| • | Our business is dependent on third party capital spending for data, communication and entertainment networks, and reductions in such capital spending could adversely affect our business. Our performance is dependent on capital spending for constructing, rebuilding, maintaining or upgrading data, communication and entertainment networks, which can be volatile and difficult to forecast. Capital spending in the communications industry is cyclical and can be curtailed or deferred on short notice. A variety of factors affect the timing and amount of capital spending in the communications industry, including:
| • | general economicA substantial portion of our business is derived from a limited number of key customers and market conditions;channel partners.
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| • | foreign currency fluctuations;We face competitive pressures with respect to all our major product groups.
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| • | seasonalityOur ability to sell our products is highly dependent on the quality of outside deployments;our support and services offerings after the sale, and our inability to execute after the sale would have a material adverse effect on business.
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| timing and adoption of the global rollout of new technologies;
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| customer-specific financial conditions;
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| changes in customer preferences or requirements;
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| • | availabilityChanges to the regulatory environment in which our customers operate and cost of capital;changes in or uncertainty about government funded programs may negatively impact our business.
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| governmental regulation;
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| demand for network services;
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| competitive pressures, including pricing pressures;
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| customer acceptance of new services offered;
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| industry consolidation; and
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| real or perceived trends or uncertainties in these factors.
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As a result of these factors, we may not be able to maintain or increase our sales in the future, and our business, financial condition, results of operations and cash flows could be materially and adversely affected.
A substantial portion of our business is derived from a limited number of key customers and channel partners.
Our customer base includes direct customers, original equipment manufacturers (OEMs) and channel partners, which include distributors, system integrators, value-added resellers and manufacturers’ representatives. For the year ended December 31, 2019, after giving effect to the Acquisition as if it happened on January 1, 2019, we would have derived approximately 21% of our consolidated net sales from our top two direct customers. Our largest customer would have been Comcast, accounting for approximately 13% of our consolidated net sales, after giving effect to the Acquisition. The concentration of our net sales with these key customers subjects us to a variety of risks including:
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| lower sales that could result from the loss of one or more of our key customers;
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| less efficient operations that could result in higher costs from an inability to accurately forecast and plan for volatile spending patterns of key customers;
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| renegotiations of agreements with key customers (or consolidation of agreements with common customers in connection with the Acquisition) that could result in materially less favorable terms;
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| financial difficulties experienced by one or more of our key customers that could result in reduced purchases of our products and/or delays or difficulties in collecting accounts receivable balances;
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| election by our key customers to purchase products from our competitors in order to diversify their supplier base and dual-source key products, resulting in reduced purchases of our products;
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| being dependent on customers with substantial purchasing power and leverage in negotiating contractual obligations, resulting in lower net sales and gross profit; and
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| reductions in inventory levels held by channel partners and OEMs, which may be unrelated to purchasing trends by end customers.
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We are also exposed to similar risks to the extent that we have significant indirect sales to one or more end-users of our products, who may also be a direct customer.
We generally have no minimum purchase commitments with any of our distributors, value-added resellers, operators or OEMs or other customers, and our contracts with these parties generally do not prohibit them from purchasing or offering products or services that compete with ours. Although we maintain long-term relationships with these parties and have not historically lost key customers, we have experienced variability in the level of purchases by our key customers. Any significant reduction in sales to these customers, including as a result of the inability or unwillingness of these customers to continue purchasing our products, could materially and adversely affect our business, financial condition, results of operations and cash flows.
We face competitive pressures with respect to all our major product groups.
Competition in our industry depends on a number of factors, including: innovative product and service solution offerings; the ability to adapt to changing markets and customer preferences; product and service quality; timing of the introduction of new products and services; speed of delivery; pricing; and customer service, including the total customer experience.
In each of our major product groups, we compete with a substantial number of foreign and domestic companies, some of which have greater financial, technical, marketing and other resources or lower operating costs. They may also have broader product offerings and market focus. This gives many of these enterprises a competitive advantage to withstand any significant reduction in capital spending by customers in our markets over the long term. In some instances, our customers themselves may also be our competition in other business areas. Some of our customers may develop their own software requiring support within our products and/or may design and develop products of their own that are produced to their own specifications directly by a contract manufacturer. Further, our industry continues to consolidate, and the combination of any of our competitors could further increase these advantages and result in competitors with broader market presence.
Some competitors may be able to bundle their products and services together and may be capable of delivering more complete solutions that better meet customer preferences than we are able to provide, which may cause us to lose sales opportunities and revenue. Competitors’ actions, such as price reductions, acceptance of high-risk contractual terms or the introduction of new, innovative products and services, and the use of exclusively price-driven auctions by customers have caused lost sales opportunities in the past and may cause us to lose sales opportunities in the future. The rapid technological changes occurring in the communications industry could also lead to the entry of new competitors against whom we may not be able to compete successfully. For example, as networks become more virtualized, the functionality of our products is at risk of being subsumed by competitors who utilize software to provide the same functions as our products. A related trend that could affect us is the emerging interest in distributed access architectures (DAA), which disaggregates some of the functions of the converged cable access platform (CCAP) and the access and transport platforms to enable deployment of these functions in ways that could reduce traditional operator capital expenditures in hybrid fiber-coaxial. Similarly, as there is technology evolution or transformation within the industry, be it DOCSIS 4.0 or PON, there is risk that our market position would be weakened. We have developed and deployed a line of DAA products, but some operators may not be aligned on the specific implementations of DAA and we could lose market share to competitors. Service providers also have the goal of virtualizing CCAP management and control functions as they deploy DAA, and although we are developing a fully virtualized CCAP product, this could potentially enable new competitors to enter the market and reduce operator dependence on our products. If any of our competitors’ products or technologies were to become the industry standard, our business would be negatively affected.
Further, if we are unable to transform our business processes to support changing customer expectations and deliver a superior total customer experience, we may lose sales opportunities in the future.
Changes in trade policies could also decrease the price competitiveness of our products and/or increase our operating costs. For a more complete discussion of our risks related to trade policies, see the risk factor “Additional tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products” under “International Risks” in this Item 1A. Risk Factors section.
We cannot assure you that we will continue to compete successfully with our existing competitors or with new competitors. If we are unable to compete in any of our markets at the same level as we have in the past or are forced to reduce the prices of our products in order to continue to be competitive, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Our ability to sell our products is highly dependent on the quality of our support and services offerings after the sale, and our failure to offer high-quality support and services after the sale would have a material adverse effect on our sales and results of operations.
After our products are deployed, our channel partners and end customers depend on our support organization to resolve any issues relating to our products. A high level of support is important for the successful marketing and sale of our products. In many cases, our channel partners provide support directly to our end-customers. We do not have complete control over the level or quality of support provided by our channel partners. These channel partners may also provide support for other third-party products, which may potentially distract resources from support for our products. If we and our channel partners do not effectively assist our end customers in deploying our products quickly resolving post-deployment issues or provide effective ongoing support, it would adversely affect our ability to sell our products to existing end customers and could harm our reputation with potential end customers. In some cases, we guarantee a certain level of performance to our channel partners and end customers, which could prove to be resource-intensive and expensive for us to fulfill if unforeseen technical problems arise.
Many of our service provider and large enterprise end customers have more complex networks and require higher levels of support than our smaller end customers. If our support organization fails to meet the requirements of our service provider or large enterprise end customers, it may be more difficult to execute on our strategy to increase our sales to large end customers. In addition, given the extent of our international operations, our support organization faces challenges, including those associated with delivering support, training and documentation in languages other than English. As a result of these factors, our failure to maintain high-quality support and services would have a material adverse effect on our business, financial condition, results of operations and cash flows.
Changes to the regulatory environment in which our customers operate and changes in or uncertainty about government funded programs may negatively impact our business.
The telecommunications and cable television industries are subject to significant and changing federal and state regulation, both in the U.S. and other countries. Many of our customers are subject to various rules and regulations as Internet service providers and changes to such rules and regulations could adversely impact our customers’ decisions regarding capital spending. Some of our customers include agencies of the U.S. federal government as well as educational institutions that receive funding from the U.S. federal government. We, as well as some of our customers, also participate in and benefit from government funded programs that encourage the development of network infrastructures. Examples include FirstNet, which is an independent authority within the U.S. Department of Commerce developing, building and operating the nationwide broadband network that equips first responders, and the E-rates program, which provides supplemental funding to school districts to fund upgrades to technical infrastructure, including Wi-Fi infrastructure. Changes in government programs in our industry or uncertainty regarding future changes could adversely impact our customers’ decisions regarding capital spending, which could decrease demand for our products. Decreased demand for our products could materially and adversely affect our business, financial condition, results of operations and cash flows.
Operational Risks Our future success depends on our ability to anticipate and adapt to changes in technology and customer preferences and develop, implement and market innovative solutions.
Many of our markets are characterized by rapid advances in information processing and communications capabilities that require increased transmission speeds and density and greater bandwidth. These advances require significant investments in R&D in order to improve the capabilities of our products and services and develop new offerings or solutions that will meet the needs and preferences of our customers. There can be no assurance that our investments in R&D will yield marketable product or service innovations.
We may not be successful in our ongoing innovation efforts if, among other things, our products and services are not cost effective, brought to market in a timely manner, compliant with evolving industry standards, accepted in the market or recognized as meeting customer requirements. We could experience a material adverse effect on our business, financial condition, results of operations and cash flows if we are not successful in our ongoing innovation efforts.
| • | If our integrated global manufacturing operations suffer production or shipping delays, we may have difficulty meeting customer demands. |
| • | Our future success depends on our ability to anticipate and adapt to changes in technology and customer preferences and develop, implement and market innovative solutions. |
| • | If we do not stay current with product life cycle developments, our business may suffer. |
| • | If our products do not effectively interoperate with cellular networks and mobile devices, future sales of our products could be negatively affected. |
| • | If our service offerings or products, including material purchased from our suppliers, have quality or performance issues, our business may suffer. |
| • | We depend on cloud computing infrastructure operated by third-parties and any disruption in these operations could adversely affect our business. |
| • | Our business depends on effective management information systems. |
| • | Cyber-security incidents, including data security breaches, ransomware or computer viruses, could harm our business by exposing us to various liabilities, disrupting our delivery of products and services and damaging our reputation. |
| • | Climate change may have a long-term impact on our business. |
As our products become more complex and customer preferences continue to change, we may encounter difficulties in meeting customer preferences, including performance, service and delivery expectations. Developing our products is expensive, complex and involves uncertainties. Each phase in the development of our products presents serious risks of failure, rework or delay, any one of which could impact the timing and cost-effective development of such product and could jeopardize end customer acceptance of the product. We have experienced in the past, and may in the future experience, design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. Any such difficulties or delays could have a material adverse effect on our results of operations, financial condition and cash flows.
If we do not stay current with product life cycle developments, our business may suffer.
To compete successfully, we must continue to innovate in anticipation of both our customers’ needs and developing industry trends, which require us to quickly design, develop, manufacture and sell new or enhanced products that provide increasingly higher levels of performance and reliability. The introduction of new or enhanced products requires that we carefully manage the transition from older products to minimize disruption in customer ordering practices and ensure that new products can be timely delivered to meet our customers’ demand.
For example, a significant portion of our revenues is dependent on the commercial deployment of technologies based on 4G wireless communications equipment and products. If we are not able to support our customers in an effective and cost-efficient manner as they advance from older generation networks or as they expand the capacity of their networks, our business will suffer. If we do not have competitively priced, market-accepted products available to meet our customers’ planned roll-out of 5G wireless communications systems, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Furthermore, there are several major trends that we expect to continue to impact the enterprise market and product life cycles. Enterprises are shifting toward mobility indoors and adjusting in-building cabling designs to support Wi-Fi, more access points and in-building cellular applications. Due to significant increases in data traffic and migrations of applications to the cloud, enterprises are also shifting spending toward multi-tenant data centers and hyperscale cloud service providers, which offer cloud data centers services as a replacement to in-house corporate data centers. As a result, there is growing demand for fiber solutions and decelerating demand for copper solutions. If we are unable to continue to support customers in these transitions, or if sales of copper products decline faster than expected, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows.
In order to stay current with product life cycle developments, we have formed strategic relationships with leading technology companies to provide us with early access to technology that we believe will help keep us at the forefront of our industry. Our strategic alliances are generally based on business relationships that have not been the subject of written agreements expressly providing for the alliance to continue for a significant period of time, and the loss of any such strategic relationship could have a material adverse effect on our business and results of operations.
If our products do not effectively interoperate with cellular networks and mobile devices, future sales of our products could be negatively affected.
Many of our products are designed to interoperate with cellular networks and mobile devices using Wi-Fi technology. These networks and devices have varied and complex specifications. As a result, we must ensure that our products interoperate effectively with these existing and planned networks and devices. To meet these requirements, we must continue development and testing efforts that require significant capital and employee resources. We may not accomplish these development efforts quickly or cost-effectively, or at all. If our products do not interoperate effectively, orders for our products could be delayed or cancelled, which would harm our revenue, operating results and reputation, potentially resulting in the loss of existing and potential end customers. The failure of our products to interoperate effectively with cellular networks or mobile devices may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. In addition, our end customers may require our products to comply with new and rapidly evolving security or other certifications and standards. If our products are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards, such end customers may not purchase our products, which would harm our business, operating results, financial condition and cash flows.
If our service offerings or products, including material purchased from our suppliers, have quality or performance issues, our business may suffer.
Our business depends on delivering products and services of consistently high quality. Many of our solutions are highly complex, and testing procedures used by us and our customers are limited to evaluating them under likely and foreseeable failure scenarios. Many of our products include both hardware and software components. It is not unusual for software, especially in earlier versions, to contain bugs that can unexpectedly interfere with expected operations. For various reasons, once deployed, our products may fail to perform as expected. Performance issues could result from faulty design, defective raw materials or components purchased from suppliers, problems in manufacturing or installation errors. We have experienced such performance issues in the past and remain exposed to such performance issues in the future. In some cases, recall of some or all affected products, product redesigns or additional capital expenditures may be required to correct a defect; and depending on the number of products affected, the cost of fixing or replacing such products could have a material impact on our operating results.
In some cases, we are dependent on a sole supplier for components used in our products. Defects in sole-sourced components subject us to additional risk of being able to quickly address any product issues or failures experienced by our customers as a result of the component defect and could delay our ability to deliver new products until the defective components are corrected or a new supplier is identified and qualified. This could increase our costs in resolving the product issue, result in decreased sales of the impacted product or damage our reputation with customers, any of which could negatively impact our operating results.
Hardware or software defects could also permit unauthorized users to gain access to our customers’ networks and/or a consumer’s home network. In addition to potentially damaging our reputation with customers, such defects may also subject us to claims for damages under agreements with our customers and fines by regulatory authorities.
We offer warranties on most products, the terms and conditions of which depend upon the product subject to the warranty. In many cases, we also indemnify our customers against damages or losses that might arise from certain claims relating to our products and services. Future claims may have a material adverse effect on our business, financial condition, results of operations and cash flows. Any significant or systemic product or service failure could also result in lost future sales as a result of reputational damage.
Although certain technical problems experienced by users may not be caused by our products, our business and reputation may be harmed if users perceive our products as the cause of a slow or unreliable network connection, or a high-profile network failure.
Our products have been deployed in many different locations and user environments and are capable of providing services and connectivity to many different types of devices operating a variety of applications. The ability of our products to operate effectively can be negatively impacted by many different elements unrelated to our products. For example, a user’s experience may suffer from an incorrect setting in a Wi-Fi device. Although certain technical problems experienced by users may not be caused by our products, users often may perceive them to be the underlying cause of poor performance of the wireless network. This perception, even if incorrect, could harm our business and reputation. Similarly, a high-profile network failure may be caused by improper operation of the network or failure of a network component that we did not supply, but service providers may perceive that our products were implicated, which, even if incorrect, could harm our business, financial condition, results of operations and cash flows.
We depend on cloud computing infrastructure operated by third-parties and any disruption in these operations could adversely affect our business.
For certain of our service offerings, in particular our Wi-Fi-related cloud services, we rely on third parties to provide cloud computing infrastructure that offers storage capabilities, data processing and other services. We currently operate our cloud-dependent services using Amazon Web Service (AWS) or Google Compute Engine (GCE). We cannot easily switch our AWS or GCE operations to another cloud provider. Any disruption of or interference with our use of these cloud services would impact our operations and our business could be adversely impacted.
Problems faced by our third-party cloud services with the telecommunications network providers with whom we or they contract or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our end customers. If AWS and GCE are unable to keep up with our needs for capacity, this could have an adverse effect on our business. Any changes in third-party cloud services or any errors, defects, disruptions or other performance problems with our cloud-based applications, could adversely affect our reputation and may damage our end customers’ stored files or result in lengthy interruptions in our services. Interruptions in our services might adversely affect our reputation and operating results, cause us to issue refunds or service credits, subject us to potential liabilities or result in contract terminations.
Our business depends on effective management information systems.
We rely on effective management information systems for critical business operations, to support strategic business decisions and to maintain a competitive edge in the marketplace. We rely on our enterprise resource planning (ERP) systems to support critical business operations such as processing sales orders and invoicing, manufacturing, shipping, inventory control, purchasing and supply chain management, human resources and financial reporting. We expect to begin the upgrade of our ERP software to a newer, cloud-based version in 2020. We may experience difficulties as we transition to the upgraded systems, including loss or corruption of data, delayed shipments, decreases in productivity as personnel implement and become familiar with new systems and processes, unanticipated expenses (including increased costs of implementation or costs of conducting business) and lost revenue. Difficulties in implementing the upgrade or significant system failure could disrupt our operations, divert management’s attention and have an adverse effect on our capital resources, financial condition, results of operations or cash flows.
We also rely on management information systems to produce information for business decision-making and planning and to support e-commerce activities. Failure to maintain an adequate digital platform or to make additional investment in our digital platform to support e-commerce activities and improve our customer experience could have a material adverse impact on our business through lost sales opportunities.
If we are unable to maintain our management information systems, including our IT infrastructure, to support critical business operations, produce information for business decision-making activities and support e-commerce activities, we could experience a material adverse impact on our business or an inability to timely and accurately report our financial results.
Cyber-security incidents, including data security breaches, ransomware or computer viruses, could harm our business by exposing us to various liabilities, disrupting our delivery of products and services and damaging our reputation.
We rely extensively on our management information technology systems and those of third parties to operate our business and store proprietary information about our products and intellectual property. Additionally, we and others acting on our behalf receive, process, store and transmit confidential data, including “personally identifiable information,” with respect to employees, vendors, customers and others. As the recent rise in cybersecurity incidents around the world indicates, all management information technology systems are vulnerable. Despite the security controls we have in place, our facilities, systems and procedures, and those of our third-party service providers, are at risk of security breaches, acts of vandalism, ransomware, software viruses, misplaced or lost data, programming and/or human errors or other similar events. In particular, unauthorized access to our computer systems or stored data could result in the theft or improper disclosure of proprietary, confidential or sensitive information, the deletion or modification of records or interruptions in our operations. These cybersecurity risks increase when we transmit information from one location to another, including transmissions over the Internet or other electronic networks. Any future significant compromise or breach of our data security, whether external or internal, or misuse of employee, vendor, customer, or Company data, could result in significant costs, lost sales, fines, lawsuits, and damage to our reputation. We employ a variety of security breach countermeasures and security controls designed to mitigate these risks, but we cannot guarantee that all breach attempts can be successfully thwarted by these measures as the sophistication of attacks increases. As cyber threats continue to evolve, we may be required to expend additional resources to mitigate new and emerging threats while continuing to enhance our information security capabilities or to investigate and remediate security vulnerabilities.
In addition, defects in some of the hardware or software we develop and sell, or in their implementation by our customers, could also result in unauthorized access to our customers’ and/or consumers’ networks. Any such events could result in theft of trade secrets and intellectual property; give rise to legal proceedings; cause us to incur increased costs for insurance premiums, security, remediation and regulatory compliance; subject us to civil and criminal penalties; expose us to liabilities to our customers, employees, vendors, governmental authorities or other third parties; allow others to unfairly compete with us; disrupt our delivery of products and services; expose the confidential information of our clients and others; and have a negative impact on our reputation, all of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Because of the nature of information that may pass through or be stored on our solutions or networks, we and our end customers may be subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters.
Globally, there has been an increase in laws and regulatory action relating to privacy-related matters. Some of these laws impose requirements for the handling of personal data, including data of employees, consumers and business contacts. Several U.S. states have adopted legislation requiring companies to protect the security of personal information that they collect from consumers over the Internet, and more states may adopt similar legislation. For example, California enacted the California Consumer Privacy Act on January 1, 2020, which subjects us to stricter obligations, greater fines and more private causes of action related to data security. Also, many jurisdictions have enacted or are enacting laws requiring companies to notify regulators or individuals of data security incidents involving certain types of personal data. These mandatory disclosures regarding security incidents often lead to widespread negative publicity. Any security incident, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our data security measures, negatively impact our ability to attract or retain customers, or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect our business and operating results.
Foreign data protection, privacy and other laws and regulations can be more restrictive than those in the U.S. For example, the EU’s General Data Protection Regulation (GDPR), which became effective in May 2018, was designed to harmonize data privacy laws across Europe, to protect and empower all EU citizens’ data privacy and to reshape the way organizations across the region approach data privacy. Compliance with GDPR has required changes to products and service offerings, internal and external software systems, including our websites, and changes to many company processes and policies. Failure to comply with GDPR could cause significant penalties and loss of business.
In addition, some countries are considering or have passed legislation requiring local storage and processing of data. For example, Brazil and India have each adopted such laws that became effective in January 2020. These new and proposed laws could increase the cost and complexity of offering our solutions or maintaining our business operations in those jurisdictions. The introduction of new solutions or expansion of our activities in certain jurisdictions may subject us to additional laws and regulations. Our channel partners and end customers also may be subject to such laws and regulations in the use of our products and services.
These U.S. federal and state and foreign laws and regulations, which often can be enforced by private parties or government entities, are constantly evolving. In addition, the application and interpretation of these laws and regulations are often uncertain, may be interpreted and applied inconsistently from jurisdiction to jurisdiction and may be contradictory with each other. For example, a government entity in one jurisdiction may demand the transfer of information forbidden from transfer by a government entity in another jurisdiction. If our actions were determined to be in violation of any of these disparate laws and regulations, in addition to the possibility of fines, we could be ordered to change our data practices, which could have an adverse effect on our business and results of operations and financial condition. There is also a risk that we, directly or as the result of a third-party service provider we use, could be found to have failed to comply with the laws or regulations applicable in a jurisdiction regarding the collection, handling, transfer, disposal or consent to the use of personal data, which could subject us to fines or other sanctions, as well as adverse reputational impact.
Compliance with these existing and proposed laws and regulations can be costly and require significant management time and attention, and failure to comply can result in negative publicity and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices. Customers may demand or request additional functionality in our products or services that they believe are necessary or appropriate to comply with such laws and regulations, which can cause us to incur significant additional costs and can delay or impede the development of new solutions. In addition, there is a risk that failures in systems designed to protect private, personal or proprietary data held by us or our customers using our solutions will allow such data to be disclosed to or seen by others, resulting in application of regulatory penalties, enforcement actions, remediation obligations, private litigation by parties whose data were improperly disclosed or claims from our customers for costs or damages they incur. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. Our existing general liability insurance coverage and coverage for errors and omissions may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims, or our insurers may deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition, results of operations and cash flow.
If our integrated global manufacturing operations suffer production or shipping delays, we may have difficulty meeting customer demands.
Disruption of our ability to produce at or distribute from our manufacturing or contract manufacturing facilities could adversely affect our ability to manufacture products at our other manufacturing or contract manufacturing facilities in a cost-effective and timely manner. In particular, some of our manufacturing and contract manufacturing facilities rely on aging production equipment and information technology infrastructure, and if we fail or our contract manufacturers fail to properly maintain or update this equipment, it could affect our ability to manufacture or ship products. Other disruptions, including labor disturbances, fire, electrical outage, natural disaster, pandemics, acts of violence or terrorism, shipping interruptions or some other catastrophic event could adversely affect our ability to manufacture products at our other manufacturing or contract manufacturer facilities in a cost-effective and timely manner, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The continued industry move to open standards may impact our future results.
Our industry has and will continue to demand products based on open standards. The move toward open standards is expected to increase the number of providers that will offer services to the market. This trend is also expected to increase the number of competitors who are able to supply products to service providers and the enterprise market. These factors may adversely impact our future revenues and margins. In addition, many of our customers participate in “technology pools” and increasingly request that we donate a portion of our source code used by customers to these pools, which may impact our ability to recapture the R&D investment made in developing such code.
We believe that we will be increasingly required to work with third-party technology providers. As a result, we expect the shift to more open standards may require us to license software and other components indirectly to third parties via various open-source or royalty-free licenses. In some circumstances, our use of such open-source technology may include technology or protocols developed by standards settings bodies, other industry forums or third-party companies. The terms of the open-source licenses granted by such parties, or the granting of royalty-free licenses, may limit our ability to commercialize products that utilize such technology, which could have a material adverse effect on our results.
Climate change may have a long-term impact on our business.
While we seek to partner with organizations that mitigate their business risks associated with climate change, we recognize that there are inherent risks wherever business is conducted. The potential physical impacts of climate change on our operations are highly uncertain and would be particular to the geographic circumstances in areas in which we operate. These may include changes in rainfall and storm patterns and intensities, water shortages, changing sea levels and changing temperatures. These impacts may adversely impact the cost, production and financial performance of our operations. Climate-related events, including the increasing frequency of extreme weather events and their impact on U.S., China and other major regions’ critical infrastructure, have the potential to disrupt our business, our third-party suppliers, and/or the business of our customers and may cause us to experience higher attrition, losses and additional costs to maintain or resume operations. CommScope aligns with the Global Reporting Initiative (GRI) standard and makes use of the Carbon Disclosure Project (CDP) platform, which is committed to aligning with the Task Force on Climate Related Financial Disclosures (TCFD) recommendations to accurately assess, take potential proactive action and report as appropriate. For additional information, see our Corporate Responsibility & Sustainability pages on the CommScope website: https://www.commscope.com/About-Us/Corporate-Responsibility-and-Sustainability.
Supply Chain Risks | • | Our dependence on commodities subjects us to cost volatility and potential availability constraints. |
| • | We are dependent on a limited number of key suppliers for certain raw materials and components. |
| • | Capacity constraints with respect to our internal facilities and/or existing or new contract manufacturers could have an adverse impact on our business. |
| • | If our contract manufacturers encounter production, quality, financial or other difficulties, we may experience difficulty in meeting customer demands. |
Financial Risks | • | Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our financial obligations. |
| • | Despite current indebtedness levels and restrictive covenants, we may still incur additional indebtedness that could further exacerbate the risks associated with our substantial financial leverage. |
| • | To service our indebtedness and pay dividends on our preferred stock, we will require a significant amount of cash and our ability to generate sufficient cash depends on many factors beyond our control. |
| • | We may need to recognize additional impairment charges related to goodwill, identified intangible assets and fixed assets. |
| • | The IRS may not agree ARRIS International plc (ARRIS) was a foreign corporation for U.S. federal income tax purposes. |
Labor Related Risks | • | We may not be able to attract and retain key employees. |
| • | Labor unrest could have a material adverse effect on our business, results of operations and financial condition. |
International Risks | • | Our significant international operations expose us to economic, political and other risks. |
| • | Additional tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products. |
| • | Our international operations expose us to increased challenges in complying with anti-corruption laws and regulations of the U.S. government and various other international jurisdictions. |
| • | We are subject to governmental export and import controls and sanctions programs that could subject us to liability or impair our ability to compete in international markets. |
Litigation and Regulatory Risks | • | We may not be successful in protecting our intellectual property and in defending against claims that we are infringing on the intellectual property of others and such actions may be costly. |
| • | Because of the nature of information that may pass through or be stored on our solutions or networks, we, our vendors and our end customers may be subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other related matters. |
| • | Compliance with current and future environmental laws and potential environmental liabilities may have a material adverse impact on our business, financial condition and results of operations. |
General Risks | • | The current COVID-19 pandemic and any other future public health crisis, could materially adversely affect our business, financial condition, results of operations and cash flows. |
| • | We may experience significant variability in our quarterly or annual effective income tax rate. |
| • | We do not intend to pay dividends on our common stock and, consequently, the ability of investors to achieve a return on their investment will depend on appreciation in the price of our common stock. |
| • | Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, as a result, depress the trading price of our common stock. |
| • | Our business could be negatively impacted as a result of actions by activist stockholders or others. |
Strategic Risks Our business strategy relies in part on acquisitions to create growth. We may not fully realize anticipated benefits from past or future acquisitions or investments in other companies. All acquisitions, including the 2019 acquisition of ARRIS (the Acquisition), involve risks, such as the assumption of additional liabilities and expenses, issuance of debt, incurrence of transaction and integration costs, diversion of management’s attention from other business concerns, assumption of unknown contingent liabilities and unanticipated litigation costs. There are also significant challenges to integrating an acquired operation into our business, including, but not limited to successfully managing the operations, manufacturing facilities and technology; integrating the sales organizations; maintaining and increasing the customer base; retaining key employees, suppliers and distributors; integrating management information systems, including ERP systems; integrating inventory management and accounting activities; integrating R&D activities; navigating markets in which we potentially have limited or no prior experience; integrating and implementing effective disclosure controls and procedures and internal controls over financial reporting; and the impact of goodwill or other impairment charges, amortization costs for acquired intangible assets and acquisition accounting treatment, including the loss of deferred revenue and increases in the fair values of inventory and other acquired assets, on our GAAP financial condition and results of operations. Furthermore, such acquisitions may be dilutive to our financial results. Although we typically expect to realize strategic, operational and financial benefits as a result of our past and future acquisitions and investments, we cannot predict or guarantee whether and to what extent anticipated cost savings, synergies and growth prospects will be achieved. Both CommScope and ARRIS have completed a number of significant acquisitions and invested in other companies over recent years and we expect to make additional acquisitions and strategic investments in the future. For instance, in 2017, ARRIS acquired the Ruckus Wireless and ICX Switch business (Ruckus Networks); in 2016, ARRIS combined with Pace plc (Pace); and in 2015, CommScope acquired TE Connectivity’s BNS business. We anticipate that a portion of any future growth of our business will be accomplished by acquiring existing businesses, products or technologies. However, we may not be able to identify suitable acquisition opportunities or obtain the necessary financing on acceptable terms. We may spend time and money investigating and negotiating with potential acquisition or investment targets but not complete the transaction. We may sell or discontinue one or more of our product lines as a result of our evaluation of our products and markets. We periodically evaluate our various product lines and may consider the divestiture or discontinuance of one or more of those product lines. Any such divestiture or discontinuance could adversely affect our financial position, results of operations and cash flows. Divestitures of product lines have inherent risks and costs, including potential post-closing claims for indemnification and potential loss of customers, even with respect to retained product lines. Expected cost savings may also be difficult to achieve or maximize due to a fixed cost structure, and we may experience varying success in the timely reduction of fixed costs or transferring of liabilities previously associated with the divested or discontinued business. Carlyle owns a substantial portion of our equity and its interests may not be aligned with yours. Funding for the Acquisition included an investment by Carlyle in our Series A Convertible Preferred Stock. As a result, Carlyle owns approximately 16% of our common stock on an if-converted basis and has the right to designate up to two directors on our Board of Directors. In addition, certain of our existing directors are senior advisors to Carlyle. Circumstances may occur in which the interests of Carlyle could conflict with the interests of our other stockholders.
Difficulties may be encountered in the realignment of manufacturing capacity and capabilities among our global manufacturing facilities and our contract manufacturers that could adversely affect our ability to meet customer demand for our products. We periodically realign manufacturing capacity among our global facilities and contract manufacturers in order to reduce costs by improving manufacturing efficiency and to strengthen our long-term competitive position. The implementation of these initiatives may include significant shifts of production capacity among facilities and contract manufacturers. We have done this in the past related to the integration of certain acquisitions, including the integration of the ARRIS business. Also, in prior years, with some of the uncertainties in the U.S. trade tariff environment, we transitioned manufacturing for certain impacted products to non-tariff countries. In addition, in response to intermittent shutdowns of our facilities during the COVID-19 pandemic, we transitioned certain manufacturing to less impacted facilities. These changes are time-consuming and costly, and changes in our contract manufacturers or manufacturing locations may cause significant interruptions in supply if the manufacturers have difficulty manufacturing products to our specifications. There are significant risks inherent in the implementation of these initiatives, including our failure to ensure the following: adequate inventory on hand or production capacity to meet customer demand while capacity is being shifted among facilities; maintaining product quality as a result of shifting capacity; adequate raw material and other service providers to meet the needs at the new production locations; ability to successfully remove, transport and re-install equipment; and availability of adequate supervisory, production and support personnel to accommodate the shifted production. In the event manufacturing realignment initiatives are not successfully implemented, we could experience lost future sales and increased operating costs, as well as customer relations problems, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may need to undertake additional restructuring actions in the future. We have previously recognized restructuring charges in response to slowdowns in demand for our products and in conjunction with the implementation of initiatives to reduce costs and improve efficiency of our operations. Most recently, we have undertaken a number of initiatives to support the integration of ARRIS, which include mostly workforce reductions. In the past, we have undertaken initiatives to support the integration of other acquisitions, which included the closure of certain domestic and international manufacturing facilities and various other workforce reductions. As a result of the continued integration efforts related to the acquisition of ARRIS, changes in business conditions and other developments, we may need to initiate additional restructuring actions that could result in workforce reductions and restructuring charges, which could adversely and materially affect our cash flows. Competitive Risks Our business is dependent on third party capital spending for data, communication and entertainment networks, and reductions in such capital spending could adversely affect our business. Our performance is dependent on third parties’ capital spending for constructing, rebuilding, maintaining or upgrading data, communication and entertainment networks, which can be volatile and difficult to forecast. Capital spending in the communications industry is cyclical and can be curtailed or deferred on short notice. A variety of factors affect the timing and amount of capital spending in the communications industry, including: | • | general economic and market conditions; |
| • | foreign currency fluctuations; |
| • | seasonality of outside deployments; |
| • | timing and adoption of the global rollout of new technologies; |
| • | customer-specific financial conditions; |
| • | changes in customer preferences or requirements; |
| • | availability and cost of capital; |
| • | governmental regulation; |
| • | demand for network services; |
| • | competitive pressures, including pricing pressures; |
| • | customer acceptance of new services offered; |
| • | industry consolidation; and |
| • | real or perceived trends or uncertainties in these factors. |
We have experienced a decrease in demand for certain of our products as a result of the COVID-19 pandemic in 2020 and this could continue in the near team. For a more complete discussion of our risks related to COVID-19, see the risk factor under “General Risk Factors” in this Item 1A, Risk Factor section, “The current pandemic of the novel coronavirus, or COVID-19, and any other future public health crisis, could materially adversely affect our business, financial condition, results of operations and cash flows.” As a result of these factors, we may not be able to maintain or increase our sales in the future, and our business, financial condition, results of operations and cash flows could be materially and adversely affected. A substantial portion of our business is derived from a limited number of key customers and channel partners. Our customer base includes direct customers, original equipment manufacturers (OEMs) and channel partners, which include distributors, system integrators, value-added resellers and sales representatives. For the year ended December 31, 2020, we derived approximately 17% of our consolidated net sales from our top two direct customers. Our largest customer, Comcast, accounted for approximately 11% of our consolidated net sales. The concentration of our net sales with these key customers subjects us to a variety of risks, including: | • | lower sales that could result from the loss of one or more of our key customers; |
| • | dependency on customers with substantial purchasing power and leverage in negotiating contractual obligations as well as the operational structure of the relationship, resulting in lower net sales and gross profit; |
| • | less efficient operations that could result in higher costs from an inability to accurately forecast and plan for volatile spending patterns of key customers; |
| • | financial difficulties experienced by one or more of our key customers that could result in reduced purchases of our products and/or delays or difficulties in collecting accounts receivable balances; |
| • | election by our key customers to purchase products from our competitors in order to diversify their supplier base and dual-source key products, resulting in reduced purchases of our products; and |
| • | reductions in inventory levels held by channel partners and OEMs, which may be unrelated to purchasing trends by end customers. |
We are also exposed to similar risks to the extent that we have significant indirect sales to one or more end-users of our products, who may also be a direct customer. We generally have no minimum purchase commitments with any of our distributors, value-added resellers, operators or OEMs or other customers, and our contracts with these parties generally do not prohibit them from purchasing or offering products or services that compete with ours. We have historically experienced variability in the level of purchases by our key customers and expect similar variability that could affect future sales. Any significant reduction in sales to these customers, including as a result of the inability or unwillingness of these customers to continue purchasing our products, could materially and adversely affect our business, financial condition, results of operations and cash flows.
We face competitive pressures with respect to all our major product groups. Competition in our industry depends on a number of factors, including: innovative product and service solution offerings; the ability to adapt to changing markets and customer preferences; product and service quality; timing of the introduction of new products and services; speed of delivery; pricing; and customer service, including the total customer experience. In each of our major product groups, we compete with a substantial number of foreign and domestic companies, some of which have greater financial, technical, marketing and other resources or lower operating costs. They may also have broader product offerings and market focus. This gives many of these enterprises a competitive advantage to withstand any significant reduction in capital spending by customers in our markets over the long term. Further, our industry continues to consolidate, and the combination of any of our competitors could further increase these advantages and result in competitors with broader market presence. Some competitors may be able to bundle their products and services together and may be capable of delivering more complete solutions that better meet customer preferences than we are able to provide, which may cause us to lose sales opportunities and revenue. Competitors’ actions, such as price reductions, acceptance of high-risk contractual terms or the introduction of new, innovative products and services, and the use of exclusively price-driven auctions by customers have caused lost sales opportunities in the past and may cause us to lose sales opportunities in the future. The rapid technological changes occurring in the communications industry could also lead to the entry of new competitors against whom we may not be able to compete successfully. For example, as networks become more virtualized, the functionality of our products is at risk of being subsumed by competitors who utilize software to provide the same functions as our products. A related trend that could affect us is the emerging interest in DAA, which disaggregates some of the functions of the CCAP and the access and transport platforms to enable deployment of these functions in ways that could reduce traditional operator capital expenditures in hybrid fiber-coaxial. We have developed and deployed a line of DAA products, but some operators may not be aligned on the specific implementations of DAA and we could lose market share to competitors. Service providers also have the goal of virtualizing CCAP management and control functions as they deploy DAA, and although we are developing a fully virtualized CCAP product, this could potentially enable new competitors to enter the market and reduce operator dependence on our products. As there is technology evolution or transformation within the industry, be it DOCSIS 4.0 or PON, there is risk that our market position would be weakened. If any of our competitors’ products or technologies were to become the industry standard, our business would be negatively affected. The continued industry move toward open standards may result in an increase in competition for our products that may adversely impact our future revenues and margins. In addition, many of our customers participate in “technology pools” and increasingly request that we donate a portion of our source code used by customers to these pools, which may impact our ability to recapture the R&D investment made in developing such code. We believe that we will be increasingly required to work with third-party technology providers. As a result, we expect the shift to more open standards may require us to license software and other components indirectly to third parties via various open-source or royalty-free licenses. In some circumstances, our use of such open-source technology may include technology or protocols developed by standards settings bodies, other industry forums or third-party companies. The terms of the open-source licenses granted by such parties, or the granting of royalty-free licenses, may limit our ability to commercialize products that utilize such technology, which could have a material adverse effect on our results. In some instances, our customers themselves may also be our competition in other business areas. Some of our customers may develop their own software requiring support within our products and/or may design and develop products of their own that are produced to their own specifications directly by a contract manufacturer. Further, if we are unable to transform our business processes to support changing customer expectations and deliver a superior total customer experience, we may lose sales opportunities in the future. We cannot assure you that we will continue to compete successfully with our existing competitors or with new competitors. If we are unable to compete in any of our markets at the same level as we have in the past or are forced to reduce the prices of our products in order to continue to be competitive, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Our ability to sell our products is highly dependent on the quality of our support and services offerings after the sale, and our inability to execute after the sale would have a material adverse effect on our business. After our products are deployed, our channel partners and end customers depend on our support organization to resolve any issues relating to our products. A high level of support is important for the successful marketing and sale of our products. In many cases, our channel partners provide support directly to our end customers. We do not have complete control over the level or quality of support provided by our channel partners. These channel partners may also provide support for other third-party products, which may potentially distract resources from support for our products. If we and our channel partners do not effectively assist our end customers in deploying our products, quickly resolving post-deployment issues and provide effective ongoing support, it would adversely affect our ability to sell our products to existing end customers and could harm our reputation with potential end customers. In some cases, we guarantee a certain level of performance to our channel partners and end customers, which could prove to be resource-intensive and expensive for us to fulfill if unforeseen technical problems arise. Many of our service provider and large enterprise end customers have more complex networks and require higher levels of support than our smaller end customers. If our support organization fails to meet the requirements of our service provider or large enterprise end customers, it may be more difficult to execute on our strategy to increase our sales to large end customers. In addition, given the extent of our international operations, our support organization faces challenges, including those associated with delivering support, training and documentation in languages other than English. Our failure to maintain high-quality support and services would have a material adverse effect on our business, financial condition, results of operations and cash flows. Changes to the regulatory environment in which our customers operate and changes in or uncertainty about government funded programs may negatively impact our business. The telecommunications and cable television industries are subject to significant and changing federal and state regulation, both in the U.S. and other countries. Many of our customers are subject to various rules and regulations as Internet service providers and changes to such rules and regulations could adversely impact our customers’ decisions regarding capital spending. Some of our customers include agencies of the U.S. federal government as well as educational institutions that receive funding from the U.S. federal government. We, as well as some of our customers, also participate in and benefit from government funded programs that encourage the development of network infrastructures. Changes in government programs in our industry or uncertainty regarding future changes could adversely impact our customers’ decisions regarding capital spending, which could decrease demand for our products and could materially and adversely affect our business, financial condition, results of operations and cash flows. Operational Risks If our integrated global manufacturing operations suffer production or shipping delays, we may have difficulty meeting customer demands. Disruption of our ability to produce at or distribute from our manufacturing or contract manufacturing facilities could adversely affect our ability to manufacture products at our other manufacturing or contract manufacturing facilities in a cost-effective and timely manner. For example, the COVID-19 pandemic negatively impacted our results in 2020 due to supply constraints primarily related to the shut-down of our factories in Suzhou, China in the first quarter of 2020. For a more complete discussion of our risks related to the COVID-19 pandemic, see the risk factor below under “General Risk Factors” in this Item 1A, “The current pandemic of the novel coronavirus, or COVID-19, and any other future public health crisis, could materially adversely affect our business, financial condition, results of operations and cash flows.” Also, some of our manufacturing and contract manufacturing facilities rely on aging production equipment and information technology infrastructure, and if we fail or our contract manufacturers fail to properly maintain or update this equipment, it could affect our ability to manufacture or ship products. Other disruptions, including labor disturbances, fire, electrical outage, natural disaster, acts of violence or terrorism, shipping interruptions or some other catastrophic event could adversely affect our ability to manufacture products at our manufacturing or contract manufacturer facilities in a cost-effective and timely manner, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our future success depends on our ability to anticipate and adapt to changes in technology and customer preferences and develop, implement and market innovative solutions. Many of our markets are characterized by rapid advances in information processing and communications capabilities that require increased transmission speeds and density and greater bandwidth. These advances require significant investments in R&D in order to improve the capabilities of our products and services and develop new offerings or solutions that will meet the needs and preferences of our customers. There can be no assurance that our investments in R&D will yield marketable product or service innovations. We may not be successful in our ongoing innovation efforts if, among other things, our products and services are not cost effective, brought to market in a timely manner, compliant with evolving industry standards, accepted in the market or recognized as meeting customer requirements. We could experience a material adverse effect on our business, financial condition, results of operations and cash flows if we are not successful in our ongoing innovation efforts. As our products become more complex and customer preferences continue to change, we may encounter difficulties in meeting customer preferences, including performance, service and delivery expectations. Developing our products is expensive, complex and involves uncertainties. Each phase in the development of our products presents serious risks of failure, rework or delay, any one of which could impact the timing and cost-effective development of such product and could jeopardize end customer acceptance of the product. We have experienced in the past, and may in the future experience, design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. Any such difficulties or delays could have a material adverse effect on our results of operations, financial condition and cash flows. If we do not stay current with product life cycle developments, our business may suffer. To compete successfully, we must continue to innovate in anticipation of both our customers’ needs and developing industry trends, which require us to quickly design, develop, manufacture and sell new or enhanced products that provide increasingly higher levels of performance and reliability. If we do not have competitively priced, market-accepted products available to meet our customers’ planned roll-out of new technologies, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected. The introduction of new or enhanced products requires that we carefully manage the transition from older products to minimize disruption in customer ordering practices and ensure that new products can be timely delivered to meet our customers’ demand. If we are not able to support our customers in an effective and cost-efficient manner as they advance from older generation networks or as they expand the capacity of their networks, our business will suffer. Furthermore, there are several major trends that we expect to continue to impact the enterprise market and product life cycles, including the shift to 5G, enterprises shifting toward mobility indoors and adjusting in-building cabling designs to support Wi-Fi, more access points and in-building cellular applications. Due to significant increases in data traffic and migrations of applications to the cloud, enterprises are also shifting spending toward multi-tenant data centers and hyperscale cloud service providers, which offer cloud data centers services as a replacement to in-house corporate data centers. As a result, there is growing demand for fiber solutions and decelerating demand for copper solutions. If we are unable to continue to support customers in these transitions, or if sales of copper products decline faster than expected, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows. In order to stay current with product life cycle developments, we have formed strategic relationships with leading technology companies to provide us with early access to technology that we believe will help keep us at the forefront of our industry. Our strategic alliances are generally based on business relationships that have not been the subject of written agreements expressly providing for the alliance to continue for a significant period of time, and the loss of any such strategic relationship could have a material adverse effect on our business and results of operations.
