10-Q 1 comm-10q_20180331.htm 10-Q comm-10q_20180331.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 March 31, 2018

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 April 13, 2018 there were 192,085,842 shares of Common Stock outstanding.

 

 

 


CommScope Holding Company, Inc.

Form 10-Q

March 31, 2018

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

24

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

36

 

 

Item 4. Controls and Procedures

36

 

 

Part II—Other Information:

 

 

 

Item 1. Legal Proceedings

37

 

 

Item 1A. Risk Factors

37

 

 

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

37

 

 

Item 3. Defaults Upon Senior Securities

37

 

 

Item 4. Mine Safety Disclosures

37

 

 

Item 5. Other Information

37

 

 

Item 6. Exhibits

38

 

 

Signatures

39

 

 

 

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

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Net sales

 

$

1,120,517

 

 

$

1,137,285

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

Cost of sales

 

 

709,117

 

 

 

683,478

 

Selling, general and administrative

 

 

185,131

 

 

 

211,821

 

Research and development

 

 

49,864

 

 

 

48,988

 

Amortization of purchased intangible assets

 

 

67,229

 

 

 

67,638

 

Restructuring costs, net

 

 

5,450

 

 

 

5,388

 

Total operating costs and expenses

 

 

1,016,791

 

 

 

1,017,313

 

Operating income

 

 

103,726

 

 

 

119,972

 

Other income (expense), net

 

 

983

 

 

 

(15,357

)

Interest expense

 

 

(59,807

)

 

 

(69,554

)

Interest income

 

 

1,434

 

 

 

874

 

Income before income taxes

 

 

46,336

 

 

 

35,935

 

Income tax expense

 

 

(12,601

)

 

 

(2,373

)

Net income

 

$

33,735

 

 

$

33,562

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

 

$

0.17

 

Diluted

 

$

0.17

 

 

$

0.17

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

191,366

 

 

 

194,068

 

Diluted

 

 

195,459

 

 

 

199,140

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

Net income

 

$

33,735

 

 

$

33,562

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

Foreign currency translation gain

 

 

46,785

 

 

 

40,351

 

Pension and other postretirement benefit activity

 

 

(1,432

)

 

 

(369

)

Loss on net investment hedge

 

 

(598

)

 

 

(355

)

Available-for-sale securities

 

 

 

 

 

1,309

 

Total other comprehensive income, net of tax

 

 

44,755

 

 

 

40,936

 

Total comprehensive income

 

$

78,490

 

 

$

74,498

 

 

 

 

 

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

2

 


CommScope Holding Company, Inc.

Condensed Consolidated Balance Sheets

(Unaudited - In thousands, except share amounts)

 

 

 

March 31, 2018

 

 

December 31, 2017

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

472,733

 

 

$

453,977

 

Accounts receivable, less allowance for doubtful accounts of

   $15,107 and $13,976, respectively

 

 

984,847

 

 

 

898,829

 

Inventories, net

 

 

470,946

 

 

 

444,941

 

Prepaid expenses and other current assets

 

 

153,681

 

 

 

146,112

 

Total current assets

 

 

2,082,207

 

 

 

1,943,859

 

Property, plant and equipment, net of accumulated depreciation

   of $407,331 and $390,389, respectively

 

 

464,306

 

 

 

467,289

 

Goodwill

 

 

2,900,958

 

 

 

2,886,630

 

Other intangible assets, net

 

 

1,578,003

 

 

 

1,636,084

 

Other noncurrent assets

 

 

124,993

 

 

 

107,804

 

Total assets

 

$

7,150,467

 

 

$

7,041,666

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

460,498

 

 

$

436,737

 

Other accrued liabilities

 

 

301,380

 

 

 

286,980

 

Total current liabilities

 

 

761,878

 

 

 

723,717

 

Long-term debt

 

 

4,371,821

 

 

 

4,369,401

 

Deferred income taxes

 

 

128,965

 

 

 

134,241

 

