10-Q 1 comm-10q_20170930.htm 10-Q comm-10q_20170930.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, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

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

As of October 16, 2017 there were 190,762,060 shares of Common Stock outstanding.

 

 

 


CommScope Holding Company, Inc.

Form 10-Q

September 30, 2017

Table of Contents

 

Part I—Financial Information (Unaudited):

 

 

 

Item 1. Condensed Consolidated Financial Statements:

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income

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

26

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

40

 

 

Item 4. Controls and Procedures

41

 

 

Part II—Other Information:

 

 

 

Item 1. Legal Proceedings

42

 

 

Item 1A. Risk Factors

42

 

 

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

42

 

 

Item 3. Defaults Upon Senior Securities

42

 

 

Item 4. Mine Safety Disclosures

42

 

 

Item 5. Other Information

42

 

 

Item 6. Exhibits

43

 

 

Signatures

44

 

 

 

1

 


Part 1 -- Financial Information (Unaudited)

ITEM 1.  Condensed Consolidated Financial Statements

 

CommScope Holding Company, Inc.

 

Condensed Consolidated Statements of Operations

 

and Comprehensive Income

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net sales

 

$

1,128,775

 

 

$

1,293,948

 

 

$

3,440,150

 

 

$

3,744,715

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

699,145

 

 

 

751,097

 

 

 

2,082,910

 

 

 

2,201,014

 

Selling, general and administrative

 

 

184,671

 

 

 

220,835

 

 

 

603,594

 

 

 

664,365

 

Research and development

 

 

44,498

 

 

 

48,430

 

 

 

140,280

 

 

 

152,554

 

Amortization of purchased intangible assets

 

 

68,271

 

 

 

74,639

 

 

 

202,890

 

 

 

224,270

 

Restructuring costs, net

 

 

5,360

 

 

 

10,826

 

 

 

24,521

 

 

 

24,503

 

Asset impairments

 

 

 

 

 

7,375

 

 

 

 

 

 

22,668

 

Total operating costs and expenses

 

 

1,001,945

 

 

 

1,113,202

 

 

 

3,054,195

 

 

 

3,289,374

 

Operating income

 

 

126,830

 

 

 

180,746

 

 

 

385,955

 

 

 

455,341

 

Other income (expense), net

 

 

1,807

 

 

 

(7,546

)

 

 

(13,414

)

 

 

(21,898

)

Interest expense

 

 

(61,798

)

 

 

(68,349

)

 

 

(192,769

)

 

 

(215,024

)

Interest income

 

 

1,180

 

 

 

1,023

 

 

 

3,784

 

 

 

4,750

 

Income before income taxes

 

 

68,019

 

 

 

105,874

 

 

 

183,556

 

 

 

223,169

 

Income tax expense

 

 

(16,862

)

 

 

(12,043

)

 

 

(43,373

)

 

 

(54,797

)

Net income

 

$

51,157

 

 

$

93,831

 

 

$

140,183

 

 

$

168,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

 

$

0.49

 

 

$

0.73

 

 

$

0.88

 

Diluted

 

$

0.26

 

 

$

0.48

 

 

$

0.71

 

 

$

0.86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

191,824

 

 

 

192,719

 

 

 

192,973

 

 

 

192,275

 

Diluted

 

 

195,815

 

 

 

196,598

 

 

 

197,387

 

 

 

196,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

51,157

 

 

$

93,831

 

 

$

140,183

 

 

$

168,372

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gain

 

 

47,087

 

 

 

8,610

 

 

 

174,187

 

 

 

8,303

 

Pension and other postretirement benefit activity

 

 

(353

)

 

 

(376

)

 

 

(1,082

)

 

 

(3,511

)

Loss on net investment hedge

 

 

(1,471

)

 

 

 

 

 

(4,822

)

 

 

 

Available-for-sale securities

 

 

(1,685

)

 

 

(257

)

 

 

(2,508

)

 

 

(2,391

)

Total other comprehensive income, net of tax

 

 

43,578

 

 

 

7,977

 

 

 

165,775

 

 

 

2,401

 

Total comprehensive income

 

$

94,735

 

