269

 

 

 

196,141

 

 

 

193,930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

93,831

 

 

$

(80,796

)

 

$

168,372

 

 

$

4,272

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

 

8,610

 

 

 

(22,835

)

 

 

8,303

 

 

 

(40,685

)

Pension and other postretirement benefit activity

 

 

(376

)

 

 

(1,566

)

 

 

(3,511

)

 

 

(4,739

)

Available-for-sale securities

 

 

(257

)

 

 

(1,737

)

 

 

(2,391

)

 

 

(5,873

)

Total other comprehensive income (loss), net of tax

 

 

7,977

 

 

 

(26,138

)

 

 

2,401

 

 

 

(51,297

)

Total comprehensive income (loss)

 

$

101,808

 

 

$

(106,934

)

 

$

170,773

 

 

$

(47,025

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

2


CommScope Holding Company, Inc.

Condensed Consolidated Balance Sheets

(Unaudited - In thousands, except share amounts)

 

 

 

September 30, 2016

 

 

December 31, 2015

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

517,275

 

 

$

562,884

 

Accounts receivable, less allowance for doubtful accounts of

   $19,388 and $19,392, respectively

 

 

966,839

 

 

 

833,041

 

Inventories, net

 

 

475,679

 

 

 

441,815

 

Prepaid expenses and other current assets

 

 

130,690

 

 

 

166,900

 

Total current assets

 

 

2,090,483

 

 

 

2,004,640

 

Property, plant and equipment, net of accumulated depreciation

   of $288,137 and $243,806, respectively

 

 

499,842

 

 

 

528,706

 

Goodwill

 

 

2,803,227

 

 

 

2,690,636

 

Other intangible assets, net

 

 

1,905,255

 

 

 

2,147,483

 

Other noncurrent assets

 

 

112,834

 

 

 

131,166

 

Total assets

 

$

7,411,641

 

 

$

7,502,631

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

417,546

 

 

$

300,829

 

Other accrued liabilities

 

 

497,777

 

 

 

371,743

 

Current portion of long-term debt

 

 

12,500

 

 

 

12,520

 

Total current liabilities

 

 

927,823

 

 

 

685,092

 

Long-term debt

 

 

4,701,486

 

 

 

5,231,131

 

Deferred income taxes

 

 

202,429

 

 

 

202,487

 

Pension and other postretirement benefit liabilities

 

 

31,201

 

 

 

37,102

 

Other noncurrent liabilities

 

 

115,471

 

 

 

124,099

 

Total liabilities

 

 

5,978,410

 

 

 

6,279,911

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $.01 par value: Authorized shares: 200,000,000;

 

 

 

 

 

 

 

 

Issued and outstanding shares: None

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Issued and outstanding shares: 192,868,939 and 191,368,727,

 

 

 

 

 

 

 

 

respectively

 

 

1,940

 

 

 

1,923

 

Additional paid-in capital

 

 

2,258,869

 

 

 

2,216,202

 

Retained earnings (accumulated deficit)

 

 

(644,022

)

 

 

(812,394

)

Accumulated other comprehensive loss

 

 

(169,277

)

 

 

(171,678

)

Treasury stock, at cost: 1,101,820 shares and 986,222 shares,

 

 

 

 

 

 

 

 

respectively

 

 

(14,279

)

 

 

(11,333

)

Total stockholders' equity

 

 

1,433,231

 

 

 

1,222,720

 

Total liabilities and stockholders' equity

 

$

7,411,641

 

 

$

7,502,631

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


CommScope Holding Company, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited - In thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

168,372

 

 

$

4,272

 

Adjustments to reconcile net income to net cash generated by

  operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

301,450

 

 

 

199,485

 

Equity-based compensation

 

 

26,621

 

 

 

21,055

 

Deferred income taxes

 

 

(94,239

)

 

 

(92,538

)

Asset impairments

 

 

22,668

 

 

 

85,334

 

Excess tax benefits from equity-based compensation

 

 

(8,083

)

 

 

(19,194

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(96,337

)

 

 

(116,131

)

Inventories

 

 