Pension and other postretirement benefit liabilities

 

 

25,212

 

 

 

25,140

 

Other noncurrent liabilities

 

 

131,234

 

 

 

141,341

 

Total liabilities

 

 

5,419,110

 

 

 

5,393,840

 

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: 192,077,678 and 190,906,110,

 

 

 

 

 

 

 

 

respectively

 

 

1,988

 

 

 

1,972

 

Additional paid-in capital

 

 

2,348,498

 

 

 

2,334,071

 

Retained earnings (accumulated deficit)

 

 

(356,259

)

 

 

(395,998

)

Accumulated other comprehensive loss

 

 

(41,848

)

 

 

(86,603

)

Treasury stock, at cost: 6,733,285 shares and 6,336,144 shares,

 

 

 

 

 

 

 

 

respectively

 

 

(221,022

)

 

 

(205,616

)

Total stockholders' equity

 

 

1,731,357

 

 

 

1,647,826

 

Total liabilities and stockholders' equity

 

$

7,150,467

 

 

$

7,041,666

 

 

See notes to unaudited condensed consolidated financial statements.

 

3

 


CommScope Holding Company, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited - In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

33,735

 

 

$

33,562

 

Adjustments to reconcile net income to net cash generated by

  operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

89,405

 

 

 

100,401

 

Equity-based compensation

 

 

10,547

 

 

 

9,412

 

Deferred income taxes

 

 

(5,444

)

 

 

(16,444

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(71,108

)

 

 

19,683

 

Inventories

 

 

(25,207

)

 

 

(19,132

)

Prepaid expenses and other assets

 

 

(24,502

)

 

 

(12,314

)

Accounts payable and other liabilities

 

 

15,412

 

 

 

(28,032

)

Other

 

 

12,422

 

 

 

15,653

 

Net cash generated by operating activities

 

 

35,260

 

 

 

102,789

 

Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(13,576

)

 

 

(12,910

)

Proceeds from sale of property, plant and equipment

 

 

2,984

 

 

 

355

 

Other

 

 

 

 

 

639

 

Net cash used in investing activities

 

 

(10,592

)

 

 

(11,916

)

Financing Activities:

 

 

 

 

 

 

 

 

Long-term debt repaid

 

 

 

 

 

(750,000

)

Long-term debt proceeds

 

 

 

 

 

750,000

 

Debt issuance and modification costs

 

 

 

 

 

(6,115

)

Debt extinguishment costs

 

 

 

 

 

(14,800

)

Cash paid for repurchase of common stock

 

 

 

 

 

(58,770

)

Proceeds from the issuance of common shares under equity-based

   compensation plans

 

 

3,929

 

 

 

5,805

 

Tax withholding payments for vested equity-based compensation

  awards

 

 

(15,406

)

 

 

(14,758

)

Net cash used in financing activities

 

 

(11,477

)

 

 

(88,638

)

Effect of exchange rate changes on cash and cash equivalents

 

 

5,565

 

 

 

7,174

 

Change in cash and cash equivalents

 

 

18,756

 

 

 

9,409

 

Cash and cash equivalent at beginning of period

 

 

453,977

 

 

 

428,228

 

Cash and cash equivalents at end of period

 

$

472,733

 

 

$

437,637

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Number of common shares outstanding:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

190,906,110

 

 

 

193,837,437

 

Issuance of shares under equity-based compensation plans

 

 

1,568,709

 

 

 

1,655,631

 

Shares surrendered under equity-based compensation plans

 

 

(397,141

)

 

 

(393,594

)

Repurchase of common stock

 

 

 

 

 

(1,632,986

)

Balance at end of period

 

 

192,077,678

 

 

 

193,466,488

 

Common stock:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,972

 

 

$

1,950

 

Issuance of shares under equity-based compensation plans

 

 

16

 

 

 

16

 

Balance at end of period

 

$

1,988

 

 

$

1,966

 

Additional paid-in capital:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

2,334,071

 