 

$

101,808

 

 

$

305,958

 

 

$

170,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2017

 

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

411,242

 

 

$

428,228

 

Accounts receivable, less allowance for doubtful accounts of

   $19,060 and $17,211, respectively

 

 

930,739

 

 

 

952,367

 

Inventories, net

 

 

485,062

 

 

 

473,267

 

Prepaid expenses and other current assets

 

 

166,905

 

 

 

139,902

 

Total current assets

 

 

1,993,948

 

 

 

1,993,764

 

Property, plant and equipment, net of accumulated depreciation

   of $371,114 and $303,734, respectively

 

 

477,718

 

 

 

474,990

 

Goodwill

 

 

2,877,813

 

 

 

2,768,304

 

Other intangible assets, net

 

 

1,698,507

 

 

 

1,799,065

 

Other noncurrent assets

 

 

98,559

 

 

 

105,863

 

Total assets

 

$

7,146,545

 

 

$

7,141,986

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

407,635

 

 

$

415,921

 

Other accrued liabilities

 

 

309,355

 

 

 

429,397

 

Current portion of long-term debt

 

 

 

 

 

12,500

 

Total current liabilities

 

 

716,990

 

 

 

857,818

 

Long-term debt

 

 

4,548,016

 

 

 

4,549,510

 

Deferred income taxes

 

 

182,855

 

 

 

199,121

 

Pension and other postretirement benefit liabilities

 

 

28,907

 

 

 

31,671

 

Other noncurrent liabilities

 

 

119,143

 

 

 

109,782

 

Total liabilities

 

 

5,595,911

 

 

 

5,747,902

 

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: 190,761,714 and 193,837,437,

 

 

 

 

 

 

 

 

respectively

 

 

1,971

 

 

 

1,950

 

Additional paid-in capital

 

 

2,322,747

 

 

 

2,282,014

 

Retained earnings (accumulated deficit)

 

 

(449,579

)

 

 

(589,556

)

Accumulated other comprehensive loss

 

 

(119,338

)

 

 

(285,113

)

Treasury stock, at cost: 6,322,910 shares and 1,129,222 shares,

 

 

 

 

 

 

 

 

respectively

 

 

(205,167

)

 

 

(15,211

)

Total stockholders' equity

 

 

1,550,634

 

 

 

1,394,084

 

Total liabilities and stockholders' equity

 

$

7,146,545

 

 

$

7,141,986

 

 

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,

 

 

 

2017

 

 

2016

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

140,183

 

 

$

168,372

 

Adjustments to reconcile net income to net cash generated by

  operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

282,543

 

 

 

301,450

 

Equity-based compensation

 

 

31,572

 

 

 

26,621

 

Deferred income taxes

 

 

(19,976

)

 

 

(94,239

)

Asset impairments

 

 

 

 

 

22,668

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

59,054

 

 

 

(96,337

)

Inventories

 

 

11,790

 

 

 

(23,480

)

Prepaid expenses and other assets

 

 

(22,682

)

 

 

12,540

 

Accounts payable and other liabilities

 

 

(178,505

)

 

 

218,590

 

Other

 

 

31,426

 

 

 

14,929

 

Net cash generated by operating activities

 

 

335,405

 

 

 

551,114

 

Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(51,152

)

 

 

(49,660

)

Proceeds from sale of property, plant and equipment

 

 

5,016

 

 

 

3,935

 

Cash paid for acquisitions, including purchase price adjustments, net of

   cash acquired

 

 

(105,249

)

 

 

2,714

 

Other

 

 

9,898

 

 

 

3,487

 

Net cash used in investing activities

 

 

(141,487

)

 

 

(39,524

)

Financing Activities:

 

 

 

 

 

 

 

 

Long-term debt repaid

 

 

(805,379

)

 

 

(546,025

)

Long-term debt proceeds

 

 

780,379

 

 

 

 

Debt issuance and modification costs

 

 

(8,363

)

 

 

 

Debt extinguishment costs

 

 

(14,800

)

 

 

(17,779

)

Cash paid for repurchase of common stock

 

 

(175,000

)

 

 

 