If our products do not effectively interoperate with cellular networks and mobile devices, future sales of our products could be negatively affected. Many of our products are designed to interoperate with cellular networks and mobile devices using Wi-Fi technology. These networks and devices have varied and complex specifications. As a result, we must ensure that our products interoperate effectively with these existing and planned networks and devices. To meet these requirements, we must continue development and testing efforts that require significant capital and employee resources. We may not accomplish these development efforts quickly or cost-effectively, or at all. If our products do not interoperate effectively, orders for our products could be delayed or cancelled, which would harm our revenue, operating results and reputation, potentially resulting in the loss of existing and potential end customers. The failure of our products to interoperate effectively with cellular networks or mobile devices may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. In addition, our end customers may require our products to comply with new and rapidly evolving security or other certifications and standards. If our products are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors first achieve compliance with these certifications and standards, such end customers may not purchase our products, which would harm our business, operating results, financial condition and cash flows. If our service offerings or products, including material purchased from our suppliers, have quality or performance issues, our business may suffer. Our business depends on delivering products and services of consistently high quality. Many of our solutions are highly complex, and testing procedures used by us and our customers are limited to evaluating them under likely and foreseeable failure scenarios. Many of our products include both hardware and software components. It is not unusual for software, especially in earlier versions, to contain bugs that can unexpectedly interfere with expected operations. For various reasons, once deployed, our products may fail to perform as expected. Performance issues could result from faulty design, defective raw materials or components purchased from suppliers, problems in manufacturing or installation errors. We have experienced such performance issues in the past and remain exposed to such performance issues in the future. In some cases, recall of some or all affected products, product redesigns or additional capital expenditures may be required to correct a defect; and depending on the number of products affected, the cost of fixing or replacing such products could have a material impact on our operating results. In some cases, we are dependent on a sole supplier for components used in our products. Defects in sole-sourced components subject us to additional risk of being able to quickly address any product issues or failures experienced by our customers as a result of the component defect and could delay our ability to deliver new products until the defective components are corrected or a new supplier is identified and qualified. This could increase our costs in resolving the product issue, result in decreased sales of the impacted product or damage our reputation with customers, any of which could negatively impact our operating results. Hardware or software defects could also permit unauthorized users to gain access to our customers’ networks and/or a consumer’s home network. In addition to potentially damaging our reputation with customers, such defects may also subject us to claims for damages under agreements with our customers and fines by regulatory authorities. We offer warranties on most products, the terms and conditions of which depend upon the product subject to the warranty. In many cases, we also indemnify our customers against damages or losses that might arise from certain claims relating to our products and services. Future claims may have a material adverse effect on our business, financial condition, results of operations and cash flows. Any significant or systemic product or service failure could also result in lost future sales as a result of reputational damage.
Our products have been deployed in many different locations and user environments and are capable of providing services and connectivity to many different types of devices operating a variety of applications. The ability of our products to operate effectively can be negatively impacted by many different elements unrelated to our products. For example, a user’s experience may suffer from an incorrect setting in a Wi-Fi device. Although certain technical problems experienced by users may not be caused by our products, users often may perceive them to be the underlying cause of poor performance of the wireless network. This perception, even if incorrect, could harm our business and reputation. Similarly, a high-profile network failure may be caused by improper operation of the network or failure of a network component that we did not supply, but service providers may perceive that our products were implicated, which, even if incorrect, could harm our business, financial condition, results of operations and cash flows. We depend on cloud computing infrastructure operated by third parties and any disruption in these operations could adversely affect our business. For certain of our service offerings, in particular our Wi-Fi-related cloud services, we rely on third parties to provide cloud computing infrastructure that offers storage capabilities, data processing and other services. We currently operate our cloud-dependent services using Amazon Web Service (AWS), Google Compute Engine (GCE) or Microsoft Azure. We cannot easily switch our AWS, GCE or Azure operations to another cloud provider. Any disruption of or interference with our use of these cloud services would impact our operations and our business could be adversely impacted. Problems faced by our third party cloud services with the telecommunications network providers with whom we or they contract or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our end customers. If AWS and GCE are unable to keep up with our needs for capacity, this could have an adverse effect on our business. Any changes in third party cloud services or any errors, defects, disruptions or other performance problems with our cloud-based applications, could adversely affect our reputation and may damage our end customers’ stored files or result in lengthy interruptions in our services. Interruptions in our services might adversely affect our reputation and operating results, cause us to issue refunds or service credits, subject us to potential liabilities or result in contract terminations. Our business depends on effective management information systems. We rely on effective management information systems for critical business operations, to support strategic business decisions and to maintain a competitive edge in the marketplace. We rely on our enterprise resource planning (ERP) systems to support critical business operations such as processing sales orders and invoicing, manufacturing, shipping, inventory control, purchasing and supply chain management, human resources and financial reporting. In 2020, we began the upgrade of our ERP software to a newer, cloud-based version. We expect the first phase to be complete in early 2021. We may experience difficulties as we transition to the upgraded systems, including loss or corruption of data, delayed shipments, decreases in productivity as personnel implement and become familiar with new systems and processes, unanticipated expenses (including increased costs of implementation or costs of conducting business) and lost revenue. Difficulties in implementing the upgrade or significant system failure could disrupt our operations, divert management’s attention and have an adverse effect on our capital resources, financial condition, results of operations or cash flows. We also rely on management information systems to produce information for business decision-making and planning and to support e-commerce activities. Failure to maintain an adequate digital platform or to make additional investment in our digital platform to support e-commerce activities and improve our customer experience could have a material adverse impact on our business through lost sales opportunities. If we are unable to maintain our management information systems, including our IT infrastructure, to support critical business operations, produce information for business decision-making activities and support digital customer experience activities, we could experience a material adverse impact on our business or an inability to timely and accurately report our financial results.
Cyber-security incidents, including data security breaches, ransomware or computer viruses, could harm our business by exposing us to various liabilities, disrupting our delivery of products and services and damaging our reputation. We rely extensively on our management information technology systems and those of third parties to operate our business and store proprietary information about our products and intellectual property. Additionally, we and others acting on our behalf receive, process, store and transmit confidential data, including “personally identifiable information,” with respect to employees, vendors, customers and others. As the recent rise in cybersecurity incidents around the world indicates, all management information technology systems are vulnerable. Despite the security controls we have in place, our facilities, systems and procedures, and those of our third party service providers, are at risk of security breaches, acts of vandalism, ransomware, software viruses, misplaced or lost data, programming and/or human errors or other similar events. In particular, unauthorized access to our computer systems or stored data could result in the theft or improper disclosure of proprietary, confidential, sensitive or personal information, the deletion or modification of records or interruptions in our operations. These cybersecurity risks increase when we transmit information from one location to another, including transmissions over the Internet or other electronic networks. Any future significant compromise or breach of our data security, whether external or internal, or misuse of employee, vendor, customer, or Company data, could result in significant costs, lost sales, fines, lawsuits, lost customers and damage to our reputation. We employ a variety of security breach countermeasures and security controls designed to mitigate these risks, but we cannot guarantee that all breach attempts can be successfully thwarted by these measures as the sophistication of attacks increases. As cyber threats continue to evolve, we may be required to expend additional resources to mitigate new and emerging threats while continuing to enhance our information security capabilities or to investigate and remediate security vulnerabilities. In addition, defects in some of the hardware or software we develop and sell, or in their implementation by our customers, could also result in unauthorized access to our customers’ and/or consumers’ networks. Any such events could result in theft of trade secrets and intellectual property; give rise to legal proceedings; cause us to incur increased costs for insurance premiums, security, remediation and regulatory compliance; subject us to civil and criminal penalties; expose us to liabilities to our customers, employees, vendors, governmental authorities or other third parties; allow others to unfairly compete with us; disrupt our delivery of products and services; expose the confidential information of our clients and others; and have a negative impact on our reputation, all of which could have a material adverse effect on our business, financial condition, results of operations and cash flows. Climate change may have a long-term impact on our business. There are inherent climate change risks wherever business is conducted. The potential physical impacts of climate change on our operations are highly uncertain and would be particular to the geographic circumstances in areas in which we operate. These may include changes in rainfall and storm patterns and intensities, water shortages, changing sea levels and changing temperatures. These impacts may adversely impact the cost, production and financial performance of our operations. Climate-related events, including the increasing frequency of extreme weather events and their impact on critical infrastructure in the regions in which we operate, have the potential to disrupt our business, our third-party suppliers, and/or the business of our customers and may cause us to experience higher attrition, losses and additional costs to maintain or resume operations. CommScope aligns with the Global Reporting Initiative (GRI) standard and makes use of the Carbon Disclosure Project (CDP) platform, which is committed to aligning with the Task Force on Climate Related Financial Disclosures (TCFD) recommendations to accurately assess, take potential proactive action and report as appropriate. For additional information, see our Corporate Responsibility & Sustainability pages on the CommScope website: https://www.commscope.com/About-Us/Corporate-Responsibility-and-Sustainability.
Supply Chain Risks Our dependence on commodities subjects us to cost volatility and potential availability constraints. Our profitability may be materially affected by changes in the market price and availability of certain raw materials, most of which are linked to the commodity markets. The principal raw materials and components we purchase are made of metals such as copper, steel, aluminum or brass, plastics and other polymers and optical fiber. Fabricated copper, steel and aluminum are used in the production of coaxial and twisted pair cables, and polymers are used to insulate and protect cables. Prices for copper, steel, aluminum, fluoropolymers and certain other polymers derived from oil and natural gas have experienced significant volatility as a result of changes in the levels of global demand, supply disruptions and other factors. As a result, we have adjusted our prices for certain products and may have to adjust prices again in the future. Delays in implementing price increases or a failure to achieve market acceptance of price increases has in the past, and could in the future, have a material adverse impact on our results of operations. In an environment of falling commodities prices, we may be unable to sell higher-cost inventory before implementing price decreases, which could have a material adverse impact on our business, financial condition and results of operations. We are dependent on a limited number of key suppliers for certain raw materials and components. We are dependent on a limited number of key suppliers for certain of our raw material and component purchases, including certain memory and chip capacitors, polymers, copper rod, copper and aluminum tapes, fine aluminum wire, steel wire, optical fiber, circuit boards and other electronic components, subassemblies and modules. Certain of our suppliers are sole source suppliers and a number of our agreements with suppliers are short-term in nature.
Our reliance on sole or limited suppliers, particularly foreign suppliers, and our reliance on subcontractors involves several risks, including a potential inability to obtain an adequate supply of required materials, components and other products, and reduced control over pricing, quality, terms and conditions of purchase and timely delivery. Current limited supply of components in the memory and passives categories could impact our ability to deliver on a timely basis and increase overall product costs. We are currently experiencing extended lead times from certain of our key suppliers which could also impact our ability to deliver on a timely basis. Our key suppliers have experienced in the past, and could experience in the future, production, operational or financial difficulties, or there may be global shortages of certain raw materials or components we use. Our inability to find sufficient sources of supply on reasonable terms could impact our ability to manufacture products in a cost-effective manner, which could have a material adverse effect on our gross margin and results of operations. It could also affect our ability to ship products on a timely basis, which could damage relationships with current and prospective customers and potentially have a material adverse effect on our business. We also source many of our components from international markets. Any changes in the laws and policies of the U.S. or other countries affecting trade is a risk to us. To the extent there are unfavorable changes imposed by the U.S. or other countries and/or retaliatory actions taken by trading partners, such as the addition of new tariffs or trade restrictions, we may experience material adverse impacts on earnings. For a more complete discussion of our risks related to tariffs and trade restrictions, see the risk factor, “Additional tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products” under our “International Risk Factors” in this Item 1A. Risk Factors section. Capacity constraints with respect to our internal facilities and/or existing or new contract manufacturers could have an adverse impact on our business. We internally produce, both domestically and internationally, a portion of the components used in our finished products. We also rely on third-party contract manufacturers, both domestically and internationally, to produce certain products or key components of products. If we do not have sufficient production capacity, either through our internal facilities or independent contract manufacturers, or if we cannot ramp up capacity for complex products fast enough to meet customer demand, we may experience lost sales opportunities, lost market share and customer relations problems, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
If our contract manufacturers encounter production, quality, financial or other difficulties, we may experience difficulty in meeting customer demands. We rely on unaffiliated contract manufacturers, both domestically and internationally, to produce certain products or key components of products. Our reliance on these contract manufacturers reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs and product supply and timing. Any manufacturing disruption by these contract manufacturers could severely impair our ability to fulfill orders. Our reliance on outsourced manufacturers also increases the potential for infringement or misappropriation of our intellectual property. If we are unable to manage our relationships with our contract manufacturers effectively, or if our contract manufacturers suffer delays or disruptions for any reason, including financial instability, labor disturbances or geopolitical instability, experience increased manufacturing lead-times, capacity constraints or quality control problems in their manufacturing operations, or fail to meet our future requirements for timely delivery, our ability to ship products to our customers may be impaired, and our business and operating results could be harmed. These manufacturers typically fulfill our supply requirements on the basis of individual orders. In most cases, we do not have long-term contracts with our contract manufacturers that guarantee capacity, the continuation of particular pricing terms or the extension of credit limits. Accordingly, our contract manufacturers are not always obligated to continue to fulfill our supply requirements, which could result in supply shortages, and the prices we are charged for manufacturing services could be increased on short notice. In addition, as a result of fluctuating global financial market conditions, natural disasters or other causes, it is possible that any of our manufacturers could experience interruptions in production, cease operations or alter our current arrangements. If our manufacturers are unable or unwilling to continue manufacturing our products in required volumes, we will be required to identify one or more acceptable alternative manufacturers.
Additionally, withIn the currentpast, in response to uncertainty in the U.S. trade tariff environment, we are transitioningtransitioned manufacturing for certain impacted products to non-tariff countries. It is time-consuming and costly to mitigate these uncertainties, and future such changes in our contract manufacturers or manufacturing locations may cause significant interruptions in supply if the manufacturers have difficulty manufacturing products to our specifications. As a result, our ability to meet our scheduled product deliveries to our customers could be adversely affected, which could cause the loss of sales to existing or potential customers, delayed revenue or an increase in our costs. For a more complete discussion of our risks related to trade policies, see the risk factor “Additional tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products” under “International Risks” in this Item 1A Risk Factors section.
Production interruptions for any reason, such as a natural disaster, pandemic/epidemic, capacity shortages or quality problems, at one of our manufacturers would negatively affect sales of our products that are manufactured by that manufacturer or utilize components produced by that manufacturer. Such difficulties could adversely affect our business, financial condition, results of operations and cash flows. Strategic Risks
Our business strategy relies in part on acquisitions to create growth. We may not fully realize anticipated benefits from past or future acquisitions or investments in other companies.
For a more complete discussion of our risks related to the risks associated with the recent acquisition of ARRIS,COVID-19 pandemic, see the “ARRIS Acquisition Risks” noted above under this Item 1A. Risk Factors section. Both CommScope and ARRIS have completed a number of significant acquisitions and invested in other companies over recent years and we expect to make additional acquisitions and strategic investments in the future. For instance, in 2017, ARRIS acquired the Ruckus Wireless and ICX Switch business (Ruckus Networks); in 2016, ARRIS combined with Pace plc (Pace); and in 2015, CommScope acquired TE Connectivity’s BNS business. We anticipate that a portion of any future growth of our business will be accomplished by acquiring existing businesses, products or technologies. However, we may not be able to identify suitable acquisition opportunities or obtain the necessary financing on acceptable terms. We may spend time and money investigating and negotiating with potential acquisition or investment targets but not complete the transaction.
Any future acquisition could involve risks, including the assumption of additional liabilities and expenses, issuance of debt, incurrence of transaction and integration costs, diversion of management’s attention from other business concerns, assumption of unknown contingent liabilities and unanticipated litigation costs. Furthermore, such acquisition may be dilutive to our financial results. There are also significant challenges to integrating an acquired operation into our business, including, but not limited to successfully managing the operations, manufacturing facilities and technology; integrating the sales organizations; maintaining and increasing the customer base; retaining key employees, suppliers and distributors; integrating management information systems, including ERP systems; integrating inventory management and accounting activities; integrating R&D activities; navigating markets in which we potentially have limited or no prior experience; integrating and implementing effective disclosure controls and procedures and internal controls over financial reporting; addressing operating losses that may exist related to individual markets, facilities or product lines; and the impact of goodwill or other impairment charges, amortization costs for acquired intangible assets and acquisition accounting treatment, including the loss of deferred revenue and increases in the fair values of inventory and other acquired assets, on our GAAP financial condition and results of operations.
Although we expect to realize strategic, operational and financial benefits as a resultrisk factor, “The current pandemic of the recent acquisition of ARRIS, as well as pastnovel coronavirus, or COVID-19, and any other future acquisitions and investments, we cannot predict or guarantee whether and to what extent anticipated cost savings, synergies and growth prospects will be achieved.
We may sell or discontinue one or more of our product lines as a result of our evaluation of our products and markets.
We periodically evaluate our various product lines and may consider the divestiture or discontinuance of one or more of those product lines. Any such divestiture or discontinuancepublic health crisis, could materially adversely affect our financial position, results of operations and cash flows. Divestitures of product lines have inherent risks, including the expense of selling the product line; the possibility that any anticipated sale will not occur; possible delays in closing any sale; the risk of lower-than-expected proceeds from the sale of the divested business; unexpected costs, including those associated with the separation of the business to be sold, from our management information and other operating systems; distracting employees; potential post-closing claims for indemnification; and potential loss of customers. Expected cost savings may also be difficult to achieve or maximize due to a fixed cost structure, and we may experience varying success in the timely reduction of fixed costs or transferring of liabilities previously associated with the divested or discontinued business.
Difficulties may be encountered in the realignment of manufacturing capacity and capabilities among our global manufacturing facilities and our contract manufacturers that could adversely affect our ability to meet customer demand for our products.
We periodically realign manufacturing capacity among our global facilities and contract manufacturers in order to reduce costs by improving manufacturing efficiency and to strengthen our long-term competitive position. The implementation of these initiatives may include significant shifts of production capacity among facilities and contract manufacturers. For example, with the current U.S. trade tariff environment, we are transitioning manufacturing for certain impacted products to non-tariff countries. It is time-consuming and costly, and changes in our contract manufacturers or manufacturing locations may cause significant interruptions in supply if the manufacturers have difficulty manufacturing products to our specifications. There are significant risks inherent in the implementation of these initiatives, including our failure to ensure the following: adequate inventory on hand or production capacity to meet customer demand while capacity is being shifted among facilities; maintaining product quality as a result of shifting capacity; adequate raw material and other service providers to meet the needs at the new production locations; ability to successfully remove, transport and re-install equipment; and availability of adequate supervisory, production and support personnel to accommodate the shifted production. In the event manufacturing realignment initiatives are not successfully implemented, we could experience lost future sales and increased operating costs, as well as customer relations problems, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.” under “General Risk Factors” in this Item 1A, Risk Factors section.
We may need to undertake additional restructuring actions in the future.
We have previously recognized restructuring charges in response to slowdowns in demand for our products and in conjunction with the implementation of initiatives to reduce costs and improve efficiency of our operations. Most recently, we have undertaken a number of initiatives to support the integration of ARRIS, which include mostly workforce reductions, and in the past, we have undertaken initiatives to support the integration of other acquisitions, which included the closure of certain domestic and international manufacturing facilities and various other workforce reductions. As a result of the continued integration efforts related to the acquisition of ARRIS, changes in business conditions and other developments, we may need to initiate additional restructuring actions that could result in workforce reductions and restructuring charges, which could adversely and materially affect our cash flows.
Financial Risks Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations with respect to our indebtedness.financial obligations. See Note 8 in the Notes to Consolidated Financial Statements included in this Form 10-K for additional details of our indebtedness. As of December 31, 2019,2020, we had approximately $10.0$9.7 billion of indebtedness. This includes indebtedness issued prior to the Acquisition and indebtedness issued in connection with the Acquisition. As of December 31, 2019,2020, we had no outstanding loans under our new asset-based revolving credit facility and approximately $796.8the remaining availability was $735.1 million, inreflecting a borrowing capacity.base of $766.9 million reduced by $31.8 million of letters of credit. Our ability to borrow under our revolving credit facility depends, in part, on inventory, accounts receivable and other assets that fluctuate from time to time and may further depend on lenders’ discretionary ability to impose reserves and availability blocks. We have entered into certain hedging agreements to reduce our exposure to variable rate debt.
Our substantial indebtedness could have important consequences. For example, it could: | • | limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, investments and other general corporate purposes; |
| • | require a substantial portion of our cash flows to be dedicated to debt service payments and reduce the amount of cash flows available for working capital, capital expenditures, investments or acquisitions and other general corporate purposes; |
| • | expose us to the risk of increased interest rates as the interest cost on a significant portion of our indebtedness is subject to changes in interest rates; |
| • | place us at a competitive disadvantage compared to certain of our competitors who have less debt; |
| • | hinder our ability to adjust rapidly to changing market conditions; |
| • | limit our ability to secure adequate bank financing or our ability to refinance existing indebtedness in the future with reasonable terms and conditions;conditions, or at all; and |
| • | increase our vulnerability to and limit our flexibility in planning for, or reacting to, a potential downturn in general economic conditions or in one or more of our businesses. |
Our variable rate indebtedness currently uses LIBOR as a benchmark for establishing the rate. On July 27, 2017, the authority that regulates LIBOR announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of calculatingIn November 2020, this deadline was extended for the LIBOR will be established such that it continues to exist after 2021.rates used in our variable rate indebtedness until June 2023. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. dollar LIBOR with a newly created index, calculated with a broad set of short-term repurchase agreements backed by treasury securities, called the Secured Overnight Financing Rate. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom (U.K.), the U.S. or elsewhere. These changes could require us to renegotiate certain of our variable rate indebtedness to address changes in the benchmark rates. In addition, the indentures and credit agreements governing our indebtedness contain affirmative and negative covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.
Despite current indebtedness levels and restrictive covenants, we may still incur additional indebtedness that could further exacerbate the risks associated with our substantial financial leverage. We may incur significant additional indebtedness in the future under the agreements governing our indebtedness. Although the indentures and the credit agreements governing our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of thresholds, qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be substantial. Additionally, these restrictions permit us to incur obligations that, although preferential to our common stock in terms of payment, do not constitute indebtedness.
To service our indebtedness and pay dividends on our preferred stock, we will require a significant amount of cash, and our ability to generate sufficient cash depends on many factors beyond our control. Our operations are conducted through our global subsidiaries and our ability to make cash payments on our indebtedness and pay cash dividends on our preferred stock will depend on the level of earnings and distributable funds from our subsidiaries. Certain of our subsidiaries may have limitations or restrictions on paying dividends and otherwise transferring funds to us. Our ability to make cash payments on and to refinance our indebtedness will depend upon our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory and other factors beyond our control. We might not be able to achieve a level of cash flows from operating activities or transfer sufficient funds from our subsidiaries to permit us to pay the principal, premium, if any, and interest on our indebtedness and dividends on our preferred stock. If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness or if we fail to comply with the various covenants in the instruments governing our indebtedness and we are unable to obtain waivers from the required lenders, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of our indebtedness could elect to declare all the funds borrowed to be due and payable, together with accrued and unpaid interest. The lenders under our revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets. As a result, we could be forced into bankruptcy or liquidation. If we do not obtain the necessary stockholder approval, we may not be able to pay dividends in kind on our Series A Convertible Preferred Stock.
At the 2020 Annual Meeting, our stockholders will be asked to vote on a proposal to approve the issuance of shares of common stock to Carlyle in connection with any future conversion or redemption of the Series A Convertible Preferred Stock into common stock, any issuance of common stock to Carlyle as a dividend-in-kind, or pursuant to Carlyle’s participation rights, which, absent such approval, would be prohibited under Nasdaq Listing Rule 5635. If this approval is not obtained, we could be unable to issue shares of common stock to Carlyle in excess of the maximum amount permitted under the listing rules of NASDAQ and, as a result, we would have to settle certain obligations to Carlyle in cash. In addition, if this approval is not obtained, we will not be able to pay dividends-in-kind on the Series A Convertible Preferred Stock. To the extent that we are not able to pay dividends-in-kind, we will have to pay dividends in cash, which could have a material adverse impact on our cash flows and reduce the amount of cash available for working capital, debt reduction, capital expenditures, growth opportunities, acquisitions and other general corporate purposes.
We may need to recognize additional impairment charges related to goodwill, identified intangible assets and fixed assets. We have substantial balances of goodwill and identified intangible assets. As of December 31, 2019,2020, goodwill and identified intangible assets represented approximately 67%66% of our total assets. We are required to test goodwill for possible impairment on the same date each year and on an interim basis if there are indicators of a possible impairment. In connection with our annual assessment for impairmentan interim test of goodwill impairment in 2019,the second quarter of 2020, we recorded an impairment charge to goodwill of $376.1 million$206.7 million. In addition, as of the October 2020 annual impairment test, the fair value of certain reporting units only modestly exceeded their carrying value and slight changes in significant assumptions or business factors could result in material impairment. In the fourth quarter of 2019. If we are unable to improve our results of operations and cash flows, or otherfuture, indicators of impairment could exist suchfor other reporting units as a sustained significant decline in our share pricewell, and market capitalization, we may incur another material charge against earnings relating to our remaining goodwill.
We are also required to evaluate identified intangible assets and fixed assets for impairment if there are indicators of a possible impairment. In the past, due to revisions in financial performance outlooks or deterioration in certain markets, we have recognized significant impairment charges on identified intangible assets and fixed assets. In the future, we may again determine that one or more of our long-lived assets is impaired and additional impairment charges may be recognized that could have a material adverse effect on our financial condition and results of operations. The IRS may not agree ARRIS was a foreign corporation for U.S. federal income tax purposes. Following the Pace combination, ARRIS was incorporated under the laws of England and Wales and a tax resident in the United Kingdom for U.K. tax purposes. There is a risk that the Internal Revenue Service does not agree that ARRIS was a foreign corporation for U.S. federal income tax purposes in periods prior to the Acquisition and we could be subject to substantial additional U.S. taxes. For U.K. tax purposes, ARRIS was expected to be treated as a U.K. tax resident for all periods prior to the Acquisition and following the Pace combination, regardless of how ARRIS was treated in the U.S. Therefore, if ARRIS was treated as a U.S. corporation for U.S. federal income tax purposes, we could be liable for both U.S. and U.K. taxes in certain periods prior to the Acquisition, which could have a material adverse effect on our financial condition, results of operations and cash flows.
Labor Related Risks We may not be able to attract and retain key employees. Our business depends upon our continued ability to hire and retain key employees. Effective succession planning is important to our long-term success. We depend on our senior management team and other key employees for strategic success. Some of our key employees have retired or are at or near retirement age, including a disproportionate amount of our workforce in key geographic areas who will reach retirement age in the next decade. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. Key employees include individuals in our sales force, operations management, engineers and skilled production workers at our operations around the world. Competition for skilled personnel and highly qualified managers in the industries in which we operate is intense. Our growth by acquisitions creates challenges in retaining employees as well. As the corporate culture evolves to incorporate new workforces, some employees may not find the new culture appealing. In addition, the pace of integration may cause retention issues with our workforce due to integration fatigue. Furthermore, as our workforce ages, we are challenged to find and attract a younger population to replace them. Younger generations are motivated by progression and opportunity, which may be limited by our current employee population. In addition, many of our employees are highly experienced, skilled individuals who have extensive knowledge or relationships in our industry. As these employees leave CommScope, we may not be able to easily replicate their experience, knowledge and relationships. Difficulties in attracting or retaining employees with the necessary management, technical and financial skills needed to achieve our business objectives may limit our growth potential and may have a material adverse effect on our business, financial condition and results of operations. Labor unrest could have a material adverse effect on our business, results of operations and financial condition. Although none of our U.S. employees are represented by unions, a significant portion of our international employees are members of unions or subject to works’ councils or similar statutory arrangements. We are required to consult with, and seek the consent or advice of, various employee groups or works’ councils that represent our employees for any changes to our activities or employee benefits. Based on requests from two separate works councils in the European Union, we are required to negotiate, and are currently negotiating, an agreement for the establishment of a European Works Council that would serve as a representative body of our European workforce. Requirements to consult with such groups could have a significant impact on our flexibility in managing costs and responding to market changes. In addition, many of our direct and indirect customers and vendors have unionized workforces. Strikes, work stoppages or slowdowns experienced by us at our international locations or experienced by our customers or vendors could have a negative impact on us. Organizations responsible for manufacturing or shipping our products may also be impacted by labor disruptions. Any interruption in the delivery of our products could harm our reputation with our customers, reduce demand for our products, increase costs and have a material adverse effect on us. International Risks Our significant international operations expose us to economic, political and other risks. We have significant international sales, manufacturing, distribution and R&D operations. Our major international manufacturing, distribution and R&D facilities are located in Australia, Belgium, China, the Czech Republic, France, Germany, India, Ireland, Mexico, Singapore and the United Kingdom. For the year ended December 31, 2020, international sales represented 39% of our consolidated net sales. In general, our international sales have lower gross margin percentages than our domestic sales. To the extent international sales increase as a percentage of our net sales, our overall gross margin percentages may decline.
Our international sales, manufacturing, distribution and R&D operations are subject to the risks inherent in operating abroad, including, but not limited to, coordinating communications among and managing international operations; currency exchange rate fluctuations; economic and political destabilization; restrictive actions by foreign governments; wage inflation; nationalizations; the laws and policies of the U.S. and other countries affecting trade, anti-bribery, foreign investment and loans; foreign tax laws, including the ability to recover amounts paid as value-added and similar taxes; potential restrictions on the repatriation of cash; reduced protection of intellectual property; longer customer payment cycles; compliance with local laws and regulations; volatile geopolitical turmoil, including popular uprisings, regional conflicts, terrorism, and war; shipping interruptions; major health concerns (such as pandemics and infectious diseases); inflexible labor contracts or labor laws in the event of business downturns; and economic boycott for doing business in certain countries. A significant portion of our products sold in the U.S. are manufactured outside the U.S. To the extent there are changes in U.S. trade policies, such as significant increases in tariffs or duties for goods brought into the U.S., our competitive position may be adversely impacted and the resulting effect on our earnings could be material. For a more complete discussion of our risks related to trade policies, see the risk factor, “Additional tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products” under “International Risks” in this Item 1A, Risk Factors section. Risks related to fluctuations in foreign currency rates can impact our sales, results of operations, cash flows and financial position. Our foreign currency risk exposure is mainly concentrated in Chinese yuan, euro, British pound sterling, Mexican peso, Australian dollar, Brazilian real, South African rand, Indian rupee and Czech koruna. We manage our foreign currency rate risks through regular operating and financing activities and use derivative financial instruments such as foreign exchange forward contracts. There can be no assurance that our risk management strategies will be effective or that the counterparties to our derivative contracts will be able to perform. In addition, foreign currency rates in many of the countries in which we operate have at times been extremely volatile and unpredictable. We may choose not to hedge or determine we are unable to effectively hedge the risks associated with this volatility. In such cases, we may experience declines in sales and adverse impacts on earnings and such changes could be material. Additional tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products. There is currently significant uncertainty about the future relationship between the U.S. and various other countries, most significantly China, with respect to trade policies and tariffs. The former U.S. administration called for substantial changes to U.S. foreign trade policy with respect to China and other countries, including the possibility of imposing greater restrictions on international trade and significant increases in tariffs on goods imported into the U.S. The new administration could have a different approach to U.S. foreign trade policy with China as well as other countries but there remains much uncertainty. This uncertainty about the future relationship between the U.S. and certain of its trading partners may reduce trade between the U.S. and other nations, including countries in which we currently operate. Changes in policy or continued uncertainty could depress economic activity and restrict our access to suppliers or customers. The tariffs implemented on our products (or on materials, parts or components we use to manufacture our products) by the former U.S. administration increased the cost of our products manufactured in the U.S. and imported into the U.S. If additional tariffs or trade restrictions are implemented on our products (or on materials, parts or components we use to manufacture our products) by the U.S. or other countries, the cost of our products manufactured in China, Mexico or other countries and imported into the U.S. or other countries could increase further. We expect to continue to pass along some of these costs to our customers, but the increased cost could adversely affect the demand for products. We have been successful in the past in shifting the manufacturing locations for the impacted products, but this takes time and results in additional one-time costs and these alternative locations may have higher ongoing manufacturing costs. These cost increases could adversely affect the demand for our products and/or reduce margins, which could have a material adverse effect on our business and our earnings.
Our international operations expose us to increased challenges in complying with anti-corruption laws and regulations of the U.S. government and various other international jurisdictions. We are required to comply with the anti-corruption laws and regulations of the U.S. government and various other international jurisdictions, and our failure to comply with these laws and regulations may expose us to significant liabilities. These laws and regulations may apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, we are subject to U.S. and foreign anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. Violations of these legal requirements are punishable by significant criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts and other remedial measures. We have established policies, procedures and internal controls designed to assist us and our personnel in complying with applicable U.S. and international anti-corruption laws and regulations. However, our employees, subcontractors or channel partners could take actions that violate these requirements. In addition, some of the international jurisdictions in which we operate have elevated levels of corruption. As a result, we are exposed to an increased risk of violating anti-corruption laws. Violation of anti-corruption laws could adversely affect our reputation, business, financial condition, results of operations and cash flows, and such effects could be material. We are subject to governmental export and import controls and sanctions programs that could subject us to liability or impair our ability to compete in international markets. Certain of our products, including purchased components of such products, are subject to export controls and may be exported only with the required export license or through an export license exemption. In addition, we are required to comply with certain U.S. and foreign import and customs rules, sanctions and embargos. If we were to fail to comply with applicable export licensing, customs regulations, economic sanctions and other laws, we could be subject to substantial civil and criminal penalties, including fines, the incarceration of responsible employees and managers and the possible loss of export or import privileges. In addition, if our distributors fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected through reputational harm and penalties. Obtaining the necessary export license for a particular sale may be time-consuming and may result in a delay or loss of sales opportunities. Furthermore, export control laws and economic sanctions prohibit the shipment of certain products to embargoed or sanctioned countries, governments and persons. While we train our employees to comply with these regulations and have systems in place designed to prevent compliance failures, we cannot assure you that a violation will not occur, whether knowingly or inadvertently. Any such shipment could have negative consequences, including government investigations, penalties, fines, civil and criminal sanctions and reputational harm. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations or change in the countries, governments, persons or technologies targeted by such regulations could result in our decreased ability to export, import or sell our products to existing or potential customers, particularly those with international operations. Any limitation on our ability to export, import or sell our products could adversely affect our business, financial condition, results of operations and cash flows, and such effects could be material. Litigation and Regulatory Risks We may not be successful in protecting our intellectual property and in defending against claims that we are infringing on the intellectual property of others and such actions may be costly. We may encounter difficulties and significant costs in protecting our intellectual property rights or obtaining rights to additional intellectual property to permit us to continue or expand our business. Other companies, including some of our largest competitors, hold intellectual property rights in our industry and the intellectual property rights of others could inhibit our ability to introduce new products unless we secure necessary licenses on commercially reasonable terms.
In the past, we have initiated litigation in order to enforce patents issued or licensed to us or to determine the scope and/or validity of a third party’s patent or other proprietary rights, and we may initiate similar litigation in the future. We also have been and may in the future be subject to lawsuits by third parties seeking to enforce their own intellectual property rights, including against certain of the products or intellectual property that we have acquired through acquisitions. Any such litigation, regardless of outcome, could be costly and could subject us to significant liabilities or require us to cease using proprietary third party technology. In addition, the payment of any damages or any necessary licensing fees or indemnification costs associated with a patent infringement claim could be material and could also materially adversely affect our operating results. Such litigation can also be a significant distraction to management. In certain markets, we may be required to address counterfeit versions of our products. We may incur significant costs in pursuing the originators of such counterfeit products and, if we are unsuccessful in eliminating them from the market, we may experience a reduction in the value of our products and/or a reduction in our net sales. Because of the nature of information that may pass through or be stored on our solutions or networks, we, our vendors and our end customers may be subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other related matters. Globally, there has been an increase in laws and regulatory action concerning privacy-related matters. Some of these laws impose requirements for the handling of personal data, including data of employees, consumers and business contacts. Several U.S. states have adopted legislation requiring companies to protect the security of personal information that they collect from consumers over the Internet, and more states may adopt similar legislation. For example, the California Consumer Privacy Act, which went into effect on January 1, 2020, subjects us to stricter obligations, greater fines and more private causes of action related to data security. The California Privacy Rights Act (CPRA), which is effective in 2023, amends and further expands the California Consumer Privacy Act. Also, many jurisdictions have enacted or are enacting laws requiring companies to notify regulators or individuals of data security incidents involving certain types of personal data. These mandatory disclosures regarding security incidents often lead to widespread negative publicity. Any security incident, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our data security measures, negatively impact our ability to attract or retain customers, or subject us to third party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect our business and operating results. Foreign data protection, privacy and other laws and regulations can be more restrictive than those in the U.S. For example, the E.U.’s General Data Protection Regulation (GDPR), which became effective in May 2018, was designed to harmonize data privacy laws across Europe, to protect all E.U. citizens’ data privacy, empower E.U. citizens with respect to their personal data and to reshape the way organizations across the region approach data privacy. Compliance with GDPR has required changes to products and service offerings, internal and external software systems, including our websites, and changes to many company processes and policies. Failure to comply with GDPR could cause significant penalties and loss of business. Recent judicial rulings in Europe about GDPR have invalidated the E.U.-U.S. privacy shield framework, which is the mechanism relied upon by some of our vendors for personal data transfers out of the E.U. Additionally, these rulings require companies like ours to assess their personal data transfers from the E.U. to determine whether the protections in the U.S. or any country without an adequacy determination meet E.U. standards in the context of the specific transfer. A European data protection authority could disagree with our assessment of such transfers, resulting in penalties or required changes in how we transfer data within our company. In addition, some countries are considering or have passed legislation requiring local storage and processing of data. For example, Brazil and India have each adopted such laws that became effective in January 2020. These new and proposed laws could increase the cost and complexity of offering our solutions or maintaining our business operations in those jurisdictions. The introduction of new solutions or expansion of our activities in certain jurisdictions may subject us to additional laws and regulations. Our channel partners and end customers also may be subject to such laws and regulations in the use of our products and services.
These U.S. federal and state and foreign laws and regulations, which often can be enforced by private parties or government entities, are constantly evolving. In addition, the application and interpretation of these laws and regulations are often uncertain, may be interpreted and applied inconsistently from jurisdiction to jurisdiction and may be contradictory with each other. For example, a government entity in one jurisdiction may demand the transfer of information forbidden from transfer by a government entity in another jurisdiction. If our actions were determined to be in violation of any of these disparate laws and regulations, in addition to the possibility of fines, we could be ordered to change our data practices, which could have an adverse effect on our business and results of operations and financial condition. There is also a risk that we, directly or as the result of a third party service provider we use, could be found to have failed to comply with the laws or regulations applicable in a jurisdiction regarding the collection, handling, transfer, disposal or consent to the use of personal data, which could subject us to fines or other sanctions, as well as adverse reputational impact. Some states and countries are considering or have introduced laws and regulations requiring minimum or particular security controls be incorporated into devices that connect to the internet (so called “Internet of Things Security laws”). Where products we manufacture are considered in scope for some of these laws and regulations, compliance obligations or customer contracts may necessitate modification of existing product features and specifications or make inventory obsolete. Inconsistencies in these laws can introduce complexity into our design, manufacturing and inventory management processes. Compliance with these existing and proposed laws and regulations can be costly and require significant management time and attention, and failure to comply can result in negative publicity and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices. Customers may demand or request additional functionality in our products or services that they believe are necessary or appropriate to comply with such laws and regulations, which can cause us to incur significant additional costs and can delay or impede the development of new solutions. In addition, there is a risk that failures in systems designed to protect private, personal or proprietary data held by us or our customers using our solutions will allow such data to be disclosed to or seen by others, resulting in application of regulatory penalties, enforcement actions, remediation obligations, private litigation by parties whose data were improperly disclosed or claims from our customers for costs or damages they incur. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. Our existing general liability insurance coverage and coverage for errors and omissions may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims, or our insurers may deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition, results of operations and cash flow. Compliance with current and future environmental laws and potential environmental liabilities may have a material adverse impact on our business, financial condition and results of operations. We are subject to various federal, state, local and foreign environmental laws and regulations governing, among other things, discharges to air and water, management of regulated materials, handling and disposal of solid and hazardous waste and investigation and remediation of contaminated sites. In addition, we are subject to laws and regulations regarding the types of substances allowable in certain of our products and the handling of our products at the end of their useful life. Because of the nature of our business, we have incurred and will continue to incur costs relating to compliance with or liability under these environmental laws and regulations and these costs could be material. In addition, new laws and regulations, new or different interpretations of existing laws and regulations, expansion of existing legal requirements related to our products, the discovery of previously unknown contamination or the imposition of new remediation or discharge requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our financial condition.
Efforts to regulate emissions of greenhouse gases (GHGs), such as carbon dioxide, are continuing to evolve in the U.S. and other countries where we operate, and this could increase the cost of raw materials, production processes and transportation of our products. If we are unable to comply with such regulations or sufficiently increase prices or otherwise reduce costs to offset the increased costs of compliance, GHG regulation could have a material adverse effect on our business, financial condition, results of operations and cash flow. Certain environmental laws impose strict and, in some circumstances, joint and several liability on current or former owners or operators of a contaminated property, as well as companies that generated, disposed of or arranged for the disposal of hazardous substances at a contaminated property, for the costs of investigation and remediation of the contaminated property. Our present and past facilities have been in operation for many years and over that time, in the course of those operations, hazardous substances and wastes have been used, generated and occasionally disposed of at such facilities, and we have disposed of waste products either directly or through third parties at numerous disposal sites. Consequently, it has been necessary to undertake investigation and remediation projects at certain sites and we have been, and may in the future be, held responsible for a portion of the investigation and clean-up costs at these sites and our share of those costs may be material. A number of governments or governmental bodies have also introduced or are contemplating regulatory changes in response to various climate change interest groups and the potential impact of climate change. Legislation and increased regulation regarding climate change could impose significant costs on us, our venture partners, and our suppliers, including costs related to increased energy requirements, capital equipment, environmental monitoring and reporting, and other costs to comply with such regulations. Any adopted future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Given the political significance and uncertainty around the impact of climate change and how it should be dealt with, we cannot predict how legislation and regulation will affect our financial condition, operating performance and ability to compete. Furthermore, even without such regulation, increased awareness and any adverse publicity in the global marketplace about potential impacts on climate change by us or other companies in our industry could harm our reputation. General Risk Factors The current pandemic of the novel coronavirus, or COVID-19, and any other future public health crisis, could materially adversely affect our business, financial condition, results of operations and cash flows. In March 2020, the World Health Organization declared a new strain of coronavirus (COVID-19) a pandemic and the U.S. declared a national emergency with respect to COVID-19. The COVID-19 pandemic has negatively impacted regional and global economies, disrupted global supply chains and created significant volatility and disruption of financial markets, and another pandemic in the future could have similar negative consequences. Many jurisdictions, including those where we have operations, have reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, social distancing protocols and restrictions on types of business that may continue to operate. Although we have been deemed an “essential” (or equivalent) business in most jurisdictions, and therefore, we have been permitted to continue most of our operations in those jurisdictions, the impact of the COVID-19 pandemic on our operational and financial performance has included temporary closures of our facilities and the facilities of certain of our customers, suppliers and other vendors in our supply chain, as well as disruptions and restrictions on our employees’ ability to travel. The COVID-19 pandemic is negatively impacting almost every industry directly or indirectly and has negatively impacted the demand for many of our products and our financial performance in 2020. The COVID-19 pandemic, or a future pandemic, could have material and adverse effects on our ability to successfully operate and on our financial condition, results of operations and cash flows due to, among other factors: | • | health concerns may lead to a complete or partial closure of, or other operational issues at, our manufacturing facilities or those of our contract manufacturers; |
| • | the reduced economic activity may severely impact our customers’ financial condition and liquidity and may lead to decreased demand for our products and services or impact the timing of on-going or planned projects; |
| • | difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations or address existing and anticipated liabilities on a timely basis; |
| • | a deterioration in our ability to operate in affected areas or delays in the supply of products or services to us from vendors that are needed for our efficient operations could adversely affect our operations; |
| • | the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during a disruption; and |
| • | remote working arrangements may increase our vulnerability to cybersecurity incidents, including breaches of information systems security, which could damage our reputation, disrupt operations and expose us to claims from customers, suppliers, employees and others. |
The extent to which COVID-19 or another future public health crisis impacts our operations and those of our customers and suppliers will depend on the scope, severity, duration and spread of the health crisis, the actions taken to contain it or mitigate its impact, and the direct and indirect economic effects of the crisis and containment measures, among others, all of which are uncertain and cannot be predicted with confidence. The continued fluidity of the COVID-19 pandemic precludes any prediction as to its full adverse impact. Nevertheless, the COVID-19 pandemic presents material uncertainty and risk. An extended period of global supply chain and economic disruption could materially affect our business, financial condition, results of operations, cash flows and access to sources of liquidity. We may experience significant variability in our quarterly or annual effective income tax rate. We have a large and complex international tax profile and a significant level of tax credit carryforwards in the U.S. and other carryforwards in various jurisdictions. Variability in the mix and profitability of domestic and international activities, identification and resolution of various tax uncertainties and the inability to realize tax credits and other carryforwards included in deferred tax assets, among other matters, have impacted our effective income tax rate in the past and may impact our effective income tax rate in the future. Tax law changes in the U.S. and certain other countries have also impacted our effective income tax rate in the past and may impact our effective tax rate in the future. A significant increase in our quarterly or annual effective income tax rate could have a material adverse impact on our results of operations. We are commonly audited by various tax authorities, and some jurisdictions, both in the U.S. and abroad, have become more aggressive in their approach to audits and their enforcement of their applicable tax laws. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Significant judgment is required in determining our worldwide provision for income taxes. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our financial statements in the period or periods for which that determination is made and on our overall effective income tax rate. The IRS may not agree ARRIS was a foreign corporation for U.S. federal income tax purposes.