 

$

2,282,014

 

Issuance of shares under equity-based compensation plans

 

 

3,913

 

 

 

5,789

 

Equity-based compensation

 

 

10,514

 

 

 

9,316

 

Cumulative effect of change in accounting principle

 

 

 

 

 

295

 

Balance at end of period

 

$

2,348,498

 

 

$

2,297,414

 

Retained earnings (accumulated deficit):

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(395,998

)

 

$

(589,556

)

Net income

 

 

33,735

 

 

 

33,562

 

Cumulative effect of change in accounting principle

 

 

6,004

 

 

 

(206

)

Balance at end of period

 

$

(356,259

)

 

$

(556,200

)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(86,603

)

 

$

(285,113

)

Other comprehensive income, net of tax

 

 

44,755

 

 

 

40,936

 

Balance at end of period

 

$

(41,848

)

 

$

(244,177

)

Treasury stock, at cost:

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(205,616

)

 

$

(15,211

)

Net shares surrendered under equity-based compensation plans

 

 

(15,406

)

 

 

(14,758

)

Repurchase of common stock

 

 

 

 

 

(65,011

)

Balance at end of period

 

$

(221,022

)

 

$

(94,980

)

Total stockholders' equity

 

$

1,731,357

 

 

$

1,404,023

 

 

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 March 31, 2018 and the Condensed Consolidated Statements of Operations and Comprehensive Income, Cash Flows and Stockholders’ Equity for the three months ended March 31, 2018 and 2017 are unaudited and reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The results of operations for these interim periods are not necessarily indicative of the results of operations to be expected for any future period or the full fiscal year. Certain prior year amounts have been reclassified to conform to the current year presentation.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and are presented in accordance with the applicable requirements of Regulation S-X. Accordingly, these financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. 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, 2017 (the 2017 Annual Report). Other than the changes described below to revenue recognition policies as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, there were no material changes in the Company’s significant accounting policies during the three months ended March 31, 2018. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements.

Revenue Recognition

The Company recognizes revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. The majority of the Company’s revenue is from product sales. Revenue from product sales is recognized when control is transferred to the customer, typically upon either shipment or delivery. A minor portion of the Company’s revenue is derived from project contracts containing a combination of product and service obligations. Revenue from project contracts is recognized at either a point in time or over time using cost input methods, based on the specific terms of each contract.

For project contracts containing multiple distinct performance obligations, the transaction price is allocated based on the relative standalone estimated selling price of each performance obligation. The relative standalone selling price is determined using current price lists and observable pricing in separate contracts with similar customers. For performance obligations recognized over-time, judgment is required to evaluate assumptions, including the total estimated costs to determine progress towards contract completion and to calculate the corresponding amount of revenue to recognize. If estimated total costs on any contract are greater than the net contract revenues, the entire estimated loss is recognized in the period the loss becomes known. The cumulative effects on revenue from revisions to total estimated costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.

6

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

The Company also recognizes revenue from other customer contract types, including licensing of intellectual property, software licensing and post-contact support (PCS) which may be sold as part of a bundled product offering or as a separate contract. For bundled product arrangements, the transaction price is allocated based on the relative standalone estimated selling price of each performance obligation. Distinct intellectual property obligations, including software, are considered functional in nature and are recognized as revenue at the point in time the customer receives the rights to use and benefit from the intellectual property or are determined using a usage-based royalty. PCS obligations are typically recognized over the term of the contract.

Revenue is measured based on the consideration to which the Company expects to be entitled, based on customer contracts. For sales to distributors, system integrators and value-added resellers (primarily for the CommScope Connectivity Solutions (CCS) segment), revenue is adjusted for variable consideration amounts, including estimated discounts, returns, rebates and distributor price protection programs. These estimates are determined based upon historical experience, contract terms, inventory levels in the distributor channel and other related factors. Adjustments to variable consideration estimates are recorded when circumstances indicate revisions may be necessary.  