Proceeds from the issuance of common shares under equity-based

   compensation plans

 

 

8,803

 

 

 

8,637

 

Tax withholding payments for vested equity-based compensation

  awards

 

 

(14,956

)

 

 

(2,946

)

Net cash used in financing activities

 

 

(229,316

)

 

 

(558,113

)

Effect of exchange rate changes on cash and cash equivalents

 

 

18,412

 

 

 

914

 

Change in cash and cash equivalents

 

 

(16,986

)

 

 

(45,609

)

Cash and cash equivalent at beginning of period

 

 

428,228

 

 

 

562,884

 

Cash and cash equivalents at end of period

 

$

411,242

 

 

$

517,275

 

 

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,

 

 

 

2017

 

 

2016

 

Number of common shares outstanding:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

193,837,437

 

 

 

191,368,727

 

Issuance of shares under equity-based compensation plans

 

 

2,117,965

 

 

 

1,615,810

 

Shares surrendered under equity-based compensation plans

 

 

(398,698

)

 

 

(115,598

)

Repurchase of common stock

 

 

(4,794,990

)

 

 

 

Balance at end of period

 

 

190,761,714

 

 

 

192,868,939

 

Common stock:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,950

 

 

$

1,923

 

Issuance of shares under equity-based compensation plans

 

 

21

 

 

 

17

 

Balance at end of period

 

$

1,971

 

 

$

1,940

 

Additional paid-in capital:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

2,282,014

 

 

$

2,216,202

 

Issuance of shares under equity-based compensation plans

 

 

8,782

 

 

 

8,620

 

Equity-based compensation

 

 

31,656

 

 

 

26,530

 

Cumulative effect of change in accounting principle

 

 

295

 

 

 

 

Tax benefit from shares issued under equity-based compensation plans

 

 

 

 

 

7,517

 

Balance at end of period

 

$

2,322,747

 

 

$

2,258,869

 

Retained earnings (accumulated deficit):

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(589,556

)

 

$

(812,394

)

Net income

 

 

140,183

 

 

 

168,372

 

Cumulative effect of change in accounting principle

 

 

(206

)

 

 

 

Balance at end of period

 

$

(449,579

)

 

$

(644,022

)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(285,113

)

 

$

(171,678

)

Other comprehensive income, net of tax

 

 

165,775

 

 

 

2,401

 

Balance at end of period

 

$

(119,338

)

 

$

(169,277

)

Treasury stock, at cost:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(15,211

)

 

$

(11,333

)

Net shares surrendered under equity-based compensation plans

 

 

(14,956

)

 

 

(2,946

)

Repurchase of common stock

 

 

(175,000

)

 

 

 

Balance at end of period

 

$

(205,167

)

 

$

(14,279

)

Total stockholders' equity

 

$

1,550,634

 

 

$

1,433,231

 

 

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 infrastructure solutions for the core, access and edge layers of 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.

Basis of Presentation

The Condensed Consolidated Balance Sheet as of September 30, 2017, the Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, and the Condensed Consolidated Statements of Cash Flows and Stockholders’ Equity for the nine months ended September 30, 2017 and 2016 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 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, 2016 (the 2016 Annual Report). There were no changes in the Company’s significant accounting policies during the three or nine months ended September 30, 2017. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements.

Prior to January 1, 2017, the Company consolidated the operating results of the acquired BNS business based on the BNS fiscal reporting calendar that resulted in a reporting lag of one day for the year ended December 31, 2016. The BNS business results included thirteen weeks for the three months ended September 30, 2017 compared to fourteen weeks for the comparable period in 2016. Effective January 1, 2017, the reporting lag was eliminated as a result of system conversions that were part of the BNS integration. The elimination of the reporting lag represents a change in accounting principle which the Company believes to be preferable because it provides more current information to the users of its financial statements. The Company determined that it was impracticable to apply the effects of the lag elimination to financial reporting periods prior to January 1, 2017. The cumulative effect of not retroactively applying this change in accounting, however, was immaterial as of January 1, 2017. Therefore, the Company reported the cumulative effect of the change in accounting principle in net income for the nine months ended September 30, 2017 and did not retrospectively apply the effects of this change to prior periods.