(23,480

)

 

 

67,518

 

Prepaid expenses and other assets

 

 

12,540

 

 

 

(43,286

)

Accounts payable and other liabilities

 

 

218,590

 

 

 

74,524

 

Other

 

 

(2,850

)

 

 

4,697

 

Net cash generated by operating activities

 

 

525,252

 

 

 

185,736

 

Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(49,660

)

 

 

(39,422

)

Proceeds from sale of property, plant and equipment

 

 

3,935

 

 

 

219

 

Cash paid for acquisitions including purchase price adjustments, net of

   cash acquired

 

 

2,714

 

 

 

(2,957,476

)

Other

 

 

3,487

 

 

 

3,268

 

Net cash used in investing activities

 

 

(39,524

)

 

 

(2,993,411

)

Financing Activities:

 

 

 

 

 

 

 

 

Long-term debt repaid

 

 

(546,025

)

 

 

(502,566

)

Long-term debt proceeds

 

 

 

 

 

3,246,875

 

Long-term debt financing costs

 

 

 

 

 

(73,890

)

Proceeds from the issuance of common shares under equity-based

   compensation plans

 

 

8,637

 

 

 

21,273

 

Excess tax benefits from equity-based compensation

 

 

8,083

 

 

 

19,194

 

Tax withholding payments for vested equity-based compensation

  awards

 

 

(2,946

)

 

 

 

Net cash generated by (used in) financing activities

 

 

(532,251

)

 

 

2,710,886

 

Effect of exchange rate changes on cash and cash equivalents

 

 

914

 

 

 

(14,570

)

Change in cash and cash equivalents

 

 

(45,609

)

 

 

(111,359

)

Cash and cash equivalents, beginning of period

 

 

562,884

 

 

 

729,321

 

Cash and cash equivalents, end of period

 

$

517,275

 

 

$

617,962

 

 

See notes to unaudited condensed consolidated financial statements.

 

4


CommScope Holding Company, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(Unaudited - In thousands, except share amounts)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

 

2015

 

Number of common shares outstanding:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

191,368,727

 

 

 

187,831,389

 

Issuance of shares under equity-based compensation plans

 

 

1,615,810

 

 

 

2,759,107

 

Shares surrendered under equity-based compensation plans

 

 

(115,598

)

 

 

 

Balance at end of period

 

 

192,868,939

 

 

 

190,590,496

 

Common stock:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,923

 

 

$

1,888

 

Issuance of shares under equity-based compensation plans

 

 

17

 

 

 

28

 

Balance at end of period

 

$

1,940

 

 

$

1,916

 

Additional paid-in capital:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

2,216,202

 

 

$

2,141,433

 

Issuance of shares under equity-based compensation plans

 

 

8,620

 

 

 

21,246

 

Equity-based compensation

 

 

26,530

 

 

 

17,500

 

Tax benefit from shares issued under equity-based compensation plans

 

 

7,517

 

 

 

19,107

 

Balance at end of period

 

$

2,258,869

 

 

$

2,199,286

 

Retained earnings (accumulated deficit):

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(812,394

)

 

$

(741,519

)

Net income

 

 

168,372

 

 

 

4,272

 

Balance at end of period

 

$

(644,022

)

 

$

(737,247

)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(171,678

)

 

$

(83,548

)

Other comprehensive income (loss), net of tax

 

 

2,401

 

 

 

(51,297

)

Balance at end of period

 

$

(169,277

)

 

$

(134,845

)

Treasury stock, at cost:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(11,333

)

 

$

(10,635

)

Net shares surrendered under equity-based compensation plans

 

 

(2,946

)

 

 

 

Balance at end of period

 

$

(14,279

)

 

$

(10,635

)

Total stockholders' equity

 

$

1,433,231

 

 

$

1,318,475

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

5


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, 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 essential infrastructure solutions for communication networks. The Company’s solutions and services for wired and wireless networks enable high-bandwidth data, video and voice applications. CommScope’s global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions and global manufacturing and distribution scale.