The Company records a contract asset for unbilled accounts receivable related to revenue that has been recognized in advance of consideration being unconditionally due from the customer, which is common for certain project contract obligations. Contract asset amounts are transferred to accounts receivable when the Company’s right to the consideration becomes unconditional, which varies by contract, but is generally based on achieving certain acceptance milestones.

A contract liability for deferred revenue is recorded when consideration is received, or is unconditionally due, from a customer prior to transferring control of goods or services to the customer under the terms of a contract. Deferred revenue balances typically result from advance payments received from customers for product contracts or from billings in excess of revenue recognized on project or services arrangements.

Concentrations of Risk and Related Party Transactions

Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 10% of the Company’s total net sales during both the three months ended March 31, 2018 and 2017. Sales to Anixter primarily originate within the CCS segment. Other than Anixter, no direct customer accounted for 10% or more of the Company’s total net sales for the three months ended March 31, 2018 or 2017. No direct customer accounted for 10% or more of the Company’s accounts receivable as of March 31, 2018.

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

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Product warranty accrual, beginning of period

 

$

16,928

 

 

$

21,631

 

Provision for warranty claims

 

 

1,420

 

 

 

2,202

 

Warranty claims paid

 

 

(2,217

)

 

 

(3,618

)

Foreign exchange

 

 

19

 

 

 

(35

)

Product warranty accrual, end of period

 

$

16,150

 

 

$

20,180

 

7

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

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 months ended March 31, 2018 or 2017.

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. Equity investments without readily determinable fair values are evaluated each reporting period for impairment based on a qualitative assessment, and they are then measured at fair value if impairment is determined to exist. Other than certain assets impaired as a result of restructuring actions, there were no definite-lived intangible or other long-lived asset impairments identified during the three months ended March 31, 2018 or 2017.

Income Taxes

On December 22, 2017, the U.S. government enacted tax reform legislation that reduced the corporate income tax rate from 35% to 21% and included a broad range of complex provisions affecting the taxation of businesses. Generally, financial statement recognition of the new legislation would be required to be completed in the period of enactment; however, in response to the complexities of this new legislation, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118 to provide companies with transitional relief. Specifically, when the initial accounting for items under the new legislation is incomplete, the guidance allows the recognition of provisional amounts when reasonable estimates can be made or the continued application of the prior tax law if a reasonable estimate of the effect cannot be made. The SEC staff has provided up to one year from the date of enactment for companies to finalize the accounting for the effects of this new legislation. Although no changes were made to the provisional amounts during the three months ended March 31, 2018, the Company expects to refine the calculations as additional analysis is completed and as a more thorough understanding of the new tax law is reached. The changes made could be material to income tax expense.

The effective income tax rate of 27.2% for the three months ended March 31, 2018 was higher than the statutory rate of 21.0% primarily due to the effect of the provision for state income taxes, the impact of earnings in foreign jurisdictions that are taxed at rates higher than the United States (U.S.) statutory rate, the impact of the new U.S. anti-deferral provisions and the impact of repatriation taxes. These increases to the effective tax rate were partially offset by the favorable impact of $4.3 million of excess tax benefits related to equity-based compensation awards.

The effective income tax rate of 6.6% for the three months ended March 31, 2017 was significantly lower than the statutory rate of 35.0% primarily due to the favorable impact of $8.7 million of excess tax benefits related to equity-based compensation awards. The effective income tax rate was also favorably affected by the impact of earnings in foreign jurisdictions that the Company did not plan to repatriate. These earnings were generally taxed at rates lower than the U.S. statutory rate. Offsetting these decreases for the three months ended March 31, 2017 was the effect of the provision for state income taxes.

8

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

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 (0.5 million shares and 0.4 million shares for the three months ended March 31, 2018 and 2017, respectively).