Concentrations of Risk and Related Party Transactions

Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 12% and 11% of the Company’s total net sales during the three and nine months ended September 30, 2017, respectively. Net sales to Anixter accounted for 11% of the Company’s total net sales during the three and nine months ended September 30, 2016. Sales to Anixter primarily originate within the CommScope Connectivity Solutions (CCS) segment. Other than Anixter, no direct customer accounted for 10% or more of the Company’s total net sales for the three or nine months ended September 30, 2017 or 2016.

Accounts receivable from Anixter and Verizon Communications Inc. (Verizon) each represented approximately 11% of accounts receivable as of September 30, 2017. Other than Anixter and Verizon, no direct customer accounted for 10% or more of the Company’s accounts receivable as of September 30, 2017.

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Product warranty accrual, beginning of period

 

$

20,283

 

 

$

18,356

 

 

$

21,631

 

 

$

17,964

 

Provision for warranty claims

 

 

284

 

 

 

3,435

 

 

 

4,515

 

 

 

7,954

 

Warranty claims paid

 

 

(2,033

)

 

 

(106

)

 

 

(7,751

)

 

 

(4,517

)

Foreign exchange

 

 

(62

)

 

 

92

 

 

 

77

 

 

 

376

 

Product warranty accrual, end of period

 

$

18,472

 

 

$

21,777

 

 

$

18,472

 

 

$

21,777

 

Commitments and Contingencies

The Company is either a plaintiff or a defendant in certain pending legal matters in the normal course of business. 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 the reporting unit may exceed its fair value. There were no goodwill impairments identified during the three and nine months ended September 30, 2017. During the nine months ended September 30, 2016, the Company recorded a $15.3 million goodwill impairment charge as a result of the change in its reportable segments. The impairment was recorded in the CCS 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 and nine 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. There were no asset impairments identified during the three and nine months ended September 30, 2017.

7

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

Income Taxes

The effective income tax rate of 24.8% and 23.6% for the three and nine months ended September 30, 2017, respectively, was lower than the statutory rate of 35.0% primarily due to a reduction in tax expense related to the expiration of statutes of limitations on various uncertain tax positions. In addition, the effective income tax rate was favorably impacted by $0.4 million and $13.5 million of excess tax benefits related to equity-based compensation awards for the three and nine months ended September 30, 2017, respectively. Such benefits, which were previously reflected in additional paid-in capital, are now recognized in income tax expense as a result of the adoption of Accounting Standards Update (ASU) No. 2016-09. See the discussion under Recent Accounting Pronouncements for further information regarding the adoption of this new accounting guidance. Offsetting these decreases for the three and nine months ended September 30, 2017 was the effect of the provision for state 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 35.0% primarily due to a reduction in tax expense related to the expiration of statutes of limitations on various 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.

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, restricted stock units and performance share 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 (1.7 million shares and 1.3 million shares for the three and nine months ended September 30, 2017, respectively, and 1.4 million shares and 1.5 million shares for the three and nine months ended September 30, 2016, respectively). During the three and nine months ended September 30, 2017, the Company repurchased 2.3 million shares and 4.8 million shares, respectively, of its common stock. The Company did not repurchase any of its common stock during the three and nine months ended September 30, 2016. See Note 11 for more information on the share repurchase programs.

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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for basic and diluted earnings per share

 

$

51,157

 

 

$

93,831

 

 

$

140,183

 

 

$

168,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

191,824

 

 

 

192,719

 

 

 

192,973

 

 

 

192,275

 

Dilutive effect of equity-based awards

 

 

3,991

 

 

 

3,879

 

 

 

4,414

 

 

 

3,866

 

Weighted average common shares outstanding - diluted

 

 

195,815

 

 

 

196,598

 

 

 

197,387

 

 

 

196,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

 

$

0.49

 

 

$

0.73

 

 

$

0.88

 

Diluted

 

$

0.26

 

 

$

0.48

 

 

$

0.71

 

 

$

0.86

 

 

 