On August 28, 2015, the Company acquired TE Connectivity’s Broadband Network Solutions (BNS) business in an all-cash transaction valued at approximately $3.0 billion. See Note 2 for additional discussion of the BNS acquisition.

As of January 1, 2016, the Company reorganized its internal management and reporting structure as part of the integration of the BNS acquisition. The reorganization changed the information regularly reviewed by the Company’s chief operating decision maker for purposes of allocating resources and assessing performance.  As a result, the Company is reporting financial performance for 2016 based on its new operating segments: CommScope Connectivity Solutions (CCS) and CommScope Mobility Solutions (CMS). Both CCS and CMS represent non-aggregated reportable operating segments. Prior to this change, the Company operated and reported the following operating segments: Wireless, Enterprise, Broadband and BNS. All prior period amounts in these interim condensed consolidated financial statements have been recast to reflect these operating segment changes.

Basis of Presentation

The Condensed Consolidated Balance Sheet as of September 30, 2016, the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015, and the Condensed Consolidated Statements of Cash Flows and Stockholders’ Equity for the nine months ended September 30, 2016 and 2015 are unaudited and reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The results of operations for these interim periods are not necessarily indicative of the results of operations to be expected for any future period or the full fiscal year.

The BNS business results of operations that are reported in the Company’s unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016 are for the fiscal periods June 25, 2016 through September 30, 2016 and December 26, 2015 through September 30, 2016, respectively. The BNS business results for the three months ended September 30, 2016 include fourteen weeks compared to thirteen weeks in each of the first two quarters of 2016. The BNS business results of operations that are reported in the Company’s unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2015 are from August 28, 2015, the date of acquisition, through their fiscal period ended September 25, 2015.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and are presented in accordance with the applicable requirements of Regulation S-X. Accordingly, these financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the 2015 Annual Report). There were no changes in the Company’s significant accounting policies during the three or nine months ended September 30, 2016. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements.

Concentrations of Risk and Related Party Transactions

Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 11% of the Company’s total net sales during the three and nine months ended September 30, 2016. Net sales to Anixter accounted for 13% of the Company’s total net sales during the three and nine months ended September 30, 2015. Sales to Anixter primarily originate within the CCS segment. Other than Anixter, no other direct customer accounted for 10% or more of the Company’s total net sales for the three or nine months ended September 30, 2016 or 2015.

Accounts receivable from Anixter and Verizon Communications Inc. (Verizon) each represented approximately 11% of accounts receivable as of September 30, 2016. Other than Anixter and Verizon, no direct customer accounted for more than 10% of the Company’s accounts receivable as of September 30, 2016.

As of September 30, 2016, funds affiliated with The Carlyle Group (Carlyle) owned 10.2% of the outstanding shares of CommScope.

 

 

6


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

Product Warranties

The Company recognizes a liability for the estimated claims that may be paid under its customer warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products. These product warranties extend over periods ranging from one to twenty-five years from the date of sale, depending upon the product subject to the warranty.The Company records a provision for estimated future warranty claims as cost of sales based upon the historical relationship of warranty claims to sales and specifically-identified warranty issues. The Company bases its estimates on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Such revisions may be material.

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Product warranty accrual, beginning of period

 

$

18,356

 

 

$

15,194

 

 

$

17,964

 

 

$

17,054

 

Accrual assumed in BNS acquisition

 

 

 

 

 

1,900

 

 

 

 

 

 

1,900

 

Provision for warranty claims

 

 

3,435

 

 

 

2,054

 

 

 

7,954

 

 

 

5,968

 

Warranty claims paid

 

 

(14

)

 

 

(3,127

)

 

 

(4,141

)

 

 

(8,901

)

Product warranty accrual, end of period

 

$

21,777

 

 

$

16,021

 

 

$

21,777

 

 

$

16,021

 

 

Commitments and Contingencies

The Company is either a plaintiff or a defendant in pending legal matters in the normal course of business, including various matters assumed as part of the BNS acquisition. Management believes none of these legal matters will have a material adverse effect on the Company’s business or financial condition upon final disposition.