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

Net income for basic and diluted earnings per share

 

$

33,735

 

 

$

33,562

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

 

191,366

 

 

 

194,068

 

Dilutive effect of equity-based awards

 

 

4,093

 

 

 

5,072

 

Weighted average common shares outstanding - diluted

 

 

195,459

 

 

 

199,140

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

 

$

0.17

 

Diluted

 

$

0.17

 

 

$

0.17

 

Recent Accounting Pronouncements

Adopted During the Three Months Ended March 31, 2018

The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, including all subsequently issued clarifying guidance on January 1, 2018. The core principle of the new guidance is to recognize revenue 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 adopted the standard using the modified retrospective application with the cumulative effect of applying the standard on the date of adoption recognized in retained earnings (accumulated deficit).

Revenue recognition for the Company’s product sales remained generally consistent with historical practice. However, the adoption of ASU No. 2014-09 resulted in acceleration of revenue recognition for certain project contracts containing integrated product and service obligations, primarily within the CommScope Mobility Solutions (CMS) segment. These multi-element revenue contracts represented less than 1% of total net sales for the three months ended March 31, 2018. For these contracts, certain performance obligations are recognized over time using cost-based input methods, which recognize revenue and cost of sales based on the relationship between actual costs incurred compared to the total estimated cost for the contract. Based on customer-specific contracts in effect at January 1, 2018, the Company recorded a cumulative effect adjustment, net of tax, of $3.4 million that reduces the accumulated deficit on the Condensed Consolidated Balance Sheets. This adjustment reflects an acceleration of revenues of $8.0 million.

9

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

The impact of adoption of the new revenue recognition standard on our condensed consolidated financial statements was as follows:

 

Three Months Ended March 31, 2018

 

 

As Reported

 

 

Amounts Without Adoption of

ASU No. 2014-09

 

 

Effect of Change

Increase / (Decrease)

 

Net sales

$

1,120,517

 

 

$

1,122,257

 

 

$

(1,740

)

Cost of sales

 

709,117

 

 

 

708,897

 

 

 

220

 

Operating income

 

103,726

 

 

 

105,686

 

 

 

(1,960

)

Income tax expense

 

12,601

 

 

 

13,114

 

 

 

(513

)

Net income

 

33,735

 

 

 

35,182

 

 

 

(1,447

)

 

 

As of  March 31, 2018

 

 

As Reported

 

 

Amounts Without Adoption of

ASU No. 2014-09

 

 

Effect of Change

Increase / (Decrease)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, less allowance for

     doubtful accounts

$

984,847

 

 

$

980,187

 

 

$

4,660

 

Inventories, net

 

470,946

 

 

 

474,556

 

 

 

(3,610

)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Other accrued liabilities

 

301,380

 

 

 

302,297

 

 

 

(917

)

Equity:

 

 

 

 

 

 

 

 

 

 

 

Retained earnings (accumulated deficit)

 

(356,259

)

 

 

(358,226

)

 

 

1,967

 

The Company adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, on January 1, 2018. This new guidance 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. Adoption of this new guidance did not have a material impact on the consolidated financial statements.

The Company adopted ASU No. 2016-16, Accounting for Income Taxes, Intra-Entity Asset Transfers of Assets Other than Inventory, on January 1, 2018. Under previous guidance, the tax effects of intra-entity asset transfers were deferred until the transferred asset was sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. As a result, the tax effect of the intra-entity asset sale would be recognized when the transfer occurs. The Company recorded a cumulative effect adjustment of $2.6 million that decreased the accumulated deficit on the Condensed Consolidated Balance Sheets as a result of this new guidance.

The Company adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on January 1, 2018. The new standard requires an employer to report the service cost component of net periodic benefit cost in the same line item as other compensation costs arising from services rendered by the employee and requires the other components of net periodic benefit cost to be reported outside the subtotal of operating income. Of the total $1.1 million of net periodic benefit income for the three months ended March 31, 2018, $2.3 million of net periodic benefit income was recorded in other income (expense), net, and $1.2 million of net periodic benefit cost was recorded within operating income. The Company utilized the practical expedient and used the amounts disclosed in its employee benefit plans note for the three months ended March 31, 2017 as the basis for applying the retrospective presentation requirements. The Company reclassified $1.4 million of net periodic benefit income from operating income to other income (expense), net for the three months ended March 31, 2017. The adoption of this guidance had no impact on the previously reported income before income taxes or net income for the three months ended March 31, 2017. See Note 10 for details on the components of the Company’s net periodic benefit cost.