Following the Pace combination, ARRIS was incorporated under the laws of England and Wales and a tax resident in the United Kingdom for U.K. tax purposes. There is a risk that the Internal Revenue Service does not agree that ARRIS was a foreign corporation for U.S. federal income tax purposes in periods prior to the Acquisition and we could be subject to substantial additional U.S. taxes. For U.K. tax purposes, ARRIS was expected to be treated as a U.K. tax resident for all periods prior to the Acquisition and following the Pace combination, regardless of how ARRIS was treated in the U.S. Therefore, if ARRIS was treated as a U.S. corporation for U.S. federal income tax purposes, we could be liable for both U.S. and U.K. taxes in certain periods prior to the Acquisition, which could have a material adverse effect on our financial condition, results of operations and cash flows.
Labor Related Risks
We may not be able to attract and retain key employees.
Our business depends upon our continued ability to hire and retain key employees. Effective succession planning is important to our long-term success. We depend on our senior management team and other key employees for strategic success. Some of our key employees have retired, announced their decision to retire or are at or near retirement age. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.
Key employees include individuals in our sales force, operations management, engineers and skilled production workers at our operations around the world. Competition for skilled personnel and highly qualified managers in the industries in which we operate is intense. Our growth by acquisitions creates challenges in retaining employees as well. As the corporate culture evolves to incorporate new workforces, some employees may not find the new culture appealing. In addition, the pace of integration may cause retention issues with our workforce due to integration fatigue.
Furthermore, as our workforce ages, we are challenged to find and attract a younger population to replace them. Younger generations are motivated by progression and opportunity, which may be limited by our current employee population. In addition, many of our employees are highly experienced, skilled individuals who have extensive knowledge or relationships in our industry. As these employees leave CommScope, we may not be able to easily replicate their experience, knowledge and relationships. Difficulties in attracting or retaining employees with the necessary management, technical and financial skills needed to achieve our business objectives may limit our growth potential and may have a material adverse effect on our business, financial condition and results of operations.
Labor unrest could have a material adverse effect on our business, results of operations and financial condition.
Although none of our U.S. employees are represented by unions, a significant portion of our international employees are members of unions or subject to works’ councils or similar statutory arrangements. We are required to consult with, and seek the consent or advice of, various employee groups or works’ councils that represent our employees for any changes to our activities or employee benefits. This requirement could have a significant impact on our flexibility in managing costs and responding to market changes. In addition, many of our direct and indirect customers and vendors have unionized workforces. Strikes, work stoppages or slowdowns experienced by us at our international locations or experienced by our customers or vendors could have a negative impact on us. Organizations responsible for manufacturing or shipping our products may also be impacted by labor disruptions. Any interruption in the delivery of our products could harm our reputation with our customers, reduce demand for our products, increase costs and have a material adverse effect on us.
International Risks
Our significant international operations expose us to economic, political and other risks.
We have significant international sales, manufacturing, distribution and R&D operations. Our major international manufacturing, distribution and R&D facilities are located in Australia, Belgium, China, the Czech Republic, France, Germany, India, Ireland, Israel, Mexico, Singapore, Sweden and the United Kingdom. For the year ended December 31, 2019, international sales represented 41% of our consolidated net sales. In general, our international sales have lower gross margin percentages than our domestic sales. To the extent international sales increase as a percentage of our net sales, our overall gross margin percentages may decline.
Our international sales, manufacturing, distribution and R&D operations are subject to the risks inherent in operating abroad, including, but not limited to, coordinating communications among and managing international operations; currency exchange rate fluctuations; economic and political destabilization; restrictive actions by foreign governments; wage inflation; nationalizations; the laws and policies of the U.S. and other countries affecting trade, anti-bribery, foreign investment and loans; foreign tax laws, including the ability to recover amounts paid as value-added and similar taxes; potential restrictions on the repatriation of cash; reduced protection of intellectual property; longer customer payment cycles; compliance with local laws and regulations; volatile geopolitical turmoil, including popular uprisings, regional conflicts, terrorism, and war; shipping interruptions; major health concerns (such as infectious diseases); inflexible labor contracts or labor laws in the event of business downturns; and economic boycott for doing business in certain countries.
A significant portion of our products sold in the U.S. are manufactured outside the U.S. We utilize lower-cost geographies for high labor content products while investing in largely automated plants in higher-cost regions close to customers. Most of our manufacturing employees are located in lower-cost geographies such as Mexico, China, India and the Czech Republic. To the extent there are changes in U.S. trade policies, such as significant increases in tariffs or duties for goods brought into the U.S., our competitive position may be adversely impacted and the resulting effect on our earnings could be material. For a more complete discussion of our risks related to trade policies, see the risk factor “Additional tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products” under “International Risks” in this Item 1A. Risk Factors section.
In June 2016, the U.K. held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as Brexit. As a result of the referendum, the British government began negotiating the terms of the U.K.’s future relationship with the E.U. in March 2017. The U.K. and E.U. entered into a withdrawal agreement whereby the U.K. left the E.U. as of January 31, 2020 but maintained access to the E.U. single market and to the global trade deals negotiated by the E.U. on behalf of its members and remained subject to E.U. law, for a transition period ending on December 31, 2020. The ongoing uncertainty within the U.K.’s government on the status of Brexit has negatively impacted the U.K.’s economy and will likely continue to have a negative impact until a definitive resolution is reached on the outstanding trade and legal matters. Even if the U.K. maintains access to the E.U. single market and trade deals following the transition period, Brexit could result in further economic downturn globally. If the U.K. ultimately loses access to the E.U. single market and trade deals, it is possible that there will be greater restrictions on imports and exports between the U.K. and E.U. countries and increased regulatory complexities. These changes could cause disruptions to and create uncertainty surrounding our business and the business of existing and future customers and suppliers as well as have an impact on our employees based in Europe, which could adversely impact our business, financial condition, results of operations and cash flows.
Risks related to fluctuations in foreign currency rates can impact our sales, results of operations, cash flows and financial position. Our foreign currency risk exposure is mainly concentrated in Chinese yuan, euro, British pound sterling, Mexican peso, Australian dollar, Brazilian real, South African rand, Indian rupee and Czech koruna. We manage our foreign currency rate risks through regular operating and financing activities and use derivative financial instruments such as foreign exchange forward contracts. There can be no assurance that our risk management strategies will be effective or that the counterparties to our derivative contracts will be able to perform. In addition, foreign currency rates in many of the countries in which we operate have at times been extremely volatile and unpredictable. We may choose not to hedge or determine we are unable to effectively hedge the risks associated with this volatility. In such cases, we may experience declines in sales and adverse impacts on earnings and such changes could be material.
Additional tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products.
During 2018 and 2019, the U.S. administration announced tariffs on certain products imported into the U.S., which has resulted in reciprocal tariffs from other countries, including countries where we operate. For example, the U.S. has implemented tariffs on a variety of goods produced or manufactured in China, and China responded by imposing tariffs on various U.S. products. In January 2020, the two sides signed a preliminary deal, but many issues remain unresolved. Both sides have indicated that further revisions will be made during a second phase of negotiations, but the timing of any such negotiations and resolution remain uncertain. The U.S. has renegotiated the North American Free Trade Agreement with Mexico and Canada. The renegotiated agreement, called the United States Mexico Canada Agreement (USMCA), was recently ratified by Congress but remains subject to approval by the Canadian legislature, and the timing of approval is uncertain.
These developments have created uncertainty about the future relationship between the U.S. and certain of its trading partners and may reduce trade between the U.S. and other nations, including countries in which we currently operate. Changes in policy or continued uncertainty could depress economic activity and restrict our access to suppliers or customers. The tariffs implemented on our products (or on materials, parts or components we use to manufacture our products) by the U.S. will increase the cost of our products manufactured and imported into the U.S. Tariffs and other trade restrictions announced by other countries on products manufactured in the U.S. could likewise increase the costs of those products when imported into other countries. If additional tariffs or trade restrictions are implemented on our products (or on materials, parts or components we use to manufacture our products) by the U.S. or other countries, the cost of our products manufactured in China, Mexico or other countries and imported into the U.S. or other countries could increase further. We expect to continue to pass along some of these costs to our customers, but the increased cost could adversely affect the demand for products. We are in the process of shifting the manufacturing locations for the impacted products, but this takes time and these locations may have higher manufacturing costs. These cost increases could adversely affect the demand for our products and/or reduce margins, which could have a material adverse effect on our business and our earnings.
Our international operations expose us to increased challenges in complying with anti-corruption laws and regulations of the U.S. government and various other international jurisdictions.
We are required to comply with the laws and regulations of the U.S. government and various other international jurisdictions, and our failure to comply with these rules and regulations may expose us to significant liabilities. These laws and regulations may apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, we are subject to U.S. and foreign anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act and the U.K. Anti-Bribery Act. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts and other remedial measures. We have established policies and procedures designed to assist us and our personnel in complying with applicable U.S. and international laws and regulations. However, our employees, subcontractors or channel partners could take actions that violate these requirements. In addition, some of the international jurisdictions in which we operate have elevated levels of corruption. As a result, we are exposed to an increased risk of violating anti-corruption laws. Violation of anti-corruption laws could adversely affect our reputation, business, financial condition, results of operations and cash flows, and such effects could be material.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
Certain of our products, including purchased components of such products, are subject to export controls and may be exported only with the required export license or through an export license exemption. In addition, we are required to comply with certain U.S. and foreign import and customs rules, sanctions and embargos. If we were to fail to comply with applicable export licensing, customs regulations, economic sanctions and other laws, we could be subject to substantial civil and criminal penalties, including fines, the incarceration of responsible employees and managers and the possible loss of export or import privileges. In addition, if our distributors fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected through reputational harm and penalties. Obtaining the necessary export license for a particular sale may be time-consuming and may result in a delay or loss of sales opportunities.
Furthermore, export control laws and economic sanctions prohibit the shipment of certain products to embargoed or sanctioned countries, governments and persons. While we train our employees to comply with these regulations, we cannot assure you that a violation will not occur, whether knowingly or inadvertently. Any such shipment could have negative consequences, including government investigations, penalties, fines, civil and criminal sanctions and reputational harm.
Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations or change in the countries, governments, persons or technologies targeted by such regulations could result in our decreased ability to export, import or sell our products to existing or potential customers, particularly those with international operations. Any decreased use of our products or limitation on our ability to export, import or sell our products could adversely affect our business, financial condition, results of operations and cash flows, and such effects could be material.
Litigation and Regulatory Risks
We may not be successful in protecting our intellectual property and in defending claims that we are infringing on the intellectual property of others and such actions may be costly.
We may encounter difficulties and significant costs in protecting our intellectual property rights or obtaining rights to additional intellectual property to permit us to continue or expand our business. Other companies, including some of our largest competitors, hold intellectual property rights in our industry and the intellectual property rights of others could inhibit our ability to introduce new products unless we secure necessary licenses on commercially reasonable terms.
In the past, we have initiated litigation in order to enforce patents issued or licensed to us or to determine the scope and/or validity of a third party’s patent or other proprietary rights, and we may initiate similar litigation in the future. We also have been and may in the future be subject to lawsuits by third parties seeking to enforce their own intellectual property rights, including against certain of the products or intellectual property that we have acquired through acquisitions. Any such litigation, regardless of outcome, could be costly and could subject us to significant liabilities or require us to cease using proprietary third-party technology. In addition, the payment of any damages or any necessary licensing fees or indemnification costs associated with a patent infringement claim could be material and could also materially adversely affect our operating results. Such litigation can also be a significant distraction to management.
In certain markets, we may be required to address counterfeit versions of our products. We may incur significant costs in pursuing the originators of such counterfeit products and, if we are unsuccessful in eliminating them from the market, we may experience a reduction in the value of our products and/or a reduction in our net sales.
Compliance with current and future environmental laws and potential environmental liabilities may have a material adverse impact on our business, financial condition and results of operations.
We are subject to various federal, state, local and foreign environmental laws and regulations governing, among other things, discharges to air and water, management of regulated materials, handling and disposal of solid and hazardous waste and investigation and remediation of contaminated sites. In addition, we are subject to laws and regulations regarding the types of substances allowable in certain of our products and the handling of our products at the end of their useful life. Because of the nature of our business, we have incurred and will continue to incur costs relating to compliance with or liability under these environmental laws and regulations and these costs could be material. In addition, new laws and regulations, new or different interpretations of existing laws and regulations, expansion of existing legal requirements related to our products, the discovery of previously unknown contamination or the imposition of new remediation or discharge requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our financial condition.
Efforts to regulate emissions of greenhouse gases (GHGs), such as carbon dioxide, are underway in the U.S. and other countries, which could increase the cost of raw materials, production processes and transportation of our products. If we are unable to comply with such regulations or sufficiently increase prices or otherwise reduce costs to offset the increased costs of compliance, GHG regulation could have a material adverse effect on our business, financial condition, results of operations and cash flow. Certain environmental laws impose strict and, in some circumstances, joint and several liability on current or former owners or operators of a contaminated property, as well as companies that generated, disposed of or arranged for the disposal of hazardous substances at a contaminated property, for the costs of investigation and remediation of the contaminated property. Our present and past facilities have been in operation for many years and over that time, in the course of those operations, hazardous substances and wastes have been used, generated and occasionally disposed of at such facilities, and we have disposed of waste products either directly or through third parties at numerous disposal sites. Consequently, it has been necessary to undertake investigation and remediation projects at certain sites and we have been, and may in the future be, held responsible for a portion of the investigation and clean-up costs at these sites and our share of those costs may be material.
A number of governments or governmental bodies have also introduced or are contemplating regulatory changes in response to various climate change interest groups and the potential impact of climate change. Legislation and increased regulation regarding climate change could impose significant costs on us, our venture partners, and our suppliers, including costs related to increased energy requirements, capital equipment, environmental monitoring and reporting, and other costs to comply with such regulations. Any adopted future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Given the political significance and uncertainty around the impact of climate change and how it should be dealt with, we cannot predict how legislation and regulation will affect our financial condition, operating performance and ability to compete. Furthermore, even without such regulation, increased awareness and any adverse publicity in the global marketplace about potential impacts on climate change by us or other companies in our industry could harm our reputation.
Common Stock Ownership Risks
We do not intend to pay dividends on our common stock and, consequently, the ability of investors to achieve a return on their investment will depend on appreciation in the price of our common stock. We do not intend to declare and pay dividends on our common stock for the foreseeable future. The payment of future dividends will be at the discretion of our Board of Directors; however, the indentures and the credit agreements governing our indebtedness place limitations on our ability to pay dividends. We currently intend to invest our future earnings, if any, to reduce our debt and fund our growth and our Board of Directors may choose to provide returns to our stockholders through share repurchases. The success of an investment in our common stock will largely depend upon future appreciation in value, and there can be no guarantee that our common stock will appreciate in value.
Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, as a result, depress the trading price of our common stock. Our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions: | • | authorize 1,300,000,000 shares of common stock, which, to the extent unissued, could be issued by the Board of Directors, without stockholder approval, to increase the number of outstanding shares and to discourage a takeover attempt; |
| • | authorize the issuance, without stockholder approval, of blank check preferred stock that our Board of Directors could issue to increase the number of outstanding shares and to discourage a takeover attempt; |
| • | grant to the Board of Directors the sole power to set the number of directors and to fill any vacancy on the Board of Directors; |
| • | limit the ability of stockholders to remove directors only “for cause” and require any such removal to be approved by holders of at least three-quarters of the outstanding shares of common stock; |
| • | prohibit our stockholders from calling a special meeting of stockholders; |
| • | prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; |
| • | provide that the Board of Directors is expressly authorized to adopt, or to alter or repeal our bylaws; |
| • | establish advance notice and certain information requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; |
| • | establish a classified Board of Directors, with three staggered terms; and |
| • | require the approval of holders of at least three-quarters of the outstanding shares of common stock to amend the bylaws and certain provisions of the certificate of incorporation. |
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company and may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if the provisions are viewed as discouraging takeover attempts in the future. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors of their choosing and cause us to take corporate actions other than those our stockholders may desire.
Our business could be negatively impacted as a result of actions by activist stockholders or others. Stockholder activism has been increasing in publicly traded companies in recent years and we are subject to the risks associated with such activism, particularly due to the overall decline in our stock price over the last two years. Our business could be negatively affected as a result of stockholder activism, which could cause us to incur significant legal fees and other costs, hinder execution of our business strategy and impact the trading value of our securities. Additionally, stockholder activism could give rise to perceived uncertainties as to our future direction, adversely affect our relationships with key executives and business partners and make it more difficult to attract and retain qualified employees. Any of these impacts could materially and adversely affect our business and operating results.
None. Our facilities are used primarily for manufacturing, distribution and administration. Facilities primarily used for manufacturing may also be used for distribution, engineering, research and development, storage, administration, sales and customer service. Facilities primarily used for administration may also be used for research and development, sales and customer service. As of December 31, 2019,2020, our principal facilities, grouped according to the facility’s primary use, were as follows: Location | | Approximate square feet | | | Principal segments | | Owned or leased | Administrative facilities: | | | | | | | | | Hickory, NC (1) | | | 84,000 | | | Corporate headquarters | | Owned | Joliet, IL (2)
| | | 690,000
| | | Corporate
| | Leased
| Horsham, PA | | | 325,000 | | | Corporate | | Owned | Suwanee, GA | | | 129,000103,000
| | | Corporate | | Leased | San Diego, CA | | | 187,000 | | | N&C and CPEBroadband & Home
| | Leased | Shakopee, MN | | | 177,000 | | | CCSVCN
| | Leased | Bangalore, India | | | 151,000 | | | CPE and N&CHome & Broadband
| | Leased | Saltaire, UK | | | 147,000112,000
| | | CPEHome
| | Leased | Lowell, MA | | | 144,000 | | | N&CBroadband
| | Leased | Santa Clara, CA | | | 132,000 | | | N&C and CPEBroadband & Home
| | Leased | Richardson, TX (1) | | | 100,000 | | | CMSOWN
| | Owned | Manufacturing and distribution facilities: | | | | | | Catawba, NC (1) | | | 1,000,000 | | | CCSBroadband
| | Owned | Claremont, NC (1) | | | 589,000 | | | CCSVCN & Broadband
| | Owned | Kessel-Lo, Belgium | | | 431,000 | | | CCSBroadband
| | Owned | Suzhou, China (3)(2) | | | 414,000 | | | CMSOWN & VCN
| | Owned | Suzhou, China (3)(2) | | | 363,000 | | | CCSBroadband
| | Owned | Goa, India (2) | | | 353,000 | | | CMSOWN & VCN
| | Owned | Juarez, Mexico | | | 344,000327,000
| | | CCSVCN
| | Owned | Santa Teresa, NM | | | 334,000300,000
| | | CCSBroadband & VCN
| | Leased | Brno, Czech Republic | | | 281,000 | | | CCSBroadband
| | Leased | Reynosa, Mexico | | | 279,000 | | | CMSOWN
| | Owned | Veenendaal, Netherlands | | | 215,000 | | | CMSOWN & VCN
| | Leased | Greensboro, NC (1) | | | 196,000 | | | CCSVCN
| | Owned | Juarez, Mexico | | | 189,000 | | | CCSBroadband
| | Leased | Cary, NC | | | 151,000 | | | CPEHome & N&CBroadband
| | Owned | Mission, TX | | | 150,000 | | | CMSVCN
| | Leased | Delicias, Mexico | | | 139,000 | | | CCSVCN
| | Owned | Campbellfield, Australia | | | 133,000 | | | CMSOWN
| | Leased | Bray, Ireland | | | 130,000 | | | CCSVCN
| | Owned | Tijuana, Mexico | | | 128,000 | | | N&CBroadband & VCN
| | Leased | Buchdorf, Germany | | | 109,000 | | | CMSVCN
| | Owned | Vacant facilities and properties: | | | | | | | | | Joliet, IL (3) | | | 690,000 | | | Corporate | | Leased | Sorocaba, Brazil (4) | | | 157,000 | | | CMSOWN
| | Owned | Orland Park, IL (1)(5) | | | — | | | CMSCorporate
| | Owned |
(1) | Our interest in each of these properties is encumbered by a mortgage or deed of trust lien securing our senior secured credit facilities (see Note 8 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K). |
(2) | The former manufacturing portion of the Joliet facility is vacant and is currently being marketed for sublease. |
(3)
| The buildings in these facilities are owned while the land is held under long-term lease agreements.
|
(3) | The Joliet facility is vacant and is currently being marketed for sublease. |
(4) | The Sorocaba, Brazil facility is currently being marketed for sale. |
(5) | The building at the Orland Park facility was demolished and cleared and the 73 acre parcel is vacant. |
We believe that our facilities and equipment generally are well maintained, in good condition and suitable for our purposes and adequate for our present operations. While we currently have excess manufacturing capacity in certain of our facilities, utilization is subject to change based on customer demand. We can give no assurances that we will not have excess manufacturing capacity or encounter capacity constraints over the long term. The Company is party to certain intellectual property claims and also periodically receives notices asserting that its products infringe on another party’s patents and other intellectual property rights. These claims and assertions, whether against the Company directly or against its customers, could require the Company to pay damages, royalties, stop offering the relevant products and/or cease other activities. The Company may also be called upon to indemnify certain customers for costs related to products sold to such customers. While the outcome of the claims and notices is uncertain and a reasonable estimate of the loss from unfavorable outcomes in certain of these matters cannot be determined, an adverse outcome could result in a material set forth under “Commitments and Contingencies”loss. The Company is also either a plaintiff or a defendant in Note 16 tocertain other pending legal matters in the Consolidated Financial Statements in Part II, Item 8normal course of this Annual Report on Form 10-K is incorporated herein by reference. business. Management believes none of these pending legal matters will behave a material to ouradverse effect on the Company’s business or financial condition upon their final disposition. In addition, the Company is subject to various federal, state, local and foreign laws and regulations governing the use, discharge, disposal and remediation of hazardous materials. Compliance with current laws and regulations has not had, and is not expected to have, a materially adverse effect on the Company’s financial condition or results of operations. ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II ITEM 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Stock PriceMarket Information and DividendsHolders
Our common stock is traded on the Nasdaq Global Select Market under the symbol COMM. As of February 7, 2020,5, 2021, all of our outstanding shares of common stock are held by one stockholder of record, Cede & Co., as nominee for the Depository Trust Company. Many brokers, banks and other institutions hold shares of common stock as nominees for beneficial owners that deposit these shares of common stock in participant accounts at the Depository Trust Company. Issuer Purchases of Equity Securities The following table summarizes the stock purchase activity for the three months ended December 31, 2019: 2020: Period | | Total Number of Shares Purchased (1) | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Value of Shares that May Yet be Purchased Under the Plans or Programs | | October 1, 2019 - October 31, 2019 | | | 7,153 | | | $ | 11.88 | | | | — | | | $ | — | | November 1, 2019 - November 30, 2019 | | | 9,836 | | | $ | 13.56 | | | | — | | | $ | — | | December 1, 2019 - December 31, 2019 | | | 48,599 | | | $ | 13.42 | | | | — | | | $ | — | | Total | | | 65,588 | | | $ | 13.27 | | | | — | | | | | |
Period | | Total Number of Shares Purchased (1) | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Value of Shares that May Yet be Purchased Under the Plans or Programs | | October 1, 2020 - October 31, 2020 | | | 701,023 | | | $ | 9.03 | | | | — | | | $ | — | | November 1, 2020 - November 30, 2020 | | | 3,965 | | | $ | 8.57 | | | | — | | | $ | — | | December 1, 2020 - December 31, 2020 | | | 20,011 | | | $ | 13.01 | | | | — | | | $ | — | | Total | | | 724,999 | | | $ | 9.14 | | | | — | | | | | |
(1) | The shares purchased were withheld to satisfy the withholding tax obligations related to restricted stock units and performance share units that vested during the period. |
Stock Performance Graph The following graph compares cumulative total return on $100 invested on December 31, 20142015 in each of CommScope’s Common Stock, the Standard & Poor’s 500 Stock Index (S&P 500 Index) and the Standard & Poor’s 1500 Communications Equipment Index (S&P 1500 Communications Equipment). The return of the Standard & Poor’s indices is calculated assuming reinvestment of dividends. CommScope has not paid any dividends on its common stock over this period. 
| | Base | | INDEXED RETURNS | | | Base | | | INDEXED RETURNS | | | | Period | | Period Ending | | | Period | | | Period Ending | | Company / Index | | 12/31/2014 | | 12/31/2015 | | | 12/31/2016 | | | 12/31/2017 | | | 12/31/2018 | | | 12/31/2019 | | | 12/31/2015 | | | 12/31/2016 | | | 12/31/2017 | | | 12/31/2018 | | | 12/31/2019 | | | 12/31/2020 | | CommScope Holding Company, Inc. | | 100 | | | 113.40 | | | | 162.94 | | | | 165.70 | | | | 71.79 | | | | 62.16 | | | | 100 | | | | 143.68 | | | | 146.12 | | | | 63.31 | | | | 54.81 | | | | 51.76 | | S&P 500 Index | | 100 | | | 101.38 | | | | 113.51 | | | | 138.29 | | | | 132.23 | | | | 173.86 | | | | 100 | | | | 111.96 | | | | 136.40 | | | | 130.42 | | | | 171.49 | | | | 203.04 | | S&P 1500 Communications Equipment Index | | 100 | | | 88.81 | | | | 106.32 | | | | 130.20 | | | | 146.56 | | | | 167.31 | | | | 100 | | | | 119.72 | | | | 146.60 | | | | 165.02 | | | | 188.38 | | | | 190.29 | |
ITEM 6. | SELECTED FINANCIAL DATA |
The following table presents our historical selected financial data as of the dates and for the periods indicated. The data for each of the years presented are derived from our audited consolidated financial statements. The information set forth below should be read in conjunction with our audited consolidated financial statements and notes thereto and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report.Not required.
Five-Year Summary of Selected Financial Data
(In millions, except per share amounts)
| Year Ended December 31, | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | Results of Operations: | | | | | | | | | | | | | | | | | | | | Net sales | $ | 8,345.1 | | | $ | 4,568.5 | | | $ | 4,560.6 | | | $ | 4,923.6 | | | $ | 3,807.8 | | Gross profit (1) | | 2,404.1 | | | | 1,633.3 | | | | 1,705.5 | | | | 1,973.1 | | | | 1,309.4 | | Restructuring costs, net | | 87.7 | | | | 44.0 | | | | 43.8 | | | | 42.9 | | | | 29.5 | | Asset impairments | | 376.1 | | | | 15.0 | | | | — | | | | 38.6 | | | | 90.8 | | Operating income (loss) | | (508.5 | ) | | | 450.0 | | | | 472.0 | | | | 567.6 | | | | 169.6 | | Net interest expense | | (559.1 | ) | | | (235.0 | ) | | | (252.8 | ) | | | (272.0 | ) | | | (230.5 | ) | Net income (loss) | | (929.5 | ) | | | 140.2 | | | | 193.8 | | | | 222.8 | | | | (70.9 | ) | Series A convertible preferred stock dividends | | (43.7 | ) | | | — | | | | — | | | | — | | | | — | | Net income (loss) attributable to common stockholders | | (973.2 | ) | | | 140.2 | | | | 193.8 | | | | 222.8 | | | | (70.9 | ) | Earnings (Loss) Per Share Information: | | | | | | | | | | | | | | | | | | | | Weighted average number of shares outstanding: | | | | | | | | | | | | | | | | | | Basic | | 193.7 | | | | 192.0 | | | | 192.4 | | | | 192.5 | | | | 189.9 | | Diluted | | 193.7 | | | | 195.3 | | | | 196.8 | | | | 196.5 | | | | 189.9 | | Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | Basic | $ | (5.02 | ) | | $ | 0.73 | | | $ | 1.01 | | | $ | 1.16 | | | $ | (0.37 | ) | Diluted | $ | (5.02 | ) | | $ | 0.72 | | | $ | 0.98 | | | $ | 1.13 | | | $ | (0.37 | ) | Other Information: | | | | | | | | | | | | | | | | | | | | Net cash generated by operating activities | | 596.4 | | | | 494.1 | | | | 586.3 | | | | 640.2 | | | | 327.1 | | Depreciation and amortization | | 770.9 | | | | 357.5 | | | | 378.0 | | | | 399.1 | | | | 303.5 | | Additions to property, plant and equipment | | 104.1 | | | | 82.3 | | | | 68.7 | | | | 68.3 | | | | 56.5 | | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | $ | 598.2 | | | $ | 458.2 | | | $ | 454.0 | | | $ | 428.2 | | | $ | 562.9 | | Goodwill and intangible assets | | 9,735.3 | | | | 4,204.3 | | | | 4,522.7 | | | | 4,567.4 | | | | 4,838.1 | | Property, plant and equipment, net | | 723.8 | | | | 450.9 | | | | 467.3 | | | | 475.0 | | | | 528.7 | | Total assets | | 14,431.6 | | | | 6,630.5 | | | | 7,041.7 | | | | 7,142.0 | | | | 7,502.6 | | Working capital | | 1,469.8 | | | | 1,187.2 | | | | 1,220.1 | | | | 1,135.9 | | | | 1,319.5 | | Long-term debt, including current maturities | | 9,832.4 | | | | 3,985.9 | | | | 4,369.4 | | | | 4,562.0 | | | | 5,243.7 | | Series A convertible preferred stock | | 1,000.0 | | | | — | | | | — | | | | — | | | | — | | Stockholders' equity | | 836.3 | | | | 1,756.8 | | | | 1,647.9 | | | | 1,394.1 | | | | 1,222.7 | |
(1)
| Effective April 1, 2019, we made a voluntary change in accounting principle that reclassifies internal handling costs to prepare goods for shipment from selling, general and administrative expense to cost of sales. The accounting policy change was applied retrospectively to the periods presented.
|
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition and results of operations is for the year ended December 31, 20192020 compared with the year ended December 31, 2018.2019. This comparison should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" included in Part I, Item 1A or in other parts of this Annual Report on Form 10-K. For a discussion and analysis of our financial condition and results of operations for the year ended December 31, 20182019 compared to December 31, 2017,2018, see Part II, Item 7, “Management��s“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 20182019 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 21, 2019.20, 2020. OVERVIEW We are a global provider of infrastructure solutions for communication and entertainment networks. Our solutions for wired and wireless networks enable service providers including cable, telephone and digital broadcast satellite operators and media programmers to deliver media, voice, Internet Protocol (IP)IP data services and Wi-Fi to their subscribers and allow enterprises to experience constant wireless and wired connectivity across complex and varied networking environments. Our solutions are complemented by a broad array of services including technical support, systems design and integration. We are a leader in digital video and IP televisionInternet Protocol Television distribution systems, broadband access infrastructure platforms, and equipment that deliversassociated data and voice networks to homes.customer premises equipment. Our global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale. On April 4, 2019, we completed the acquisition of ARRIS International plc (ARRIS) (the Acquisition) in an all-cash transaction with a total purchase price of approximately $7.7 billion, including debt assumed. The combined company is expected to drive profitable growth in new markets, shape the future of wired and wireless communications, and be in a position to benefit from key industry trends, including network convergence, fiber and mobility everywhere, 5G, Internet of Things (IoT) and rapidly changing network and technology architectures. The operations of the ARRIS business are included in our consolidated operating results for the year ended December 31, 2020; however, for the comparative year ended December 31, 2019, the operations of the ARRIS business are included only from the date of the Acquisition, April 4, 2019. PriorAcquisition. During the years ended December 31, 2020 and 2019, we recognized $24.9 million and $195.3 million, respectively, of transaction and integration costs and $88.4 million and $87.7 million, respectively, of restructuring costs mostly related to the Acquisition and integration activities. We will continue to incur integration and restructuring costs and such costs may be material.
As of January 1, 2020, we reorganized our internal management and reporting structure as part of the integration of the Acquisition. The reorganization changed the information regularly reviewed by our chief operating decision maker for purposes of allocating resources and assessing performance. As a result, we are reporting financial performance based on four new operating segments: Broadband Networks (Broadband), Home Networks (Home), Outdoor Wireless Networks (OWN) and Venue and Campus Networks (VCN). These four segments represent non-aggregated reportable operating segments. Prior to this change, we operated and reported based on twofive operating segments: Connectivity Solutions, (Connectivity) and Mobility Solutions, (Mobility). Following the Acquisition, we have operated and managed CommScope in the following reportable segments: Connectivity, Mobility, Customer Premises Equipment, (CPE), Network &and Cloud (N&C) and Ruckus Networks (Ruckus). We recently announcedNetworks. Our change in segments as of January 1, 2020 resulted in a realignment of our operating structureexisting reporting units. Although the reporting units were realigned, our reporting units remained the same except for where two reporting units have been combined into a new reporting unit. In this case, goodwill was simply combined in the new reporting units. Since the composition of the reporting units and the assignment of goodwill to the reporting units were unaffected, an interim goodwill impairment test was not performed due to our change in segments during the first quarter of 2020.
In March 2020, the World Health Organization declared the new strain of coronavirus (COVID-19) a pandemic and the United States (U.S.) declared a national emergency with respect to COVID-19. The COVID-19 pandemic has negatively impacted regional and global economies, disrupted global supply chains and created significant volatility and disruption of financial markets. Many jurisdictions, including those where we have operations, have reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, social distancing protocols and restrictions on types of business that became effectivemay continue to operate. While we have been deemed an “essential” (or equivalent) business in January 2020. Basedmost jurisdictions, and therefore, we have been permitted to continue most of our operations in those jurisdictions, the impact of the COVID-19 pandemic on our operational and financial performance has included temporary closures of our facilities and the facilities of certain of our customers, suppliers and other vendors in our supply chain, as well as disruptions and restrictions on our employees’ ability to travel. We have taken measures to protect the health and safety of our employees, including implementing new and increased cleaning procedures, health screenings, safety protocols and social distancing requirements where appropriate, working with our customers and vendors to minimize potential disruptions and supporting our community in addressing the challenges posed by this new operating structure,global pandemic. The COVID-19 outbreak negatively impacted our new segments are Venue and Campus Networks, Broadband Networks, Outdoor Wireless Networksfinancial performance during the year ended December 31, 2020, as discussed more below, particularly in our VCN, OWN and Home Networks. We will begin reporting based on these segmentssegments. While the impacts in the first quarter of 2020. To fund2020 were primarily related to supply constraints due to the Acquisition,shutdown of our factories in February 2019,Suzhou, China, the impacts on the second, third and fourth quarters reflected a combination of changes in demand, business continuity costs and supply constraints. Currently, most CommScope factories are fully operational,but we issued $1.25 billion of 5.50% senior secured noteshave experienced periodic, temporary factory closures in certain jurisdictions due 2024 (the 2024 Secured Notes), $1.5 billion of 6.00% senior secured notesto health concerns. From a demand standpoint, the impact has been mixed with network strain driving increased demand for our Broadband products, while VCN has been negatively impacted due 2026 (the 2026 Secured Notes) and $1.0 billion of 8.25% senior unsecured notes due 2027 (the New Unsecured Notes and, together with the 2024 Secured Notesto social distancing measures and the 2026 Secured Notes, the New Notes), the proceeds from which were released from escrow on the dategeneral economic slowdown. We have taken a number of actions to reduce our operating costs and manage our balance sheet in light of the Acquisition. On the dateCOVID-19 pandemic, including headcount reductions, improved working capital management, lower capital spending and suspension of certain discretionary spending.
The extent of the Acquisition, we borrowed $3.2 billion under a new senior secured term loan due 2026 (the 2026 Term Loan) with an interest rateimpact of LIBOR plus 3.25%the COVID-19 pandemic on our operational and entered into a new asset-based revolvingfinancial performance will depend on future developments, including the duration and spread of the pandemic, the effectiveness of vaccines and related actions taken by domestic and international jurisdictions to maintain and prevent disease spread, all of which are uncertain and cannot be predicted. We have considered the impact of the economic slowdown on our evaluation of our significant estimates, including goodwill impairment indicators and credit facility in an amount up to $1.0 billion with availability of $796.8 millionlosses, as of December 31, 2019, reflecting a borrowing base2020. Although no indicators of $820.9 million reduced by $24.1 million of letters ofgoodwill impairment or significant changes in credit under the facility. Alsorisk were identified as of April 4, 2019, we issued $1.0 billion in Series A Convertible Preferred Stock (the Convertible Preferred Stock) to Carlyle Partners VII S1 Holdings, L.P. (Carlyle). During the year ended December 31, 2019, we recognized $195.3 million2020, it is possible that impairments and/or credit losses could emerge as the long-term impact of transaction and integration costs primarily related to the Acquisition. We will continue to incur transaction and integration costs as well as restructuring costs to integrate the ARRIS businesscrisis becomes clearer and those costs maylosses could be material. See the discussion below under “Critical Accounting Policies” for more information regarding the interim goodwill impairment test performed during the second quarter of 2020.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) in the United States (U.S.).U.S. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and their underlying assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other objective sources. Management bases its estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when changes in events or circumstances indicate that revisions may be necessary. The following critical accounting policies and estimates reflected in our financial statements are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events. While we have generally not experienced significant deviations from our critical estimates in the past, it is reasonably possible that these estimates may ultimately differ materially from actual results. See Note 2 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a description of all of our significant accounting policies.
Business Combinations
We use the acquisition method of accounting for business combinations which requires the tangible and intangible assets acquired and liabilities assumed to be recorded at their respective fair market value as of the acquisition date. Goodwill represents the excess of the consideration transferred over the fair value of the net assets acquired. The fair values of the assets acquired and liabilities assumed are determined based upon management’s valuation and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date. We use a measurement period following the acquisition date to gather information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities assumed. The measurement period ends once all information is obtained, but no later than one year from the acquisition date.
Asset Impairment Reviews Impairment Reviews of Goodwill We test goodwill at the reporting unit level for impairment annually as of October 1 and on an interim basis when events occur or circumstances exist that indicate the carrying value may no longer be recoverable. As of January 1, 2019, we early adopted Accounting Standards Update (ASU) 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, which eliminated Step 2 of the goodwill impairment test. Step 2 required an entity to determine the fair value at the impairment testing date of its assets and liabilities. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. In accordance with the new standard, weWe compare the fair value of our reporting units with the carrying amount, including goodwill. We recognize an impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value. We estimate the fair value of a reporting unit using a discounted cash flow (DCF) method or, as appropriate, a combination of the DCF method and a market approach known as the guideline public company method. Under the DCF method, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. The significant assumptions in the DCF model primarily include, but are not limited to, forecasts of annual revenue growth rates, annual operating income margin, the terminal growth rate and the discount rate used to determine the present value of the cash flow projections. When determining these assumptions and preparing these estimates, we consider historical performance trends, industry data, insight derived from customers, relevant changes in the reporting unit’s underlying business and other market trends that may affect the reporting unit. The discount rate is based on the estimated weighted average cost of capital as of the test date of market participants in the industry in which the reporting unit operates.operates and is commensurate with the risk and uncertainty inherent in each reporting unit and in internally developed forecasts. Under the guideline public company method, we estimate the fair value based upon market multiples of revenue and earnings derived from publicly traded companies with similar operating and investment characteristics as the reporting unit. The weighting of the fair value derived from the market approach may vary depending on the level of comparability of these publicly-traded companies to the reporting unit. When comparable public companies are not meaningful or not available, we may estimate the fair value of a reporting unit using only the DCF method.
Estimating the fair value of a reporting unit involves uncertainties because it requires management to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry economic factors and future business strategy. Changes in projected revenue growth rates, projected operating income margins or estimated discount rates due to uncertain market conditions, loss of one or more key customers, changes in our strategy, changes in technology or other factors could negatively affect the fair value in one or more of our reporting units and result in a material impairment charge in the future. To assess the reasonableness of the calculated fair values of our reporting units, we also compare the sum of the reporting units’ fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting units’ fair values over the market capitalization). If the implied control premium is not reasonable, we will reevaluate the fair value estimates of the reporting unit by adjusting the discount rates and/or other assumptions. 20192020 Interim Goodwill Analysis
During the second quarter of 2019, management2020, we determined that indicators of possible goodwill impairment existed for our Home Networks reporting unit due to lower projected operating results, primarily driven by the accelerated decline in demand for video devices. This trend was projected to continue as consumers adopt the use of other streaming applications and was further impacted negatively by the macro-economic effects of COVID-19. Accordingly, we assessed the fair value of our Home Networks reporting units from the recently acquired ARRIS business. Since the closingunit as of the Acquisition at the beginning of the second quarter of 2019, the ARRIS reporting units (CPE, N&CMay 31, 2020 and Ruckus) had continued to experience challenges that impacted our performance. The challenges included declines in spending by our cable operator customers that resulted in declines in revenue and operating income for these reporting units and the loss of key leaders of these reporting units following the Acquisition. Certain of these challenges were expected to persist throughout the remainder of 2019 and impact management’s ability to grow these businesses at the rate that was originally estimated when we completed the acquisition of ARRIS. Based on these indicators,recorded a goodwill impairment test was performed for these reporting units using a DCF valuation model. Given the proximity to the acquisition date, we did not use a market approach for the interim goodwill test. The discount rates usedcharge of $206.7 million in the second quarter 2019 interimHome segment. This reflects a full impairment of the remaining goodwill in the Home segment, and as such, the Home segment has no remaining goodwill balance as of December 31, 2020. To determine the fair value of our Home Networks reporting unit and test for goodwill impairment, test were 9.5%, 10.5% and 11.0% for the CPE, N&C and Ruckus reporting units. As a result, managementwe developed a revised forecast for 20192020 and updated the annual financial forecasts for the years beyond 2019 that consider these challenges. The projections assumed a recovery of spending by these customers would begin in 2020. The extentWe used an income approach (DCF method) because we believe this is the most direct approach to incorporate the specific economic attributes and timing of this recovery were key assumptions in the determination of the fair valuerisk profile of the reporting units. The second quarterunit into our valuation model. Consistent with our 2019 annual impairment test, showed no impairment.we used a 9.0% discount rate for the interim goodwill impairment test for the Home Networks reporting unit. We determined that the utilization of a market approach for the interim goodwill impairment test would not impact the conclusion.
20192020 Annual Goodwill Analysis
The annual test of goodwill impairment was performed for each of the reporting units with goodwill balances as of October 1, 2019. As2020. There were no goodwill impairments identified as a result of the annual impairment test we recorded goodwill impairment charges totaling $376.1 million, of which $192.8 million related to our CPE reporting unit, $142.1 million related to our N&C reporting unit and $41.2 million related to our Ruckus reporting unit. These reporting units were acquired in our ARRIS acquisition on April 4, 2019. Since the closing of the Acquisition, the ARRIS reporting units have experienced challenges that impacted our performance. These challenges included declines in spending by cable operator customers that resulted in declines in net sales and operating income for these reporting units and the loss of key leaders of these reporting units following the Acquisition. Initially, we anticipated a recovery in spending by certain customers starting in 2020. During our annual strategic planning processperformed in the fourth quarter of 2019, a number of specific factors arose, including an assessment of historical and future operating results, key customer inputs, new assessments of market trends and anticipated expenditures required to support the changing market dynamics affecting each of the reporting units. As a result of these factors, we expect a more prolonged recovery and have concluded that the fair value of each of the ARRIS reporting units was less than its carrying value, which resulted in a partial write-off of goodwill for each of the reporting units as of October 1, 2019. The expense was recorded in the asset impairments line on the Consolidated Statement of Operations. 2020. For the 20192020 annual goodwill test, we determined the fair value of each reporting unit using a DCF model and a guideline public company approach, with 75% of the value determined using the DCF model and 25% of the value determined using the market approach.
As discussed, our CPE, N&C and Ruckus reporting units failed the annual goodwill impairment test and an impairment was recorded as The range of October 1, 2019. Our distributed coverage and capacity systems (DCCS) reporting unit was also at risk of failing the goodwill impairment test as the amount by which its fair value exceeded its carrying value was less than 10%. The DCCS reporting unit isdiscount rates used in our Mobility segment. Considering the relatively low headroom going forwardannual tests were 9.0% to 10.5% for the CPE, N&C, Ruckus2020 and DCCS reporting units, there is a risk9.0% to 11.0% for future impairment in the event of decline in general economic, market or business conditions or any significant unfavorable change in the forecasted cash flows, weighted average cost of capital and growth rates. If current and long-term projections for our CPE, N&C, Ruckus and DCCS reporting units are not realized or decrease materially, we may be required to recognize additional goodwill impairment charges.2019.