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

Asset Impairments

Goodwill is tested for impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of a reporting unit with goodwill may not be recoverable. During the first quarter of 2016, the Company assessed goodwill for impairment due to the change in reportable segments, which also resulted in changes to several reporting units. As a result, the Company performed impairment testing for goodwill under the reporting unit structure immediately before the change and determined that no impairment existed. The Company reallocated goodwill to the new reporting units under the new reporting structure and performed impairment testing for goodwill under the new segment reporting structure immediately after the change and determined that a $15.3 million goodwill impairment existed within one of the CCS reporting units at January 1, 2016. The impairment test was performed using a discounted cash flow (DCF) valuation model. Significant assumptions in the DCF model are annual revenue growth rates, annual operating income margins and the discount rate used to determine the present value of the cash flow projections. The discount rate was based on the estimated weighted average cost of capital as of the test date for market participants in our reporting units’ industries.

 

Results for the three and nine months ended September 30, 2015, included a goodwill impairment charge of $74.4 million in the CMS segment.

Property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable, based on the undiscounted cash flows expected to be derived from the use and ultimate disposition of the assets. Assets identified as impaired are carried at estimated fair value. During the three months ended September 30, 2016, as a result of revisions to the business plan for a particular product line, the Company determined that certain intangible assets in the CCS segment were no longer recoverable and a $7.4 million impairment charge was recorded.  

7


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

Results for the three and nine months ended September 30, 2015, included a $10.9 million impairment charge in the CCS segment for a note receivable related to a previous divestiture.  Other than the impairments described above, there were no other material asset impairments identified during the three or nine months ended September 30, 2016 or 2015.

Income Taxes

The effective income tax rate of 11.4% and 24.6% for the three and nine months ended September 30, 2016, respectively, was lower than the statutory rate of 35% primarily due to a reduction in tax expense related to uncertain tax positions and the release of valuation allowances related to certain foreign deferred tax assets. The effective income tax rate was also favorably affected by the impact of earnings in foreign jurisdictions that the Company does not plan to repatriate.  These earnings are generally taxed at rates lower than the United States (U.S.) statutory rate. Offsetting these decreases for the nine months ended September 30, 2016 was the effect of the provision for state income taxes as well as the goodwill impairment for which only partial tax benefits were recorded.

 

The effective income tax rate for the three and nine months ended September 30, 2015 reflected the impact of impairment charges for which minimal tax benefits were recorded. The effective income tax rate was favorably affected by the impact of earnings in foreign jurisdictions that are generally taxed at rates lower than the U.S. statutory rate, benefits recognized from adjustments related to prior years’ tax returns and a reduction in tax expense related to uncertain tax positions. These benefits were partially offset by losses in certain jurisdictions where the Company did not recognize tax benefits due to the likelihood of them not being realizable.

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on net income divided by the weighted average number of common shares outstanding plus the effect of potentially dilutive common shares using the treasury stock method. Potentially dilutive common shares include outstanding equity-based awards (stock options, performance share units and restricted stock units). Certain outstanding equity-based awards were not included in the computation of diluted earnings per share because the effect was either antidilutive or the performance conditions were not met (1.4 million shares and 1.5 million shares for the three and nine months ended September 30, 2016, respectively, and 5.3 million shares and 1.5 million shares for the three and nine months ended September 30, 2015, respectively).  Antidilutive securities for the three months ended September 30, 2015 included 4.4 million shares of equity-based awards which would have been considered dilutive if the Company had not been in a net loss position.

The following table presents the basis for the earnings per share computations:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) for basic and diluted earnings per share

 

$

93,831

 

 

$

(80,796

)

 

$

168,372

 

 

$

4,272

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

192,719

 

 

 

190,269

 

 

 

192,275

 

 

 

189,483

 

Dilutive effect of equity-based awards

 

 

3,879

 

 

 

 

 

 

3,866

 

 

 

4,447

 

Weighted average common shares outstanding - diluted

 

 

196,598

 

 

 

190,269

 

 

 

196,141

 

 

 

193,930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.49

 

 

$

(0.42

)

 

$

0.88

 

 

$

0.02

 

Diluted

 