8

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

Recent Accounting Pronouncements

Adopted During the Nine Months Ended September 30, 2017

The Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, on January 1, 2017. The new standard 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. Beginning January 1, 2017, the Company recognized all excess tax benefits in income tax expense. An income tax benefit of $0.4 million and $13.5 million was recognized for the three and nine months ended September 30, 2017, respectively, under ASU No. 2016-09. The Company recognized a $0.2 million, net of tax, cumulative effect adjustment to retained earnings as a result of its election to change its accounting policy to account for forfeitures as they occur. The impact of the adoption of ASU No. 2016-09 to the Condensed Consolidated Statements of Cash Flows was to present excess tax benefits or deficiencies as an operating activity rather than as a financing activity. The Company elected to present the impact on the Condensed Consolidated Statements of Cash Flows retrospectively; therefore, the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2016 reflects an increase to both net cash generated by operating activities and net cash used in financing activities of $8.1 million.

The Company also adopted ASU No. 2016-15, Cash Flow Classification of Certain Cash Receipts and Cash Payments, as of January 1, 2017. This guidance amends or clarifies guidance on classification of certain transactions in the statement of cash flows, including debt extinguishment costs and contingent consideration payments after a business combination. During the nine months ended September 30, 2017, the impact of adoption on the Company’s Condensed Consolidated Statements of Cash Flows was to present $14.8 million of debt redemption premium paid as a financing activity rather than as an operating activity. The provisions of this new standard are required to be applied retrospectively; therefore, the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2016 reflects the payment of $17.8 million of debt redemption premiums as a financing activity rather than as an operating activity.

Issued but Not Adopted

In March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an employer to report the service cost component in the same line item as other compensation costs arising from services rendered by the employee and requires the other components of net benefit cost to be reported outside the subtotal of operating income. ASU No. 2017-07 is effective for the Company as of January 1, 2018 and must be applied retrospectively. While the Company is still evaluating the impact of the new guidance on the consolidated financial statements, it does expect the application of this new guidance to decrease operating income. For details on the components of the Company’s annual net periodic benefit cost, see Note 10 to the Company’s audited consolidated financial statements included in the Company’s 2016 Annual Report. The details on the components of the Company’s interim net periodic benefit cost can be found in Note 10 in these Notes to Unaudited Condensed Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test of Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under the new guidance, an entity will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize a goodwill impairment charge for the excess of the reporting unit’s carrying amount over its fair value, up to the amount of goodwill allocated to that reporting unit. ASU No. 2017-04 is effective for the Company as of January 1, 2020 and early adoption is permitted. The Company is evaluating the impact of the new guidance on the consolidated financial statements 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 the new guidance on the consolidated financial statements and when it may be adopted.

9

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

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 plans to adopt this new guidance as of January 1, 2019. The Company continues to evaluate the impact of adoption on the consolidated financial statements but expects the ASU to have a material impact on its Condensed Consolidated Balance Sheets as a result of the requirement to recognize right-of-use assets and lease liabilities.

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 does not expect the new guidance to have a material impact on the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard defines a single comprehensive model of 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. The Company will be required to adopt the new standard, including subsequently issued 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.

The Company has completed an impact assessment and determined that adoption of the standard will likely result in an acceleration of when revenues are recognized for certain contracts containing multiple performance obligations. These contract revenues are currently accounted for using the multi-element guidance and are primarily for certain metro cell, distributed antenna system (DAS) and small cell solutions within the CommScope Mobility Solutions (CMS) segment. These multi-element revenue contracts represented less than 2% of total net sales for the three and nine months ended September 30, 2017. Due to the short-term nature of most of the contracts, the impact to the Company’s consolidated financial statements at adoption will be based on customer-specific contract terms in effect at that time and could be significant.

The Company is in the process of implementing the necessary changes to its accounting policies, processes, internal controls and information systems that will be required to meet the new standard’s reporting and disclosure requirements.

2. ACQUISITIONS

On August 1, 2017, the Company acquired Cable Exchange in an all cash transaction. The Company paid $108.7 million ($105.2 million net of cash acquired) and recorded a $14.5 million liability for the remaining payments due. Cable Exchange is a quick-turn supplier of fiber optic and copper assemblies for data, voice and video communications. Net sales of Cable Exchange products reflected in the Condensed Consolidated Statement of Operations and Comprehensive Income for the three months ended September 30, 2017 were not material to the CCS segment.  