The following table sets forthprovides summary information regarding our CPE, N&C, Ruckus and DCCS reporting units aswith the lowest level of December 31, 2019,headroom, including key assumptions used in our annual goodwill analysis, along with sensitivity analysis showing the effect of a change in certain key assumptions, assuming all other assumptions remain constant, to the resulting fair value using an income approach, asapproach. Accordingly, if performance is worse than anticipated for these reporting units, future impairment tests could result in impairment charges that could be material to our results of October 1, 2019:operations. The Enterprise reporting unit is in our VCN segment and the N&C reporting unit is in our Broadband segment. | | Key Assumptions | | Goodwill | | Excess (Deficit) of Fair Value to Carrying Value | Reporting Unit | | Discount Rate | | Terminal Growth Rate | | Balance at December 31, 2019 | | | Percent of Total Assets | | Result of Annual Goodwill Test as of October 1, 2019 | | | Decrease of 10% in Cash Flows | | | Decrease of 0.5% in Long-term Growth Rate | | | Increase of 0.5% in Discount Rate | | | (dollars in millions) | CPE | | | 9.0 | | % | | | 0.0 | | % | | $ | 209.3 | | | 1.5 | % | | $ | (192.8 | ) | | $ | (354.9 | ) | | $ | (236.8 | ) | | $ | (283.1 | ) | | N&C | | | 10.0 | | % | | | 2.0 | | % | | | 2,029.1 | | | 14.1 | % | | | (142.1 | ) | | | (433.5 | ) | | | (194.9 | ) | | | (289.1 | ) | | Ruckus | | | 11.0 | | % | | | 3.0 | | % | | | 375.8 | | | 2.6 | % | | | (41.2 | ) | | | (117.4 | ) | | | (78.1 | ) | | | (107.1 | ) | | DCCS | | | 9.5 | | % | | | 2.0 | | % | | | 235.3 | | | 1.6 | % | | | 44.2 | | | | (24.8 | ) | | | (2.7 | ) | | | (17.2 | ) | |
| | Key Assumptions | | | Goodwill | | | Excess (Deficit) of Fair Value to Carrying Value | | Reporting Unit | | Discount Rate | | | Terminal Growth Rate | | | Balance at December 31, 2020 | | | % of Total Assets | | | Result of Annual Goodwill Test as of October 1, 2020 | | | Decrease of 10% in Cash Flows | | | Decrease of 0.5% in Long-term Growth Rate | | | Increase of 0.5% in Discount Rate | | Enterprise | | | 10.5 | % | | | 1.5 | % | | $ | 987.3 | | | | 7.3 | % | | $ | 35.7 | | | $ | (78.1 | ) | | $ | (1.2 | ) | | $ | (30.2 | ) | N&C | | | 9.5 | % | | | 2.0 | % | | | 2,036.6 | | | | 15.0 | % | | | 375.8 | | | | 66.8 | | | | 240.0 | | | | 162.4 | |
Definite-Lived Intangible Assets and Other Long-Lived Assets Management reviews definite-lived intangible assets and other long-lived assets for impairment when events or changes in circumstances indicate that their carrying values may not be fully recoverable. This analysis differs from our goodwill impairment analysis in that an intangible or other long-lived asset impairment is only deemed to have occurred if the sum of the forecasted undiscounted future net cash flows related to the assets being evaluated is less than the carrying value of the assets. If the forecasted net cash flows are less than the carrying value, then the asset is written down to its estimated fair value. WeOther than certain assets impaired as a result of restructuring actions, we did not identify any impairments of definite-lived intangible assets or other long-lived assets in 2019.2020. Changes in the estimates of forecasted net cash flows may result in future asset impairments that could be material to our results of operations. Revenue Recognition We recognize revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. Our revenue is generated primarily from product or equipment sales. We also generate revenue from custom design and installation services as well as bundled sales arrangements that include product, software and services. Revenue is recognized when performance obligations in a contract are satisfied through the transfer of control of the good or service at the amount of consideration expected to be received. The following are required before revenue is recognized: | • | Identify the contract with the customer. A variety of arrangements are considered contracts; however, contracts typically take the form of a master purchase agreement or customer purchase orders. |
| • | Identify the performance obligations in the contract. Performance obligations are identified as promised goods or services that are distinct within an arrangement. |
| • | Determine the transaction price. The transaction price is the amount of consideration we expect to receive in exchange for transferring the promised goods or services. The consideration may include fixed or variable amounts or both. |
| • | Allocate the transaction price to the performance obligations. The transaction price is allocated to the performance obligations on a relative standalone selling price basis. |
| • | Recognize revenue as the performance obligations are satisfied. Revenue is recognized when transfer of control of the promised goods or services has occurred. This is either at a point in time or over time. |
Product sales represent over 90% of our revenue. For these sales, revenue is recognized when control of the product has transferred to the customer, which is generally at the point in time when products have been shipped, right to payment has been obtained and risk of loss has been transferred. Certain of our product performance obligations include proprietary operating system software, which typically is not considered separately identifiable. Therefore, sales of these products and the related software are considered one performance obligation. License contracts include revenue recognized for the licensing of intellectual property, including software, sold separately without products. Functional intellectual property licenses do not meet the criteria for revenue to be recognized over time and revenue is most commonly recognized upon delivery of the license/software to the customer. Certain customer transactions may be project based and include multiple performance obligations based on the bundling of equipment, software and services. When a multiple performance obligation arrangement exists, the transaction price is allocated to the performance obligations based on the relative standalone selling price, and revenue is recognized upon transfer of control of each deliverable. To determine the standalone selling price, we first look to establish the standalone selling price through an observable price when the good or service is sold separately in similar circumstances. If the standalone selling price cannot be established through an observable price, we will make an estimate based on market conditions, customer specific factors and customer class. We may use a combination of approaches to estimate the standalone selling price. For performance obligations recognized over time, judgment is required to evaluate assumptions, including the total estimated costs to determine progress towards completion of the performance obligation 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 costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. Other customer contract types include a variety of post-contract support services offerings, including: | • | Maintenance and support services provided under annual service-level agreements with our customers. These services represent stand-ready obligations that are recognized over time (on a straight-line basis over the contract period) because the customer simultaneously receives and consumes the benefits of the services as the services are performed. |
| • | Professional services and other similar services consist primarily of “Day 2” services to help customers maximize their utilization of deployed systems. The services are recognized over time because the customer simultaneously receives and consumes the benefits of the service as the services are performed. |
| • | Installation services relate to the routine installation of equipment ordered by the customer at the customer’s site and are distinct performance obligations from delivery of the related hardware. The associated revenues are recognized over time as the services are provided. |
Revenue is measured based on the consideration to which we expect to be entitled based on customer contracts. For sales to distributors, system integrators and value-added resellers, revenue is adjusted for variable consideration amounts, including but not limited to 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. 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.
Unbilled receivables are recorded when revenues are recognized in advance of invoice issuance. A contract asset is any portion of unbilled receivables for which the right to consideration is conditional on a factor other than the passage of time, which is common for certain project contract performance obligations. These assets are presented on a combined basis with accounts receivable and are converted to accounts receivable once our right to the consideration becomes unconditional, which varies by contract but is generally based on achieving certain acceptance milestones. We recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset would be one year or less. We include shipping and handling costs billed to customers in net sales and include the costs incurred to transport product to customers as well as certain internal handling costs, which relate to activities to prepare goods for shipment, as cost of sales. Shipping and handling costs incurred after control is transferred to the customer are accounted for as fulfillment costs and are not accounted for as separate revenue obligations. Leases We determine if a contract is a lease or contains a lease at inception. Right of use assets related to operating type leases are reported in other noncurrent assets and the present value of remaining lease obligations is reported in accrued and other liabilities and other noncurrent liabilities on the Consolidated Balance Sheets. We do not currently have any financing type leases. Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The majority of our leases do not provide an implicit rate; therefore, we use the incremental borrowing rates applicable to the economic environment and the duration of the lease, based on the information available at commencement date, in determining the present value of future payments. The right of use asset for operating leases is measured using the lease liability adjusted for the impact of lease payments made prior to commencement, lease incentives received, initial direct costs incurred and any asset impairments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We remeasure and reallocate the consideration in a lease when there is a modification of the lease that is not accounted for as a separate contract. The lease liability is remeasured when there is a change in the lease term or a change in the assessment of whether we will exercise a lease option. We assess right of use assets for impairment in accordance with our long-lived asset impairment policy. We account for lease agreements with contractually required lease and non-lease components on a combined basis. Lease payments made for cancellable leases, variable amounts that are not based on an observable index and lease agreements with an original duration of less than twelve months are recorded directly to lease expense. Inventory Reserves We maintain reserves to reduce the value of inventory based on the lower of cost or net realizable value, including allowances for excess and obsolete inventory. These reserves are based on management’s assumptions about and analysis of relevant factors including current levels of orders and backlog, forecasted demand, market conditions and new products or innovations that diminish the value of existing inventories. If actual market conditions deteriorate from those anticipated by management, additional allowances for excess and obsolete inventory could be required and may be material to earnings.
Product Warranty Reserves We recognize a liability for the estimated claims that may be paid under our customer assurance-type warranty agreements to remedy potential deficiencies of quality or performance of our products. The product warranties extend over various periods, depending upon the product subject to the warranty and the terms of the individual agreements. We record a provision for estimated future warranty claims based upon the historical relationship of warranty claims to sales and specifically identified warranty issues. We base our estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revise our estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is reasonably possible that they may ultimately differ materially from actual results, including in the case of a significant product failure. Tax Valuation Allowances and Liabilities for Unrecognized Tax Benefits We establish an income tax valuation allowance when available evidence indicates that it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider the amounts, character, source and timing of expected future deductions or carryforwards as well as sources of taxable income and tax planning strategies that may enable utilization. We maintain an existing valuation allowance until sufficient positive evidence exists to support its reversal. Changes in the amount or timing of expected future deductions or taxable income may have a material impact on the level of income tax valuation allowances. If we determine that we will not be able to realize all or part of a deferred tax asset in the future, an increase to an income tax valuation allowance would be charged to earnings in the period such determination was made. We recognize income tax benefits related to particular tax positions only when it is considered more likely than not that the tax position will be sustained if examined on its technical merits by tax authorities. The amount of benefit recognized is the largest amount of tax benefit that is evaluated to be greater than 50% likely to be realized. Considerable judgment is required to evaluate the technical merits of various positions and to evaluate the likely amount of benefit to be realized. Lapses in statutes of limitations, developments in tax laws, regulations and interpretations, and changes in assessments of the likely outcome of uncertain tax positions could have a material impact on the overall tax provision. We establish deferred tax liabilities for the estimated tax cost associated with foreign earnings that we do not consider permanently reinvested (primarily foreign withholding and state income taxes). These liabilities are subject to adjustment if there is a change in the assertion of whether the foreign earnings are considered to be permanently reinvested. We also establish allowances related to value-added and similar recoverable taxes when it is considered probable that those assets are not recoverable. Changes in the probability of recovery or in the estimates of the amount recoverable are recognized in the period such determination is made and may be material to earnings. Business Combinations We use the acquisition method of accounting for business combinations which requires the tangible and intangible assets acquired and liabilities assumed to be recorded at their respective fair market value as of the acquisition date. Goodwill represents the excess of the consideration transferred over the fair value of the net assets acquired. The fair values of the assets acquired and liabilities assumed are determined based upon management’s valuation and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date. We use a measurement period following the acquisition date to gather information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities assumed. The measurement period ends once all information is obtained, but no later than one year from the acquisition date.
RESULTS OF OPERATIONS Comparison of results of operations for the year ended December 31, 20192020 with the year ended December 31, 20182019 | | Year Ended December 31, | | | | | | | | | | | | 2019 | | | 2018 | | | | | | | Amount | | | % of Net Sales | | | Amount | | | % of Net Sales | | | $ Change | | | % Change | | | | (dollars in millions, except per share amounts) | | Net sales | | $ | 8,345.1 | | | | 100.0 | % | | $ | 4,568.5 | | | | 100.0 | % | | $ | 3,776.6 | | | | 82.7 | % | Gross profit | | | 2,404.1 | | | | 28.8 | | | | 1,633.3 | | | | 35.8 | | | | 770.8 | | | | 47.2 | | Operating income (loss) | | | (508.5 | ) | | | (6.1 | ) | | | 450.0 | | | | 9.9 | | | | (958.5 | ) | | | (213.0 | ) | Non-GAAP adjusted operating income (1) | | | 1,153.8 | | | | 13.8 | | | | 838.0 | | | | 18.3 | | | | 315.8 | | | | 37.7 | | Non-GAAP adjusted EBITDA (1) | | | 1,297.5 | | | | 15.5 | | | | 913.6 | | | | 20.0 | | | | 383.9 | | | | 42.0 | | Net income (loss) | | | (929.5 | ) | | | (11.1 | ) | | | 140.2 | | | | 3.1 | | | | (1,069.7 | ) | | | (763.0 | ) | Net income (loss) attributable to common stockholders | | | (973.2 | ) | | | (11.7 | ) | | | 140.2 | | | | 3.1 | | | | (1,113.4 | ) | | | (794.2 | ) | Diluted earnings (loss) per share | | $ | (5.02 | ) | | | | | | $ | 0.72 | | | | | | | $ | (5.74 | ) | | | (797.2 | ) |
| | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | 2020 | | | 2019 | | | | | | | Amount | | | % of Net Sales | | | Amount | | | % of Net Sales | | | $ Change | | | % Change | | | | (dollars in millions, except per share amounts) | | Net sales | | $ | 8,435.9 | | | | 100.0 | % | | $ | 8,345.1 | | | | 100.0 | % | | $ | 90.8 | | | | 1.1 | % | Gross profit | | | 2,747.8 | | | | 32.6 | | | | 2,404.1 | | | | 28.8 | | | | 343.7 | | | | 14.3 | | Operating loss | | | (51.8 | ) | | | (0.6 | ) | | | (508.5 | ) | | | (6.1 | ) | | | 456.7 | | | NM | | Non-GAAP adjusted EBITDA (1) | | | 1,215.2 | | | | 14.4 | | | | 1,297.5 | | | | 15.5 | | | | (82.3 | ) | | | (6.3 | ) | Net loss | | | (573.4 | ) | | | (6.8 | )% | | | (929.5 | ) | | | (11.1 | )% | | | 356.1 | | | NM | | Diluted loss per share | | $ | (3.20 | ) | | | | | | $ | (5.02 | ) | | | | | | $ | 1.82 | | | NM | |
(1) | See "Reconciliation of Non-GAAP Measures" in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below. |
Net sales | | Year Ended December 31, | | | $ | | | % | | | | 2019 | | | 2018 | | | Change | | | Change | | | | (dollars in millions) | | Net sales | | $ | 8,345.1 | | | $ | 4,568.5 | | | $ | 3,776.6 | | | | 82.7 | % | Domestic net sales | | | 4,922.2 | | | | 2,539.2 | | | | 2,383.0 | | | | 93.8 | | International net sales | | | 3,422.9 | | | | 2,029.3 | | | | 1,393.6 | | | | 68.7 | |
| | | | | | | | | | | | | | Year Ended December 31, | | | $ | | | % | | | | 2020 | | | 2019 | | | Change | | | Change | | Net sales | | $ | 8,435.9 | | | $ | 8,345.1 | | | $ | 90.8 | | | | 1.1 | % | Domestic | | | 5,185.3 | | | | 4,923.3 | | | | 262.0 | | | | 5.3 | | International | | | 3,250.6 | | | | 3,421.8 | | | | (171.2 | ) | | | (5.0 | ) |
Net sales for the year ended December 31, 2019 included ARRIS net sales of $4.0 billion. Excluding the ARRIS business, CommScope’s net sales were lower for 2019in 2020 increased compared to the prior year. Approximately 50%year by $531.9 million in our Broadband segment, primarily related to the addition of the decline relatedARRIS business for the full year of 2020 compared to lower volumes, approximately 35% relatedonly a partial year in 2019, but also due to pricing pressuresincreased demand for our Network Cable and the remainder related to impacts of foreign exchange rate changes among other factors. From a regional perspective, we saw lower net sales across all regions for 2019. For 2019, the decreaseConnectivity (NCC) and N&C products. These increases were partially offset by decreases in net sales excludingof $231.3 million in our OWN segment, $179.0 million in our Home segment and $30.8 million in our VCN segment. The decreases in the OWN and Home segments were driven primarily by a slowdown in sales to both U.S. and international service provider customers as demand for video products and wireless network equipment decreased. The decline in the VCN segment was driven by decreases in sales of Enterprise products. Both the Home and VCN segments declined in 2020 despite the inclusion of the ARRIS business was primarily driven by declines of $166.6 millionfor a full year in the Asia Pacific (APAC) region and $41.0 million in the Europe, Middle East and Africa (EMEA) region. Net sales to customers located outside of the U.S. comprised 41.0% of total net sales for 20192020 compared to 44.4% for 2018.a partial year in 2019. For further details by segment, see the section titled “Segment Results” below.
From a regional perspective, net sales increased in 2020 in the U.S. by $262.0 million primarily due to the Acquisition. Net sales decreased in the Asia Pacific (APAC) region by $122.5 million, the Caribbean and Latin America (CALA) region by $40.4 million and the Europe, Middle East and Africa (EMEA) region by $13.4 million and increased in Canada by $5.1 million. Net sales to customers located outside of the U.S. comprised 38.5% of total net sales for 2020 compared to 41.0% for 2019. We believe lower demand caused by COVID-19 reduced our net sales during 2020. While it is difficult to quantify the demand impacts, we believe the most significant reductions in demand related to COVID-19 for 2020 were in our VCN segment. We do not believe that supply chain disruptions related to COVID-19 materially impacted net sales during the second half of 2020, but we estimate that supply chain disruptions reduced revenue by approximately $90 million during the first half of 2020. Management currently expects the decline in net sales caused by the economic slowdown to continue into 2021.
Gross profit, SG&A expense and R&D expense | | Year Ended December 31, | | | $ | | | % | | | | | | | | | | | | | | | 2019 | | | 2018 | | | Change | | | Change | | | Year Ended December 31, | | | $ | | | % | | | | (dollars in millions) | | | 2020 | | | 2019 | | | Change | | | Change | | Gross profit | | $ | 2,404.1 | | | $ | 1,633.3 | | | $ | 770.8 | | | | 47.2 | % | | $ | 2,747.8 | | | $ | 2,404.1 | | | $ | 343.7 | | | | 14.3 | % | As a percent of sales | | | 28.8 | % | | | 35.8 | % | | | | | | 32.6 | % | | | 28.8 | % | | | | SG&A expense | | | 1,277.1 | | | | 674.0 | | | | 603.1 | | | | 89.5 | | | | 1,170.7 | | | | 1,277.1 | | | | (106.4 | ) | | | (8.3 | ) | As a percent of sales | | | 15.3 | % | | | 14.8 | % | | | | | | 13.9 | % | | | 15.3 | % | | | | R&D expense | | | 578.5 | | | | 185.7 | | | | 392.8 | | | | 211.5 | | | | 703.3 | | | | 578.5 | | | | 124.8 | | | | 21.6 | | As a percent of sales | | | 6.9 | % | | | 4.1 | % | | | | | | | | | | | 8.3 | % | | | 6.9 | % | | | | | | | | |
Gross profit (net sales less cost of sales) Gross profit increased for 2020 compared to the prior year primarily due to the addition of the ARRIS business for the full year in 2020 compared to a partial year in 2019. Gross profit in 2019 was negatively affectedimpacted by ARRIS acquisition accounting adjustments of $264.2 million primarily related to the markup of inventory to its estimated fair value less the estimated costs associated with its sale.value. Excluding the acquisition accounting adjustments recorded in 2019, CommScope’s gross profit for CommScope was $2.7 billion$2,668.3 million and gross profit as a percentage of sales was 32.0%. Excluding the ARRISWe estimate that a combination of supply chain disruptions and business in total, for 2019, CommScope’s gross profit was $1.5 billion and gross profit as a percentage of sales was 34.8%. For 2019, gross profit and gross profit as a percentage of sales for the legacy CommScope business decreased duecontinuity costs related to lower net sales and the $55.0 million settlement of patent infringement litigation as described in Note 16 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. The Connectivity segment experienced lower gross profit in 2019 compared to the prior year primarily as a result of the $255.3 million decrease in net sales. The Mobility segment’s gross profit was essentially unchanged compared to the prior year despite the $55.0 million patent infringement litigation settlement.
As discussed in Note 2 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, we changed our accounting principle to reclassify certain internal handling costs from selling, general and administrative (SG&A) expense to cost of sales. The impact of this change increased cost of sales and decreasedCOVID-19 reduced gross profit by $55.0approximately $70 million for 2018. All comparisons presented in this management’s discussion and analysis have been adjusted to reflect the impact of this change in accounting principle.2020.
Selling, general and administrative expense For 2019,2020, selling, general and administrative (SG&A) expense decreased compared to the prior year due to a reduction of $170.4 million in transaction and integration costs related to the Acquisition. Excluding transaction and integration costs, SG&A expense for 2020 increased primarily due to the inclusion of ARRIS SG&A expense (excluding transaction and integration costs) of $445.8 million and transaction and integration costs of $195.3 million. Excluding the ARRIS business for a full year in 2020 compared to a partial year in 2019 as well as transactionhigher variable incentive compensation. These increases were partially offset by the benefits in 2020 of acquisition synergies and integration costs, SG&A expense decreased $18.5 million for 2019, compared to the prior year primarily due to benefits fromother cost savings initiatives. Excluding transaction and integration costs and the ARRIS business, SG&A expense as a percentage of sales was 14.8% for 2019. Research and development expense Research and development (R&D) expense for 2020 increased for 2019 compared to the prior yearprimarily due to the inclusion of the ARRIS R&D expenses of $385.7 million. Excluding ARRIS, R&D expensebusiness for CommScope increased by $7.1 million primarilya full year in 2020 compared to a partial year in 2019 but also due to our continuing investment in Mobilitycertain VCN segment products.products and higher variable incentive costs. R&D activities generally relate to ensuring that our products are capable of meeting the evolving technological needs of our customers, bringing new products to market and modifying existing products to better serve our customers. Amortization of purchased intangible assets, Restructuring costs, net and Asset impairments | | Year Ended December 31, | | | $ | | | | | | | | | | | | | | | 2019 | | | 2018 | | | Change | | | Year Ended December 31, | | | $ | | | % | | | | (dollars in millions) | | | 2020 | | | 2019 | | | Change | | | Change | | Amortization of purchased intangible assets | | $ | 593.2 | | | $ | 264.6 | | | $ | 328.6 | | | $ | 630.5 | | | $ | 593.2 | | | $ | 37.3 | | | | 6.3 | % | Restructuring costs, net | | | 87.7 | | | | 44.0 | | | | 43.7 | | | | 88.4 | | | | 87.7 | | | | 0.7 | | | | 0.8 | % | Asset impairments | | | 376.1 | | | | 15.0 | | | | 361.1 | | | | 206.7 | | | | 376.1 | | | | (169.4 | ) | | | (45.0 | %) |
Amortization of purchased intangible assets The amortization of purchased intangible assets was higher in 20192020 compared to the prior year primarily due to the additionalinclusion of the ARRIS business for a full year in 2020 compared to a partial year in 2019. Excluding this comparability impact, amortization resulting from the Acquisition. Excluding ARRIS, amortization related to CommScope was lower by $32.0 milliondecreased for 20192020 compared to the prior year because certain of our intangible assets became fully amortized.
Restructuring costs, net The restructuring costs recorded in 2020 and 2019 were primarily related to integrating and preparing to integrate the ARRIS business while the restructuring costs recognized in the prior year were primarily related to the integration of the BNS business. From a cash perspective, we paid $89.9$76.7 million to settle restructuring liabilities during 20192020 and expect to pay an additional $23.9 million by the end of 2020 related to restructuring actions that have been initiated. In addition, we expect to pay $4.4$26.0 million between 2021 and 2022 related to restructuring actions that have been initiated. No significant restructuring charges are expected to be incurred to complete the previously announced BNS integration initiatives. Additional restructuring actions related to the acquisition of ARRISAcquisition are expected to be identified and the resulting charges and cash requirements are expected to be material. In 2020, we also recorded certain asset impairment charges of $11.6 million identified as restructuring costs because they resulted from restructuring initiatives. Asset impairments DuringIn 2020, we recorded goodwill impairment charges of $206.7 million related to our Home Networks reporting unit within our Home segment. See the discussion above under “Critical Accounting Policies” for more information regarding the interim and annual goodwill impairment tests performed during 2020. In 2019, we recorded goodwill impairment charges of $192.8$142.1 million, $142.1$192.8 million and $41.2 million related to our CPE, N&CBroadband, Home and RuckusVCN segments, respectively, as a result of our annual goodwill impairment test. During 2018, we recorded an impairment charge of $15.0 million allocated equally between the Connectivity and Mobility segments to fully impair an equity investment in a privately-held company.
Other expense, net | | Year Ended December 31, | | | $ | | | | | | | | | | | | | | | 2019 | | | 2018 | | | Change | | | Year Ended December 31, | | | $ | | | % | | | | (dollars in millions) | | | 2020 | | | 2019 | | | Change | | | Change | | Foreign currency loss | | $ | (11.9 | ) | | $ | (29.9 | ) | | $ | 18.0 | | | $ | (19.2 | ) | | $ | (11.9 | ) | | $ | (7.3 | ) | | NM | | Other income (expense), net | | | 5.5 | | | | (14.4 | ) | | | 19.9 | | | | (10.1 | ) | | | 5.5 | | | | (15.6 | ) | | | (283.6 | %) |
Foreign currency loss Foreign currency loss includes the net foreign currency gains and losses resulting from the settlement of receivables and payables, foreign currency contracts and short-term intercompany advances in a currency other than the subsidiary’s functional currency. The decreaseincrease in 2019 was driven by a $14.0 million foreign currency loss in 2018 that was related to foreign currency translation adjustments previously reported in accumulated other comprehensive loss that were recognized in other expense, net due to the liquidation of a foreign subsidiary. Other income (expense), net
The decrease in other expense, net for 20192020 compared to the prior year was primarily due the impact in 2018 of the termination of a U.S. defined benefit pension plan and the termination of benefits underdriven by certain of our U.S. postretirement medical plans. As a result of the pension plan terminations, we recognized a pretax charge of $34.5 million in 2018 related to unrecognized net actuarial losses previously recorded in accumulated other comprehensive loss. We also recognized a pretax gain of $9.7 million related to unrecognized prior service credits and unrecognized net actuarial gains previously recorded in accumulated other comprehensive loss for the postretirement medical plans. unhedged currencies.
Other income (expense), net for 2019 includes gains of $6.1 million related to the sale of certain investments. Interest expense, Interest income and Income taxes
| | Year Ended December 31, | | | $ | | | | 2019 | | | 2018 | | | Change | | | | (dollars in millions) | | Interest expense | | $ | (577.2 | ) | | $ | (242.0 | ) | | $ | (335.2 | ) | Interest income | | | 18.1 | | | | 7.0 | | | | 11.1 | | Income tax (expense) benefit | | | 144.5 | | | | (30.5 | ) | | | 175.0 | |
Interest expense and interest income
Interest expense for 2019 increased compared to the prior year due to the financing of the Acquisition. In February 2019, we issued the New Notes, which were held in escrow until the Acquisition date, April 4, 2019. In February 2019, we also secured the borrowing of $3.2 billion, less $32.0 million of original issue discount, under the 2026 Term Loan which was funded on April 4, 2019 as well. We began accruing interest on the New Notes in February 2019 and accrued ticking fees related to the 2026 Term Loan from February 2019 to April 2019. We incurred $379.2 million of incremental interest expense during 2019 as a result of this acquisition-related debt.
We used the proceeds from the New Notes and a portionpaid redemption premiums of the 2026 Term Loan, together with cash on hand and proceeds from the issuance of the Convertible Preferred Stock to finance the Acquisition. The remaining proceeds from the 2026 Term Loan$17.9 million that were used to pay off the existing senior secured term loan due 2022 (the 2022 Term Loan). We also made voluntary payments on the 2022 Term Loanincluded in other income (expense), net during 2019. In2020 in connection with the repaymentsrefinancing of the 2022 Term Loan, $7.7 million of original issue discount and debt issuance costs were written off and included in interest expense in 2019. During 2019, we also redeemed $500.0 million aggregate principal amount of our 5.00% senior notes due 2021 (the 2021 Notes) and accelerated the recognition5.50% senior notes due 2024 (the 2024 Notes) and the redemptions of $2.1$200.0 million of the 6.00% senior notes due 2025 (the 2025 Notes), as further described in Note 8 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. We did not pay any similar redemption premiums during 2019. Interest expense, Interest income and Income taxes | | | | | | | | | | | | | | Year Ended December 31, | | | $ | | | % | | | | 2020 | | | 2019 | | | Change | | | Change | | Interest expense | | $ | (577.8 | ) | | $ | (577.2 | ) | | $ | (0.6 | ) | | NM | | Interest income | | | 4.4 | | | | 18.1 | | | | (13.7 | ) | | | (75.7 | %) | Income tax benefit | | | 81.1 | | | | 144.5 | | | | (63.4 | ) | | | (43.9 | %) |
Interest expense and interest income Interest expense for 2020 was relatively unchanged compared to the prior year period. Interest expense increased in 2020 due to the financing of the Acquisition that occurred in February 2019 but this increase was offset by lower variable interest rates and lower debt issuance costsbalances due to voluntary repayments in interest expense. Our weighted average effective interest rate on outstanding borrowings, including the amortization of debt issuance costs and original issue discount, was 6.13% at December 31, 2019 and 5.73% at December 31, 2018.2020.
Interest income increased during 2019 due to $10.9 million of interest earned on the proceeds of the New Notes that were held in an interest-bearing escrow account until the Acquisition date.
In March 2019, we entered into pay-fixed, receive-variable interest rate swap derivatives and designated them as cash flow hedges of interest rate risk. These swaps effectively fixed the interest rate on a portion of the senior secured term loan due 2026 (the 2026 Term Loan.Loan). The total notional amount of the interest rate swap derivatives as of December 31, 20192020 was $600 million with outstanding maturities of up to fifty-onethirty-nine months. Our weighted average effective interest rate on outstanding borrowings, including the impact of the interest rate swap and the amortization of debt issuance costs and original issue discount, was 5.86% at December 31, 2020 and 6.13% at December 31, 2019. Interest income decreased during 2020 primarily due to $10.9 million of interest earned on the proceeds of the acquisition-related debt that were held in an interest-bearing escrow account in the prior year until the Acquisition date. Income tax (expense) benefit For 2020, our effective tax rate was 12.4% and we recognized a tax benefit of $81.1 million on a pretax loss of $654.5 million. Our tax benefit was less than the statutory rate of 21.0% in 2020 primarily due to a goodwill impairment charge of $206.7 million, for which minimal tax benefits were recorded. Our tax rate was also impacted unfavorably by excess tax costs of $14.0 million related to equity compensation awards as well as U.S. anti-deferral provisions and foreign withholding taxes. These unfavorable impacts were offset partially by favorable impacts related to federal tax credits and foreign tax rate changes. See Note 13 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for more discussion of our income tax benefit. For 2019, our effective tax rate was 13.5% and we recognized a tax benefit of $144.5 million on a pretax loss of $1,074.0 million. The unfavorable impact to ourOur tax benefit was drivenless than the statutory rate primarily by $77.9 million relateddue to a goodwill impairment chargescharge of $376.1 million, for which minimal tax benefits were recorded. The rate was also unfavorably impacted by U.S. anti-deferral provisions and foreign withholding taxes but these were partially offset by the favorable impact of federal tax credits and the expiration of statutes of limitations on various uncertain tax positions. The impact of excess tax costs related to equity-based compensation awards was not material in 2019. See Note 13 Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for more discussion of our income tax benefit. The effective income tax rate of 17.9% for 2018 was lower than the statutory rate of 21.0% primarily due to a reduction in tax expense of $23.3 million related to the expiration of statutes of limitations on various uncertain tax positions, a $7.8 million benefit recorded for changes to provisional amounts related to the tax reform legislation enacted in 2017 and the favorable impact of $4.6 million of excess tax benefits related to equity-based compensation awards for 2018. These decreases to the effective tax rate were partially offset by an increase in tax expense 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 U.S., the impact of the new U.S. anti-deferral provisions and the impact of repatriation taxes.
Segment Results | | Year Ended December 31, | | | | | | | | | | | | | | 2019 | | | | 2018 | | | | | | | Amount | | | % of Net Sales | | | | Amount | | | % of Net Sales | | | | $ Change | | | % Change | | | | | (dollars in millions) | Net sales by segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Connectivity | | $ | 2,557.4 | | | | 30.6 | | % | | $ | 2,812.7 | | | | 61.6 | | % | | $ | (255.3 | ) | | | (9.1 | ) | % | Mobility | | | 1,754.2 | | | | 21.0 | | | | | 1,755.8 | | | | 38.4 | | | | | (1.6 | ) | | | (0.1 | ) | | CPE | | | 2,539.0 | | | | 30.4 | | | | | — | | | | — | | | | | 2,539.0 | | | NM | | | N&C | | | 1,073.6 | | | | 12.9 | | | | | — | | | | — | | | | | 1,073.6 | | | NM | | | Ruckus | | | 420.9 | | | | 5.0 | | | | | — | | | | — | | | | | 420.9 | | | NM | | | Consolidated net sales | | $ | 8,345.1 | | | | 100.0 | | % | | $ | 4,568.5 | | | | 100.0 | | % | | $ | 3,776.6 | | | | 82.7 | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) by segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Connectivity | | $ | 174.4 | | | | 6.8 | | % | | $ | 271.9 | | | | 9.7 | | % | | $ | (97.5 | ) | | | (35.9 | ) | % | Mobility | | | 180.7 | | | | 10.3 | | | | | 178.1 | | | | 10.1 | | | | | 2.6 | | | | 1.5 | | | CPE | | | (196.0 | ) | | | (7.7 | ) | | | | — | | | | — | | | | | (196.0 | ) | | NM | | | N&C | | | (441.5 | ) | | | (41.1 | ) | | | | — | | | | — | | | | | (441.5 | ) | | NM | | | Ruckus | | | (226.1 | ) | | | (53.7 | ) | | | | — | | | | — | | | | | (226.1 | ) | | NM | | | Consolidated operating income (loss) | | $ | (508.5 | ) | | | (6.1 | ) | % | | $ | 450.0 | | | | 9.9 | | % | | $ | (94.9 | ) | | | (21.1 | ) | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-GAAP adjusted operating income by segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Connectivity | | $ | 412.2 | | | | 16.1 | | % | | $ | 521.8 | | | | 18.6 | | % | | $ | (109.6 | ) | | | (21.0 | ) | % | Mobility | | | 357.9 | | | | 20.4 | | | | | 316.2 | | | | 18.0 | | | | | 41.7 | | | | 13.2 | | | CPE | | | 163.5 | | | | 6.4 | | | | | — | | | | — | | | | | 163.5 | | | NM | | | N&C | | | 206.4 | | | | 19.2 | | | | | — | | | | — | | | | | 206.4 | | | NM | | | Ruckus | | | 13.8 | | | | 3.3 | | | | | — | | | | — | | | | | 13.8 | | | NM | | | Non-GAAP consolidated adjusted operating income (1) | | $ | 1,153.8 | | | | 13.8 | | % | | $ | 838.0 | | | | 18.3 | | % | | $ | 315.8 | | | | 37.7 | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-GAAP adjusted EBITDA by segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Connectivity | | $ | 462.1 | | | | 18.1 | | % | | $ | 575.2 | | | | 20.5 | | % | | $ | (113.1 | ) | | | (19.7 | ) | % | Mobility | | | 380.1 | | | | 21.7 | | | | | 338.4 | | | | 19.3 | | | | | 41.7 | | | | 12.3 | | | CPE | | | 193.7 | | | | 7.6 | | | | | — | | | | — | | | | | 193.7 | | | NM | | | N&C | | | 237.0 | | | | 22.1 | | | | | — | | | | — | | | | | 237.0 | | | NM | | | Ruckus | | | 24.6 | | | | 5.8 | | | | | — | | | | — | | | | | 24.6 | | | NM | | | Non-GAAP consolidated adjusted EBITDA (1) | | $ | 1,297.5 | | | | 15.5 | | % | | $ | 913.6 | | | | 20.0 | | % | | $ | 383.9 | | | | 42.0 | | % |
| | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | | | | 2020 | | | | 2019 | | | | | | | Amount | | | % of Net Sales | | | | Amount | | | % of Net Sales | | | | $ Change | | | % Change | | | Net sales by segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Broadband | | $ | 2,895.7 | | | | 34.3 | | % | | $ | 2,363.8 | | | | 28.3 | | % | | $ | 531.9 | | | | 22.5 | | % | Home | | | 2,360.0 | | | | 28.0 | | | | | 2,539.0 | | | | 30.4 | | | | | (179.0 | ) | | | (7.1 | ) | | OWN | | | 1,243.7 | | | | 14.7 | | | | | 1,475.0 | | | | 17.7 | | | | | (231.3 | ) | | | (15.7 | ) | | VCN | | | 1,936.5 | | | | 23.0 | | | | | 1,967.3 | | | | 23.6 | | | | | (30.8 | ) | | | (1.6 | ) | | Consolidated net sales | | $ | 8,435.9 | | | | 100.0 | | % | | $ | 8,345.1 | | | | 100.0 | | % | | $ | 90.8 | | | | 1.1 | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) by segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Broadband | | $ | 171.5 | | | | 5.9 | | % | | $ | (326.1 | ) | | | (13.8 | ) | % | | $ | 497.6 | | | NM | | | Home | | | (289.7 | ) | | | (12.3 | ) | | | | (196.0 | ) | | | (7.7 | ) | | | | (93.7 | ) | | NM | | | OWN | | | 181.1 | | | | 14.6 | | | | | 200.3 | | | | 13.6 | | | | | (19.2 | ) | | | (9.6 | ) | % | VCN | | | (114.7 | ) | | | (5.9 | ) | | | | (186.7 | ) | | | (9.5 | ) | | | | 72.0 | | | NM | | | Consolidated operating loss | | $ | (51.8 | ) | | | (0.6 | ) | % | | $ | (508.5 | ) | | | (6.1 | ) | % | | $ | 456.7 | | | NM | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA by segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Broadband | | $ | 640.5 | | | | 22.1 | | % | | $ | 473.3 | | | | 20.0 | | % | | $ | 167.2 | | | | 35.3 | | % | Home | | | 116.2 | | | | 4.9 | | | | | 193.7 | | | | 7.6 | | | | | (77.5 | ) | | | (40.0 | ) | | OWN | | | 278.5 | | | | 22.4 | | | | | 361.2 | | | | 24.5 | | | | | (82.7 | ) | | | (22.9 | ) | | VCN | | | 180.0 | | | | 9.3 | | | | | 269.3 | | | | 13.7 | | | | | (89.3 | ) | | | (33.2 | ) | | Non-GAAP consolidated adjusted EBITDA (1) | | $ | 1,215.2 | | | | 14.4 | | % | | $ | 1,297.5 | | | | 15.5 | | % | | $ | (82.3 | ) | | | (6.3 | ) | % |
(1) | See “Reconciliation of Non-GAAP Measures” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below. |
Connectivity SolutionsBroadband Networks Segment
ConnectivityBroadband segment net sales were lowerhigher in 2019 compared to the prior year. Approximately 70% of the decline in net sales was due to lower sales volumes, approximately 20% was due to pricing pressure and the remaining decline related to the impacts of foreign exchange rate changes among other factors. From a regional perspective, the Connectivity segment saw declines of $88.6 million in the U.S., $77.4 million in the EMEA region and $70.2 million in the APAC region. Net sales in the U.S. were down due to declines in spending by our cable operator customers. Sales in the EMEA and APAC regions were lower due to decreases in sales of enterprise solutions and to a lesser extent, the impact of unfavorable foreign exchange rate changes.
Connectivity segment operating income and non-GAAP adjusted EBITDA decreased during 20192020 compared to the prior year primarily due to lower net sales. For 2019, Connectivity segment operating income was favorably impacted by lower intangible amortization and restructuring costs, partially offset by higher transaction and integration costs, allthe inclusion of which are excluded from non-GAAP adjusted EBITDA. See “Reconciliation of Non-GAAP Measures” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.
Mobility Solutions Segment
Mobility segment net sales remained relatively unchanged during 2019the N&C business for a full year in 2020 compared to the priora partial year as pricing pressures were almost fully offset byin 2019, but also due to higher volumes. Foreign exchange rate changes negatively impacted Mobility segment net sales by approximately 1% for 2019 compared to the prior year.of both our NCC and N&C products. From a regional perspective, Mobilityfor 2020, Broadband segment net sales increased across all major regions, driven by $71.8increases of $431.7 million in the U.S. and $36.4, $48.9 million in the EMEA region, but these increases were largely offset by a decline of $96.4$31.8 million in the APAC region. Sales of metro cell solutions drove the increaseregion and $21.1 million in the U.S. while higherCALA region. Supply constraints related to the COVID-19 pandemic negatively affected Broadband segment net sales during the first half of distributed antenna systems and macro cell products drove2020; however, we believe the increasesegment also benefitted from increased demand for certain of its products. The negative impacts of COVID-19 were not significant to the Broadband segment in the EMEA region. Lower salessecond half of macro cell solutions, primarily2020 and we do not expect significant negative impacts in India, drove the decrease in sales to the APAC region.2021.
MobilityFor 2020, Broadband segment operating income and adjusted EBITDA increased slightly for 2019 despite a $55.0due to higher net sales, the impact of cost savings initiatives and lower material costs. Broadband segment operating income was also favorably impacted by reductions in goodwill impairment charges of $142.1 million, settlementreductions in acquisition accounting adjustments of a patent infringement claim (see Note 16 in$124.4 million primarily related to the Notesmark-up of inventory to Consolidated Financial Statements included in this Annual Report on Form 10-K) and a $15.7 million increaseits estimated fair value, reductions in transaction and integration costs. Mobility segment operating income for 2019 benefitted from lower intangible amortization expense,costs of $112.3 million and reductions in restructuring costs of $19.1 million. Asset impairment charges, transaction and asset impairments when compared to 2018. All of theseintegration costs, acquisition accounting adjustments and restructuring costs are excluded from the calculation of non-GAAP adjusted EBITDA, which also increased for 2019 compared to the prior year. The increasenot reflected in adjusted EBITDA for 2019 was primarily due to favorable geographic mix and lower input costs.EBITDA. See “Reconciliation of Segment adjusted EBITDA” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.
Customer Premises EquipmentHome Networks Segment
Net sales for the Home segment decreased in 2020, despite the inclusion of the ARRIS business for a full year in 2020 compared to customers outsidea partial year in 2019, due to lower sales volumes of video products to service provider customers. From a regional perspective, for 2020, the U.S. comprised 40.3% of total CPEdecrease in Home segment net sales for 2019. Thesewas driven by decreases of $96.0 million in the APAC region, $86.7 million in the U.S. and $39.9 million in the CALA region, but these were partially offset by an increase in net sales to international customers were primarily to customers in the EMEA region of $46.1 million. For 2020, we believe the impacts from COVID-19 were a combination of supply chain disruptions and Caribbeanlower demand for video products. We anticipate ongoing softness in the Home segment continuing into 2021, partially due to the impacts of COVID-19 but also due to the continuing declines in demand for video products. For 2020, the Home segment operating loss increased and Latin America (CALA) regions. CPEadjusted EBITDA decreased compared to the prior year primarily due to lower sales volumes. Home segment net sales were unfavorablyoperating loss was favorably impacted by a $25.9 million reduction in acquisition accounting adjustments related to deferred revenue of $5.2 million for 2019. Operating income for our CPE segment for 2019 was negatively impacted by a goodwill impairment charge of $192.8 million, $27.8 million of acquisition accounting adjustments related to deferred revenue and the mark-up of inventory to its fair value and $23.2 million of restructuring costs for 2019. Asset impairments, acquisition accounting adjustments and restructuring charges are not reflected in non-GAAP adjusted EBITDA.
Network & Cloud Segment
Net sales to customers outside the U.S. comprised 39.5% of total N&C segment net sales for 2019. These sales to international customers were spread across all major geographic regions. N&C segment net sales were unfavorably impacted by acquisition accounting adjustments related to deferred revenue of $29.5 million for 2019.
Operating income for our N&C segment was negatively impacted by a goodwill impairment charge of $142.1 million, $135.8 million of acquisition accounting adjustmentsprimarily related to the mark-up of inventory to its estimated fair value, and deferred revenue, $32.1the release of a $23.6 million accrual related to a patent royalty matter that was settled for less than anticipated. These favorable impacts to operating loss were offset by higher goodwill impairment charges of restructuring costs and $100.0$13.8 million, ofhigher transaction and integration costs for 2019. All of these charges$8.5 million and higher restructuring costs of $6.8 million. Asset impairments, acquisition accounting adjustments, transaction and integration costs, restructuring costs and a portion of the patent and litigation settlement described above are not reflected in adjusted EBITDA. Of the $23.6 million patent royalty accrual release, $15.1 million related to pre-acquisition sales and was excluded from ourthe calculation of non-GAAP adjusted EBITDA.EBITDA; the remaining $8.5 million release provided a benefit to Home segment adjusted EBITDA in 2020. See “Reconciliation of Segment adjusted EBITDA” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.
RuckusOutdoor Wireless Networks Segment
NetOWN segment net sales decreased during 2020 compared to customers outsidethe prior year primarily due to a slowdown in sales of wireless network equipment to both U.S. and international service provider customers. From a regional perspective, for 2020, OWN segment net sales were lower across all major regions and were primarily driven by decreases in the U.S. comprised 44.0% of total Ruckus$156.5 million, the EMEA region of $56.8 million and the APAC region of $28.1 million. U.S. net sales of OWN segment products in 2019 benefitted from the build out of next generation 4G networks to support commercial and public safety markets, and that spending did not recur at the same level in 2020. In addition, we believe a portion of the decline in OWN segment net sales for 2019. Sales2020 was caused by lower demand as a result of the macroeconomic slowdown caused by the COVID-19 pandemic. We currently believe the impact from COVID-19 could continue to international customers were primarilynegatively affect the OWN segment into 2021.
For 2020, OWN segment operating income decreased compared to customersthe prior year due to lower net sales in the EMEAcurrent year partially offset by the impact of a patent litigation claim settled during the prior year period for $55.0 million. Adjusted EBITDA decreased for 2020 compared to the prior year primarily due to the decrease in net sales. Patent litigation settlements are not reflected in adjusted EBITDA. See “Reconciliation of Segment adjusted EBITDA” within this Management’s Discussion and APAC regions. RuckusAnalysis of Financial Condition and Results of Operations, below. Venue and Campus Networks Segment VCN segment net sales were unfavorably impactedlower in 2020 compared to the prior year, primarily due to lower sales of Enterprise products primarily driven by the COVID-19 pandemic, despite the incremental sales of the acquired Ruckus business in 2020 compared to 2019. From a regional perspective, for 2020, VCN segment net sales increased $73.4 million in the U.S. but decreased across all other major regions, driven by decreases of $51.6 million in the EMEA region, $30.2 million in the APAC region and $15.4 million in the CALA region. Management currently expects the impact of COVID-19 to continue to negatively affect the VCN segment into 2021.