$

0.48

 

 

$

(0.42

)

 

$

0.86

 

 

$

0.02

 

 

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-15, Cash Flow Classification of Certain Cash Receipts and Cash Payments. The standard update amended or clarified guidance on classification of certain transactions in the statement of cash flows, including classification of debt prepayments, debt extinguishment

8


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

costs and contingent consideration payments after a business combination. ASU 2016-15 is effective for the Company as of January 1, 2018 and early adoption is permitted. The Company is evaluating the impact of this new guidance on the Company’s consolidated statement of cash flows and when it may be adopted.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The new guidance replaces the current incurred loss method used for determining credit losses on financial assets, including trade receivables, with an expected credit loss method.  ASU No. 2016-13 is effective for the Company as of January 1, 2020 and early adoption is permitted. The Company is evaluating the impact of this new guidance on the Company’s consolidated financial statements and when it may be adopted.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU No. 2016-09 is effective for the Company as of January 1, 2017 and early adoption is permitted. The Company plans to adopt this ASU as of January 1, 2017 and does not expect that its application will have a significant impact on income before income taxes; however, it may impact the Company’s net income because excess tax benefits or deficiencies, which are currently reflected in additional paid in capital, must be reflected in income tax expense under ASU No. 2016-09. The significance of the impact will depend on the intrinsic value at the time of vesting or exercise of equity-based compensation awards. The impact to the Consolidated Statements of Cash Flows will be to present excess tax benefits or deficiencies as an operating activity instead of a financing activity. The Company also expects to make an accounting policy election to account for forfeitures as they occur.

In February 2016, the FASB issued ASU No. 2016-02, Leases, which supersedes the current leasing guidance in Topic 840, Leases.   Under the new guidance, lessees are required to recognize assets and lease liabilities for the rights and obligations created by leased assets previously classified as operating leases.  ASU No. 2016-02 is effective for the Company as of January 1, 2019 and early adoption is permitted. The Company is evaluating the impact of this new guidance on the Company’s consolidated financial statements and when it may be adopted.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which modifies how entities measure equity investments (except those accounted for under the equity method of accounting) and present changes in the fair value of financial liabilities; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; changes presentation and disclosure requirements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The guidance is effective for the Company as of January 1, 2018 and with the exception of certain provisions, early adoption is not permitted. The Company is evaluating the impact of this new guidance on the Company’s consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The guidance requires that inventory be measured at the lower of cost and net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This guidance simplifies the prior guidance by eliminating the options of measuring inventory at replacement cost or net realizable value less an approximate normal profit margin. This guidance is effective for the Company as of January 1, 2017, with early adoption permitted. The Company plans to adopt the new guidance in the fourth quarter of 2016 and does not expect a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The new accounting standard defines a single comprehensive model in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the ASU is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. In August 2015, the FASB deferred the effective date of ASU No. 2014-09 by one year.  During 2016, the FASB has issued additional accounting standard updates clarifying the guidance in ASU No. 2014-09.  The Company will be required to adopt the new standard, including subsequent clarifying guidance, as of January 1, 2018 using either: (i) full retrospective application to each prior reporting period presented; or (ii) modified retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional required disclosures. The Company plans to adopt the new accounting model as of January 1, 2018 using the modified retrospective method and is continuing to assess the impact on the Company’s consolidated financial statements.

 

 

9


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

2. ACQUISITIONS

Broadband Network Solutions

On August 28, 2015, the Company acquired TE Connectivity’s BNS business in an all-cash transaction. The Company has made net payments of $3,017.4 million ($2,953.7 million net of cash acquired). As of September 30, 2016, the Company had a net payable of $1.0 million due to TE Connectivity for remaining purchase price adjustments. Net sales of $523.7 million and $1,367.8 million for the three and nine months ended September 30, 2016, respectively, and $141.1 million for the three and nine months ended September 30, 2015 related to the acquired business are reflected in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and are primarily reported in the CCS segment.