10

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

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

 

 

Estimated Fair

Value

 

Cash and cash equivalents

 

$

3.5

 

Accounts receivable

 

 

6.4

 

Inventory

 

 

4.4

 

Property, plant and equipment

 

 

0.9

 

Goodwill

 

 

49.6

 

Identifiable intangible assets

 

 

61.1

 

Less: Liabilities assumed

 

 

(2.7

)

Net acquisition cost

 

$

123.2

 

The goodwill arising from the purchase price allocation of the Cable Exchange 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.

As additional information is obtained, adjustments may be made to the preliminary purchase price allocation. The Company is still finalizing the estimated fair value of certain tangible and intangible assets acquired and liabilities assumed.

On August 28, 2015, the Company acquired TE Connectivity’s BNS business for approximately $3.0 billion in an all-cash transaction. During the nine months ended September 30, 2016, the Company received $3.7 million in net settlements for certain adjustments related to the BNS acquisition. Also during the three and nine months ended September 30, 2016, the Company recorded measurement period adjustments 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 was not material to the Company’s results.

3. GOODWILL

The following table presents goodwill by reportable segment (in millions):

 

 

 

CCS

 

 

CMS

 

 

Total

 

Goodwill, gross at December 31, 2016

 

$

2,077.5

 

 

$

901.8

 

 

$

2,979.3

 

Acquisitions

 

 

49.6

 

 

 

 

 

 

49.6

 

Foreign exchange

 

 

57.3

 

 

 

2.6

 

 

 

59.9

 

Goodwill, gross at September 30, 2017

 

 

2,184.4

 

 

 

904.4

 

 

 

3,088.8

 

Accumulated impairment charges at December 31, 2016

   and September 30, 2017

 

 

(51.5

)

 

 

(159.5

)

 

 

(211.0

)

Goodwill, net at September 30, 2017

 

$

2,132.9

 

 

$

744.9

 

 

$

2,877.8

 

 

4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Inventories

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Raw materials

 

$

123,068

 

 

$

126,027

 

Work in process

 

 

108,353

 

 

 

135,848

 

Finished goods

 

 

253,641

 

 

 

211,392

 

 

 

$

485,062

 

 

$

473,267

 

 

11

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

Other Accrued Liabilities

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Compensation and employee benefit liabilities

 

$

89,864

 

 

$

169,923

 

Accrued interest

 

 

48,787

 

 

 

8,586

 

Deferred revenue

 

 

17,340

 

 

 

25,859

 

Product warranty accrual

 

 

18,472

 

 

 

21,631

 

Restructuring reserve

 

 

17,479

 

 

 

30,438

 

Income taxes payable

 

 

16,378

 

 

 

49,984

 

Value-added taxes payable

 

 

12,860

 

 

 

14,885

 

Accrued professional fees

 

 

9,664

 

 

 

10,621

 

Other

 

 

78,511

 

 

 

97,470

 

 

 

$

309,355

 

 

$

429,397

 

Accumulated Other Comprehensive Loss

The following table presents changes in accumulated other comprehensive income (AOCI), net of tax, and accumulated other comprehensive loss (AOCL), net of tax:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Foreign currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(127,048

)

 

$

(160,927

)

 

$

(254,148

)

 

$

(160,620

)

Other comprehensive income

 

 

47,087

 

 

 

8,604

 

 

 

173,920

 

 

 

7,991

 

Amounts reclassified from AOCL

 

 

 

 

 

6

 

 

 

267

 

 

 

312

 

Balance at end of period

 

$

(79,961

)

 

$

(152,317

)

 

$

(79,961

)

 

$

(152,317

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit plan activity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(34,202

)

 

$

(20,702

)

 

$

(33,473

)

 

$

(17,567

)

Other comprehensive income (loss)

 

 

 

 

 

345

 

 

 

 

 

 

(1,385

)

Amounts reclassified from AOCL

 

 

(353

)

 

 

(721

)