For 2020, VCN segment operating loss decreased due to a $93.3 million reduction in acquisition accounting adjustments related to deferred revenue of $10.7 million for 2019. Operating income for our Ruckus segment for 2019 was negatively impacted by $100.6 million of acquisition accounting adjustmentsprimarily related to the mark-up of inventory to its estimated fair value and deferred revenue, a goodwill impairment charge of $41.2 million andas well as reductions in transaction and integration costs of $35.3$51.6 million. These favorable impacts were offset partially by a $13.7 million increase in patent litigation costs and a $4.2 million increase in restructuring costs. For 2020, VCN segment operating loss and adjusted EBITDA were negatively impacted by lower sales and unfavorable product mix, offset partially by the impacts of cost savings initiatives. Acquisition accounting adjustments, asset impairmentsrestructuring costs, patent litigation costs and transaction and integration costs are not includedreflected in non-GAAP adjusted EBITDA. See “Reconciliation of Segment adjusted EBITDA” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.
Liquidity and Capital Resources The following table summarizes certain key measures of our liquidity and capital resources: | | December 31, | | | $ | | | % | | | | | | 2019 | | | 2018 | | | Change | | | Change | | | | December 31, | | | | | | | | | | | | | (dollars in millions) | | 2020 | | | 2019 | | | $ Change | | | % Change | | | Cash and cash equivalents | | $ | 598.2 | | | $ | 458.2 | | | $ | 140.0 | | | | 30.6 | | % | | $ | 521.9 | | | $ | 598.2 | | | $ | (76.3 | ) | | | (12.8 | ) | % | Working capital (1), excluding cash and cash equivalents and current portion of long-term debt | | | 903.6 | | | | 729.0 | | | | 174.6 | | | | 24.0 | | | | | 911.2 | | | | 903.6 | | | | 7.6 | | | | 0.8 | | | Availability under revolving credit facility | | | 796.8 | | | | 463.1 | | | | 333.7 | | | | 72.1 | | | | | 735.1 | | | | 796.8 | | | | (61.7 | ) | | | (7.7 | ) | | Long-term debt, including current portion | | | 9,832.4 | | | | 3,985.9 | | | | 5,846.5 | | | | 146.7 | | | | | 9,520.6 | | | | 9,832.4 | | | | (311.8 | ) | | | (3.2 | ) | | Total capitalization (2) | | | 11,668.7 | | | | 5,742.7 | | | | 5,926.0 | | | | 103.2 | | | | | 10,917.4 | | | | 11,668.7 | | | | (751.3 | ) | | | (6.4 | ) | | Long-term debt, including current portion, as a percentage of total capitalization | | | 84.3 | % | | | 69.4 | % | | | | | | | | | | | Long-term debt as a percentage of total capitalization | | | | 87.2 | % | | | 84.3 | % | | | | | | | | | |
(1) | Working capital consists of current assets of $3,354.5 million less current liabilities of $1,953.4 million as of December 31, 2020 and current assets of $3,511.8 million less current liabilities of $2,042.0 million as of December 31, 2019 and current assets of $1,877.8 million less current liabilities of $690.6 million as of December 31, 2018.2019. |
(2) | Total capitalization includes long-term debt, including the current portion, Series A convertible preferred stock (the Convertible Preferred Stock) and stockholders’ equity. |
Our principal sources of liquidity on a short-term basis are cash and cash equivalents, cash flows provided by operations and availability under our credit facilities. To fund the Acquisition, on February 19, 2019In April 2020, we issued the New Notes, the proceeds from which were held in escrow until they were released on April 4, 2019, the Acquisition date. In February 2019, we alsoborrowed $250.0 million under our senior secured the borrowing of $3.2 billion under the 2026 Term Loan with an interest rate of LIBOR plus 3.25% that was funded on the Acquisition date. In addition, at the closing of the Acquisition, we entered into a new asset-based revolving credit facility. Availability under the new asset-based revolving credit facility was $796.8 million(the Revolving Credit Facility) as a precautionary measure to reinforce our cash position and preserve financial flexibility in light of December 31, 2019, reflecting a borrowing base of $820.9 million reduced by $24.1 million of letters of credit under the facility.uncertainty in the global economy at that time resulting from the COVID-19 pandemic. We subsequently repaid the full amount in July 2020 because we did not borrow underbelieve the new asset-based revolving credit facilityproceeds were needed for future liquidity as our cash flow generation has continued to fundimprove and the Acquisition, but we did borrow and repay $15.0 million under the facility in the second quarter of 2019. In additionbroader financial markets have continued to incremental new debt, we funded the Acquisition by issuing the Convertible Preferred Stock to Carlyle for an aggregate investment of $1.0 billion. The Convertible Preferred Stock pays dividends at an annual rate of 5.50%, with dividends payable quarterly and is convertible at the option of the holders at any time into shares of CommScope common stock at a price of $27.50 per share, subject to certain limits on the number of shares that may be issued unless we obtain shareholder approval.stabilize. On a long-term basis, our potential sources of liquidity also include raising capital through the issuance of additional equity and/or debt.
The primary uses of liquidity include debt service requirements (including voluntary debt repayments or redemptions), funding working capital requirements, paying acquisition integration costs, paying transaction costs, capital expenditures, paying restructuring costs, paying dividends related to the Convertible Preferred Stock if we elect to pay such dividends in cash, paying litigation settlements and income tax payments. We believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our new asset-based revolving credit facility and access to capital markets,the Revolving Credit Facility, will be sufficient to meet our presently anticipated future cash needs. We may experience volatility in cash flows between periods due to, among other reasons, variability in the timing of vendor payments and customer receipts. We may, from time to time, borrow additional amounts under our revolving credit facilitythe Revolving Credit Facility or issue securities, if market conditions are favorable, to meet future cash needs or to reduce our borrowing costs.
Although there are no financial maintenance covenants under the terms of our senior notes, there is a limitation, among other limitations, on certain future borrowings based on an adjusted leverage ratio or a fixed charge coverage ratio. These ratios are based on financial measures similar to non-GAAP adjusted EBITDA as presented in the “Reconciliation of Non-GAAP Measures” section below, but also give pro forma effect to certain events, including acquisitions, synergies and savings from cost reduction initiatives such as facility closures and headcount reductions. For the year ended December 31, 2019,2020, our non-GAAP pro forma adjusted EBITDA, as measured pursuant to the indentures governing our notes, was $1,481.6$1,289.9 million, which included increases to our non-GAAP adjusted EBITDA related to the ARRIS business from January 1, 2019 to the Acquisition date, calculated in accordance with CommScope’s definition ($70.8 million); annualized synergies expected to be realized in the threenext two years following the close of the Acquisition ($105.032.6 million); and annualized savings expected from announced cost reduction initiatives ($8.342.1 million) so that the impact of the cost reduction initiatives is fully reflected in the twelve-month period used in the calculation of the ratios. In addition to limitations under these indentures, our senior secured credit facilities contain customary negative covenants based on similar financial measures. We believe we are in compliance with the covenants under our indentures and senior secured credit facilities at December 31, 2019.2020. Cash and cash equivalents increaseddecreased during 20192020 primarily due to the additiondebt redemptions of the ARRIS business,$1.0 billion, partially offset by funding the Acquisition, settling assumed ARRIS debt, payments on the 2022 Term Loan, redemptionsissuance of the 2021 Notes, acquisition-related payments and restructuring payments.$700.0 million of 7.125% senior unsecured notes due in 2028 (the 2028 Notes). We also invested $121.2 million in capital expenditures. These uses of cash were offset partially by cash generated by operating activities of $436.2 million. As of December 31, 2019,2020, approximately 57%46% of our cash and cash equivalents were held outside the U.S. Working capital, excluding cash and cash equivalents and the current portion of long-term debt, increased slightly during 2019 due to the Acquisition. Excluding the ARRIS business, working capital, excluding cash and cash equivalents, decreased mainly2020 due to higher accrued interest related to the debt incurred to finance the Acquisition coupled withinventory and lower accounts payable balances mostly offset by lower accounts receivable balances.balances primarily due to lower fourth quarter sales in the current year. The increasenet reduction in total capitalization during 20192020 reflected the proceeds fromnet loss for the New Notes funded in the first quarter, the 2026 Term Loan, which was funded on the Acquisition date,period and the Convertible Preferred Stock, all of which were utilized to fund a substantial portion of the Acquisition on April 4, 2019.$332.0 million net reduction in gross debt.
Cash Flow Overview Comparison for the year ended December 31, 2019 with the year ended December 31, 2018
| | Year Ended December 31, | | | $ | | | % | | | | | | 2019 | | | 2018 | | | Change | | | Change | | | | Year Ended December 31, | | | $ | | | % | | | | (dollars in millions) | | | | 2020 | | | 2019 | | | Change | | | Change | | Net cash generated by operating activities | | $ | 596.4 | | | $ | 494.1 | | | $ | 102.3 | | | | 20.7 | | % | | $ | 436.2 | | | $ | 596.4 | | | $ | (160.2 | ) | | | (26.9 | %) | Net cash used in investing activities | | | (5,154.9 | ) | | | (64.3 | ) | | | (5,090.6 | ) | | NM | | | | | (120.2 | ) | | | (5,154.9 | ) | | | 5,034.7 | | | NM | | Net cash generated by (used in) financing activities | | | 4,698.6 | | | | (409.6 | ) | | | 5,108.2 | | | NM | | | | | (383.8 | ) | | | 4,698.6 | | | | (5,082.4 | ) | | | (108.2 | %) |
NM - Not meaningful
Operating Activities | | Year Ended | | | | | | | December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | Operating Activities: | | | | | | | | | | | | | | | | | Net income (loss) | | $ | (929.5 | ) | | $ | 140.2 | | | Adjustments to reconcile net income (loss) to net cash generated by operating activities: | | | | | | | | | | Net loss | | | $ | (573.4 | ) | | $ | (929.5 | ) | Adjustments to reconcile net loss to net cash generated by operating activities: | | | | | | | | | | Depreciation and amortization | | | 770.9 | | | | 357.5 | | | | 823.3 | | | | 770.9 | | Equity-based compensation | | | 90.8 | | | | 44.9 | | | | 115.0 | | | | 90.8 | | Deferred income taxes | | | (260.8 | ) | | | (49.2 | ) | | | (154.7 | ) | | | (260.8 | ) | Asset impairments | | | 376.1 | | | | 15.0 | | | | 206.7 | | | | 376.1 | | Changes in assets and liabilities: | | | | | | | | | | | | | | | | | Accounts receivable | | | 258.8 | | | | 65.1 | | | | 228.4 | | | | 258.8 | | Inventories | | | 489.1 | | | | (48.5 | ) | | | (100.5 | ) | | | 489.1 | | Prepaid expenses and other assets | | | 19.5 | | | | 1.0 | | | Prepaid expenses and other current assets | | | | (17.2 | ) | | | 19.5 | | Accounts payable and other accrued liabilities | | | (274.0 | ) | | | (0.8 | ) | | | (175.2 | ) | | | (274.0 | ) | Other noncurrent liabilities | | | 7.2 | | | | (54.6 | ) | | | (4.0 | ) | | | 7.2 | | Other noncurrent assets | | | 46.0 | | | | (8.0 | ) | | | 28.8 | | | | 46.0 | | Other | | | 2.3 | | | | 31.5 | | | | 59.0 | | | | 2.3 | | Net cash generated by operating activities | | $ | 596.4 | | | $ | 494.1 | | | $ | 436.2 | | | $ | 596.4 | |
During 2019,2020, operating cash generated from operating activities increasedflows decreased compared to the prior year period due to addition of$109.0 million paid in the ARRIS business partially offset bycurrent year related to patent claims and litigation and $55.7 million in additional interest paid in the payment of $233.9 million more in interestcurrent year as a result of the Acquisition-related debt and payments of $210.7 million of transaction and integration costs related to the Acquisition during 2019. We also paid $49.7 million more in restructuring costs for 2019 compared to the prior year. The change in inventory during 2019 reflects $218.8 million of acquisition accounting adjustments related to the mark-up of inventory to its estimated fair value.debt.
Investing Activities | | Year Ended | | | | | | | December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | Investing Activities: | | | | | | | | | | | | | | | | | Additions to property, plant and equipment | | $ | (104.1 | ) | | $ | (82.3 | ) | | $ | (121.2 | ) | | $ | (104.1 | ) | Proceeds from sale of property, plant and equipment | | | 1.6 | | | | 12.9 | | | | 5.0 | | | | 1.6 | | Cash paid for current year acquisitions, net of cash acquired | | | (5,053.4 | ) | | | — | | | Cash paid for prior year acquisition | | | (11.0 | ) | | | — | | | Proceeds from sale of long-term investments | | | 9.3 | | | | — | | | | — | | | | 9.3 | | Proceeds upon settlement of net investment hedge | | | 2.7 | | | | 5.1 | | | Cash paid for ARRIS acquisition, net of cash acquired | | | | — | | | | (5,053.4 | ) | Cash paid for Cable Exchange acquisition | | | | (3.5 | ) | | | (11.0 | ) | Other | | | | (0.5 | ) | | | 2.7 | | Net cash used in investing activities | | $ | (5,154.9 | ) | | $ | (64.3 | ) | | $ | (120.2 | ) | | $ | (5,154.9 | ) |
During 2019, we paid $5.1 billion, net of cash acquired, to fund the Acquisition using a combination of cash on hand, proceeds from the issuance of long-term debt and proceeds from the issuance of the Convertible Preferred Stock. Our2020, our investment in property, plant and equipment during 2019 was $21.8 million higher than 2018, primarily as a result ofdue to the addition of ARRIS’ investmentincremental time the ARRIS business was owned in property, plant and equipment since the Acquisition date.current year compared to the prior year. Our investments in property, plant and equipment were primarily related to supporting improvements in manufacturing operations, including expanding production capacity and investing in information technology, including software developed for internal use. During 2020 and 2019, we alsosold property and equipment that was no longer being utilized for $5.0 million and $1.6 million, respectively. During 2020 and 2019, we paid $3.5 million and $11.0 million, of the $14.5 million liability for remaining payments duerespectively, related to the Augustour 2017 acquisition of Cable Exchange. The payment in 2020 was the final payment related to the Cable Exchange acquisition. During 2019, we paid $5.1 billion, net of cash acquired, using a combination of cash on hand, proceeds from the issuance of long-term debt and proceeds from the issuance of the Convertible Preferred Stock to fund the Acquisition.
Financing Activities | | | | | | Year Ended December 31, | | | | 2020 | | | 2019 | | Financing Activities: | | | | | | | | | Long-term debt repaid | | $ | (1,282.0 | ) | | $ | (3,061.3 | ) | Long-term debt proceeds | | | 950.0 | | | | 6,933.0 | | Debt issuance costs | | | (11.7 | ) | | | (120.8 | ) | Debt extinguishment costs | | | (17.9 | ) | | | — | | Series A convertible preferred stock proceeds | | | — | | | | 1,000.0 | | Dividends paid on Series A convertible preferred stock | | | (14.3 | ) | | | (40.7 | ) | Deemed dividend paid on Series A convertible preferred stock | | | — | | | | (3.0 | ) | Proceeds from the issuance of common shares under equity-based compensation plans | | | 9.0 | | | | 4.6 | | Tax withholding payments for vested equity-based compensation awards | | | (16.9 | ) | | | (13.2 | ) | Net cash generated by (used in) financing activities | | $ | (383.8 | ) | | $ | 4,698.6 | |
In 2020, we redeemed $100.0 million aggregate principal amount of the 2021 Notes. We then issued $700.0 million of the 2028 Notes and used the net proceeds from the offering to redeem and retire the remaining $700.0 million outstanding under the 2021 Notes and the 2024 Notes. We incurred $11.7 million of debt issuance costs in connection with the issuance of the 2028 Notes. Also during 2020, we borrowed and repaid $250.0 million under the Revolving Credit Facility. In addition, during 2019, we received proceedsredeemed $200.0 million aggregate principal amount of $9.3the 2025 Notes and paid four quarterly scheduled amortization payments totaling $32.0 million on the sale2026 Term Loan. We paid redemption premiums of certain investments. During 2019$11.9 million to retire the 2024 Notes and 2018, we sold property and equipment no longer being utilized$6.0 million to partially redeem the 2025 Notes. We may continue to look for $1.6 million and $12.9 million, respectively. During 2019 and 2018, we received $2.7 million and $5.1 million, respectively,favorable opportunities to settle net investment hedges that we entered into forrefinance portions of our existing debt to lower borrowing costs, extend the purposeterm or adjust the total amount of mitigating a portion of the foreign currency risk on the euro net investment in a foreign subsidiary.fixed or floating-rate debt. Financing Activities
| | Year Ended | | | | December 31, | | | | 2019 | | | 2018 | | Financing Activities: | | | | | | | | | Long-term debt repaid | | $ | (3,061.3 | ) | | $ | (550.0 | ) | Long-term debt proceeds | | | 6,933.0 | | | | 150.0 | | Debt issuance costs | | | (120.8 | ) | | | — | | Series A convertible preferred stock proceeds | | | 1,000.0 | | | | — | | Dividends paid on Series A convertible preferred stock | | | (40.7 | ) | | | — | | Deemed dividend paid on Series A convertible preferred stock | | | (3.0 | ) | | | — | | Proceeds from the issuance of common shares under equity-based compensation plans | | | 4.6 | | | | 6.1 | | Tax withholding payments for vested equity-based compensation awards | | | (13.2 | ) | | | (15.7 | ) | Net cash generated by (used in) financing activities | | $ | 4,698.6 | | | $ | (409.6 | ) |
During 2019, we received net proceeds from the issuanceAcquisition-related debt of the New Notes and the 2026 Term Loan ofapproximately $6.9 billion to fund the Acquisition. On the date of the Acquisition, we also entered into a new asset-based revolving credit facility in an amount up to $1.0 billion, which had availability of $796.8 million as of December 31, 2019, reflecting a borrowing base of $820.9 billion reduced by $24.1 million of letters of credit issued under the facility. We borrowed and repaid $15.0 million under the new asset-based revolving credit facility during the second quarter of 2019. We had no outstanding borrowings under the new asset-based revolving credit facility as of December 31, 2019. In connection with these financing transactions, we paid $120.8 million of debt issuance costs during 2019.
We repaid $225.0 million of the senior secured term loan due 2022 Term Loan in the first quarter of 2019 and we repaid the remaining balance of $261.3 million on April 4, 2019 using proceeds from the 2026 Term Loan. As part of funding the Acquisition,In addition, we repaid ARRIS’ outstanding debt of $2.1 billion under its senior secured credit facilities. We redeemed $500.0 million aggregate principal amount of our 2021 Notes during 2019. We also paid an $8.0 million scheduled payment during December 2019 related to the 2026 Term Loan.We may repurchase more As part of our senior notes if market conditions are favorable andfunding the applicable indenture and the credit agreements governing theAcquisition, we repaid ARRIS’ outstanding debt of $2.1 billion under its senior secured credit facilities permit such repayment or repurchase.facilities. We also borrowed and repaid $15.0 million under the Revolving Credit Facility in 2019. In addition,connection with the Acquisition-related debt, we may refinance portionspaid $120.8 million of our existing debt to lowerissuance costs during 2019. As of December 31, 2020, we had no outstanding borrowings under the Revolving Credit Facility and the remaining availability was $735.1 million, reflecting a borrowing costs, extendbase of $766.9 million reduced by $31.8 million of letters of credit issued under the term or adjust the total amount of fixed or floating-rate debt.Revolving Credit Facility. In 2019, in addition to the new debt, we funded the Acquisition by issuing the Convertible Preferred Stock to Carlyle for an aggregate investment of $1.0 billion. We paid $3.0 million in transaction fees on Carlyle’s behalf related to the Convertible Preferred Stock and we treated that as a deemed dividend during 2019. During 2020 and 2019, we paid $14.3 million and $40.7 million, respectively, in authorizedcash dividends for the Convertible Preferred Stock. In 2020, we also paid $41.8 million of dividends in kind for the Convertible Preferred Stock but this was not impactful to our cash flows. During 2020, we received proceeds of $9.0 million related to the exercise of stock options. Also during 2020, employees surrendered 1.8 million shares of our common stock to satisfy their tax withholding requirements on vested restricted stock units and performance share units, which reduced cash flows by $16.9 million. During 2019, we received proceeds of $4.6 million related to the exercise of stock options. Also during 2019,options and employees surrendered 0.7 million shares of our common stock to satisfy their tax withholding requirements on vested restricted stock units and performance share units, which reduced cash flows by $13.2 million. During 2018, we received proceeds of $6.1 million related to the exercise of stock options and employees surrendered 0.4 million shares of our common stock to satisfy their tax withholding requirements on vested restricted stock units, which reduced cash flows by $15.7 million.
Reconciliation of Non-GAAP Measures We believe that presenting certain non-GAAP financial measures enhances an investor’s understanding of our financial performance. We further believe that these financial measures are useful in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business. We also use certain of these financial measures for business planning purposes and in measuring our performance relative to that of our competitors. We believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the terms non-GAAP adjusted operating income andterm non-GAAP adjusted EBITDA may vary from that of others in our industry. TheseThis financial measuresmeasure should not be considered as alternativesan alternative to operating income (loss), net income (loss) or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance, operating cash flows or liquidity. Although there are no financial maintenance covenants under the terms of our senior notes, there is a limitation, among other limitations, on certain future borrowings based on an adjusted leverage ratio or a fixed charge coverage ratio. These ratios are based on financial measures similar to non-GAAP adjusted EBITDA as presented in this section, but also give pro forma effect to certain events, including acquisitions and savings from cost reduction initiatives such as facility closures and headcount reductions. Consolidated | | | | | | | | | | | Year Ended December 31, | | | | | | | | | | | 2019 | | | 2018 | | | 2017 | | | Year Ended December 31, | | | | (in millions) | | | 2020 | | | 2019 | | | 2018 | | Net income (loss) | | $ | (929.5 | ) | | $ | 140.2 | | | $ | 193.8 | | | $ | (573.4 | ) | | $ | (929.5 | ) | | $ | 140.2 | | Income tax expense (benefit) | | | (144.5 | ) | | | 30.5 | | | | 16.0 | | | | (81.1 | ) | | | (144.5 | ) | | | 30.5 | | Interest income | | | (18.1 | ) | | | (7.0 | ) | | | (4.2 | ) | | | (4.4 | ) | | | (18.1 | ) | | | (7.0 | ) | Interest expense | | | 577.2 | | | | 242.0 | | | | 257.0 | | | | 577.8 | | | | 577.2 | | | | 242.0 | | Other expense, net | | | 6.4 | | | | 44.3 | | | | 9.4 | | | | 29.3 | | | | 6.4 | | | | 44.3 | | Operating income (loss) | | $ | (508.5 | ) | | $ | 450.0 | | | $ | 472.0 | | | $ | (51.8 | ) | | $ | (508.5 | ) | | $ | 450.0 | | Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of purchased intangible assets | | | 593.2 | | | | 264.6 | | | | 271.0 | | | | 630.5 | | | | 593.2 | | | | 264.6 | | Restructuring costs, net | | | 87.7 | | | | 44.0 | | | | 43.8 | | | | 88.4 | | | | 87.7 | | | | 44.0 | | Equity-based compensation | | | 90.8 | | | | 44.9 | | | | 41.8 | | | | 115.0 | | | | 90.8 | | | | 44.9 | | Asset impairments | | | 376.1 | | | | 15.0 | | | | — | | | | 206.7 | | | | 376.1 | | | | 15.0 | | Transaction and integration costs (1) | | | 195.3 | | | | 19.5 | | | | 48.0 | | | | 24.9 | | | | 195.3 | | | | 19.5 | | Purchase accounting adjustments (2) | | | 264.2 | | | | — | | | | — | | | Patent litigation settlement | | | 55.0 | | | | — | | | | — | | | Non-GAAP adjusted operating income | | $ | 1,153.8 | | | $ | 838.0 | | | $ | 876.7 | | | Acquisition accounting adjustments (2) | | | | 20.6 | | | | 264.2 | | | | — | | Patent claims and litigation settlements | | | | 16.3 | | | | 55.0 | | | | — | | Executive severance | | | | 6.3 | | | | — | | | | — | | Depreciation | | | 143.7 | | | | 75.6 | | | | 81.7 | | | | 158.3 | | | | 143.7 | | | | 75.6 | | Non-GAAP adjusted EBITDA | | $ | 1,297.5 | | | $ | 913.6 | | | $ | 958.4 | | | $ | 1,215.2 | | | $ | 1,297.5 | | | $ | 913.6 | |
(1) | In 2020 and 2019, primarily reflects transaction and integration costs related to the Acquisition. In 2018, and 2017, primarily reflects integration costs related to the acquisition of the BNS business and transaction costs related to other potential and consummated acquisitions and costs related to secondary stock offerings.acquisitions. |
(2) | For the year ended December 31, 2020, reflects acquisition accounting adjustments related to reducing deferred revenue to its estimated fair value. For the year ended December 31, 2019, reflects purchaseacquisition accounting adjustments of $218.8 million related to the mark up of inventory to its estimated fair value and purchaseacquisition accounting adjustments of $45.4 million related to reducing deferred revenue to its estimated fair value. |
Reconciliation of Segment Adjusted EBITDA Segment adjusted EBITDA is provided as a performance measure in Note 17 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Below we reconcile segment adjusted EBITDA for each segment individually to operating income (loss) for that segment to supplement the reconciliation of the total segment adjusted EBITDA to consolidated operating income (loss) in that footnote. Connectivity
Broadband Networks Segment | | Year Ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Operating income (loss) | | $ | 171.5 | | | $ | (326.1 | ) | | $ | 172.4 | | Adjustments: | | | | | | | | | | | | | Amortization of purchased intangible assets | | | 323.1 | | | | 273.2 | | | | 76.6 | | Restructuring costs, net | | | 17.8 | | | | 36.9 | | | | 11.7 | | Equity-based compensation | | | 44.4 | | | | 35.5 | | | | 9.4 | | Asset impairments | | | — | | | | 142.1 | | | | 3.7 | | Transaction and integration costs | | | 7.9 | | | | 120.2 | | | | 6.3 | | Acquisition accounting adjustments | | | 11.4 | | | | 135.8 | | | | — | | Patent claims and litigation settlements | | | 3.0 | | | | — | | | | — | | Executive severance | | | 2.2 | | | | — | | | | — | | Depreciation | | | 59.2 | | | | 55.6 | | | | 29.3 | | Adjusted EBITDA | | $ | 640.5 | | | $ | 473.3 | | | $ | 309.4 | |
Home Networks Segment | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | | (in millions) | | Operating income | | $ | 174.4 | | | $ | 271.9 | | | $ | 239.0 | | Adjustments: | | | | | | | | | | | | | Amortization of purchased intangible assets | | | 161.4 | | | | 178.6 | | | | 175.5 | | Restructuring costs, net | | | 12.4 | | | | 24.2 | | | | 36.6 | | Equity-based compensation | | | 24.6 | | | | 27.3 | | | | 24.4 | | Asset impairments | | | — | | | | 7.5 | | | | — | | Transaction and integration costs | | | 39.4 | | | | 12.3 | | | | 47.9 | | Depreciation | | | 49.9 | | | | 53.4 | | | | 58.5 | | Adjusted EBITDA | | $ | 462.1 | | | $ | 575.2 | | | $ | 581.8 | |
Mobility Segment
| | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | | (in millions) | | Operating income | | $ | 180.7 | | | $ | 178.1 | | | $ | 233.0 | | Adjustments: | | | | | | | | | | | | | Amortization of purchased intangible assets | | | 71.1 | | | | 86.0 | | | | 95.5 | | Restructuring costs, net | | | 11.2 | | | | 19.8 | | | | 7.2 | | Equity-based compensation | | | 16.9 | | | | 17.6 | | | | 17.5 | | Asset impairments | | | — | | | | 7.5 | | | | — | | Transaction and integration costs | | | 23.0 | | | | 7.3 | | | | 0.2 | | Patent litigation settlement | | | 55.0 | | | | — | | | | — | | Depreciation | | | 22.2 | | | | 22.2 | | | | 23.2 | | Adjusted EBITDA | | $ | 380.1 | | | $ | 338.4 | | | $ | 376.6 | |
CPE Segment
| | Year Ended December 31, | | | | | 2019 | | | 2018 | | | 2017 | | | Year Ended December 31, | | | | (in millions) | | | 2020 | | | 2019 | | | 2018 | | Operating loss | | $ | (196.0 | ) | | $ | — | | | $ | — | | | $ | (289.7 | ) | | $ | (196.0 | ) | | $ | — | | Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of purchased intangible assets | | | 103.9 | | | | — | | | | — | | | | 103.9 | | | | 103.9 | | | | — | | Restructuring costs, net | | | 23.2 | | | | — | | | | — | | | | 30.0 | | | | 23.2 | | | | — | | Equity-based compensation | | | 14.1 | | | | — | | | | — | | | | 22.1 | | | | 14.1 | | | | — | | Asset impairments | | | 192.8 | | | | — | | | | — | | | | 206.7 | | | | 192.8 | | | | — | | Transaction and integration costs | | | (2.3 | ) | | | — | | | | — | | | | 6.2 | | | | (2.3 | ) | | | — | | Purchase accounting adjustments | | | 27.8 | | | | — | | | | — | | | Acquisition accounting adjustments | | | | 1.9 | | | | 27.8 | | | | — | | Patent claims and litigation settlements | | | | (0.3 | ) | | | — | | | | — | | Executive severance | | | | 1.2 | | | | — | | | | — | | Depreciation | | | 30.2 | | | | | | | | | | | | 34.3 | | | | 30.2 | | | | — | | Adjusted EBITDA | | $ | 193.7 | | | $ | — | | | $ | — | | | $ | 116.2 | | | $ | 193.7 | | | $ | — | |
N&C Segment
| | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | | (in millions) | | Operating loss | | $ | (441.5 | ) | | $ | — | | | $ | — | | Adjustments: | | | | | | | | | | | | | Amortization of purchased intangible assets | | | 212.7 | | | | — | | | | — | | Restructuring costs, net | | | 32.1 | | | | — | | | | — | | Equity-based compensation | | | 25.2 | | | | | | | | | | Asset impairments | | | 142.1 | | | | — | | | | — | | Transaction and integration costs | | | 100.0 | | | | — | | | | — | | Purchase accounting adjustments | | | 135.8 | | | | — | | | | — | | Depreciation | | | 30.6 | | | | | | | | | | Adjusted EBITDA | | $ | 237.0 | | | $ | — | | | $ | — | |
RuckusOutdoor Wireless Networks Segment
| | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | (in millions) | | | Operating loss | | $ | (226.1 | ) | | $ | — | | | $ | — | | | Operating income | | | $ | 181.1 | | | $ | 200.3 | | | $ | 198.4 | | Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of purchased intangible assets | | | 44.1 | | | | — | | | | — | | | | 45.8 | | | | 49.5 | | | | 64.2 | | Restructuring costs, net | | | 8.8 | | | | — | | | | — | | | | 15.7 | | | | 6.9 | | | | 17.1 | | Equity-based compensation | | | 10.0 | | | | — | | | | — | | | | 13.6 | | | | 12.9 | | | | 12.9 | | Asset impairments | | | 41.2 | | | | — | | | | — | | | | — | | | | — | | | | 7.5 | | Transaction and integration costs | | | 35.2 | | | | — | | | | — | | | | 4.2 | | | | 19.1 | | | | 6.0 | | Purchase accounting adjustments | | | 100.6 | | | | — | | | | — | | | Patent claims and litigation settlements | | | | — | | | | 55.0 | | | | — | | Executive severance | | | | 1.2 | | | | — | | | | — | | Depreciation | | | 10.8 | | | | | | | | | | | | 17.0 | | | | 17.5 | | | | 17.4 | | Adjusted EBITDA | | $ | 24.6 | | | $ | — | | | $ | — | | | $ | 278.5 | | | $ | 361.2 | | | $ | 323.6 | |
Venue and Campus Networks Segment | | Year Ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Operating income (loss) | | $ | (114.7 | ) | | $ | (186.7 | ) | | $ | 79.2 | | Adjustments: | | | | | | | | | | | | | Amortization of purchased intangible assets | | | 157.7 | | | | 166.6 | | | | 123.8 | | Restructuring costs, net | | | 24.9 | | | | 20.7 | | | | 15.2 | | Equity-based compensation | | | 34.9 | | | | 28.3 | | | | 22.6 | | Asset impairments | | | — | | | | 41.2 | | | | 3.8 | | Transaction and integration costs | | | 6.7 | | | | 58.3 | | | | 7.2 | | Acquisition accounting adjustments | | | 7.3 | | | | 100.6 | | | | — | | Patent claims and litigation settlements | | | 13.7 | | | | — | | | | — | | Executive severance | | | 1.7 | | | | — | | | | — | | Depreciation | | | 47.8 | | | | 40.4 | | | | 28.9 | | Adjusted EBITDA | | $ | 180.0 | | | $ | 269.3 | | | $ | 280.6 | |
Note: Components may not sum to total due to rounding
Contractual Obligations In February 2019, we issuedDuring 2020, the NewCompany redeemed $150.0 million aggregate principal amount of the 2021 Notes, $650.0 million aggregate principal amount of the 2024 Notes and repaid $225.0$200.0 million aggregate principal amount of the 2025 Notes. Also during 2020, the Company issued $700.0 million of the 2022 Term Loan. In April 2019, we completed the Acquisition, borrowed $3.2 billion under the 2026 Term Loan and repaid the remaining $261.3 million of the 2022 Term Loan. During the third and fourth quarters of 2019, we redeemed $500.0 million of the 20212028 Notes. The following table summarizes our contractual obligations as of December 31, 2019. This table does not include the obligations related to our Series A convertible preferred stock discussed in Note 14 in our Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
| | | | | | Amount of Payments Due per Period | | | | | | | Amount of Payments Due per Period | | Contractual Obligations | | Total Payments Due | | | 2020 | | | 2021-2022 | | | 2023-2024 | | | Thereafter | | | Total Payments Due | | | 2021 | | | 2022-2023 | | | 2024-2025 | | | Thereafter | | | | (in millions) | | | Long-term debt, including current maturities (a) | | $ | 9,992.0 | | | $ | 32.0 | | | $ | 214.0 | | | $ | 1,964.0 | | | $ | 7,782.0 | | | $ | 9,660.0 | | | $ | 32.0 | | | $ | 64.0 | | | $ | 2,614.0 | | | $ | 6,950.0 | | Interest on long-term debt (a)(b) | | | 3,434.0 | | | | 576.0 | | | | 1,135.8 | | | | 1,071.0 | | | | 651.2 | | | | 2,813.5 | | | | 517.0 | | | | 1,030.8 | | | | 878.3 | | | | 387.4 | | Operating leases | | | 259.6 | | | | 74.7 | | | | 107.0 | | | | 55.2 | | | | 22.7 | | | | 220.9 | | | | 73.5 | | | | 85.1 | | | | 38.6 | | | | 23.7 | | Purchase obligations and other supplier agreements (c) | | | 347.2 | | | | 347.2 | | | | — | | | | — | | | | — | | | | 326.8 | | | | 326.8 | | | | — | | | | — | | | | — | | Pension and other postretirement benefit liabilities (d) | | | 9.0 | | | | 6.3 | | | | 0.8 | | | | 0.7 | | | | 1.2 | | | | 11.1 | | | | 8.1 | | | | 1.0 | | | | 0.8 | | | | 1.2 | | Restructuring costs, net (e) | | | 26.3 | | | | 21.9 | | | | 4.4 | | | | — | | | | — | | | | 25.1 | | | | 21.2 | | | | 3.9 | | | | — | | | | — | | Patent litigation settlement (f) | | | 55.0 | | | | 55.0 | | | | — | | | | — | | | | — | | | Unrecognized tax benefits (g) | | | — | | | | — | | | | — | | | | — | | | | — | | | Unrecognized tax benefits (f) | | | | — | | | | — | | | | — | | | | — | | | | — | | Total contractual obligations | | $ | 14,123.1 | | | $ | 1,113.1 | | | $ | 1,462.0 | | | $ | 3,090.9 | | | $ | 8,457.1 | | | $ | 13,057.4 | | | $ | 978.6 | | | $ | 1,184.8 | | | $ | 3,531.7 | | | $ | 7,362.3 | |
(a) | No prepayment or redemption of any of our long-term debt balances has been assumed. Refer to Note 8 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for information regarding the terms of our long-term debt agreements. |
(b) | Interest on long-term debt excludes the amortization of debt issuance costs and original issue discount. Interest on variable rate debt is estimated based upon rates in effect as of December 31, 2019.2020. |
(c) | Purchase obligations and other supplier agreements include $332.2$322.3 million related to obligations, primarily to our contract manufacturers, with non-cancelable terms to purchase goods or services;services and payments of $11.4$4.5 million due in 20202021 for minimum amounts owed under take-or-pay or requirements contracts; and $3.6 million purchase price payments due in 2020 related to the acquisition of Cable Exchange.contracts. Generally, amounts covered by open purchase orders, other than the portion that is noncancelable as disclosed above, are excluded as there is no contractual obligation until goods or services are received. |
(d) | Amounts reflect expected contributions related to payments under the postretirement benefit plans through 20292030 and expected pension contributions of $5.9$7.5 million in 20202021 (see Note 12 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K). |
(e) | Future restructuring payments exclude payments due under lease arrangements which are included in operating leases above. |
(f) | Amount reflects the settlement of patent litigation. The payment is due in two installments, with $30.0 due in January 2020 and $25.0 million due in June 2020.
|
(g)
| Due to the uncertainty in predicting the timing of tax payments related to our unrecognized tax benefits, $156.6$153.8 million has been excluded from the presentation. We anticipate a reduction of up to $6.0$8.5 million of unrecognized tax benefits during the next twelve months (see Note 13 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K). |
Recent Accounting Pronouncements See Note 12 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements. Off-Balance Sheet Arrangements We were not a party to any significant off-balance sheet arrangements during the year ended December 31, 2019.2020. Effects of Inflation and Changing Prices We continually attempt to minimize the effect of inflation on earnings by controlling our operating costs and adjusting our selling prices. The principal raw materials and components purchased by us (memory and chip capacitors, copper, aluminum, steel, optical fiber, plastics and other polymers) are subject to changes in market price as they are influenced by commodity markets and other factors. Prices for these items have, at times, been volatile. As a result, we have adjusted our prices for certain products and may have to adjust prices again in the future. To the extent that we are unable to pass on cost increases to customers without a significant decrease in sales volume or must implement price reductions in response to a rapid decline in raw material costs, these cost changes could have a material adverse impact on the results of our operations. ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risks related to changes in interest rates, foreign currency exchange rates and commodity prices. We may utilize derivative financial instruments, among other methods, to hedge some of these exposures. We do not use derivative financial instruments for speculative or trading purposes. Interest Rate Risk The table below summarizes the expected interest and principal payments associated with our variable rate debt outstanding at December 31, 20192020 (mainly the $3.2 billion variable rate senior secured term loan due 2026 (the 2026 Term LoanLoan) and newour asset-based revolving credit facility). The principal payments presented below are based on scheduled maturities and assume no borrowings under the newour asset-based revolving credit facility. The interest payments presented below assume the interest rates in effect as of December 31, 20192020 (see Note 8 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K). The impact of a 1% increase in the interest rate index on projected future interest payments on the variable rate debt is also included in the table below. | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | There- after | | | | | (dollars in millions) | | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | There- after | | Principal and interest payments on variable rate debt | | $ | 196.0 | | | $ | 194.3 | | | $ | 192.7 | | | $ | 191.1 | | | $ | 187.1 | | | $ | 3,203.2 | | | $ | 142.4 | | | $ | 141.3 | | | $ | 140.3 | | | $ | 136.7 | | | $ | 134.4 | | | $ | 3,012.8 | | Average cash interest rate | | | 5.16 | % | | | 5.16 | % | | | 5.17 | % | | | 5.17 | % | | | 5.09 | % | | | 5.05 | % | | | 3.51 | % | | | 3.51 | % | | | 3.51 | % | | | 3.44 | % | | | 3.40 | % | | | 3.40 | % | Impact of 1% increase in interest rate index | | $ | 31.8 | | | $ | 31.4 | | | $ | 31.1 | | | $ | 30.8 | | | $ | 30.5 | | | $ | 33.9 | | | $ | 31.4 | | | $ | 31.1 | | | $ | 30.8 | | | $ | 30.5 | | | $ | 30.2 | | | $ | 3.8 | |
We also have $6.8$6.5 billion aggregate principal amount of fixed rate senior notes. The table below summarizes our expected interest and principal payments related to our fixed rate debt at December 31, 2019.2020. | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | There- after | | | | | (dollars in millions) | | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | There- after | | Principal and interest payments on fixed rate debt | | $ | 412.0 | | | $ | 558.3 | | | $ | 404.5 | | | $ | 404.5 | | | $ | 2,252.3 | | | $ | 5,230.0 | | | $ | 406.6 | | | $ | 406.6 | | | $ | 406.6 | | | $ | 1,622.3 | | | $ | 1,598.9 | | | $ | 4,324.6 | | Average cash interest rate | | | 6.06 | % | | | 6.07 | % | | | 6.08 | % | | | 6.08 | % | | | 6.18 | % | | | 6.61 | % | | | 6.26 | % | | | 6.26 | % | | | 6.26 | % | | | 6.34 | % | | | 6.50 | % | | | 6.94 | % |
As part of our hedging strategy to mitigate a portion of the exposure to changes in cash flows resulting from the variable interest rate on the 2026 Term Loan, in March 2019, we entered into and designated pay-fixed, receive-variable interest rate swap derivatives as cash flow hedges of interest rate risk. The total notional amount of the interest rate swap derivatives as of December 31, 20192020 was $600 million with outstanding maturities of up to fifty-onethirty-nine months. As of December 31, 2019,2020, the combined fair value of the interest rate swaps was a $16.3$29.9 million loss. The table above excludes the impact of these interest rate swap derivatives. See Note 9 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion of these contracts. Foreign Currency Risk Approximately 41%39% and 44%41% of net sales for 20192020 and 2018,2019, respectively, were to customers located outside the U.S. Significant changes in foreign currency exchange rates could adversely affect our international sales levels and the related collection of amounts due. In addition, a significant decline in the value of currencies used in certain regions of the world as compared to the U.S. dollar could adversely affect product sales in those regions because our products may become more expensive for those customers to pay for in their local currency. Conversely, significant increases in the value of foreign currencies as compared to the U.S. dollar could adversely affect profitability as certain product costs increase relative to a U.S. dollar-denominated sales price. The foreign currencies to which we have the greatest exposure include the Chinese yuan, euro, Czech koruna, Australian dollar, Indian rupee, Mexican peso and Brazilian real. Local manufacturing provides a partial natural hedge and we continue to evaluate additional alternatives to help us reasonably manage the market risk related to foreign currency exposures. We use derivative instruments such as forward exchange contracts to manage the risk of fluctuations in the value of certain foreign currencies. As of December 31, 2019,2020, we had foreign exchange contracts with a net unrealized lossgain of $1.0$8.4 million, with maturities of up to tensix months and aggregate notional value of $508$515.5 million (based on exchange rates as of December 31, 2019)2020). These contracts are not designated as hedges for accounting purposes and are marked to market each period through earnings and, as such, there were no unrecognized gains or losses as of December 31, 20192020 or 2018.2019. In addition, we hold certain foreign exchange forward contracts and cross currency swaps designated as net investment hedges to mitigate a portion of the foreign currency risk on the Euroeuro net investment in a foreign subsidiary. As of December 31, 2019,2020, the notional value of these derivative contracts was $300 million, with outstanding maturities of up to eighteensix months. The unrealized gainloss on the contracts was $5.8$21.1 million. Our derivative instruments are not leveraged and are not held for trading or speculation. See Note 9 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion of these contracts. We continuously evaluate the amount and type of derivative instruments utilized to manage the market risk related to foreign currency exposures. Commodity Price Risk Materials account for a large portion of our cost of sales. These materials, such as copper, aluminum, steel, plastics and other polymers, bimetals and optical fiber, are subject to changes in market price as they are influenced by commodity markets and supply and demand levels, among other factors. Management attempts to mitigate these risks through effective requirements planning and by working closely with key suppliers to obtain the best possible pricing and delivery terms. We may also enter into agreements with certain suppliers to guarantee our access to certain key components. As of December 31, 2019,2020, we had forward purchase commitments outstanding under take-or-pay contracts for certain metals of approximately $11.4$4.5 million that we expect to consume in the normal course of operations through the second quarter of 2020.2021. We continuously evaluate the amount and type of derivative instruments utilized to manage commodity price risk.
Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of CommScope Holding Company, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of CommScope Holding Company, Inc. (the Company) as of December 31, 20192020 and 2018, and2019, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2019,2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 20, 202016, 2021 expressed an unqualified opinion thereon. Adoption of New Accounting Standard
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leased assets previously classified as operating leases in 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842).
Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit MattersMatter The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accountsaccount or disclosures to which they relate.it relates. | | | Accounting for the ARRIS International plc (ARRIS) Acquisition
| Description of the Matter
| During 2019, the Company completed its acquisition of ARRIS for total consideration of $7,669.7 million, as disclosed in Note 3 to the consolidated financial statements. The transaction was accounted for as a business combination. The consideration paid in the acquisition must be allocated to the acquired assets and liabilities assumed generally based on their fair value with the excess of the purchase price over those fair values allocated to goodwill.