The purchase price for BNS was assigned to assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition and the excess was allocated to goodwill. The following table summarizes the preliminary allocation of the purchase price at the date of acquisition and the subsequent measurement period adjustments to arrive at the final allocation of the purchase price at the acquisition date (in millions):

 

 

 

Amounts Recognized as of Acquisition Date

 

 

Measurement Period Adjustments

 

 

Amounts Recognized as of Acquisition Date (as adjusted)

 

Cash and cash equivalents

 

$

63.7

 

 

$

 

 

$

63.7

 

Accounts receivable

 

 

252.9

 

 

 

(1.9

)

 

 

251.0

 

Inventories

 

 

266.4

 

 

 

(12.3

)

 

 

254.1

 

Other current assets

 

 

40.0

 

 

 

1.6

 

 

 

41.6

 

Property, plant and equipment

 

 

247.6

 

 

 

(1.6

)

 

 

246.0

 

Goodwill

 

 

1,242.8

 

 

 

182.9

 

 

 

1,425.7

 

Identifiable intangible assets

 

 

1,150.0

 

 

 

(63.5

)

 

 

1,086.5

 

Other noncurrent assets

 

 

22.3

 

 

 

3.0

 

 

 

25.3

 

Current liabilities

 

 

(224.2

)

 

 

(4.8

)

 

 

(229.0

)

Noncurrent pension liabilities

 

 

(30.5

)

 

 

18.9

 

 

 

(11.6

)

Other noncurrent liabilities

 

 

(27.1

)

 

 

(107.8

)

 

 

(134.9

)

Net acquisition cost

 

$

3,003.9

 

 

$

14.5

 

 

$

3,018.4

 

 

The Company has recorded measurement period adjustments since the acquisition date primarily related to the finalization of the valuation of inventory, intangible assets, plant and equipment, pension liabilities and deferred taxes. The impact of these measurement period adjustments to the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) were not material to any current year period. If these adjustments had been applied at the original acquisition date, the impact to current year and prior year periods also would have been immaterial.

The goodwill arising from the purchase price allocation of the BNS acquisition is believed to result from the company’s reputation in the marketplace and assembled workforce. A significant portion of the goodwill is expected to be deductible for income tax purposes.

Various valuation techniques were used to estimate the fair value of the assets acquired and the liabilities assumed which use significant unobservable inputs, or Level 3 inputs as defined by the fair value hierarchy.  Using these valuation approaches requires the Company to make significant estimates and assumptions.

There were certain foreign assets acquired and liabilities assumed in the BNS acquisition for which title did not transfer at the acquisition date although the consideration was paid as part of the overall purchase price discussed above.  As of September 30, 2016, these transfers have been completed.   

The BNS amounts included in the following pro forma information are based on their historical results prepared on a carve-out basis of accounting and, therefore, may not be indicative of the actual results when operated as part of CommScope. The pro forma adjustments represent management’s best estimates based on information available at the time the pro forma information was prepared and may differ from the adjustments that may actually have been required. Accordingly, the pro forma financial information should not be relied upon as being indicative of the results that would have been realized had the acquisition occurred as of the date indicated or that may be achieved in the future.

10


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

The following table presents unaudited pro forma condensed consolidated results of operations for CommScope for the three and nine months ended September 30, 2015 as though the BNS acquisition had been completed as of January 1, 2014 (in millions, except per share amounts):

 

 

 

Three Months

Ended

 

 

Nine Months

Ended

 

 

 

September 30, 2015

 

 

September 30, 2015

 

Net sales

 

$

1,247.3

 

 

$

3,835.8

 

Net income (loss)

 

 

(48.1

)

 

 

57.2

 

Net income (loss) per diluted share

 

 

(0.25

)

 

 

0.29

 

 

These pro forma results reflect adjustments for net interest expense for the debt related to the acquisition; depreciation expense for property, plant and equipment that has been adjusted to its estimated fair value; amortization for intangible assets with finite lives identified separate from goodwill; equity-based compensation for equity awards issued to BNS employees; and the related income tax impacts of these adjustments.