10

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

The Company adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, on January 1, 2018. The new guidance provides targeted improvements to the hedge accounting model intended to allow financial reporting to more closely reflect an entity’s risk management activities and to simplify the application of hedge accounting. Beginning January 1, 2018, the Company has elected to assess the effectiveness of its net investment hedges using the spot rate method. As a result, differences between the spot rate and the forward rate will be amortized on a straight-line basis to other income (expense), net over the life of the contract. See Note 6 for the details on the impact of this change to the financial statements.

Issued but Not Adopted

In February 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to elect reclassification from accumulated other comprehensive income to retained earnings for certain tax effects resulting from the U.S. tax legislation enacted in 2017. ASU No. 2018-02 is effective for the Company as of January 1, 2019 and early adoption is permitted. The Company does not expect to elect the permitted reclassification and therefore does not expect the new guidance to have an impact on the 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.

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. 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.

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 are reflected in the CCS segment for the three months ended March 31, 2018 and were not material.  

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

 

11

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

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 liabilities assumed.

3. GOODWILL

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

 

 

 

CCS

 

 

CMS

 

 

Total

 

Goodwill, gross at December 31, 2017

 

$

2,193.2

 

 

$

904.4

 

 

$

3,097.6

 

Foreign exchange

 

 

14.3

 

 

 

0.1

 

 

 

14.4

 

Goodwill, gross at March 31, 2018

 

 

2,207.5

 

 

 

904.5

 

 

 

3,112.0

 

Accumulated impairment charges at December 31, 2017

   and March 31, 2018

 

 

(51.5

)

 

 

(159.5

)

 

 

(211.0

)

Goodwill, net at March 31, 2018

 

$

2,156.0

 

 

$

745.0

 

 

$

2,901.0

 

 

4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Disaggregated Net Sales

The following table presents net sales by reportable segment, disaggregated based on contract type (in millions):

 

Three Months Ended March 31, 2018

 

 

CCS

 

 

CMS

 

 

Total

 

Contract type:

 

 

 

 

 

 

 

 

 

 

 

Product contracts

$

671.5

 

 

$

425.3

 

 

$

1,096.8

 

Project contracts

 

 

 

 

10.5

 

 

 

10.5

 

Other contracts

 

2.1

 

 

 

11.1

 

 

 

13.2

 

Consolidated net sales

$

673.6

 

 

$

446.9

 

 

$

1,120.5

 

Further information on net sales by reportable segment and geographic region is included in Note 8.

Allowance for Doubtful Accounts

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Allowance for doubtful accounts, beginning of period

 

$

13,976

 

 

$

17,211

 

Charged to costs and expenses

 

 

1,466

 

 

 

812

 

Deductions (1)

 

 

(335

)

 

 

80

 

Allowance for doubtful accounts, end of period

 

$

15,107

 

 

$

18,103

 

(1)

Uncollectible customer accounts written off, net of recoveries of previously written off customer accounts.  

12

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

Customer Contract Balances

The following table provides the balance sheet location and amounts of contract assets and liabilities from contracts with customers as of March 31, 2018 and December 31, 2017.

 

Balance Sheet Location

 

March 31,

2018

 

 

 

 

December 31,

2017

 

Unbilled accounts receivable

Accounts receivable, less allowance for doubtful accounts

 

$

4,900

 

 

 

 

$

 

Deferred revenue

Other accrued liabilities

 

 

12,716

 

 

 

 

 

12,611

 

There were no material changes to contract asset balances for the three months ended March 31, 2018 as a result of changes in estimates or impairments. The full amount of the deferred revenue balance as of March 31, 2018 was classified as current as the Company expects to recognize these amounts as revenue over the next twelve months.