Auditing the Company’s accounting for its acquisition of ARRIS was complex due to the significant estimation uncertainty in the Company’s determination of the fair value of identified intangible assets of $3,509.6 million, which principally consisted of customer contracts and relationships, patents and technologies and trademarks. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to the significant underlying assumptions. The significant assumptions used to estimate the value of the intangible assets included certain assumptions that form the basis of the forecasted results (e.g., revenue growth rates and EBITDA margin). These significant assumptions are forward looking and were based on expectations of future economic and market conditions.
| How We Addressed the Matter in Our Audit
| We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over its accounting for the acquisition of ARRIS. For example, we tested controls over the estimation process supporting the recognition and measurement of the intangible assets acquired, including customer contracts and relationships, patents and technologies and trademarks, including the valuation models and management’s review of the underlying assumptions used to develop such estimates.
To test the estimated fair value of the ARRIS acquired customer contracts and relationships, patents and technologies and trademarks intangible assets, we performed audit procedures that included, among others, evaluating the selection of the valuation methodologies used, evaluating the significant assumptions used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For example, we compared the significant assumptions for revenue growth rates and EBITDA margin to industry, market and economic trends, to the assumptions used to value similar assets in other acquisitions and to the historical results of the acquired ARRIS business. We also involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates.
| | Valuation of Goodwillfor Certain Reporting Units |
| | Description of the Matter | As more fully described in Note 4 to the consolidated financial statements, at December 31, 2019,2020, the Company’s goodwill was $5,471.7 million, of which $209.3 million relates to the Customer Premises Equipment (CPE) reporting unit, $2,029.1 million relates to the Network and Cloud (N&C) reporting unit, and $375.8 million relates to the Ruckus Networks (Ruckus) reporting unit.$5,286.5 million. The Company’s goodwill is initially assigned to its reporting units as of the acquisition date. Goodwill is tested for impairment at least annually at the reporting unit level.level annually, or more frequently if indicators of potential goodwill impairment exist. During the second quarter of 2020, the Company determined that indicators of goodwill impairment existed for the Home Networks reporting unit and performed an interim goodwill impairment test using a discounted cash flow (DCF) model, which indicated that the carrying value of the Home Networks reporting unit exceeded its fair value. As a result, the Company recorded a goodwill impairment charge of $206.7 million related to the Home Networks reporting unit, which reflects a full impairment of the goodwill of that reporting unit. The Company performed its annual goodwill impairment test for all reporting units in the fourth quarter of 2020 using both a DCF model and a guideline public company approach. No goodwill impairments were identified as a result of the annual impairment test performed in the fourth quarter of 2019, the Company recorded goodwill impairment charges totaling $376.1 million for these reporting units as the estimated fair values were less than their carrying values.test. Auditing management’s annual goodwill impairment testtests was complex and highly judgmental due to the significant estimation required in determining the fair value of the CPE, N&C and Ruckus reporting units. In particular, for these reporting units, the fair value estimates were sensitive to changes in significant assumptions such as the weighted average cost of capital (WACC),discount rate, revenue growth rate and operating income margin, which are affected by expectations about future market or economic conditions.conditions, including uncertainty resulting from the COVID-19 pandemic. |
| | How We Addressed the Matter in Our Audit | We evaluated the Company’s assessmentassessments of the impairment of goodwill for the CPE, N&C and Ruckus reporting units.goodwill. We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls that address the risks of material misstatement relating to the annual goodwill impairment test and impairment of goodwill for these reporting units,tests, including controls over management’s development and review of the significant assumptions discussed above. To test the estimated fair value of the CPE, N&C and Ruckus reporting units, we performed audit procedures with the assistance of our valuation specialists that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis.analyses. We compared the significant assumptions of revenue growth rate and operating income margin used by management to current industry and economic trends, changes to the Company’s business model, customer base or product mix orand other relevant factors. We evaluated the Company’s WACCdiscount rate methodology and developed independent ranges of reasonable WACCs.discount rates. We also evaluated the reasonableness of the guideline public companies used to develop the fair value estimates forof the CPE, N&C and Ruckus reporting units. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of thesethe reporting units that would result from changes in the assumptions. In addition, we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the Company. |
/s/ Ernst & Young LLP We have served as the Company’s auditor since 2008. Charlotte, North Carolina February 20, 2020
Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of CommScope Holding Company, Inc. Opinion on Internal Control Over Financial Reporting We have audited CommScope Holding Company, Inc.’s internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, CommScope Holding Company, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20192020 and 2018,2019, the related consolidated statements of operations, and comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019,2020, and the related notes and our report dated February 20, 202016, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Charlotte, North Carolina February 20, 202016, 2021
CommScope Holding Company, Inc. Consolidated Statements of Operations (In millions, except per share amounts) | | Year Ended December 31, | | | Year Ended December 31, | | | | | 2019 | | | | 2018 | | | | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Net sales | | $ | 8,345.1 | | | $ | 4,568.5 | | | | $ | 4,560.6 | | | $ | 8,435.9 | | | $ | 8,345.1 | | | $ | 4,568.5 | | Cost of sales | | | 5,941.0 | | | | 2,935.2 | | | | | 2,855.1 | | | | 5,688.1 | | | | 5,941.0 | | | | 2,935.2 | | Gross profit | | | 2,404.1 | | | | 1,633.3 | | | | | | 1,705.5 | | | | 2,747.8 | | | | 2,404.1 | | | | 1,633.3 | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | Selling, general and administrative | | | 1,277.1 | | | | 674.0 | | | | 733.1 | | | | 1,170.7 | | | | 1,277.1 | | | | 674.0 | | Research and development | | | 578.5 | | | | 185.7 | | | | 185.6 | | | | 703.3 | | | | 578.5 | | | | 185.7 | | Amortization of purchased intangible assets | | | 593.2 | | | | 264.6 | | | | 271.0 | | | | 630.5 | | | | 593.2 | | | | 264.6 | | Restructuring costs, net | | | 87.7 | | | | 44.0 | | | | 43.8 | | | | 88.4 | | | | 87.7 | | | | 44.0 | | Asset impairments | | | 376.1 | | | | 15.0 | | | | | — | | | | 206.7 | | | | 376.1 | | | | 15.0 | | Total operating expenses | | | 2,912.6 | | | | 1,183.3 | | | | | 1,233.5 | | | | 2,799.6 | | | | 2,912.6 | | | | 1,183.3 | | Operating income (loss) | | | (508.5 | ) | | | 450.0 | | | | | 472.0 | | | | (51.8 | ) | | | (508.5 | ) | | | 450.0 | | Other expense, net | | | (6.4 | ) | | | (44.3 | ) | | | | (9.4 | ) | | | (29.3 | ) | | | (6.4 | ) | | | (44.3 | ) | Interest expense | | | (577.2 | ) | | | (242.0 | ) | | | | (257.0 | ) | | | (577.8 | ) | | | (577.2 | ) | | | (242.0 | ) | Interest income | | | 18.1 | | | | 7.0 | | | | | 4.2 | | | | 4.4 | | | | 18.1 | | | | 7.0 | | Income (loss) before income taxes | | | (1,074.0 | ) | | | 170.7 | | | | | 209.8 | | | | (654.5 | ) | | | (1,074.0 | ) | | | 170.7 | | Income tax (expense) benefit | | | 144.5 | | | | (30.5 | ) | | | | | (16.0 | ) | | | 81.1 | | | | 144.5 | | | | (30.5 | ) | Net income (loss) | | | (929.5 | ) | | | 140.2 | | | | | | 193.8 | | | | (573.4 | ) | | | (929.5 | ) | | | 140.2 | | Series A convertible preferred stock dividend | | | (40.7 | ) | | | — | | | | — | | | | (56.1 | ) | | | (40.7 | ) | | | — | | Deemed dividend on Series A convertible preferred stock | | | (3.0 | ) | | | — | | | | | — | | | | — | | | | (3.0 | ) | | | — | | Net income (loss) attributable to common stockholders | | $ | (973.2 | ) | | $ | 140.2 | | | | $ | 193.8 | | | $ | (629.5 | ) | | $ | (973.2 | ) | | $ | 140.2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | (5.02 | ) | | $ | 0.73 | | $ | 1.01 | | | $ | (3.20 | ) | | $ | (5.02 | ) | | $ | 0.73 | | Diluted | | $ | (5.02 | ) | | $ | 0.72 | | $ | 0.98 | | | $ | (3.20 | ) | | $ | (5.02 | ) | | $ | 0.72 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 193.7 | | | | 192.0 | | | | | | 192.4 | | | | 196.8 | | | | 193.7 | | | | 192.0 | | Diluted | | | 193.7 | | | | 195.3 | | | | 196.8 | | | | 196.8 | | | | 193.7 | | | | 195.3 | | | | | | | | | | | | | | | | | | | | | | | | | | See notes to consolidated financial statements. | See notes to consolidated financial statements. | | See notes to consolidated financial statements. | |
CommScope Holding Company, Inc. Consolidated Statements of Comprehensive Income (Loss) (In millions) | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | | 2019 | | | | 2018 | | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) | | $ | (929.5 | ) | | $ | 140.2 | | | $ | 193.8 | | | $ | (573.4 | ) | | $ | (929.5 | ) | | $ | 140.2 | | Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation gain (loss) | | | (22.2 | ) | | | (87.7 | ) | | | 201.4 | | | | 82.2 | | | | (22.2 | ) | | | (87.7 | ) | Defined benefit plans: | | | | | | | | | | | | | | | | | | | | | | | | | Change in unrecognized actuarial gain (loss) | | | (8.1 | ) | | | 23.3 | | | | 6.9 | | | | (10.8 | ) | | | (7.7 | ) | | | 23.3 | | Change in unrecognized net prior service credit | | | — | | | | (11.7 | ) | | | (2.3 | ) | | | (0.2 | ) | | | (0.4 | ) | | | (11.7 | ) | Gain (loss) on hedging instruments | | | (7.5 | ) | | | 3.5 | | | | (5.0 | ) | | | (30.1 | ) | | | (7.5 | ) | | | 3.5 | | Available-for-sale securities | | | — | | | | — | | | | (2.5 | ) | | Total other comprehensive income (loss), net of tax | | | (37.8 | ) | | | (72.6 | ) | | | 198.5 | | | | 41.1 | | | | (37.8 | ) | | | (72.6 | ) | Total comprehensive income (loss) | | $ | (967.3 | ) | | $ | 67.6 | | | $ | 392.3 | | | $ | (532.3 | ) | | $ | (967.3 | ) | | $ | 67.6 | | | | | | | | | | | | | | | | See notes to consolidated financial statements. | | See notes to consolidated financial statements. | |
CommScope Holding Company, Inc. | | Consolidated Balance Sheets | | (In millions, except share amounts) | | | | | | | | | | | | | December 31, | | | | 2020 | | | 2019 | | Assets | | | | | | | | | Cash and cash equivalents | | $ | 521.9 | | | $ | 598.2 | | Accounts receivable, less allowance for doubtful accounts of $40.3 and $35.4, respectively | | | 1,487.4 | | | | 1,698.8 | | Inventories, net | | | 1,088.9 | | | | 975.9 | | Prepaid expenses and other current assets | | | 256.3 | | | | 238.9 | | Total current assets | | | 3,354.5 | | | | 3,511.8 | | Property, plant and equipment, net of accumulated depreciation of $705.7 and $553.8, respectively | | | 684.5 | | | | 723.8 | | Goodwill | | | 5,286.5 | | | | 5,471.7 | | Other intangible assets, net | | | 3,650.4 | | | | 4,263.6 | | Other noncurrent assets | | | 600.9 | | | | 460.7 | | Total assets | | $ | 13,576.8 | | | $ | 14,431.6 | | Liabilities and Stockholders' Equity | | | | | | | | | Accounts payable | | $ | 1,010.8 | | | $ | 1,148.0 | | Accrued and other liabilities | | | 910.6 | | | | 862.0 | | Current portion of long-term debt | | | 32.0 | | | | 32.0 | | Total current liabilities | | | 1,953.4 | | | | 2,042.0 | | Long-term debt | | | 9,488.6 | | | | 9,800.4 | | Deferred income taxes | | | 206.2 | | | | 215.1 | | Other noncurrent liabilities | | | 531.8 | | | | 537.8 | | Total liabilities | | | 12,180.0 | | | | 12,595.3 | | Commitments and contingencies | | | | | | | | | Series A convertible preferred stock, $0.01 par value | | | 1,041.8 | | | | 1,000.0 | | Stockholders' equity: | | | | | | | | | Preferred stock, $0.01 par value: Authorized shares: 200,000,000; | | | | | | | | | Issued and outstanding shares: 1,041,819 Series A convertible preferred stock | | | — | | | | — | | Common stock, $0.01 par value: Authorized shares: 1,300,000,000; | | | | | | | | | Issued and outstanding shares: 200,095,232 and 194,563,530, | | | | | | | | | respectively | | | 2.1 | | | | 2.0 | | Additional paid-in capital | | | 2,512.9 | | | | 2,445.1 | | Retained earnings (accumulated deficit) | | | (1,752.7 | ) | | | (1,179.3 | ) | Accumulated other comprehensive loss | | | (155.9 | ) | | | (197.0 | ) | Treasury stock, at cost: 9,223,081 shares and 7,411,382 shares, | | | | | | | | | respectively | | | (251.4 | ) | | | (234.5 | ) | Total stockholders' equity | | | 355.0 | | | | 836.3 | | Total liabilities and stockholders' equity | | $ | 13,576.8 | | | $ | 14,431.6 | |
See notes to consolidated financial statements.
CommScope Holding Company, Inc. Consolidated Balance Sheets
(In millions, except share amounts)
| | December 31, | | | | 2019 | | | 2018 | | Assets | | | | | | | | | Cash and cash equivalents | | $ | 598.2 | | | $ | 458.2 | | Accounts receivable, less allowance for doubtful accounts of $35.4 and $17.4, respectively | | | 1,698.8 | | | | 810.4 | | Inventories, net | | | 975.9 | | | | 473.3 | | Prepaid expenses and other current assets | | | 238.9 | | | | 135.9 | | Total current assets | | | 3,511.8 | | | | 1,877.8 | | Property, plant and equipment, net of accumulated depreciation of $553.8 and $437.7, respectively | | | 723.8 | | | | 450.9 | | Goodwill | | | 5,471.7 | | | | 2,852.3 | | Other intangible assets, net | | | 4,263.6 | | | | 1,352.0 | | Other noncurrent assets | | | 460.7 | | | | 97.5 | | Total assets | | $ | 14,431.6 | | | $ | 6,630.5 | | Liabilities and Stockholders' Equity | | | | | | | | | Accounts payable | | $ | 1,148.0 | | | $ | 399.2 | | Accrued and other liabilities | | | 862.0 | | | | 291.4 | | Current portion of long-term debt | | | 32.0 | | | | — | | Total current liabilities | | | 2,042.0 | | | | 690.6 | | Long-term debt | | | 9,800.4 | | | | 3,985.9 | | Deferred income taxes | | | 215.1 | | | | 83.3 | | Other noncurrent liabilities | | | 537.8 | | | | 113.9 | | Total liabilities | | | 12,595.3 | | | | 4,873.7 | | Commitments and contingencies | | | | | | | | | Series A convertible preferred stock, $0.01 par value | | | 1,000.0 | | | | — | | Stockholders' equity: | | | | | | | | | Preferred stock, $0.01 par value: Authorized shares: 200,000,000; | | | | | | | | | Issued and outstanding shares: 1,000,000 Series A convertible preferred stock | | | — | | | | — | | Common stock, $0.01 par value: Authorized shares: 1,300,000,000; | | | | | | | | | Issued and outstanding shares: 194,563,530 and 192,376,255, | | | | | | | | | respectively | | | 2.0 | | | | 2.0 | | Additional paid-in capital | | | 2,445.1 | | | | 2,385.1 | | Retained earnings (accumulated deficit) | | | (1,179.3 | ) | | | (249.8 | ) | Accumulated other comprehensive loss | | | (197.0 | ) | | | (159.2 | ) | Treasury stock, at cost: 7,411,382 shares and 6,744,082 shares, | | | | | | | | | respectively | | | (234.5 | ) | | | (221.3 | ) | Total stockholders' equity | | | 836.3 | | | | 1,756.8 | | Total liabilities and stockholders' equity | | $ | 14,431.6 | | | $ | 6,630.5 | | | | | | | | | | See notes to consolidated financial statements. | |
CommScope Holding Company, Inc.
Consolidated Statements of Cash Flows (In millions) | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Operating Activities: | | | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) | | $ | (929.5 | ) | | $ | 140.2 | | | $ | 193.8 | | | $ | (573.4 | ) | | $ | (929.5 | ) | | $ | 140.2 | | Adjustments to reconcile net income (loss) to net cash generated by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | | 770.9 | | | | 357.5 | | | | 378.0 | | | | 823.3 | | | | 770.9 | | | | 357.5 | | Equity-based compensation | | | 90.8 | | | | 44.9 | | | | 41.8 | | | | 115.0 | | | | 90.8 | | | | 44.9 | | Deferred income taxes | | | (260.8 | ) | | | (49.2 | ) | | | (71.5 | ) | | | (154.7 | ) | | | (260.8 | ) | | | (49.2 | ) | Asset impairments | | | 376.1 | | | | 15.0 | | | | — | | | | 206.7 | | | | 376.1 | | | | 15.0 | | Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | Accounts receivable | | | 258.8 | | | | 65.1 | | | | 96.7 | | | | 228.4 | | | | 258.8 | | | | 65.1 | | Inventories | | | 489.1 | | | | (48.5 | ) | | | 53.7 | | | | (100.5 | ) | | | 489.1 | | | | (48.5 | ) | Prepaid expenses and other current assets | | | 19.5 | | | | 1.0 | | | | (1.3 | ) | | | (17.2 | ) | | | 19.5 | | | | 1.0 | | Accounts payable and other accrued liabilities | | | (274.0 | ) | | | (0.8 | ) | | | (154.7 | ) | | | (175.2 | ) | | | (274.0 | ) | | | (0.8 | ) | Other noncurrent liabilities | | | 7.2 | | | | (54.6 | ) | | | 14.6 | | | | (4.0 | ) | | | 7.2 | | | | (54.6 | ) | Other noncurrent assets | | | 46.0 | | | | (8.0 | ) | | | (8.4 | ) | | | 28.8 | | | | 46.0 | | | | (8.0 | ) | Other | | | 2.3 | | | | 31.5 | | | | 43.6 | | | | 59.0 | | | | 2.3 | | | | 31.5 | | Net cash generated by operating activities | | | 596.4 | | | | 494.1 | | | | 586.3 | | | | 436.2 | | | | 596.4 | | | | 494.1 | | Investing Activities: | | | | | | | | | | | | | | | | | | | | | | | | | Additions to property, plant and equipment | | | (104.1 | ) | | | (82.3 | ) | | | (68.7 | ) | | | (121.2 | ) | | | (104.1 | ) | | | (82.3 | ) | Proceeds from sale of property, plant and equipment | | | 1.6 | | | | 12.9 | | | | 5.4 | | | | 5.0 | | | | 1.6 | | | | 12.9 | | Cash paid for current year acquisitions, net of cash acquired | | | (5,053.4 | ) | | | — | | | | (105.2 | ) | | Cash paid for prior year acquisition | | | (11.0 | ) | | | — | | | | — | | | Proceeds from sale of long-term investments | | | 9.3 | | | | — | | | | 9.9 | | | | — | | | | 9.3 | | | | — | | Proceeds (payments) upon settlement of net investment hedge | | | 2.7 | | | | 5.1 | | | | (7.6 | ) | | Cash paid for ARRIS acquisition, net of cash acquired | | | | — | | | | (5,053.4 | ) | | | — | | Cash paid for Cable Exchange acquisition | | | | (3.5 | ) | | | (11.0 | ) | | | — | | Other | | | | (0.5 | ) | | | 2.7 | | | | 5.1 | | Net cash used in investing activities | | | (5,154.9 | ) | | | (64.3 | ) | | | (166.2 | ) | | | (120.2 | ) | | | (5,154.9 | ) | | | (64.3 | ) | Financing Activities: | | | | | | | | | | | | | | | | | | | | | | | | | Long-term debt repaid | | | (3,061.3 | ) | | | (550.0 | ) | | | (990.4 | ) | | | (1,282.0 | ) | | | (3,061.3 | ) | | | (550.0 | ) | Long-term debt proceeds | | | 6,933.0 | | | | 150.0 | | | | 780.4 | | | | 950.0 | | | | 6,933.0 | | | | 150.0 | | Debt issuance and modification costs | | | (120.8 | ) | | | — | | | | (8.4 | ) | | Debt issuance costs | | | | (11.7 | ) | | | (120.8 | ) | | | — | | Debt extinguishment costs | | | — | | | | — | | | | (14.8 | ) | | | (17.9 | ) | | | — | | | | — | | Series A convertible preferred stock proceeds | | | 1,000.0 | | | | — | | | | — | | | | — | | | | 1,000.0 | | | | — | | Dividends paid on Series A convertible preferred stock | | | (40.7 | ) | | | — | | | | — | | | | (14.3 | ) | | | (40.7 | ) | | | — | | Deemed dividend paid on Series A convertible preferred stock | | | (3.0 | ) | | | — | | | | — | | | | — | | | | (3.0 | ) | | | — | | Cash paid for repurchase of common stock | | | — | | | | — | | | | (175.0 | ) | | Proceeds from the issuance of common shares under equity-based compensation plans | | | 4.6 | | | | 6.1 | | | | 9.9 | | | | 9.0 | | | | 4.6 | | | | 6.1 | | Tax withholding payments for vested equity-based compensation awards | | | (13.2 | ) | | | (15.7 | ) | | | (15.4 | ) | | | (16.9 | ) | | | (13.2 | ) | | | (15.7 | ) | Net cash generated by (used in) financing activities | | | 4,698.6 | | | | (409.6 | ) | | | (413.7 | ) | | | (383.8 | ) | | | 4,698.6 | | | | (409.6 | ) | Effect of exchange rate changes on cash and cash equivalents | | | (0.1 | ) | | | (16.0 | ) | | | 19.4 | | | | (8.5 | ) | | | (0.1 | ) | | | (16.0 | ) | Change in cash and cash equivalents | | | 140.0 | | | | 4.2 | | | | 25.8 | | | | (76.3 | ) | | | 140.0 | | | | 4.2 | | Cash and cash equivalents at beginning of period | | | 458.2 | | | | 454.0 | | | | 428.2 | | | Cash and cash equivalent at beginning of period | | | | 598.2 | | | | 458.2 | | | | 454.0 | | Cash and cash equivalents at end of period | | $ | 598.2 | | | $ | 458.2 | | | $ | 454.0 | | | $ | 521.9 | | | $ | 598.2 | | | $ | 458.2 | | | | | | | | | | | | | | | | | | | | | | | | | | | See notes to consolidated financial statements. | See notes to consolidated financial statements. | | See notes to consolidated financial statements. | |
CommScope Holding Company, Inc. Consolidated Statements of Stockholders' Equity (In millions, except share amounts) | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Number of common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of period | | | 192,376,255 | | | | 190,906,110 | | | | 193,837,437 | | | | 194,563,530 | | | | 192,376,255 | | | | 190,906,110 | | Issuance of shares under equity-based compensation plans | | | 2,854,575 | | | | 1,878,083 | | | | 2,275,595 | | | | 7,343,401 | | | | 2,854,575 | | | | 1,878,083 | | Shares surrendered under equity-based compensation plans | | | (667,300 | ) | | | (407,938 | ) | | | (411,932 | ) | | | (1,811,699 | ) | | | (667,300 | ) | | | (407,938 | ) | Repurchase of common stock | | | — | | | | — | | | | (4,794,990 | ) | | Balance at end of period | | | 194,563,530 | | | | 192,376,255 | | | | 190,906,110 | | | | 200,095,232 | | | | 194,563,530 | | | | 192,376,255 | | Common stock: | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning and end of period | | $ | 2.0 | | | $ | 2.0 | | | $ | 2.0 | | | Balance at beginning of period | | | $ | 2.0 | | | $ | 2.0 | | | $ | 2.0 | | Issuance of shares under equity-based compensation plans | | | | 0.1 | | | | — | | | | — | | Balance at end of period | | | $ | 2.1 | | | $ | 2.0 | | | $ | 2.0 | | Additional paid-in capital: | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of period | | $ | 2,385.1 | | | $ | 2,334.1 | | | $ | 2,282.1 | | | $ | 2,445.1 | | | $ | 2,385.1 | | | $ | 2,334.1 | | Issuance of shares under equity-based compensation plans | | | 4.6 | | | | 6.1 | | | | 9.9 | | | | 8.9 | | | | 4.6 | | | | 6.1 | | Equity-based compensation | | | 90.8 | | | | 44.9 | | | | 41.8 | | | | 115.0 | | | | 90.8 | | | | 44.9 | | Equity-based compensation assumed | | | 8.3 | | | | — | | | | — | | | | — | | | | 8.3 | | | | — | | Cumulative effect of change in accounting principle | | | — | | | | — | | | | 0.3 | | | Dividend on Series A convertible preferred stock | | | (40.7 | ) | | | — | | | | — | | | | (56.1 | ) | | | (40.7 | ) | | | — | | Deemed dividend on Series A convertible preferred stock | | | (3.0 | ) | | | — | | | | — | | | | — | | | | (3.0 | ) | | | — | | Balance at end of period | | $ | 2,445.1 | | | $ | 2,385.1 | | | $ | 2,334.1 | | | $ | 2,512.9 | | | $ | 2,445.1 | | | $ | 2,385.1 | | Retained earnings (accumulated deficit): | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of period | | $ | (249.8 | ) | | $ | (396.0 | ) | | $ | (589.6 | ) | | $ | (1,179.3 | ) | | $ | (249.8 | ) | | $ | (396.0 | ) | Net income (loss) | | | (929.5 | ) | | | 140.2 | | | | 193.8 | | | | (573.4 | ) | | | (929.5 | ) | | | 140.2 | | Cumulative effect of change in accounting principles | | | — | | | | 6.0 | | | | (0.2 | ) | | Cumulative effect of change in accounting principle | | | | — | | | | — | | | | 6.0 | | Balance at end of period | | $ | (1,179.3 | ) | | $ | (249.8 | ) | | $ | (396.0 | ) | | $ | (1,752.7 | ) | | $ | (1,179.3 | ) | | $ | (249.8 | ) | Accumulated other comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of period | | $ | (159.2 | ) | | $ | (86.6 | ) | | $ | (285.1 | ) | | $ | (197.0 | ) | | $ | (159.2 | ) | | $ | (86.6 | ) | Other comprehensive loss, net of tax: | | | (37.8 | ) | | | (72.6 | ) | | | 198.5 | | | Other comprehensive income (loss), net of tax | | | | 41.1 | | | | (37.8 | ) | | | (72.6 | ) | Balance at end of period | | $ | (197.0 | ) | | $ | (159.2 | ) | | $ | (86.6 | ) | | $ | (155.9 | ) | | $ | (197.0 | ) | | $ | (159.2 | ) | Treasury stock, at cost: | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of period | | $ | (221.3 | ) | | $ | (205.6 | ) | | $ | (15.2 | ) | | $ | (234.5 | ) | | $ | (221.3 | ) | | $ | (205.6 | ) | Net shares surrendered under equity-based compensation plans | | | (13.2 | ) | | | (15.7 | ) | | | (15.4 | ) | | | (16.9 | ) | | | (13.2 | ) | | | (15.7 | ) | Repurchase of common stock | | | — | | | | — | | | | (175.0 | ) | | Balance at end of period | | $ | (234.5 | ) | | $ | (221.3 | ) | | $ | (205.6 | ) | | $ | (251.4 | ) | | $ | (234.5 | ) | | $ | (221.3 | ) | Total stockholders' equity | | $ | 836.3 | | | $ | 1,756.8 | | | $ | 1,647.9 | | | $ | 355.0 | | | $ | 836.3 | | | $ | 1,756.8 | | | | | | | | | | | | | | | | | | | | | | | | | | | See notes to consolidated financial statements. | See notes to consolidated financial statements. | | See notes to consolidated financial statements. | |
7875
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements (In millions, unless otherwise noted) 1. BACKGROUND AND DESCRIPTION OF THE BUSINESS CommScope Holding Company, Inc., along with its direct and indirect subsidiaries (CommScope or the Company), is a global provider of infrastructure solutions for communication and entertainment networks. The Company’s solutions for wired and wireless networks enable service providers including cable, telephone and digital broadcast satellite operators and media programmers to deliver media, voice, Internet Protocol (IP) data services and Wi-Fi to their subscribers and allow enterprises to experience constant wireless and wired connectivity across complex and varied networking environments. The Company’s solutions are complemented by a broad array of services including technical support, systems design and integration. CommScope is a leader in digital video and IP television distribution systems, broadband access infrastructure platforms and equipment that delivers data and voice networks to homes. CommScope’s global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale. On April 4, 2019, the Company completed the acquisition of ARRIS International plc (ARRIS) (the Acquisition) in an all-cash transaction with a total purchase price of approximately $7.7 billion, including debt assumed. The results of operations of ARRIS’ products and services are reflected in the new reporting segments of Customer Premises Equipment (CPE), Network and Cloud (N&C) and Ruckus Networks (Ruckus). The Company borrowed approximately $7.0 billion, issued $1.0 billion in Series A Convertible Preferred Stock (the Convertible Preferred Stock) and used cash on hand to fund the Acquisition and related costs. See Note 3 for additional discussion of the Acquisition, Note 8 for additional discussionAcquisition. As of January 1, 2020, the Company reorganized its internal management and reporting structure as part of the debt financing transactions and Note 14 for additional discussionintegration of the Convertible Preferred Stock.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 now reports financial performance for the 2020 year based on four operating segments: Broadband Networks (Broadband), Home Networks (Home), Outdoor Wireless Networks (OWN) and Venue and Campus Networks (VCN). These four segments represent non-aggregated reportable operating segments. Prior to this change, the Company operated and reported five operating segments: Connectivity Solutions, Mobility Solutions, Customer Premises Equipment, Network and Cloud and Ruckus Networks. All prior period amounts in these consolidated financial statements have been recast to reflect these operating segment changes. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Consolidation The accompanying consolidated financial statements include CommScope Holding Company, Inc., along with its direct and indirect subsidiaries. All intercompany accounts and transactions are eliminated in consolidation. The Acquisition was accounted for using the acquisition method of accounting and the ARRIS results of operations are reported in the Company’s audited consolidated financial statements from April 4, 2019, the date of acquisition, through December 31, 2019.
Certain prior year amounts have been reclassified to conform to the current year presentation. Use of Estimates in the Preparation of the Financial Statements The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S.) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and their underlying assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other objective sources. The Company bases its estimates on historical experience and 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. Significant accounting estimates reflected in the Company’s financial statements include the allowance for doubtful accounts; reserves for sales returns, discounts, allowances, rebates and distributor price protection programs; inventory excess and obsolescence reserves; product warranty reserves and other contingent liabilities; tax valuation allowances; liabilities for unrecognized tax benefits; purchase price allocations; impairment reviews for investments, property, plant and equipment, goodwill and other intangibles;intangible assets; and pension and other postretirement benefit costs and liabilities. Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is at least reasonably possible that they may ultimately differ materially from actual results. 7976
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Cash and Cash Equivalents Cash and cash equivalents represent deposits in banks and cash invested temporarily in various instruments with a maturity of three months or less at the time of purchase. Accounts Receivable and Allowance for Doubtful Accounts AccountsTrade accounts receivable and contract assets for unbilled receivables are stated at the amount owed by the customer, net of allowances for estimated doubtful accounts, discounts, returns and rebates. The Company maintainsallowancesmeasures the allowance fordoubtfulaccountsforestimatedlosses using an expected credit loss model, which uses a lifetime expected loss allowance for all trade accounts receivable and contract assets. To measure the expected credit losses, trade accounts receivable and contract assets are grouped based on shared credit risk characteristics and the days past due. Contract assets relate to resultfromunbilled work in progress and have substantially theinability same risk characteristics as trade accounts receivable for the same types of its customersto makerequiredpayments.These estimatescontracts. Therefore, the Company has concluded that the expected loss rates for trade accounts receivables arebasedon management’sevaluation a reasonable approximation of theabilityof customersto makepayments,focusingon loss rates for the contract assets.
In calculating an allowance for doubtful accounts, the Company uses its historical experience, known customerfinancial difficultiesexternal indicators and forward-looking information to calculate expected credit losses using an aging method. The Company assesses impairment of trade accounts receivable on a collective basis as they possess shared credit risk characteristics which have been grouped based on the days past due. The expected loss rates are based on the payment profiles of sales over the preceding thirty-six months and the agecorresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of receivablebalances. Accounts receivable are chargedthe customers to the allowance when determined to be no longer collectible. The Company does not offer extended payment terms to customers and as a result amounts owed are not adjusted for the effects of any significant financing component.settle their trade accounts receivable. Inventories Inventories are stated at the lower of cost or net realizable value. Inventory cost is determined on a first-in, first-out (FIFO) basis. Costs such as idle facility expense, excessive scrap and re-handling costs are expensed as incurred. The Company maintains reserves to reduce the value of inventory to the lower of cost or net realizable value, including reserves for excess and obsolete inventory. Long-Lived Assets Property, Plant and Equipment Property, plant and equipment are stated at cost. Upon application of acquisition accounting, property, plant and equipment are measured at estimated fair value as of the acquisition date to establish a new historical cost basis. Provisions for depreciation are based on estimated useful lives of the assets using the straight-line method. Useful lives generally range from 10 to 35 years for buildings and improvements and 3 to 10 years for machinery and equipment. Expenditures for repairs and maintenance are expensed as incurred. Assets that management intends to dispose of and that meet held for sale criteria are carried at the lower of the carrying value or fair value less costs to sell. Goodwill and Other Intangible Assets Goodwill is assigned to reporting units based on the difference between the purchase price as allocated to the reporting units and the estimated fair value of the identified net assets acquired as allocated to the reporting units. Purchased intangible assets with finite lives are carried at their estimated fair values at the time of acquisition less accumulated amortization and any impairment charges. Amortization is recognized on a straight-line basis over the estimated useful lives of the respective assets. 77
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Asset Impairments Goodwill is tested for impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of the reporting unit may exceed its fair value. 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 are then measured at fair value if an impairment is determined to exist. See Notes 4 and 10 for discussion of asset impairment charges. 80
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Income Taxes Deferred income taxes reflect the future tax consequences of differences between the financial reporting and tax basis of assets and liabilities. The Company records a valuation allowance, when appropriate, to reduce deferred tax assets to an amount that is more likely than not to be realized. Tax benefits that result from uncertain tax positions may be recognized only if they are considered more likely than not to be sustainable, based on their technical merits. The amount of benefit to be recognized is the largest amount of tax benefit that is at least 50% likely to be realized. In addition, the Company does not provide for U.S. taxes related to the foreign currency remeasurement gains and losses on its long-term intercompany loans with foreign subsidiaries. These loans are not expected to be repaid in the foreseeable future, and the foreign currency gains and losses are therefore recorded to accumulated other comprehensive loss. The Company records the income tax effects related to the activity of its defined benefit plans and hedging instruments in accumulated other comprehensive loss at the currently enacted tax rate and reclassifies it to net income in the same period that the related pre-tax accumulated comprehensive income reclassifications are recognized. Revenue Recognition The Company recognizes revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. The Company’s revenue is generated primarily from product or equipment sales. The Company also generates revenue from custom design and installation services as well as bundled sales arrangements that include product, software and services. Revenue is recognized when performance obligations in a contract are satisfied through the transfer of control of the good or service at the amount of consideration expected to be received. The following are required before revenue is recognized: | • | Identify the contract with the customer. A variety of arrangements are considered contracts; however, contracts typically take the form of a master purchase agreement or customer purchase orders. |
| • | Identify the performance obligations in the contract. Performance obligations are identified as promised goods or services that are distinct within an arrangement. |
| • | Determine the transaction price. The transaction price is the amount of consideration the Company expects to receive in exchange for transferring the promised goods or services. The consideration may include fixed or variable amounts or both. |
| • | Allocate the transaction price to the performance obligations. The transaction price is allocated to the performance obligations on a relative standalone selling price basis. |
| • | Recognize revenue as the performance obligations are satisfied. Revenue is recognized when transfer of control of the promised goods or services has occurred. This is either at a point in time or over time. |
78
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Product sales represent over 90% of the Company’s revenue. For these sales, revenue is recognized when control of the product has transferred to the customer, which is generally at the point in time when products have been shipped, right to payment has been obtained and risk of loss has been transferred. Certain of the Company’s product performance obligations include proprietary operating system software, which typically is not considered separately identifiable. Therefore, sales of these products and the related software are considered one performance obligation. License contracts include revenue recognized for the licensing of intellectual property, including software, sold separately without products. Functional intellectual property licenses do not meet the criteria for revenue to be recognized over time and revenue is most commonly recognized upon delivery of the license/software to the customer. 81
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Certain customer transactions may be project based and include multiple performance obligations based on the bundling of equipment, software and services. When a multiple performance obligation arrangement exists, the transaction price is allocated to the performance obligations based on their relative standalone selling price, and revenue is recognized upon transfer of control of each deliverable. To determine the standalone selling price, the Company first looks to establish the standalone selling price through an observable price when the good or service is sold separately in similar circumstances. If the standalone selling price cannot be established through an observable price, the Company will make an estimate based on market conditions, customer specific factors and customer class. The Company may use a combination of approaches to estimate the standalone selling price. For performance obligations recognized over time, judgment is required to evaluate assumptions, including the total estimated costs to determine progress towards completion of the performance obligation 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 costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. Other customer contract types include a variety of post-contract support services offerings, including: | • | Maintenance and support services provided under annual service-level agreements with the Company’s customers. These services represent stand-ready obligations that are recognized over time (on a straight-line basis over the contract period) because the customer simultaneously receives and consumes the benefits of the services as the services are performed. |
| • | Professional services and other similar services consist primarily of “Day 2” services to help customers maximize their utilization of deployed systems. The services are recognized over time because the customer simultaneously receives and consumes the benefits of the service as the services are performed. |
| • | Installation services relate to the routine installation of equipment ordered by the customer at the customer’s site and are distinct performance obligations from delivery of the related hardware. The associated revenues are recognized over time as the services are provided. |
Revenue is measured based on the consideration the Company expects to be entitled based on customer contracts. For sales to distributors, system integrators and value-added resellers, revenue is adjusted for variable consideration amounts, including but not limited to 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. 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. 79
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Unbilled receivables are recorded when revenues are recognized in advance of invoice issuance. A contract asset is any portion of unbilled receivables for which the right to consideration is conditional on a factor other than the passage of time, which is common for certain project contract performance obligations. These assets are presented on a combined basis with accounts receivable and are converted to accounts receivable once the Company’s right to the consideration becomes unconditional, which varies by contract but is generally based on achieving certain acceptance milestones. The Company recognizes the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset would be one year or less. The Company includes shipping and handling costs billed to customers in net sales and includes the costs incurred to transport product to customers as well as certain internal handling costs, which relate to activities to prepare goods for shipment, as cost of sales. See discussion of the Company’s voluntary change in accounting principle below. Shipping and handling costs incurred after control is transferred to the customer are accounted for as fulfillment costs and are not accounted for as separate revenue obligations. 82
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Effective April 1, 2019, the Company made a voluntary change in accounting principle related to its classification of internal handling costs to prepare goods for shipment. Historically, the Company presented these handling costs within selling, general and administrative expense (SG&A). Under the new policy, the Company is presenting these expenses within cost of sales in the Consolidated Statements of Operations. The Company believes that this change is preferable as the classification in cost of sales better reflects the costs of generating the related revenue and results in more meaningful presentation of gross margin. Additionally, this presentation enhances the comparability of the Company’s financial statements with industry peers and provides more consistency in the treatment of all shipping and handling costs. The accounting policy change was applied retrospectively to all periods presented. There was no change to net income (loss), earnings (loss) per share, retained earnings (accumulated deficit) or cash flows; however, cost of sales increased by $55.0 million and $62.3 million and SG&A decreased by the same amounts for the years ended December 31, 2018 and 2017, respectively. The Company recorded handling costs as a component of cost of sales for the year ended December 31, 2019. The Consolidated Statements of Operations was adjusted to reflect this change; however, there was no other impact on the consolidated financial statements.
Leases The Company determines if a contract is a lease or contains a lease at inception. Right of use assets related to operating type leases are reported in other noncurrent assets and the present value of remaining lease obligations is reported in accrued and other liabilities and other noncurrent liabilities on the Consolidated Balance Sheets. For the periods presented, CommScope does not have any financing type leases. Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The majority of the Company’s leases do not provide an implicit rate; therefore, the Company uses the incremental borrowing rates applicable to the economic environment and the duration of the lease, based on the information available at commencement date, in determining the present value of future payments. The right of use asset for operating leases is measured using the lease liability adjusted for the impact of lease payments made prior to commencement, lease incentives received, initial direct costs incurred and any asset impairments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company remeasures and reallocates the consideration in a lease when there is a modification of the lease that is not accounted for as a separate contract. The lease liability is remeasured when there is a change in the lease term or a change in the assessment of whether the Company will exercise a lease option. The Company assesses right of use assets for impairment in accordance with its long-lived asset impairment policy. The Company accounts for lease agreements with contractually required lease and non-lease components on a combined basis. Lease payments made for cancellable leases, variable amounts that are not based on an observable index and lease agreements with an original duration of less than twelve months are recorded directly to lease expense. Tax Collected from Customers Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, which are collected by the Company from customers, are excluded from net sales. 83
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Product Warranties The Company recognizes a liability for the estimated claims that may be paid under its customer assurance-type warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products. These product warranties extend over various periods, depending on the product subject to the warranty and the terms of the individual agreements. 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. 80
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Advertising Costs Advertising costs are expensed in the period in which they are incurred. Advertising expense was $45.9 million, $39.5 million $17.3 million and $21.2$17.3 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. Research and Development Research and development (R&D) costs are expensed in the period in which they are incurred. R&D costs include materials and equipment that have no alternative future use, depreciation on equipment and facilities currently used for R&D purposes, personnel costs, contract services and reasonable allocations of indirect costs, if clearly related to an R&D activity. Expenditures in the pre-production phase of an R&D project are recorded as R&D expense. However, costs incurred in the pre-production phase that are associated with output actually used in production are recorded in cost of sales. A project is considered finished with pre-production efforts when management determines that it has achieved acceptable levels of scrap and yield, which vary by project. Expenditures related to ongoing production are recorded in cost of sales. Derivative Instruments and Hedging Activities CommScope is exposed to risks resulting from adverse fluctuations in commodity prices, interest rates and foreign currency exchange rates. CommScope’s risk management strategy includes the use of derivative financial instruments whenever management determines their use to be reasonable and practical. This strategy does not permit the use of derivative financial instruments for trading or speculation. The Company uses forward contracts to hedge a portion of its balance sheet foreign exchange re-measurement risk and to hedge certain planned foreign currency expenditures. Unrealized gains and losses resulting from these contracts are recognized in other expense, net and partially offset corresponding foreign exchange gains and losses on the balances and expenditures being hedged. These instruments are not designated as hedges for hedge accounting purposes and are marked to market each period through earnings. The Company has a hedging strategy to designate certain foreign currency contracts as net investment hedges to mitigate a portion of the foreign currency risk on the euro net investment in a foreign subsidiary. Hedge effectiveness is assessed each quarter based on the net investment in the foreign subsidiary designated as the hedged item and the changes in the fair value of designated foreign currency contracts based on spot rates. For hedges that meet the effectiveness requirements, changes in fair value are recorded as a component of other comprehensive income (loss), net of tax. Amounts excluded from hedge effectiveness at inception under the spot method for designated forward contracts are recognized on a straight-line basis over the life of each contract and for designated cross-currency swap contracts are recognized as interest accrues. During 2019, theThe Company implementedalso has a hedging strategy to mitigate a portion of the exposure to changes in cash flows resulting from variable interest rates on the senior secured term loan due 2026 which are based on the one-month LIBOR benchmark rate (see Note 8). Hedge effectiveness is assessed each quarter, and for hedges that meet the effectiveness requirements, changes in fair value are recorded as a component of other comprehensive income (loss), net of tax, and are reclassified to interest expense as interest payments are made on the Company’s variable rate debt.