 

These pro forma results for the three and nine months ended September 2015, exclude $59.8 million and $80.1 million, respectively, of integration and transaction costs related to the BNS acquisition and $30.5 million of additional cost of goods sold related to the inventory mark up included in the purchase price allocation as these costs are nonrecurring to the Company.

Airvana

On October 1, 2015, the Company acquired the assets and assumed certain liabilities of Airvana LP (Airvana), a provider of small cell solutions for wireless networks. The Company paid $45.1 million ($44.5 million net of cash acquired), including $1.0 million that was paid during the three months ended September 30, 2016.  Airvana provides 4G LTE and 3G small cell solutions that enable communication and access to information and entertainment in challenging and high-value environments, such as office buildings and public venues.  Net sales of Airvana products reflected in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) were $4.1 million and $10.4 million for the three and nine months ended September 30, 2016, respectively, and are reported in the CMS segment.

The allocation of the purchase price, based on estimates of the fair values of assets acquired and liabilities assumed, is as follows (in millions):

 

 

 

Estimated Fair

Value

 

Cash and cash equivalents

 

$

0.6

 

Accounts receivable

 

 

4.2

 

Other assets

 

 

3.8

 

Property, plant and equipment

 

 

2.5

 

Goodwill

 

 

20.4

 

Identifiable intangible assets

 

 

19.1

 

Less: Liabilities assumed

 

 

(5.5

)

Net acquisition cost

 

$

45.1

 

 

The goodwill arising from the purchase price allocation of the Airvana acquisition is believed to result from the company’s reputation in the marketplace and assembled workforce and is expected to be deductible for income tax purposes.

 

11


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

3. GOODWILL

As a result of the change in segments, goodwill was reallocated from the previous segments to the new segments. The following table presents goodwill after the reallocation to the new reportable segments (in millions):

 

 

 

CCS

 

 

CMS

 

 

Total

 

Goodwill, gross, as of December 31, 2015

 

$

1,986.6

 

 

$

899.7

 

 

$

2,886.3

 

Adjustments to preliminary purchase price

 

 

107.7

 

 

 

4.4

 

 

 

112.1

 

Foreign exchange

 

 

16.4

 

 

 

(0.6

)

 

 

15.8

 

Goodwill, gross, as of September 30, 2016

 

 

2,110.7

 

 

 

903.5

 

 

 

3,014.2

 

Accumulated impairment charges as of December 31, 2015

 

 

(36.2

)

 

 

(159.5

)

 

 

(195.7

)

Impairment charges

 

 

(15.3

)

 

 

 

 

 

(15.3

)

Accumulated impairment charges as of September 30, 2016

 

 

(51.5

)

 

 

(159.5

)

 

 

(211.0

)

Goodwill, net, as of September 30, 2016

 

$

2,059.2

 

 

$

744.0

 

 

$

2,803.2

 

 

 

4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Inventories

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Raw materials

 

$

126,094

 

 

$

114,329

 

Work in process

 

 

136,219

 

 

 

131,030

 

Finished goods

 

 

213,366

 

 

 

196,456

 

 

 

$

475,679

 

 

$

441,815

 

 

Investments

The Company owns shares of Hydrogenics Corporation (Hydrogenics), a publicly traded company that supplies hydrogen generators and hydrogen-based power modules and fuel cells for various uses. These shares are accounted for as available-for-sale securities and are carried at fair value with changes in fair value recorded, net of tax, in other comprehensive income (loss). The Company also has a $15.0 million non-controlling interest (cost method investment) in Kaiam Corporation, a developer of photonic integrated circuit products. Investments are recorded in other noncurrent assets on the Condensed Consolidated Balance Sheets.

The following table presents information related to the Company’s investment in Hydrogenics:

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Shares owned

 

 

1,184

 

 

 

1,332

 

Cost basis

 

$

887

 

 

$

997

 

Fair value

 

$

7,771

 

 

$

11,683

 

Pretax unrealized gain in accumulated other comprehensive

   income (loss)

 

$

6,884

 

 

$

10,685

 

 

The following table provides information related to the sale of shares in Hydrogenics:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Shares sold

 

 

 

 

 

 

 

 

148

 

 

 

202

 

Proceeds received