Inventories

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Raw materials

 

$

137,902

 

 

$

126,558

 

Work in process

 

 

105,390

 

 

 

98,526

 

Finished goods

 

 

227,654

 

 

 

219,857

 

 

 

$

470,946

 

 

$

444,941

 

Other Accrued Liabilities

 

 

 

March 31,

2018

 

 

December 31,

2017

 

Compensation and employee benefit liabilities

 

$

93,021

 

 

$

97,522

 

Accrued interest

 

 

48,876

 

 

 

23,485

 

Deferred revenue

 

 

12,716

 

 

 

12,611

 

Product warranty accrual

 

 

16,150

 

 

 

16,928

 

Restructuring reserve

 

 

15,793

 

 

 

24,961

 

Income taxes payable

 

 

14,354

 

 

 

16,949

 

Purchase price payable

 

 

12,655

 

 

 

2,098

 

Value-added taxes payable

 

 

11,980

 

 

 

11,838

 

Accrued professional fees

 

 

7,496

 

 

 

10,224

 

Other

 

 

68,339

 

 

 

70,364

 

 

 

$

301,380

 

 

$

286,980

 

13

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

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

March 31,

 

 

 

2018

 

 

2017

 

Foreign currency translation

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(52,770

)

 

$

(254,148

)

Other comprehensive income

 

 

46,785

 

 

 

40,084

 

Amounts reclassified from AOCL

 

 

 

 

 

267

 

Balance at end of period

 

$

(5,985

)

 

$

(213,797

)

 

 

 

 

 

 

 

 

 

Net investment hedge

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(4,981

)

 

$

 

Other comprehensive loss

 

 

(598

)

 

 

(355

)

Balance at end of period

 

$

(5,579

)

 

$

(355

)

 

 

 

 

 

 

 

 

 

Defined benefit plan activity

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(28,852

)

 

$

(33,473

)

Amounts reclassified from AOCL

 

 

(1,432

)

 

 

(369

)

Balance at end of period

 

$

(30,284

)

 

$

(33,842

)

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

 

 

$

2,508

 

Other comprehensive income

 

 

 

 

 

1,698

 

Amounts reclassified from AOCI

 

 

 

 

 

(389

)

Balance at end of period

 

$

 

 

$

3,817

 

Net AOCL at end of period

 

$

(41,848

)

 

$

(244,177

)

Amounts reclassified from net AOCL related to foreign currency translation and available-for-sale securities are recorded in other income (expense), net in the Condensed Consolidated Statements of Operations and Comprehensive Income. Defined benefit plan amounts reclassified from net AOCL are included in the computation of net periodic benefit cost (income) and are recorded in other income (expense), net in the Condensed Consolidated Statements of Operations and Comprehensive Income.

Cash Flow Information

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes, net of refunds

 

$

22,056

 

 

$

17,006

 

Interest

 

 

31,907

 

 

 

16,643

 

 

14

 


CommScope Holding Company, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, unless otherwise noted)

 

5. FINANCING

 

 

 

March 31, 2018

 

 

December 31, 2017

 

5.00% senior notes due March 2027

 

$

750,000

 

 

$

750,000

 

6.00% senior notes due June 2025

 

 

1,500,000

 

 

 

1,500,000

 

5.50% senior notes due June 2024

 

 

650,000

 

 

 

650,000

 

5.00% senior notes due June 2021

 

 

650,000

 

 

 

650,000

 

Senior secured term loan due December 2022

 

 

886,250

 

 

 

886,250

 

Senior secured revolving credit facility expires May 2020

 

 

 

 

 

 

Total principal amount of debt

 

$

4,436,250

 

 

$

4,436,250

 

Less: Original issue discount, net of amortization

 

 

(3,236

)