84
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The Company has elected and documented the use of the normal purchases and sales exception for normal purchase and sales contracts that meet the definition of a derivative financial instrument. See Note 9 for further disclosure related to the derivative instruments and hedging activities. 81
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Foreign Currency Translation For the years ended December 31, 2020, 2019 and 2018, approximately 39%, 41% and 2017, approximately 41%, 44% and 46%, respectively, of the Company’s net sales were to customers located outside the U.S. A portion of these sales were denominated in currencies other than the U.S. dollar, particularly sales from the Company’s foreign subsidiaries. The financial position and results of operations of certain of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Revenues and expenses of these subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities of these subsidiaries have been translated at the exchange rates as of the balance sheet date. Translation gains and losses are recorded in accumulated other comprehensive loss. Upon sale or liquidation of an investment in a foreign subsidiary, the amount of net translation gains or losses that have been accumulated in other comprehensive loss attributable to that investment are reported as a gain or loss in earnings in the period in which the sale or liquidation occurs. During the year ended December 31, 2018, the Company liquidated a foreign subsidiary and recognized $14.0 million in translation losses in other expense, net that had been in accumulated other comprehensive loss. Aggregate foreign currency gains and losses, such as those resulting from the settlement of receivables or payables, foreign currency contracts and short-term intercompany advances in a currency other than the subsidiary’s functional currency, are recorded currently in earnings (included in other expense, net) and resulted in losses of $11.8$19.2 million, $15.9$11.9 million and $8.7$15.9 million during the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. Foreign currency remeasurement gains and losses related to certain long-term intercompany loans that are not expected to be settled in the foreseeable future and the effective portion of foreign currency contracts designated as net investment hedges are recorded in accumulated other comprehensive loss. See Note 9 for disclosure of foreign currency gains and losses specifically related to foreign currency contracts. Equity-Based Compensation The estimated fair value of stock awards is recognized as expense over the requisite service periods. Forfeitures of stock awards are recognized as they occur. The Company records deferred tax assets related to compensation expense for awards that are expected to result in future tax deductions for the Company, based on the amount of compensation cost recognized and the Company’s statutory tax rate in the jurisdiction in which it expects to receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and actual tax deductions reported on the Company’s income tax return are recorded in the Consolidated Statements of Operations within income tax expense. Earnings (Loss) Per Share Basic earnings (loss) per share (EPS) is computed by dividing net income (loss), less any dividends and deemed dividends related to the Series A convertible preferred stock (the Convertible Preferred Stock,Stock), by the weighted average number of common shares outstanding during the period. The numerator in diluted EPS is based on the basic EPS numerator adjusted to add back any dividends and deemed dividends related to the Convertible Preferred Stock, subject to antidilution requirements. The denominator used in diluted EPS is based on the basic EPS computation plus the effect of potentially dilutive common shares related to the Convertible Preferred Stock and equity-based compensation plans, subject to antidilution requirements. For the years ended December 31, 2020, 2019 and 2018, and 2017,17.4 million, 11.2 million 2.1 million and 1.52.1 million shares, respectively, of outstanding equity-based compensation awards were not included in the computation of diluted EPS because the effect was either antidilutive or the performance conditions were not met. Of those amounts, for the yearyears ended December 31, 2020 and 2019, 4.4 million and 2.4 million shares, respectively, would have been considered dilutive if the Company had not been in a net loss position. 8582
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) For the yearyears ended December 31, 2020 and 2019, 37.1 million and 27.0 million, respectively, of as-if converted shares related to the Convertible Preferred Stock were excluded from the diluted share count because they were anti-dilutive; however, they 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 (loss) per share computations: | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Numerator: | | | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) for basic and diluted earnings (loss) per share | | $ | (929.5 | ) | | $ | 140.2 | | | $ | 193.8 | | | Net income (loss) | | | $ | (573.4 | ) | | $ | (929.5 | ) | | $ | 140.2 | | Dividends on Series A convertible preferred stock | | | (40.7 | ) | | | — | | | | — | | | | (56.1 | ) | | | (40.7 | ) | | | — | | Deemed dividends on Series A convertible preferred stock | | | (3.0 | ) | | | — | | | | — | | | | — | | | | (3.0 | ) | | | — | | Net income (loss) attributable to common stockholders | | $ | (973.2 | ) | | $ | 140.2 | | | $ | 193.8 | | | $ | (629.5 | ) | | $ | (973.2 | ) | | $ | 140.2 | | | | | | | | | | | | | | | | | | | | | | | | | | | Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average common shares outstanding - basic | | | 193.7 | | | | 192.0 | | | | 192.4 | | | | 196.8 | | | | 193.7 | | | | 192.0 | | Dilutive effect of as-if converted Series A convertible preferred stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | Dilutive effect of equity-based awards | | | — | | | | 3.3 | | | | 4.4 | | | | — | | | | — | | | | 3.3 | | Weighted average common shares outstanding - diluted | | | 193.7 | | | | 195.3 | | | | 196.8 | | | | 196.8 | | | | 193.7 | | | | 195.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | (5.02 | ) | | $ | 0.73 | | | $ | 1.01 | | | $ | (3.20 | ) | | $ | (5.02 | ) | | $ | 0.73 | | Diluted | | $ | (5.02 | ) | | $ | 0.72 | | | $ | 0.98 | | | $ | (3.20 | ) | | $ | (5.02 | ) | | $ | 0.72 | |
Business Combinations The Company uses the acquisition method of accounting for business combinations which requires the tangible and intangible assets acquired and liabilities assumed to be recorded at their respective fair market value as of the acquisition date. Goodwill represents the excess of the consideration transferred over the fair value of the net assets acquired. The fair values of the assets acquired and liabilities assumed are determined based upon the Company’s valuation and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date. The Company uses a measurement period following the acquisition date to gather information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities assumed. The measurement period ends once all information is obtained, but no later than one year from the acquisition date. Concentrations of Risk Non-derivative financial instruments used by the Company in the normal course of business include letters of credit and commitments to extend credit, primarily accounts receivable. The Company generally does not require collateral on its accounts receivable. These financial instruments involve risk, including the credit risk of nonperformance by the counterparties to those instruments, and the actual loss may exceed the reserves provided in the Company’s Consolidated Balance Sheets. See Note 17 for further discussion of customer-related concentrations of risk. The Company manages its exposures to credit risk associated with accounts receivable using such tools as credit approvals, credit limits and monitoring procedures. CommScope estimates the allowance for doubtful accounts based on the actual payment history and individual circumstances of significant customers as well as the age of receivables. In management’s opinion, as of December 31, 2019,2020, the Company did not have significant unreserved risk of credit loss due to the non-performance of customers or other counterparties related to amounts receivable. However, an adverse change in financial condition of a significant customer or group of customers or in the telecommunications industry could materially affect the Company’s estimates related to doubtful accounts. 8683
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The principal raw materials purchased by CommScope (aluminum, bimetals, copper, optical fiber, plastics and other polymers and steel) are subject to changes in market price as these materials are linked to various commodity markets. The Company attempts to mitigate these risks through effective requirements planning and by working closely with its key suppliers to obtain the best possible pricing and delivery terms. The Company relies on sole suppliers or a limited group of suppliers for certain key components (memory and chip capacitors), subassemblies and modules and a limited group of contract manufacturers to manufacture a significant portion of its products. Any disruption or termination of these arrangements could have a material adverse impact on the Company’s results of operations. Recent Accounting Pronouncements Adopted in 20192020 On January 1, 2019,2020, the Company adopted ASU No. 2016-02,2016-13, LeasesMeasurement of Credit Losses on Financial Instruments, and all subsequently issued clarifying guidance. Undersubsequent amendments to the initial guidance: ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05 and ASU No. 2020-02 (collectively, Topic 326). The new guidance lessees are requiredreplaces the incurred loss methodology with the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to recognizefinancial assets measured at amortized cost, including trade accounts receivable. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and lease liabilities forother similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842. The Company adopted Topic 326 using the rights and obligations created by leased assets previously classified as operating leases. In July 2018, the FASB issued ASU No. 2018-11, which permitted entities to record the impact of adoption using a modified retrospective method with any cumulative-effect as an adjustment to retained earnings (accumulated deficit) as opposed to restating comparative periodsfor all financial assets measured at amortized cost, which are primarily trade accounts receivable and contract assets for the effects of applying the new standard. The Company elected this transition approach; therefore, the Company’sCompany. Results for reporting periods beginning after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported results are not restated to include thein accordance with previously applicable U.S. GAAP. The impact of this adoption. In addition, the Company elected the package of three transition practical expedients which alleviate the requirement to reassess embedded leases, lease classification and initial direct costs for leases commencing prior to the adoption date. The adoption effect of the new guidance increased total assets and total liabilities in the Consolidated Balance Sheets by $98.8 millionadopting Topic 326 as of January 1, 2019 due2020 was not material to the addition of right-of-use assets and lease obligations for operating type leases, net of the elimination of existing prepaid rent, deferred rent and lease termination cost amounts. The adoption of the new standard did not materially affect the Consolidated Statements of Operations; and therefore, 0 cumulative effect adjustment was recorded. Adoption of the new standard also did not materially affect the Consolidated Statements of Cash Flows. See Note 5 for further discussion of the Company’s leasing activities.
On January 1, 2019, the Company adopted ASU No. 2017-04, Simplifying the Test of Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under the new guidance, the Company performs its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing 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. The new guidance was applied to the goodwill impairment tests performed in 2019.
On January 1, 2019, the Company adopted ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement (CCA) that is a Service Contract. The new guidance aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Adoption of the new standard did not materially impact the Company’s consolidated financial statements.
Issued but Not Adopted In December 2019, August 2020, the FASBFinancial Accounting Standards Board (FASB) issued ASU No. 2019-12, 2020-06, Simplifying theDebt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Income TaxesConvertible Instruments and Contracts in an Entity’s Own Equity. The new guidance simplifies the accounting for income taxesconvertible instruments by removing certain exceptionsreducing the number of accounting models available for convertible debt instruments and convertible preferred stock and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to the general principles in Accounting Standards Codification (ASC) Topic 740reduce form-over-substance-based accounting conclusions and improves consistentrequires the application of and simplifies GAAPthe if-converted method for other areas of ASC Topic 740 by clarifying and amending existing guidance.calculating diluted earnings per share, along with expanded disclosures. ASU No. 2019-122020-06 is effective for the Company as of January 1, 20212022 and early adoption is permitted.permitted beginning January 1, 2021. The Company is currently evaluating the impact of the new guidance on the consolidated financial statements. 87In March 2020, theFASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. The Company can elect to apply the amendments as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance on the consolidated financial statements.
84
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) In June 2016,January 2020, the FASB issued ASU No. 2016-13, 2020-01Measurement of Credit Losses on Financial Instruments, , Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10 and ASU 2019-11 (collectively, ASC Topic 326). The new guidance replacesis based on a consensus of the current incurred lossEmerging Issues Task Force and is expected to increase comparability in accounting for these transactions. The amendments in this guidance clarify the interaction of accounting for equity securities under Topic 321 and investments accounted for under the equity method usedof accounting in Topic 323 and the accounting for determining credit losses on financial assets, including trade receivables, with an expected credit loss method. ASCcertain forward contracts and purchased options accounted for under Topic 326815. ASU No. 2020-01 is effective for the Company as of January 1, 2020.2021. The Company is continuing to assess and evaluate assumptions and models to estimate losses. Upon adoption of the guidance, the Company will be required to record a cumulative effect adjustment to retained earnings (accumulated deficit) for the impact as of the date of adoption. As credit losses from the Company's trade receivables have not historically been significant, the Company anticipates that the adoption of ASC Topic 326this new guidance will not materiallyhave a material impact on the consolidated financial statementsstatements. In December 2019 the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning January 1, 2021 for the Company. The Company is currently evaluating the impact of the new guidance on the consolidated financial statements and disclosures. 3. ACQUISITIONS ARRISACQUISITION
On April 4, 2019, the Company acquired all of the issued ordinary shares of ARRIS in an all cash transaction with a total consideration of approximately $7.7 billion, including debt assumed. ARRIS is a global leader in entertainment, communications and networking technology. The combined company is expectedCompany acquired ARRIS to drive profitable growth in new markets, shape the future of wired and wireless communications, and position the Company to benefit from key industry trends, including network convergence, fiber and mobility everywhere, 5G, Internet of Things and rapidly changing network and technology architectures. For the year ended December 31, 2019, net sales of $4.0 billion and an operating loss of $863.6 million, was included in the Consolidated Statements of Operations related to the ARRIS business. For the year ended December 31, 2019, the Company recorded $195.3 million of transaction and integration costs related to the Acquisition and these costs were recognized in SG&A in the Consolidated Statements of Operations. The following amounts representtable summarizes the preliminary determination of theestimated fair value of identifiable assets acquired and liabilities assumed from the Acquisition. The final determination of the fair value of certain assets and liabilities will be completed within the one-year measurement period from the date of acquisition as required by ASC Topic 805, Business Combinations. As of December 31, 2019, the valuation studies necessary to determine the fair market valuevalues of the assets acquired and liabilities assumed are preliminary, including the validation of the underlying cash flows used to determine the fair value of the identified intangible assets. The size and breadth of the Acquisition necessitates use of the one-year measurement period to adequately analyze all the factors used in establishing the asset and liability fair values as ofat the acquisition date, including, but not limited to, intangible assets, inventory, real property, leases, deferred tax assets and liabilities, certain reserves and the related tax impacts of any adjustments. Any potential adjustments could be material in relation to the preliminary values presented below: | | Amounts Recognized as of Acquisition Date | | | Q3 Measurement Period Adjustments | | | Q4 Measurement Period Adjustments | | | Amounts Recognized as of Acquisition Date (as adjusted) | | Assets | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 556.1 | | | $ | — | | | $ | — | | | $ | 556.1 | | Accounts receivable | | | 1,151.8 | | | | 3.2 | | | | — | | | | 1,155.0 | | Inventory | | | 1,063.4 | | | | — | | | | (67.9 | ) | | | 995.5 | | Other current assets | | | 131.0 | | | | 1.0 | | | | — | | | | 132.0 | | Property, plant and equipment | | | 328.2 | | | | (4.5 | ) | | | (7.1 | ) | | | 316.6 | | Goodwill | | | 2,894.6 | | | | (9.0 | ) | | | 105.6 | | | | 2,991.2 | | Identifiable intangible assets | | | 3,542.8 | | | | — | | | | (33.2 | ) | | | 3,509.6 | | Other noncurrent assets | | | 463.6 | | | | (14.7 | ) | | | (1.2 | ) | | | 447.7 | | Less: Liabilities assumed | | | | | | | | | | | | | | | | | Current liabilities | | | (1,505.9 | ) | | | 17.1 | | | | (26.2 | ) | | | (1,515.0 | ) | Debt | | | (2,052.0 | ) | | | — | | | | — | | | | (2,052.0 | ) | Other noncurrent liabilities | | | (959.3 | ) | | | 10.4 | | | | 30.0 | | | | (918.9 | ) | Net acquisition cost | | $ | 5,614.3 | | | $ | 3.5 | | | $ | — | | | $ | 5,617.8 | |
88date:
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
| | Estimated Fair Value | | Assets | | | | | Cash and cash equivalents | | $ | 556.1 | | Accounts receivable | | | 1,155.0 | | Inventory | | | 995.5 | | Other current assets | | | 132.0 | | Property, plant and equipment | | | 316.6 | | Goodwill | | | 2,981.4 | | Identifiable intangible assets | | | 3,509.6 | | Other noncurrent assets | | | 447.7 | | Less: Liabilities assumed | | | | | Current liabilities | | | (1,534.8 | ) | Debt | | | (2,052.0 | ) | Other noncurrent liabilities | | | (889.3 | ) | Net acquisition cost | | $ | 5,617.8 | |
The Company recorded measurement period adjustments on a prospective basis sincefinalized the acquisition date. Duringaccounting for the fourthbusiness combination in the first quarter of 2019, the Company recorded measurement period adjustments decreasing intangible assets2020 and inventory by $33.2 million and $67.9 million, respectively, with a corresponding offset to goodwill as a result of the progression of analysis regarding the fair value of the assets and estimated useful lives of the intangibles. Although these adjustments did not have an impact on the Consolidated Statements of Operations for the year ended December 31, 2019, had these adjustmentshas been recorded as of the acquisition date, the interim period impacts on the Consolidated Statements of Operations for 2019 would have been as follows: | •
| Amortization expense for the second, third and fourth quarters of 2019 would have increased (decreased) by $(23.8) million, $(23.7) million and $47.5 million, respectively.
|
| •
| Cost of sales for the second, third, and fourth quarters of 2019 would have increased (decreased) by $(14.5) million, $(9.9) million, and $24.4 million, respectively.
|
The impact of other measurement period adjustments to the Consolidated Statements of Operations was not material to the year ended December 31, 2019 or the interim periods within.
The fair value of net accounts receivable was $1,155.0 million with a gross contractual amount of $1,176.5 million. The Company expects $21.5 million to be uncollectible. The debt of $2,052.0 million was repaid on April 4, 2019. Total consideration excludes $131.1 million related to the cash settlement of outstanding unvested ARRIS equity compensation awards. These cash settled equity awards were recorded as transaction costs during the year ended December 31, 2019 and are included in SG&A in the Consolidated Statements of Operations.
The Company uses the acquisition method of accounting for business combinations which requires the tangible and intangible assets acquired and liabilities assumed to be recorded at their respective fair market value as of the acquisition date. For accounting and financial reporting purposes, fair value is defined under ASC Topic 820, Fair Value Measurements and Disclosures as the price that would be received upon sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed to be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. Use of different estimates and judgments could yield different results. In determining the fair value of identifiable assets acquired and liabilities assumed, a review was conducted for any significant contingent assets or liabilities existing as of the acquisition date.
assigned accordingly. The goodwill arising from the Acquisition is believed to result from ARRIS’ reputation in the marketplace and assembled workforce and is not 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. The estimated fair values may change as the Company completes its valuation analyses of the assets acquired and liabilities assumed in the first quarter of 2020.
The table below summarizes the preliminary valuations of the intangible assets acquired that were determined by management to meet the criteria for recognition apart from goodwill and determined to have finite lives. The values presented below are preliminary estimates and are subject to change as management completes its valuation of the Acquisition.
| | Estimated Fair Value | | | Weighted Average Estimated Useful Life (in years) | Customer contracts and relationships | | $ | 1,595.0 | | | 17 | Trademarks | | | 414.0 | | | 13 | Patents and technologies | | | 1,442.6 | | | 5 | Backlog | | | 58.0 | | | 0.5 | Total amortizable intangible assets | | $ | 3,509.6 | | | |
8985
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The amounts related to ARRIS included in the following unaudited pro forma information are based on their historical results 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 unaudited 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.
The following table presents the unaudited pro forma consolidated results of operations for CommScope for the years ended December 31, 2019 and 2018 as though the Acquisition had been completed as of January 1, 2018 (in millions, except per share amounts):
| | Year Ended | | | | December 31, | | | | 2019 | | | 2018 | | Net sales | | $ | 9,782.1 | | | $ | 11,260.3 | | Net loss attributable to common stockholders | | | (749.0 | ) | | | (486.7 | ) | Net loss per diluted share | | $ | (3.87 | ) | | $ | (2.53 | ) |
These unaudited 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 marked up to its estimated fair value; amortization for intangible assets with finite lives identified separate from goodwill; equity-based compensation for equity awards issued to ARRIS employees; and the related income tax impacts of these adjustments.
The unaudited pro forma results for the year ended December 31, 2019 were adjusted to exclude certain non-recurring transaction and integration costs, acquisition accounting adjustments related to the markup of inventory to its estimated fair value and deferred revenue, and the related income tax impacts. The unaudited pro forma results for the year ended December 31, 2018 were adjusted to include the impact of these items. These adjustments in the aggregate on a pre-tax basis were $441.2 million and $(444.3) million and for the years ended December 31, 2019 and 2018, respectively.
Cable Exchange
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) in 2017 and $11.0 million in 2019. As of December 31, 2019, the Company had $3.5 million payable in 2020 to complete the transaction. 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 included in the CCS segment for the years ended December 31, 2019, 2018 and 2017 and were not material.
The 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 | | Assets | | | | | 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 | |
90
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, 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.
4. GOODWILL AND OTHER INTANGIBLE ASSETS The following table presents details of the Company’s intangible assets other than goodwill as of December 31, 20192020 and 2018:2019: | 2020 | | | 2019 | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | Customer base | $ | 3,524.1 | | | $ | 1,563.2 | | | $ | 1,960.9 | | | $ | 3,503.3 | | | $ | 1,318.8 | | | $ | 2,184.5 | | Trade names and trademarks | | 1,024.3 | | | | 376.6 | | | | 647.7 | | | | 1,021.9 | | | | 308.3 | | | | 713.6 | | Patents and technologies | | 2,039.7 | | | | 997.9 | | | | 1,041.8 | | | | 2,021.6 | | | | 656.1 | | | | 1,365.5 | | Other | | 58.3 | | | | 58.3 | | | | — | | | | 58.3 | | | | 58.3 | | | | — | | Total intangible assets | $ | 6,646.4 | | | $ | 2,996.0 | | | $ | 3,650.4 | | | $ | 6,605.1 | | | $ | 2,341.5 | | | $ | 4,263.6 | |
| 2019 | | | 2018 | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | | Gross Carrying Amount | | | Accumulated Amortization | | | Net Carrying Amount | | Customer base | $ | 3,503.3 | | | $ | 1,318.8 | | | $ | 2,184.5 | | | $ | 1,911.2 | | | $ | 1,103.5 | | | $ | 807.7 | | Trade names and trademarks | | 1,021.9 | | | | 308.3 | | | | 713.6 | | | | 608.4 | | | | 249.3 | | | | 359.1 | | Patents and technologies | | 2,021.6 | | | | 656.1 | | | | 1,365.5 | | | | 582.9 | | | | 397.7 | | | | 185.2 | | Other | | 58.3 | | | | 58.3 | | | | — | | | | 0.3 | | | | 0.3 | | | | — | | Total intangible assets | $ | 6,605.1 | | | $ | 2,341.5 | | | $ | 4,263.6 | | | $ | 3,102.8 | | | $ | 1,750.8 | | | $ | 1,352.0 | |
There were 0 impairments of definite-livedfinite-lived intangible assets identified during the years ended December 31, 2020, 2019 2018 or 2017. The Company’s finite-lived intangible assets are being amortized on a straight-line basis over the weighted-average amortization periods in the following table. The aggregate weighted-average amortization period is 11.6 years.
| Weighted-
Average
Amortization
Period
| | | (in years)
| | Customer base
| | 13.8
| | Trade names and trademarks
| | 16.3
| | Patents and technologies
| | 5.9
| |
2018. Amortization expense for intangible assets was $630.5 million, $593.2 million $264.6 million and $271.0$264.6 million for the years ended December 31, 2020, 2019 and 2018, and 2017, respectively. EstimatedFuture amortization expense for the next five yearsas of December 31, 2020 is as follows: | Estimated Amortization Expense | | 2021 | $ | 614.4 | | 2022 | | 547.4 | | 2023 | | 433.4 | | 2024 | | 346.1 | | 2025 | | 280.8 | | Thereafter | | 1,428.3 | |
The following table presents goodwill by reportable segment. Foreign currency fluctuations are included within other adjustments. Additions (deductions) reflect the preliminary allocation and subsequent measurement period adjustments of the Company’s acquisition of ARRIS, which was completed in 2020. | Estimated Amortization Expense | | 2020 | $ | 630.1 | | 2021 | | 610.4 | | 2022 | | 544.2 | | 2023 | | 495.2 | | 2024 | | 438.6 | |
| | December 31, 2019 | | | | | | | | | | | | | | | December 31, 2020 | | | | Goodwill | | | Accumulated Impairment Losses | | | Total | | | Additions (Deductions) | | | Impairment | | | Other | | | Goodwill | | | Accumulated Impairment Losses | | | Total | | Broadband | | $ | 3,355.1 | | | $ | (193.6 | ) | | $ | 3,161.5 | | | $ | (7.1 | ) | | $ | — | | | $ | 21.7 | | | $ | 3,369.7 | | | $ | (193.6 | ) | | $ | 3,176.1 | | Home | | | 402.1 | | | | (192.8 | ) | | | 209.3 | | | | (1.3 | ) | | | (206.7 | ) | | | (1.3 | ) | | | 399.5 | | | | (399.5 | ) | | | — | | OWN | | | 666.0 | | | | (159.5 | ) | | | 506.5 | | | | — | | | | — | | | | 3.1 | | | | 669.1 | | | | (159.5 | ) | | | 509.6 | | VCN | | | 1,635.6 | | | | (41.2 | ) | | | 1,594.4 | | | | (1.4 | ) | | | — | | | | 7.8 | | | | 1,642.0 | | | | (41.2 | ) | | | 1,600.8 | | Total | | $ | 6,058.8 | | | $ | (587.1 | ) | | $ | 5,471.7 | | | $ | (9.8 | ) | | $ | (206.7 | ) | | $ | 31.3 | | | $ | 6,080.3 | | | $ | (793.8 | ) | | $ | 5,286.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | | | | December 31, 2019 | | | | Goodwill | | | Accumulated Impairment Losses | | | Total | | | Additions (Deductions) | | | Impairment | | | Other | | | Goodwill | | | Accumulated Impairment Losses | | | Total | | Broadband | | $ | 1,180.6 | | | $ | (51.5 | ) | | $ | 1,129.1 | | | $ | 2,171.2 | | | $ | (142.1 | ) | | $ | 3.3 | | | $ | 3,355.1 | | | $ | (193.6 | ) | | $ | 3,161.5 | | Home | | | — | | | | — | | | | — | | | | 403.0 | | | | (192.8 | ) | | | (0.9 | ) | | | 402.1 | | | | (192.8 | ) | | | 209.3 | | OWN | | | 666.4 | | | | (159.5 | ) | | | 506.9 | | | | — | | | | — | | | | (0.4 | ) | | | 666.0 | | | | (159.5 | ) | | | 506.5 | | VCN | | | 1,216.3 | | | | — | | | | 1,216.3 | | | | 417.0 | | | | (41.2 | ) | | | 2.3 | | | | 1,635.6 | | | | (41.2 | ) | | | 1,594.4 | | Total | | $ | 3,063.3 | | | $ | (211.0 | ) | | $ | 2,852.3 | | | $ | 2,991.2 | | | $ | (376.1 | ) | | $ | 4.3 | | | $ | 6,058.8 | | | $ | (587.1 | ) | | $ | 5,471.7 | |
9186
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The following table presentsCompany’s change in segments as of January 1, 2020 resulted in a realignment of its existing reporting units. Although the reporting units were realigned under the new segments, the Company’s reporting units remained the same except for where two reporting units have been combined into a new reporting unit. In this case, goodwill by reportable segment: | Connectivity | | | Mobility | | | CPE | | | N&C | | | Ruckus | | | Total | | Goodwill, gross, as of December 31, 2016 | $ | 2,077.5 | | | $ | 901.8 | | | $ | — | | | $ | — | | | $ | — | | | | 2,979.3 | | Acquisitions | | 49.6 | | | | — | | | | — | | | | — | | | | — | | | | 49.6 | | Foreign exchange | | 66.1 | | | | 2.6 | | | | — | | | | — | | | | — | | | | 68.7 | | Goodwill, gross, as of December 31, 2017 | | 2,193.2 | | | | 904.4 | | | | — | | | | — | | | | — | | | | 3,097.6 | | Foreign exchange | | (31.6 | ) | | | (2.7 | ) | | | — | | | | — | | | | — | | | | (34.3 | ) | Goodwill, gross, as of December 31, 2018 | | 2,161.6 | | | | 901.7 | | | | — | | | | — | | | | — | | | | 3,063.3 | | Preliminary acquisition allocation | | — | | | | — | | | | 402.9 | | | | 2,171.2 | | | | 417.0 | | | | 2,991.1 | | Foreign exchange and other | | 3.5 | | | | 1.7 | | | | (0.8 | ) | | | — | | | | — | | | | 4.4 | | Goodwill, gross, as of December 31, 2019 | | 2,165.1 | | | | 903.4 | | | | 402.1 | | | | 2,171.2 | | | | 417.0 | | | | 6,058.8 | | Accumulated impairment charges as of December 31, 2017 and 2018 | | (51.5 | ) | | | (159.5 | ) | | | — | | | | — | | | | — | | | | (211.0 | ) | Impairment charges for year ended December 31, 2019 | | — | | | | — | | | | (192.8 | ) | | | (142.1 | ) | | | (41.2 | ) | | | (376.1 | ) | Accumulated impairment charges as of December 31, 2019 | | (51.5 | ) | | | (159.5 | ) | | | (192.8 | ) | | | (142.1 | ) | | | (41.2 | ) | | | (587.1 | ) | Goodwill, net, as of December 31, 2019 | $ | 2,113.6 | | | $ | 743.9 | | | $ | 209.3 | | | $ | 2,029.1 | | | $ | 375.8 | | | $ | 5,471.7 | |
Duringwas simply combined in the new reporting units. Since the composition of the reporting units and the assignment of goodwill to the reporting units were unaffected, an interim goodwill impairment test due to the change in segments was not performed in the first quarter of 2019, the Company assessed goodwill for impairment due to a change in reporting units in the Connectivity segment. As a result, the Company performed impairment testing for goodwill under the Connectivity segment reporting unit structure immediately before the change and determined that 0 impairment existed. The Company reallocated goodwill to the new reporting units and performed impairment testing for goodwill immediately after the change and determined no impairment existed. 2020.
During the second quarter of 2019,2020, the Company determined that indicators of possible goodwill impairment existed for the Home Networks reporting unitsunit due to lower projected operating results, primarily from the acquired ARRIS business. Sinceaccelerated decline in video devices. This trend was projected to continue as consumers adopt the closinguse of other streaming applications and was further impacted by the Acquisition on April 4, 2019,macro-economic effects caused by the ARRIS reporting units (CPE, N&C and Ruckus) had experienced challenges that impacted the Company’s performance. These challenges included declines in spending by cable operator customers that resulted in declines in net sales and operating income for these reporting units and the lossnew strain of key leaders of these reporting units following the Acquisition. Certain of these challenges were expected to persist throughout the remainder of 2019 and were expected to impact management’s ability to grow these businesses at the rate that was originally estimated when the Acquisition was closed.coronavirus (COVID-19). The Company performed a quantitative goodwill impairment testingtest during the second quarter of 20192020 and determined that 0 impairment existed. No indicators ofrecorded a $206.7 million goodwill impairment were identifiedcharge during the second quarter 2020 relating to the Home Networks reporting unit. It is reflected in the third quarterasset impairments line on the Consolidated Statements of 2019.Operations for the year ended December 31, 2020. This reflected a full impairment of the remaining goodwill in the Home segment, and as such, the Home segment has 0 remaining goodwill balance as of December 31, 2020. AsThere were 0 goodwill impairments identified as a result of the annual impairment test performed in the fourth quarter of 2020. For the year ended December 31, 2019, the Company recorded goodwill impairment charges totaling $376.1 million, of which $142.1 million related to the Network and Cloud reporting unit, $192.8 million related to the CPE reporting unit, $142.1 million related to the N&CHome Networks reporting unit and $41.2 million related to the Ruckus reporting unit. These reporting unitsThere were acquired in0 goodwill impairments identified for the ARRIS acquisition on April 4, 2019 (see Note 3). During the Company’s annual strategic planning process in the fourth quarter of 2019, several factors arose, including an assessment of historical and future operating results, key customer inputs, new assessments of market trends and anticipated expenditures required to support the changing market dynamics affecting each of the ARRIS reporting units. As a result of these factors, the Company concluded that the fair value of each of these reporting units was less than its carrying value. The goodwill impairment expense was recorded in the asset impairments line on the Consolidated Statement of Operations. year ended December 31, 2018.
Estimating the fair value of a reporting unit involves uncertainties because it requires management to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry economic factors and future business strategy. Changes in projected revenue growth rates, projected operating income margins or estimated discount rates due to uncertain market conditions, loss of one or more key customers, changes in the Company’s strategy, changes in technology or other factors could negatively affect the fair value in one or more of the Company’s reporting units and result in a material impairment charge in the future. 92
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
5. REVENUE FROM CONTRACTS WITH CUSTOMERS Disaggregated Net Sales The following table presents net sales by reportable segment, disaggregated based on contract type: | | Year Ended December 31, 2019 | | | | Connectivity | | | Mobility | | | CPE | | | N&C | | | Ruckus | | | Total | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | Contract type: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Product contracts | | $ | 2,550.1 | | | $ | 2,803.5 | | | $ | 1,677.3 | | | $ | 1,662.3 | | | $ | 2,522.8 | | | $ | — | | | $ | 847.8 | | | $ | — | | | $ | 376.9 | | | $ | — | | | $ | 7,974.9 | | | $ | 4,465.8 | | Project contracts | | | 0.2 | | | | 0.8 | | | | 45.0 | | | | 49.5 | | | | — | | | | — | | | | 19.4 | | | | — | | | | — | | | | — | | | | 64.6 | | | | 50.3 | | Other contracts | | | 7.1 | | | | 8.4 | | | | 31.9 | | | | 44.0 | | | | 16.2 | | | | — | | | | 206.4 | | | | — | | | | 44.0 | | | | — | | | | 305.6 | | | | 52.4 | | Consolidated net sales | | $ | 2,557.4 | | | $ | 2,812.7 | | | $ | 1,754.2 | | | $ | 1,755.8 | | | $ | 2,539.0 | | | $ | — | | | $ | 1,073.6 | | | $ | — | | | $ | 420.9 | | | $ | — | | | $ | 8,345.1 | | | $ | 4,568.5 | |
| | Year Ended December 31, | | | | Broadband | | | Home | | | OWN | | | VCN | | | Total | | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | Contract type: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Product contracts | | $ | 2,579.8 | | | $ | 2,072.3 | | | $ | 2,351.7 | | | $ | 2,529.4 | | | $ | 1,220.0 | | | $ | 1,452.5 | | | $ | 1,743.1 | | | $ | 1,861.8 | | | $ | 7,894.6 | | | $ | 7,916.0 | | Other contracts | | | 315.9 | | | | 291.5 | | | | 8.3 | | | | 9.6 | | | | 23.7 | | | | 22.5 | | | | 193.4 | | | | 105.5 | | | | 541.3 | | | | 429.1 | | Consolidated net sales | | $ | 2,895.7 | | | $ | 2,363.8 | | | $ | 2,360.0 | | | $ | 2,539.0 | | | $ | 1,243.7 | | | $ | 1,475.0 | | | $ | 1,936.5 | | | $ | 1,967.3 | | | $ | 8,435.9 | | | $ | 8,345.1 | |
The other contracts line above primarily includes service contracts, project contracts with multiple performance obligations and other contracts with revenue recognized over time. Further information on net sales by reportable segment and geographic region is included in Note 17. 87
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Allowance for Doubtful Accounts | | Year ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Allowance for doubtful accounts, beginning of period | | $ | 17.4 | | | $ | 14.0 | | | $ | 17.2 | | | $ | 35.4 | | | $ | 17.4 | | | $ | 14.0 | | Charged to costs and expenses | | | 10.6 | | | | 6.0 | | | | 1.3 | | | | 5.0 | | | | 10.6 | | | | 6.0 | | Account write-offs and other | | | 7.4 | | | | (2.6 | ) | | | (4.5 | ) | | Write-offs | | | | (3.2 | ) | | | (1.7 | ) | | | (1.2 | ) | Recoveries | | | | — | | | | — | | | | — | | Foreign exchange and other | | | | 3.1 | | | | 9.1 | | | | (1.4 | ) | Allowance for doubtful accounts, end of period | | $ | 35.4 | | | $ | 17.4 | | | $ | 14.0 | | | $ | 40.3 | | | $ | 35.4 | | | $ | 17.4 | |
Customer Contract Balances The following table provides the balance sheet location and amounts of contract assets and liabilities from contracts with customers as of December 31, 2019 and December 31, 2018.customers. | | | December 31, | | | | | December 31, | | | Balance Sheet Location | | 2019 | | | | 2018 | | | Balance Sheet Location | | 2020 | | | 2019 | | Unbilled accounts receivable | Accounts receivable, less allowance for doubtful accounts | | $ | 28.6 | | | | $ | 3.1 | | | Accounts receivable, less allowance for doubtful accounts | | $ | 21.9 | | | $ | 28.6 | | Deferred revenue | Accrued and other liabilities and Other noncurrent liabilities | | | 122.2 | | | | 7.6 | | | Accrued and other liabilities and Other noncurrent liabilities | | | 143.2 | | | | 122.2 | |
There were no material changes to contract asset balances for the year ended December 31, 20192020 as a result of changes in estimates or impairments. As of December 31, 2019,2020, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied and that have a duration of one year or less was $82.6$90.0 million, with the remaining $39.5$53.2 million having a duration greater than one year. 93
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Contract Liabilities The following table presents the changes in deferred revenue for the year ended December 31, 2019:revenue: | | | | | | | Year Ended | | | Year Ended December 31, | | | | December 31, 2019 | | | 2020 | | | 2019 | | Balance at beginning of period | | $ | 7.6 | | | $ | 122.2 | | | $ | 7.6 | | Fair value of deferred revenue acquired in ARRIS acquisition | | | 90.1 | | | | — | | | | 90.1 | | Deferral of revenue | | | 124.8 | | | | 186.7 | | | | 124.8 | | Recognition of unearned revenue | | | (100.3 | ) | | | (165.7 | ) | | | (100.3 | ) | Balance at end of period | | $ | 122.2 | | | $ | 143.2 | | | $ | 122.2 | |
6. LEASES The Company has operating type leases for real estate, equipment and vehicles both in the U.S. and internationally. As of December 31, 2019,2020, the Company had 0 finance type leases. The Company’s leases have remaining lease terms of up to 10 years, some of which may include options to extend the leases for up to 5 years or options to terminate the leases within 1 year. Operating lease expense was $105.2 million and $88.3 million for the yearyears ended December 31, 2020 and 2019, respectively, inclusive of period cost for short-term, cancellable and variable leases, not included in lease liabilities, of $31.3 million and $26.7 million for the yearyears ended December 31, 2019.2020 and 2019, respectively. The Company occasionally subleases all or a portion of certain unutilized real estate facilities. As of December 31, 2019,2020, the Company’s sublease arrangements were classified as operating type leases and the income amounts were not material for the yearyears ended December 31, 2019.2020 and 2019, respectively. Supplemental cash flow information related to operating leases:
| Year Ended | | | December 31, 2019 | | Operating cash paid to settle lease liabilities | $ | 68.4 | | Right of use asset additions in exchange for lease liabilities | | 33.7 | |
Supplemental balance sheet information related to operating leases:
| Balance Sheet Location | | December 31, 2019 | | Right of use assets | Other noncurrent assets | | $ | 222.9 | | | | | | | | Lease liabilities | Accrued and other liabilities | | $ | 61.7 | | Lease liabilities | Other noncurrent liabilities | | | 160.4 | | Total lease liabilities | | | $ | 222.1 | |
Weighted average remaining lease term (in years)
| | 4.3
| | Weighted average discount rate
| | 6.7
| %
|
9488
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Supplemental cash flow information related to operating leases: | | | | Year Ended December 31, | | | 2020 | | | 2019 | | Operating cash paid to settle lease liabilities | $ | 74.6 | | | $ | 68.4 | | Right of use asset additions in exchange for lease liabilities | | 21.9 | | | | 33.7 | |
Supplemental balance sheet information related to operating leases: | | | December 31, | | | Balance Sheet Location | | 2020 | | | 2019 | | Right of use assets | Other noncurrent assets | | $ | 159.3 | | | $ | 204.9 | | | | | | | | | | | | Lease liabilities | Accrued and other liabilities | | $ | 62.4 | | | $ | 61.7 | | Lease liabilities | Other noncurrent liabilities | | | 119.1 | | | | 160.4 | | Total lease liabilities | | | $ | 181.5 | | | $ | 222.1 | |
Weighted average remaining lease term (in years) | | 3.9 | | Weighted average discount rate | | 7.4 | % |
Future minimum lease payments under non-cancellable leases as of December 31, 20192020 are as follows: | Operating Leases | | Operating Leases | | 2020 | | 74.7 | | | 2021 | | 63.8 | | $ | 73.5 | | 2022 | | 43.2 | | | 48.2 | | 2023 | | 33.0 | | | 36.9 | | 2024 | | 22.2 | | | 25.5 | | 2025 | | | 13.1 | | Thereafter | | 22.7 | | | 23.7 | | Total minimum lease payments | $ | 259.6 | | $ | 220.9 | | Less: imputed interest | | (37.5 | ) | | (39.4 | ) | Total | $ | 222.1 | | $ | 181.5 | |
7. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION Inventories | | December 31, | | | December 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | Raw materials | | $ | 240.1 | | | $ | 146.8 | | | $ | 280.2 | | | $ | 240.1 | | Work in process | | | 121.6 | | | | 98.8 | | | | 140.6 | | | | 121.6 | | Finished goods | | | 614.2 | | | | 227.7 | | | | 668.1 | | | | 614.2 | | | | $ | 975.9 | | | $ | 473.3 | | | $ | 1,088.9 | | | $ | 975.9 | |
Property, Plant and Equipment
| | December 31, | | | | 2019 | | | 2018 | | Land and land improvements | | $ | 57.4 | | | $ | 49.3 | | Buildings and improvements | | | 333.3 | | | | 212.2 | | Machinery and equipment | | | 849.9 | | | | 597.0 | | Construction in progress | | | 37.0 | | | | 30.1 | | | | | 1,277.6 | | | | 888.6 | | Accumulated depreciation | | | (553.8 | ) | | | (437.7 | ) | | | $ | 723.8 | | | $ | 450.9 | |
Depreciation expense was $143.7 million, $75.6 million and $81.7 million during the years ended December 31, 2019, 2018 and 2017, respectively. NaN interest was capitalized during the years ended December 31, 2019, 2018 or 2017.
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CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Property, Plant and Equipment | | December 31, | | | | 2020 | | | 2019 | | Land and land improvements | | $ | 60.5 | | | $ | 57.4 | | Buildings and improvements | | | 339.8 | | | | 333.3 | | Machinery and equipment | | | 916.7 | | | | 849.9 | | Construction in progress | | | 73.2 | | | | 37.0 | | | | | 1,390.2 | | | | 1,277.6 | | Accumulated depreciation | | | (705.7 | ) | | | (553.8 | ) | | | $ | 684.5 | | | $ | 723.8 | |
Depreciation expense was $158.3 million, $143.7 million and $75.6 million during the years ended December 31, 2020, 2019 and 2018, respectively. NaN interest was capitalized during the years ended December 31, 2020, 2019 or 2018. Accrued and Other Liabilities | | December 31, | | | December 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | Compensation and employee benefit liabilities | | $ | 187.3 | | | $ | 94.3 | | | $ | 277.9 | | | $ | 187.3 | | Operating lease liabilities | | | 61.7 | | | | — | | | | 62.4 | | | | 61.7 | | Accrued interest | | | 97.8 | | | | 18.5 | | | | 120.2 | | | | 97.8 | | Deferred revenue | | | 82.6 | | | | 7.6 | | | | 90.0 | | | | 82.6 | | Accrued royalties | | | 63.9 | | | | 1.2 | | | | 21.9 | | | | 63.9 | | Product warranty accrual | | | 61.0 | | | | 15.6 | | | | 45.8 | | | | 42.8 | | Restructuring reserve | | | 24.0 | | | | 29.9 | | | | 22.0 | | | | 24.0 | | Income taxes payable | | | 15.8 | | | | 7.7 | | | | 13.0 | | | | 15.8 | | Value-added taxes payable | | | 27.3 | | | | 12.4 | | | | 29.3 | | | | 27.3 | | Accrued professional fees | | | 32.4 | | | | 19.3 | | | Patent litigation settlement | | | 55.0 | | | | — | | | Contract manufacturing liability | | | | 25.5 | | | | 25.4 | | Patent claims and litigation settlements | | | | 25.7 | | | | 70.1 | | Other | | | 153.2 | | | | 84.9 | | | | 176.9 | | | | 163.3 | | | | $ | 862.0 | | | $ | 291.4 | | | $ | 910.6 | | | $ | 862.0 | |
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CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Accumulated Other Comprehensive Loss The following table presents changes in accumulated other comprehensive loss (AOCL), net of tax: | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | Foreign currency translation | | | | | | | | | | | | | | | | | Balance at beginning of period | | $ | (140.5 | ) | | $ | (52.8 | ) | | $ | (162.7 | ) | | $ | (140.5 | ) | Other comprehensive loss | | | (23.9 | ) | | | (102.5 | ) | | Other comprehensive income (loss) | | | | 82.2 | | | | (23.9 | ) | Amounts reclassified from AOCL | | | 1.7 | | | | 14.8 | | | | — | | | | 1.7 | | Balance at end of period | | $ | (162.7 | ) | | $ | (140.5 | ) | | $ | (80.5 | ) | | $ | (162.7 | ) | | | | | | | | | | | | | | | | | | Hedging instruments | | | | | | | | | | | | | | | | | Balance at beginning of period | | $ | (1.4 | ) | | $ | (4.9 | ) | | $ | (8.9 | ) | | $ | (1.4 | ) | Other comprehensive income (loss) | | | (7.5 | ) | | | 3.5 | | | Other comprehensive loss | | | | (30.1 | ) | | | (7.5 | ) | Balance at end of period | | $ | (8.9 | ) | | $ | (1.4 | ) | | $ | (39.0 | ) | | $ | (8.9 | ) | | | | | | | | | | | | | | | | | | Defined benefit plan activity | | | | | | | | | | | | | | | | | Balance at beginning of period | | $ | (17.3 | ) | | $ | (28.9 | ) | | $ | (25.4 | ) | | $ | (17.3 | ) | Other comprehensive loss | | | (8.4 | ) | | | (1.7 | ) | | | (10.9 | ) | | | (8.4 | ) | Amounts reclassified from AOCL | | | 0.3 | | | | 13.3 | | | | (0.1 | ) | | | 0.3 | | Balance at end of period | | $ | (25.4 | ) | | $ | (17.3 | ) | | $ | (36.4 | ) | | $ | (25.4 | ) | Net AOCL at end of period | | $ | (197.0 | ) | | $ | (159.2 | ) | | $ | (155.9 | ) | | $ | (197.0 | ) |
Amounts reclassified from net AOCL related to foreign currency translation and defined benefit plans are recorded in other expense, net in the Consolidated Statements of Operations. Cash Flow Information | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Cash paid during the period for: | | | | | | | | | | | | | | | | | | | | | | | | | Income taxes, net of refunds | | $ | 120.9 | | | $ | 112.1 | | | $ | 100.9 | | | $ | 94.4 | | | $ | 120.9 | | | $ | 112.1 | | Interest | | | 465.2 | | | | 231.3 | | | | 216.7 | | | | 520.9 | | | | 465.2 | | | | 231.3 | |
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CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) 8. FINANCING | | December 31, | | | December 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | 7.125% senior notes due July 2028 | | | $ | 700.0 | | | $ | — | | 5.00% senior notes due March 2027 | | $ | 750.0 | | | $ | 750.0 | | | | 750.0 | | | | 750.0 | | 8.25% senior notes due March 2027 | | | 1,000.0 | | | | — | | | | 1,000.0 | | | | 1,000.0 | | 6.00% senior notes due June 2025 | | | 1,500.0 | | | | 1,500.0 | | | | 1,300.0 | | | | 1,500.0 | | 5.50% senior notes due June 2024 | | | 650.0 | | | | 650.0 | | | | — | | | | 650.0 | | 5.00% senior notes due June 2021 | | | 150.0 | | | | 650.0 | | | | — | | | | 150.0 | | 6.00% senior secured notes due March 2026 | | | 1,500.0 | | | | — | | | | 1,500.0 | | | | 1,500.0 | | 5.50% senior secured notes due March 2024 | | | 1,250.0 | | | | — | | | | 1,250.0 | | | | 1,250.0 | | Senior secured term loan due April 2026 | | | 3,192.0 | | | | — | | | | 3,160.0 | | | | 3,192.0 | | Senior secured term loan due December 2022 | | | — | | | | 486.3 | | | Senior secured revolving credit facility | | | — | | | | — | | | | — | | | | — | | Total principal amount of debt | | $ | 9,992.0 | | | $ | 4,036.3 | | | $ | 9,660.0 | | | $ | 9,992.0 | | Less: Original issue discount, net of amortization | | | (29.2 | ) | | | (1.5 | ) | | | (24.8 | ) | | | (29.2 | ) | Less: Debt issuance costs, net of amortization | | | (130.4 | ) | | | (48.9 | ) | | | (114.6 | ) | | | (130.4 | ) | Less: Current portion | | | (32.0 | ) | | | — | | | | (32.0 | ) | | | (32.0 | ) | Total long-term debt | | $ | 9,800.4 | | | $ | 3,985.9 | | | $ | 9,488.6 | | | $ | 9,800.4 | |
Senior Notes In connection with the Acquisition, in February 2019,July 2020, CommScope, Finance LLC,Inc., a wholly owned subsidiary of the Company, and an unrestricted subsidiary as defined in the indentures governing the Company’s then-existing senior notes and the credit agreements governing the Company’s then-existing senior secured credit facilities, issued $1.0 billion$700.0 million aggregate principal amount of 8.25%7.125% senior notes due 2027July 2028 (the New Unsecured2028 Notes). The 2028 Notes were offered in a private placement exempt from registration under the Securities Act of 1933, as amended (the Securities Act), to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons outside of the United States in reliance on Regulation S under the Securities Act. The Company used the net proceeds from the offering of the 2028 Notes, together with cash on hand, to redeem and retire all of the outstanding 5.00% senior notes due 2021 (the 2021 Notes) and the outstanding 5.50% senior notes due 2024 (the 2024 Notes) and pay fees and expenses related to the transaction. The Company had previously redeemed $100.0 million of the 2021 Notes in February 2020. The redemption of the 2024 Notes resulted in a charge of $11.9 million which is reflected in other expense, net during the year ended December 31, 2020. In connection with the redemptions of the 2021 Notes and the 2024 Notes, $5.0 million of debt issuance costs were written off and included in interest expense during the year ended December 31, 2020. During 2019, $500.0 million aggregate principal amount of the 2021 Notes was redeemed and resulted in the write-off of $2.1 million of debt issuance costs, which was reflected in interest expense. In connection with issuing the 2028 Notes, the Company incurred costs of $11.7 million during the year ended December 31, 2020 which were recorded as a reduction of the carrying amount of the debt and are being amortized over the term of the 2028 Notes. As of December 31, 2020, the Company had outstanding two series of senior secured notes: (1) $1.5 billion of 6.00% senior secured notes due 2026 issued by CommScope, Inc. in February 2019 (the 2026 Secured Notes) and (2) $1.25 billion of 5.50% senior secured notes due 2024 issued by CommScope, Inc. in February 2019 (the 2024 Secured Notes and, together with the 2026 Secured Notes, the Secured Notes;Notes). In addition to the Secured2028 Notes, together with the New Unsecured Notes, the New Notes). The proceeds from the issuance of the New Notes were held in escrow until the closing of the Acquisition on April 4, 2019 and were then used to fund the Acquisition, which also included the repayment of ARRIS’ outstanding debt of $2.1 billion under its senior secured credit facilities. Concurrent with the closing of the Acquisition, CommScope Finance LLC merged with and into CommScope, Inc., with CommScope, Inc., a wholly owned subsidiary of the Company, continuing as the surviving entity, upon which CommScope, Inc. became the issuer of the New Notes by operation of law. As of December 31, 2019,2020, the Company had outstanding four additionalthree series of senior notes: (1) $750.0$ 750.0 million initial aggregate principal amount of 5.00% senior notes due March 15, 2027 issued by CommScope Technologies LLC (CommScope Technologies), a wholly owned subsidiary of the Company, in March 2017 (the 5.00% 2027 Notes); (2) $1.5$1.3 billion initial aggregate principal amount of 6.00% senior notes due June 15, 2025 issued by CommScope Technologies in June 2015 (the 2025 Notes, and together with the 5.00% 2027 Notes, the CommScope Technologies Notes); (3) $650.0 million$1.0 billion initial aggregate principal amount of 5.50%8.25% senior notes due 2024March 1, 2027 issued by CommScope, Inc. in May 2014February 2019 (the 20248.25% 2027 Notes and, together with the 2027 Notes and the 2025 Notes, the CommScope Technologies Notes); and (4) $650.0 million initial aggregate principal amount of 5.00% senior notes due June 15, 2021 issued by CommScope, Inc. in May 2014 (the 2021 Notes and, together with the New Unsecured2028 Notes, the CommScope, Inc. Notes; the Secured Notes, the CommScope Technologies Notes and the CommScope, Inc. Notes, collectively, the Senior Notes).
92
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The indentures governing the Senior Notes contain covenants that restrict the ability of CommScope, Inc. and its restricted subsidiaries to, among other things, incur additional debt, make certain payments, including payment of dividends (except, in the case of the NewCommScope, Inc. Notes and the Secured Notes, with respect to the Convertible Preferred Stock) or repurchases of equity interests of CommScope, Inc. or the applicable issuer, make loans or acquisitions or capital contributions and certain investments, incur certain liens, sell assets, merge or consolidate or liquidate other entities and enter into certain transactions with affiliates. 97
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
There are no financial maintenance covenants in the indentures governing the Senior Notes. Events of default under the indentures governing the Senior Notes include, among others, non-payment of principal or interest when due, covenant defaults, bankruptcy and insolvency events and cross acceleration to material debt. 6.00% Senior Secured Notes due 2026 and 5.50% Senior Secured Notes due 2024 (the Secured Notes) The 2024 Secured Notes mature on March 1, 2024 and the 2026 Secured Notes mature on March 1, 2026. Interest is payable on the Secured Notes semi-annually in arrears on March 1 and September 1 of each year. The Secured Notes are guaranteed on a senior secured basis by the Company and each of CommScope, Inc.’s existing and future wholly owned domestic restricted subsidiaries that is an obligor under the senior secured credit facilities or certain other debt, subject to certain exceptions. The Secured Notes and the related guarantees are secured on a first-priority basis by security interests in all of the assets that secure indebtedness under the 2026 Term Loan (as defined below) on a first-priority basis, and on a second-priority basis in all assets that secure the new asset-based revolving credit facilityRevolving Credit Facility (as defined below) on a first-priority basis and the 2026 Term Loan on a second-priority basis. The Secured Notes and the related guarantees rank senior in right of payment to all of CommScope, Inc.’s and the guarantors’ subordinated indebtedness and equally in right of payment with all of CommScope, Inc.’s and the guarantors’ senior indebtedness (without giving effect to collateral arrangements), including the senior secured credit facilities and the other Senior Notes. The Secured Notes and the related guarantees are effectively senior to all of CommScope, Inc.’s and the guarantors’ unsecured indebtedness and debt secured by a lien junior to the liens securing the Secured Notes, in each case to the extent of the value of the collateral, and effectively equal to all of CommScope, Inc.’s and the guarantors’ senior indebtedness secured on the same priority basis as the Secured Notes, including the 2026 Term Loan. The Secured Notes and the related guarantees are effectively subordinated to any of CommScope, Inc.’s or the guarantors’ indebtedness that is secured by assets that do not constitute collateral for the Secured Notes and effectively subordinated to any of CommScope, Inc.’s or the guarantors’ indebtedness that is secured by a senior-priority lien, including under the new asset-based revolving credit facility,Revolving Credit Facility, in each case to the extent of the value of the assets securing such indebtedness. In addition, the Secured Notes and related guarantees are structurally subordinated to all existing and future liabilities (including trade payables) of CommScope, Inc.’s subsidiaries that do not guarantee the Secured Notes. 93
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The Secured Notes may be redeemed prior to maturity under certain circumstances. Upon certain change of control events, the Secured Notes may be redeemed at the option of the holders at 101% of their face amount, plus accrued and unpaid interest. The 2024 Secured Notes may be redeemed on or after March 1, 20222021 by CommScope, Inc. at the redemption prices specified in the indenture governing the Secured Notes. Prior to March 1, 2021, the 2024 Secured Notes may be redeemed by CommScope, Inc. at a redemption price equal to 100% of their principal amount, plus a make-whole premium (as specified in the indenture governing the Secured Notes), plus accrued and unpaid interest. Prior to March 1, 2021, under certain circumstances, CommScope, Inc. may also redeem up to 40% of the aggregate principal amount of the 2024 Secured Notes at a redemption price of 105.50%, with respect to the 2024 Secured Notes, and 106.00%, with respect to the 2026 Secured Notes, in each case plus accrued and unpaid interest, using the proceeds of certain equity offerings. In connection with issuing At any time prior to March 1, 2021, CommScope, Inc. may redeem during each calendar year up to 10.0% of the aggregate principal amount of the 2024 Secured Notes the Company incurred costs of $18.4 million during the year ended December 31, 2019, which were recorded asat a reductionredemption price equal to 103.0% of the carryingaggregate principal amount of the debt and are being amortized over the term of the 2024 Secured Notes to be redeemed, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. The 2026 Secured Notes may be redeemed on or after March 1, 2022 by CommScope, Inc. at the redemption prices specified in the indenture governing the 2026 Secured Notes. In connection with issuingPrior to March 1, 2022, the 2026 Secured Notes may be redeemed by CommScope, Inc. at a redemption price equal to 100% of their principal amount, plus a make-whole premium (as specified in the Company incurred costs of $22.0 million duringindenture governing the year ended December 31, 2019, which were recorded as a reductionSecured Notes), plus accrued and unpaid interest. Prior to March 1, 2022, under certain circumstances, CommScope, Inc. may also redeem up to 40% of the carryingaggregate principal amount of the debt and are being amortized over the term of the 2026 Secured Notes.
98
Notes at a redemption price of 106.00%, plus accrued and unpaid interest, using the proceeds of certain equity offerings. At any time prior to March 1, 2022, CommScope, Holding Company, Inc. may redeem during each calendar year up to 10.0% of the aggregate principal amount of the 2026 Secured Notes at a redemption price equal to 103.0% of the aggregate principal amount of the 2026 Secured Notes to Consolidated Financial Statements-(Continued)be redeemed, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. (In millions, unless otherwise noted)
7.125% Senior Notes due 2028 and 8.25% Senior Notes due 2027 5.50% Senior Notes due 2024 and 5.00% Senior Notes due 2021 (the CommScope, Inc. Notes) The New Unsecured2028 Notes mature on July 1, 2028 and the 8.25% 2027 Notes mature on March 1, 2027, the 2024 Notes mature on June 15, 2024 and the 2021 Notes mature on June 15, 2021.2027. Interest is payable on the New Unsecured Notes semi-annually in arrears on Marchthe 2028 Notes on July 1 and SeptemberJanuary 1 of each year and on the 2024 Notes and the 20218.25% 2027 Notes on June 15March 1 and December 15September 1 of each year. The CommScope, Inc. Notes are guaranteed on a senior unsecured basis by each of CommScope, Inc.’s existing and future wholly owned domestic restricted subsidiaries that is an obligor under the senior secured credit facilities or certain other capital markets debt, subject to certain exceptions. The CommScope, Inc. Notes and the related guarantees rank senior in right of payment to all of CommScope, Inc.’s and the guarantors’ subordinated indebtedness and equally in right of payment with all of CommScope, Inc.’s and the guarantors’ senior indebtedness (without giving effect to collateral arrangements), including the senior secured credit facilities and the other Senior Notes. The CommScope, Inc. Notes and the related guarantees are effectively junior to all of CommScope, Inc.’s and the guarantors’ existing and future secured indebtedness, including the Secured Notes and the senior secured credit facilities, to the extent of the value of the assets securing such secured indebtedness. In addition, the CommScope, Inc. Notes and related guarantees are structurally subordinated to all existing and future liabilities (including trade payables) of CommScope, Inc.’s subsidiaries that do not guarantee the CommScope, Inc. Notes. The CommScope, Inc. Notes may be redeemed prior to maturity under certain circumstances. Upon certain change of control events, the CommScope, Inc. Notes may be redeemed at the option of the holders at 101% of their principal amount, plus accrued and unpaid interest. The 2021 Notes and the 2024 Notes may be redeemed at the redemption prices specified in the respective indentures governing the 2021 Notes and the 2024 Notes. The New Unsecured2028 Notes may be redeemed by CommScope, Inc. on or after MarchJuly 1, 20222023 at the redemption prices specified in the indenture governing the New Unsecured2028 Notes. Prior to MarchJuly 1, 2022,2023, the New Unsecured2028 Notes may be redeemed by CommScope, Inc. at a redemption price equal to 100% of their principal amount, plus a make-whole premium (as specified in the indenture governing the New Unsecured2028 Notes), plus accrued and unpaid interest. Prior to July 1, 2023, under certain circumstances, CommScope, Inc. may also redeem up to 40% of the aggregate principal amount of the 2028 Notes at a redemption price of 107.125%, plus accrued and unpaid interest, using the proceeds of certain equity offerings. The 8.25% 2027 Notes may be redeemed by CommScope, Inc. on or after March 1, 2022 at the redemption prices specified in the indenture governing the 8.25% 2027 Notes. Prior to March 1, 2022, the 8.25% 2027 Notes may be redeemed by CommScope, Inc. at a redemption price equal to 100% of their principal amount, plus a make-whole premium (as specified in the indenture governing the 8.25% 2027 Notes), plus accrued and unpaid interest. Prior to March 1, 2022, under certain circumstances, CommScope, Inc. may also redeem up to 40% of the aggregate principal amount of the New Unsecured8.25% 2027 Notes at a redemption price of 108.25%, plus accrued and unpaid interest, using the proceeds of certain equity offerings. 94
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In connection with issuing the New Unsecured Notes, the Company incurred costs of $17.3 million during the year ended December 31, 2019, which were recorded as a reduction of the carrying amount of the debt and are being amortized over the term of the New Unsecured Notes. During 2019, $500.0 million aggregate principal amount of the 2021 Notes was redeemed and resulted in the write-off of $2.1 million of debt issuance costs, which was reflected in interest expense.millions, unless otherwise noted)
5.00% Senior Notes due 2027 and 6.00% Senior Notes due 2025 (the CommScope Technologies Notes) The 5.00% 2027 Notes mature on March 15, 2027 and the 2025 Notes mature on June 15, 2025. Interest is payable on the 5.00% 2027 Notes semi-annually in arrears on March 15 and September 15 of each year and on the 2025 Notes on June 15 and December 15 of each year. The CommScope Technologies Notes are guaranteed on a senior unsecured basis by CommScope, Inc. and each of CommScope, Inc.’s existing and future wholly owned domestic restricted subsidiaries (other than CommScope Technologies) that is an obligor under the senior secured credit facilities or certain other capital markets debt, subject to certain exceptions. The CommScope Technologies Notes and the related guarantees rank senior in right of payment to all of CommScope Technologies’ and the guarantors’ subordinated indebtedness and equally in right of payment with all of CommScope Technologies’ and the guarantors’ senior indebtedness (without giving effect to collateral arrangements), including the senior secured credit facilities and the other Senior Notes. The CommScope Technologies Notes and the related guarantees are effectively junior to all of CommScope Technologies’ and the guarantors’ existing and future secured indebtedness, including the Secured Notes and the senior secured credit facilities, to the extent of the value of the assets securing such secured indebtedness. In addition, the CommScope Technologies Notes and related guarantees are structurally subordinated to all existing and future liabilities (including trade payables) of CommScope, Inc.’s subsidiaries that do not guarantee the CommScope Technologies Notes. 99
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The CommScope Technologies Notes may be redeemed prior to maturity under certain circumstances. Upon certain change of control events, the CommScope Technologies Notes may be redeemed at the option of the holders at 101% of their principal amount, plus accrued and unpaid interest. The 5.00% 2027 Notes may be redeemed by CommScope Technologies on or after March 15, 2022 at the redemption prices specified in the indenture governing the 5.00% 2027 Notes. Prior to March 15, 2022, the 5.00% 2027 Notes may be redeemed by CommScope Technologies at a redemption price equal to 100% of the aggregate principal amount of the 5.00% 2027 Notes to be redeemed, plus a make-whole premium (as specified in the indenture governing the 5.00% 2027 Notes), plus accrued and unpaid interest. Prior to March 15, 2020, under certain circumstances, CommScope Technologies may also redeem up to 40% of the aggregate principal amount of the 2027 Notes at a redemption price of 105%, plus accrued and unpaid interest, using the proceeds of certain equity offerings. The 2025 Notes may be redeemed by CommScope Technologies on or after June 15, 2020 at the redemption prices specified in the indenture governing the 2025 Notes. Prior to June 15, During the year ended December 31, 2020, the 2025 Notes may beCompany redeemed by CommScope Technologies at a redemption price equal to 100% of the aggregate principal amount to be redeemed, plus a make-whole premium (as specified in the indenture governing the 2025 Notes), plus accrued and unpaid interest. Prior to June 15, 2020, under certain circumstances, CommScope Technologies may also redeem up to 40% of the$200.0 million aggregate principal amount of the 20272025 Notes, at a redemption pricewhich resulted in charges of 106%, plus accrued and unpaid interest, using the proceeds of certain equity offerings. $6.0 million that are reflected in other expense, net. In connection with issuing the 2027 Notes, the Company paid $7.2redemptions, $2.6 million of debt issuance costs was written off and included in interest expense during the year ended December 31, 2017, which was recorded as a reduction of the carrying amount of the debt and is being amortized over the term of the notes.2020. Senior Secured Credit Facilities Senior Secured Term Loan Duedue 2026 In connection with the Acquisition, on April 4, 2019, CommScope, Inc. borrowed $3.2 billion, less $32.0 million of original issue discount, under a newThe senior secured term loan due 2026 (the 2026 Term Loan). The Company used a portion of the proceeds from the 2026 Term Loan to pay off the remaining $261.3 million on the 2022 Term Loan and the rest of the proceeds were used to finance the Acquisition. During the first quarter of 2019, the Company repaid $225.0 million of the 2022 Term Loan. In connection with the repayments of the 2022 Term Loan, $4.1 million and $7.7 million of original issue discount and debt issuance costs were written off and included in interest expense for the year ended December 31, 2019. The Company incurred costs of $50.0 million during the year ended December 31, 2019 related to the 2026 Term Loan that were recorded as a reduction of the carrying amount of the debt after closing of the Acquisition and will be amortized over the term of the 2026 Term Loan. The Company also incurred ticking fees related to the 2026 Term Loan of $12.3 million during the year ended December 31, 2019 that were included in interest expense.
The 2026 Term Loan has scheduled amortization payments of $32.0 million per year due in equal quarterly installments, beginningwhich began with the quarter endingended December 31, 2019, with the balance due at maturity (April 2026). The current portion of long-term debt reflects $32.0 million of repayments due under the 2026 Term Loan. The interest rate is, at the Company’s option, either (1) the base rate (which is the highest of (w) the greater of the then-current federal funds rate set by the Federal Reserve Bank of New York and the overnight federal funds rate, in each case, plus 0.5%, (x) the prime rate on such day, (y) the one-month Eurodollar rate published on such date plus 1.00% and (z) 1.00% per annum) plus an applicable margin of 2.25% or (2) one-, two-, three- or six-month LIBOR or, if available from all lenders, 12-month LIBOR or any shorter period (selected at the option of CommScope, Inc.) plus an applicable margin of 3.25%. The 2026 Term Loan is subject to a LIBOR floor of 0.00%.
Subject to certain conditions, the 2026 Term Loan may be increased or a new incremental term loan facility may be added to increase the capacity by up to the sum of the greater of $950.0 million and 50% of Consolidated EBITDA, as defined in the credit agreement governing the 2026 Term Loan (the Credit Agreement), plus an unlimited amount as long as on a pro forma basis the Company meets certain net leverage ratios or fixed charge ratios as defined in the Credit Agreement. 10095
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) CommScope, Inc. may voluntarily prepay loans under the 2026 Term Loan, subject to minimum amounts, with prior notice but without premium or penalty. CommScope, Inc. must prepay the 2026 Term Loan with the net cash proceeds of certain asset sales, the incurrence or issuance of specified refinancing indebtedness and, commencing with the fiscal year ending in December 2020, 50% of excess cash flow (such percentage subject to reduction based on the achievement of specified Consolidated First Lien Net Leverage Ratios), in each case, subject to certain reinvestment rights and other exceptions. CommScope, Inc.’s obligations under the 2026 Term Loan are guaranteed by the Company and each of CommScope, Inc.’s direct and indirect wholly owned U.S. subsidiaries (subject to certain permitted exceptions based on immateriality thresholds of aggregate assets and revenues of excluded U.S. subsidiaries). The 2026 Term Loan is secured by a lien on substantially all of CommScope, Inc.’s and the guarantors’ current and fixed assets (subject to certain exceptions), and the 2026 Term Loan will have a first-priority lien on all fixed assets and a second-priority lien on all current assets (second in priority to the liens securing the new asset-based revolving credit facility)Revolving Credit Facility), in each case, subject to other permitted liens. The 2026 Term Loan contains customary negative covenants consistent with those applicable to the New Notes, including, but not limited to, restrictions on the ability of CommScope, Inc. and its subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, pay dividends (except with respect to the Convertible Preferred Stock) or make other restricted payments, sell or otherwise transfer assets or enter into certain transactions with affiliates. The 2026 Term Loan provides that, upon the occurrence of certain events of default, the obligations thereunder may be accelerated. Such events of default will include payment defaults, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy proceedings, material money judgments, material pension-plan events, change of control and other customary events of default. During the year ended December 31, 2020, the Company made scheduled amortization payments of $32.0 million due in equal quarterly installments on the 2026 Term Loan. The current portion of long-term debt reflects $32.0 million of repayments due under the 2026 Term Loan. NaN portion of the 2026 Term Loan was reflected as a current portion of long-term debt as of December 31, 2020 related to the potentially required excess cash flow payment because no such payment is expected to be required. During 2019, the Company paid off the then existing senior secured term loan due 2022 (the 2022 Term Loan). In connection with the repayments of the 2022 Term Loan, $4.1 million of original issue discount and $7.7 million of debt issuance costs were written off and included in interest expense for the year ended December 31, 2019. The Company also incurred ticking fees related to the 2026 Term Loan of $12.3 million during the year ended December 31, 2019 that were included in interest expense. Senior Secured Revolving Credit Facility On April 4, 2019, the Company replaced itsThe Company’s asset-based revolving credit facility with a new asset-based revolving credit facility in an amount(the Revolving Credit Facility) provides borrowing capacity of up to $1.0 billion, subject to borrowing capacity,certain limitations, with a maturity in April 2024, available to CommScope, Inc. and its U.S. subsidiaries designated as co-borrowers (the Revolving Borrowers). The ability to draw under the new asset-based revolving credit facilityRevolving Credit Facility or issue letters of credit is conditioned upon, among other things, delivery of prior written notice of a borrowing or issuance, as applicable, the ability of the borrowers to reaffirm the representations and warranties contained in the new asset-based revolving credit facilityRevolving Credit Facility and the absence of any default or event of default. In connection with the new asset-based revolving credit facility, the Company incurred costs of approximately $13.2 million in the year ended December 31, 2019, which were recorded in other noncurrent assets and are being amortized over the term of the credit facility. The Company borrowed and repaid $15.0$250.0 million under the new asset-based revolving credit facilityRevolving Credit Facility during the year ended December 31, 2019.2020. As of December 31, 2019,2020, the Company had 0 outstanding borrowings under the new asset-based revolving credit facilityRevolving Credit Facility and had availability of $796.8$735.1 million, after giving effect to borrowing base limitations and outstanding letters of credit.
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CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Letters of credit under the new asset-based revolving credit facilityRevolving Credit Facility are limited to the lesser of (x) $250.0 million and (y) the aggregate unused amount of commitments under the new asset-based revolving credit facilityRevolving Credit Facility then in effect. Subject to certain conditions, the new asset-based revolving credit facilityRevolving Credit Facility may be expanded by up to $400.0 million in additional commitments. Loans under the new asset-based revolving credit facilityRevolving Credit Facility may be denominated, at the option of the Revolving Borrowers, in U.S. dollars, euros, pounds sterling or Swiss francs. Borrowings under the new asset-based revolving credit facilityRevolving Credit Facility are limited by borrowing base calculations based on the sum of specified percentages of eligible accounts receivable and eligible inventory, minus the amount of any applicable reserves. Borrowings will bear interest at a floating rate, which can be either an adjusted Eurodollar rate plus an applicable margin of 1.25% to 1.50% or, at the option of the Revolving Borrowers, a base rate plus an applicable margin of 0.25% to 0.50%. 101
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The obligations of the Revolving Borrowers under the new asset-based revolving credit facilityRevolving Credit Facility are guaranteed by the Company, CommScope, Inc. and each of CommScope, Inc.’s direct and indirect wholly owned U.S. subsidiaries (subject to certain permitted exceptions based on immateriality thresholds of aggregate assets and revenues of excluded U.S. subsidiaries). The new asset-based revolving credit facilityRevolving Credit Facility is secured by a lien on substantially all of the Revolving Borrowers’ and the guarantors’ current and fixed assets (subject to certain exceptions). The new asset-based revolving credit facilityRevolving Credit Facility has a first-priority lien on all current assets and a second-priority lien on all fixed assets (second in priority to the liens securing the 2024 Secured Notes, the 2026 Secured Notes and the 2026 Term Loan), in each case, subject to other permitted liens. The following fees are applicable under the new asset-based revolving credit facility:Revolving Credit Facility: (i) an unused line fee of (x) 0.25% per annum of the unused portion of the new asset-based revolving credit facilityRevolving Credit Facility when the average unused portion of the facility is less than 50% of the aggregate commitments under the new asset-based revolving credit facilityRevolving Credit Facility or (y) 0.375% per annum of the unused portion of the new asset-based revolving credit facilityRevolving Credit Facility when the average unused portion of the facility is equal to or greater than 50% of the aggregate commitments under the new asset-based revolving credit facility;Revolving Credit Facility; (ii) a letter of credit participation fee on the aggregate stated amount of each letter of credit equal to the applicable margin for adjusted Eurodollar rate loans, as applicable; (iii) a letter of credit fronting fee of 0.125% per annum, multiplied by the average aggregate daily maximum amount available to be drawn under all applicable letters of credit issued by such letter of credit issuer; and (iv) certain other customary fees and expenses of the lenders and agents thereunder. The Revolving Borrowers will be required to make prepayments under the new asset-based revolving credit facilityRevolving Credit Facility at any time when, and to the extent that, the aggregate amount of the outstanding loans and letters of credit under the new asset-based revolving credit facilityRevolving Credit Facility exceeds the lesser of the aggregate amount of commitments in respect of the new asset-based revolving credit facilityRevolving Credit Facility and the borrowing base. The new asset-based revolving credit facilityRevolving Credit Facility contains customary covenants, including, but not limited to, restrictions on the ability of CommScope, Inc. and its subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends (except with respect to the Convertible Preferred Stock), sell or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness, enter into certain transactions with affiliates or change lines of business. The new asset-based revolving credit facilityRevolving Credit Facility contains a Covenant Fixed Charge Coverage Ratio (as defined in the credit agreement governing the asset-based revolving credit facility)Revolving Credit Facility) of 1.00 to 1.00. The credit agreement provides that the Covenant Fixed Charge Coverage Ratio must be tested and must exceed the level set forth above only; in the event that excess availability under the asset-based revolving credit facilityRevolving Credit Facility is less than the greater of $80 million and 10% of the borrowing base as of the end of anythe most recent fiscal quarter, the Covenant Fixed Charge Coverage Ratio for that fiscal quarter must be tested and must exceed the level set forth above.quarter. As of December 31, 2019,2020, the Company’s excess availability and Covenant Fixed Charge Coverage Ratio were in excess of the asset-based revolving credit facility’sRevolving Credit Facility’s requirements. The new asset-based revolving credit facilityRevolving Credit Facility provides that, upon the occurrence of certain events of default, the obligations thereunder may be accelerated and the lending commitments terminated. Such events of default include payment defaults, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy proceedings, material money judgments, material pension-plan events, certain change of control events and other customary events of default. Other Matters
The following table summarizes scheduled maturities of long-term debt as of December 31, 2019:
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Scheduled maturities of long-term debt | $ | 32.0 | | $ | 182.0 | | $ | 32.0 | | $ | 32.0 | | $ | 1,932.0 | | $ | 7,782.0 | |
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CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Other Matters The following table summarizes scheduled maturities of long-term debt as of December 31, 2020: | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | Thereafter | | Scheduled maturities of long-term debt | | $ | 32.0 | | | $ | 32.0 | | | $ | 32.0 | | | $ | 1,282.0 | | | $ | 1,332.0 | | | $ | 6,950.0 | |
The Company’s non-guarantor subsidiaries held $2,466 million, or 18%, of total assets and $956 million, or 8%, of total liabilities as of December 31, 2020 and accounted for $2,430 million, or 29%, of net sales for the year ended December 31, 2020. As of December 31, 2019, the non-guarantor subsidiaries held $3,773 million, or 26%, of total assets and $714 million, or 6%, of total liabilities as of December 31, 2019 and accounted for $3,044 million, or 37%, of net sales for the year ended December 31, 2019. As of December 31, 2018, the non-guarantor subsidiaries held $2,354 million, or 36%, of total assets and $454 million, or 9%, of total liabilities. For the year ended December 31, 2018,2019, the non-guarantor subsidiaries accounted for $1,835$3,044 million, or 40%37%, of net sales. All amounts presented exclude intercompany balances. The Company is dependent upon the earnings and cash flow of its subsidiaries to make certain payments, including debt and interest payments. Certain subsidiaries may have limitations or restrictions on transferring funds to other subsidiaries that may be necessary to meet those requirements. The weighted average effective interest rate on outstanding borrowings, including the impact of the interest rate swap, and the amortization of debt issuance costs and original issue discount, was 5.86% at December 31, 2020 and 6.13% at December 31, 2019 and 5.73% at December 31, 2018.2019. 9. DERIVATIVES AND HEDGING ACTIVITIES Derivatives Not Designated As Hedging Instruments The Company uses forward contracts to hedge a portion of its balance sheet foreign exchange re-measurement risk and to hedge certain planned foreign currency expenditures. As of December 31, 2019,2020, the Company had foreign exchange contracts outstanding with maturities of up to tensix months and aggregate notional values of $508.0$515.5 million (based on exchange rates as of December 31, 2019)2020). Unrealized gains and losses resulting from these contracts are recognized in other expense, net and partially offset corresponding foreign exchange gains and losses on the balances and expenditures being hedged. The following table presents the balance sheet location and fair value of the Company’s derivatives not designated as hedging instruments: | | | | Fair Value of Asset (Liability) | | | | | | | | | | | December 31, | | | | | December 31, | | | | Balance Sheet Location | | 2019 | | | 2018 | | | Contract Type | | | Location of Asset (Liability) | | 2020 | | | 2019 | | Foreign currency contracts | | Prepaid expenses and other current assets | | $ | 4.9 | | | $ | 1.7 | | | Prepaid expenses and other current assets | | $ | 11.7 | | | $ | 4.9 | | Foreign currency contracts | | Accrued and other liabilities | | | (5.9 | ) | | | (3.0 | ) | | Accrued and other liabilities | | | (3.3 | ) | | | (5.9 | ) | Total derivatives not designated as hedging instruments | | | | $ | (1.0 | ) | | $ | (1.3 | ) | | | | $ | 8.4 | | | $ | (1.0 | ) |
The pretax impact of the foreign currency forward contracts, both matured and outstanding, on the Consolidated Statements of Operations is as follows: Foreign Currency Forward Contracts | | Location of Gain (Loss) | | Gain (Loss) Recognized | | Year ended December 31, 2019 | | Other expense, net | | $ | (13.6 | ) | Year ended December 31, 2018 | | Other expense, net | | $ | (17.8 | ) | Year ended December 31, 2017 | | Other expense, net | | $ | 28.6 | |
| | Year Ended December 31, | | Location of Gain (Loss) | | 2020 | | | 2019 | | | 2018 | | Other expense, net | | $ | 24.9 | | | $ | (13.6 | ) | | $ | (17.8 | ) |
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CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Derivative Instruments Designated As Net Investment Hedges The Company has a hedging strategy to designate certain foreign currency contracts as net investment hedges to mitigate a portion of the foreign currency risk on the euro net investment in a foreign subsidiary. As of December 31, 2019,2020, the Company held designated foreign currency contracts with outstanding maturities of up to eighteensix months and an aggregate notional value of $300 million. For the year ended December 31, 2019, the Company recognized $4.4 million of pre-tax income in interest expense as a result of amounts excluded from hedge effectiveness under the spot method. As of December 31, 20192020 and 2018,2019, there was no ineffectiveness on the instruments designated as net investment hedges. 103
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The following table presents the balance sheet location and fair value of the derivative instruments designated as net investment hedges: | | | | Fair Value of Asset (Liability) | | | | | | | | | | | December 31, | | | | | December 31, | | | | Balance Sheet Location | | 2019 | | | 2018 | | | Contract Type | | | Location of Asset (Liability) | | 2020 | | | 2019 | | Foreign currency contracts | | Prepaid expenses and other current assets | | $ | — | | | $ | 0.8 | | | Other noncurrent assets | | $ | — | | | $ | 5.8 | | Foreign currency contracts | | Other noncurrent assets | | | 5.8 | | | | — | | | Accrued and other liabilities | | | (21.1 | ) | | | — | | Total derivatives designated as hedging instruments | | | | $ | 5.8 | | | $ | 0.8 | | | Total derivatives designated as net investment hedging instruments | | | | | $ | (21.1 | ) | | $ | 5.8 | |
The after tax impact of the forward contracts designated as net investment hedging instruments, both matured and outstanding, on the Consolidated Statements of Operations is as follows: Foreign Currency Forward Contracts | | Location of Gain (Loss) | | Effective Portion of Gain (Loss) Recognized | | Year ended December 31, 2019 | | Other comprehensive income (loss), net of tax | | $ | 5.6 | | Year ended December 31, 2018 | | Other comprehensive income (loss), net of tax | | $ | 3.5 | | Year ended December 31, 2017 | | Other comprehensive income (loss), net of tax | | $ | (5.0 | ) |
| | Year Ended December 31, | | Location of Gain (Loss) | | 2020 | | | 2019 | | | 2018 | | Other comprehensive income (loss), net of tax | | $ | (19.9 | ) | | $ | 5.6 | | | $ | 3.5 | |
Derivative Instruments Designated As Cash Flow Hedges of Interest Rate Risk As part of the Company’sThe Company has a hedging strategy to mitigate a portion of the exposure to changes in cash flows resulting from variable interest rates on the 2026 Term Loan which are based on the one-month LIBOR benchmark rate (see Note 8), during the first quarter of 2019, the Company entered into and designated pay-fixed, receive-variable interest rate swap derivatives as cash flow hedges of interest rate risk which effectively fixed the interest rate on a portion the variable-rate debt. Totalsenior secured term loan due 2026. The total notional amount of the interest rate swap derivatives as of December 31, 20192020 was $600 million with outstanding maturities up to fifty-onethirty-nine months. There were no derivative instruments designated as cash flow hedgesAs of interest rate risk during the years ended December 31, 2018 or 2017. As of December 31,2020 and 2019,, there was no ineffectiveness on the instruments designated as cash flow hedges. The Company did not have derivative instruments designated as cash flow hedges of interest rate during the year ended December 31, 2018.
The following table presents the balance sheet location and fair value of the derivative instruments designated as cash flow hedges of interest rate risk: | | | | Fair Value of Asset (Liability) | | | | | | | | | Balance Sheet Location | | December 31, 2019 | | | December 31, 2018 | | | | | December 31, | | Contract Type | | | Location of Asset (Liability) | | 2020 | | | 2019 | | Interest rate swap contracts | | Other noncurrent liabilities | | $ | (16.3 | ) | | $ | — | | | Other noncurrent liabilities | | $ | (29.9 | ) | | $ | (16.3 | ) | Total derivatives designated as cash flow hedges of interest rate risk | | $ | (16.3 | ) | | $ | — | | |
The impact of the effective portion of the interest rate swap contracts designated as cash flow hedging instruments on the Consolidated Statements of Comprehensive Income (Loss) is as follows: Interest Rate Derivatives | | Location of Loss | | Effective Portion of Loss Recognized | | Year Ended December 31, 2019 | | Other comprehensive income (loss), net of tax | | $ | (12.2 | ) |
| | Year Ended December 31, | | Location of Gain (Loss) | | 2020 | | | 2019 | | Other comprehensive income (loss), net of tax | | $ | (10.2 | ) | | $ | (12.2 | ) |
10499
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) 10. FAIR VALUE MEASUREMENTS The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, debt instruments, interest rate derivatives and foreign currency contracts. For cash and cash equivalents, trade receivables and trade payables, the carrying amounts of these financial instruments as of December 31, 20192020 and December 31, 20182019 were considered representative of their fair values due to their short terms to maturity. The fair values of the Company’s debt instruments, interest rate derivatives and foreign currency contracts were based on indicative quotes. Fair value measurements using quoted prices in active markets for identical assets and liabilities fall within Level 1 of the fair value hierarchy, measurements using significant other observable inputs fall within Level 2, and measurements using significant unobservable inputs fall within Level 3. The carrying amounts, estimated fair values and valuation input levels of the Company’s debt instruments, interest rate derivatives and foreign currency contracts as of December 31, 20192020 and December 31, 2018,2019, are as follows: | | December 31, 2019 | | | December 31, 2018 | | | | | December 31, 2020 | | | December 31, 2019 | | | | | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | | | Valuation Inputs | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | | | Valuation Inputs | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency contracts | | $ | 10.7 | | | $ | 10.7 | | | $ | 2.5 | | | $ | 2.5 | | | Level 2 | | $ | 11.7 | | | $ | 11.7 | | | $ | 10.7 | | | $ | 10.7 | | | Level 2 | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 7.125% senior notes due 2028 | | | $ | 700.0 | | | $ | 743.8 | | | $ | — | | | $ | — | | | Level 2 | 5.00% senior notes due 2027 | | | 750.0 | | | | 696.4 | | | | 750.0 | | | | 608.0 | | | Level 2 | | | 750.0 | | | | 741.5 | | | | 750.0 | | | | 696.4 | | | Level 2 | 8.25% senior notes due 2027 | | | 1,000.0 | | | | 1,052.5 | | | | — | | | | — | | | Level 2 | | | 1,000.0 | | | | 1,068.5 | | | | 1,000.0 | | | | 1,052.5 | | | Level 2 | 6.00% senior notes due 2025 | | | 1,500.0 | | | | 1,501.7 | | | | 1,500.0 | | | | 1,355.6 | | | Level 2 | | | 1,300.0 | | | | 1,329.3 | | | | 1,500.0 | | | | 1,501.7 | | | Level 2 | 5.50% senior notes due 2024 | | | 650.0 | | | | 656.0 | | | | 650.0 | | | | 591.8 | | | Level 2 | | | — | | | | — | | | | 650.0 | | | | 656.0 | | | Level 2 | 5.00% senior notes due 2021 | | | 150.0 | | | | 149.9 | | | | 650.0 | | | | 641.9 | | | Level 2 | | | — | | | | — | | | | 150.0 | | | | 149.9 | | | Level 2 | 6.00% senior secured notes due 2026 | | | 1,500.0 | | | | 1,595.6 | | | | — | | | | — | | | Level 2 | | | 1,500.0 | | | | 1,576.8 | | | | 1,500.0 | | | | 1,595.6 | | | Level 2 | 5.50% senior secured notes due 2024 | | | 1,250.0 | | | | 1,302.1 | | | | — | | | | — | | | Level 2 | | | 1,250.0 | | | | 1,285.9 | | | | 1,250.0 | | | | 1,302.1 | | | Level 2 | Senior secured term loan due 2026 | | | 3,192.0 | | | | 3,219.9 | | | | — | | | | — | | | Level 2 | | | 3,160.0 | | | | 3,156.1 | | | | 3,192.0 | | | | 3,219.9 | | | Level 2 | Senior secured term loan due 2022 | | | — | | | | — | | | | 486.3 | | | | 461.9 | | | Level 2 | | Senior secured revolving credit facility | | | | — | | | | — | | | | — | | | | — | | | Level 2 | Foreign currency contracts | | | 5.9 | | | | 5.9 | | | | 3.0 | | | | 3.0 | | | Level 2 | | | 24.4 | | | | 24.4 | | | | 5.9 | | | | 5.9 | | | Level 2 | Interest rate swap contracts | | | 16.3 | | | | 16.3 | | | | — | | | | — | | | Level 2 | | | 29.9 | | | | 29.9 | | | | 16.3 | | | | 16.3 | | | Level 2 |
Non-Recurring Fair Value Measurements During the fourthsecond quarter of 2019,2020, the Company recorded a pretax goodwill impairment charge of $376.1$206.7 million related to the CPE, N&C and Ruckus segmentsHome Networks reporting unit in the Home segment (see Note 4). The fair value of eachthe reporting unit was determined as of May 31, 2020 using a discounted cash flow (DCF) model and a guideline public company approach, with 75% of the value determined using the DCF model and 25% of the value determined using the market approach.model. Under the DCF method, the fair value of a reporting unit is based on the present value of estimated future cash flows. Under the guideline public company method, the fair value is based upon market multiples of revenue and earnings derived from publicly traded companies with similar operating and investment characteristics as the reporting unit. The inputs to both the DCF model and the guideline public company analysis arewere Level 3 valuation inputs. Changes in any of these inputs, among other factors, could negatively affect the fair value of one or more of the Company’s reporting units and result in a material impairment charge in the future. During the fourth quarter of 2018,2019, the Company recorded a pretax goodwill impairment charge of $15.0$376.1 million that was allocated equallyrelated to the ConnectivityBroadband, Home and MobilityVCN segments to fully impair an equity investment in a privately-held company.(see Note 4). The determination of the impairment charge was based on Level 3 valuation inputs. These fair value estimates are based on pertinent information available to management as of the valuation date. Although management is not aware of any factors that would significantly affect these fair value estimates, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from the amounts presented. 105100
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) 11. RESTRUCTURING COSTS The Company incurs costs associated with restructuring initiatives intended to improve overall operating performance and profitability. The costs related to restructuring actions are generally composedcash-based and primarily consist of employee-related costs, fixed asset relatedwhich include severance and other one-time termination benefits. In addition to the employee-related costs, and lease related costs. Employee-relatedthe Company records other costs include the expected severance costs and related benefits as well as one-time severance benefits that are accrued over the remaining period employees are required to work in order to receive such benefits. Fixed asset related costs include non-cash impairments or fixed asset disposals associated with restructuring actions in addition tosuch as the cash costs to uninstall, pack, ship and reinstall manufacturing equipment and the costs to prepare the receiving facility to accommodate relocated equipment. Fixed asset related costs are expensed as incurred. Cash paid is net of proceeds received from(gain) loss on the sale of related assets. Effective January 1, 2019, with the adoption of ASU No. 2016-02, Leases, lease exit obligations related to unused leased facilities are reported as part of lease liabilities. Contract termination relatedand impairment costs include non-cash impairments of lease assets related to restructuring actions in addition to any one-time cash termination costs. As a result of restructuring and consolidation actions, the Company ownsarising from unutilized real estate at various facilities in the U.S. and internationally.or equipment. The Company is attemptingattempts to sell or lease this unutilized space. Additionalspace but additional impairment charges may be incurred related to these or other excess assets.
The Company’s net pretax restructuring charges, by segment, were as follows: | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Connectivity | | $ | 12.4 | | | $ | 24.2 | | | $ | 36.6 | | Mobility | | | 11.2 | | | | 19.8 | | | | 7.2 | | CPE | | | 23.2 | | | | — | | | | — | | N&C | | | 32.1 | | | | — | | | | — | | Ruckus | | | 8.8 | | | | — | | | | — | | Total | | $ | 87.7 | | | $ | 44.0 | | | $ | 43.8 | |
| | | | | | | | | | Year Ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Broadband | | $ | 17.8 | | | $ | 36.9 | | | $ | 11.7 | | Home | | | 30.0 | | | | 23.2 | | | | — | | OWN | | | 15.7 | | | | 6.9 | | | | 17.1 | | VCN | | | 24.9 | | | | 20.7 | | | | 15.2 | | Total | | $ | 88.4 | | | $ | 87.7 | | | $ | 44.0 | |
Restructuring reserves were included in the Company’s Consolidated Balance Sheets as follows: | | December 31, | | | December 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | Accrued and other liabilities | | $ | 24.0 | | | $ | 29.9 | | | $ | 22.0 | | | $ | 24.0 | | Other noncurrent liabilities | | | 4.4 | | | | 5.1 | | | | 4.0 | | | | 4.4 | | Total liability | | $ | 28.4 | | | $ | 35.0 | | | $ | 26.0 | | | $ | 28.4 | |
ARRIS Integration Restructuring Actions In anticipation of and following the ARRIS Acquisition, the Company initiated a series of restructuring actions, which are currently ongoing, to integrate and streamline operations and achieve cost synergies. The activity within the liability established for the ARRIS integration restructuring actions was as follows: | | Employee- Related Costs | | | Contractual Termination Costs | | | Total | | | Employee- Related Costs | | | Other | | | Total | | Balance at December 31, 2018 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | Obligation assumed in ARRIS acquisition | | | 2.3 | | | | — | | | | 2.3 | | | | 2.3 | | | | — | | | | 2.3 | | Additional charge recorded | | | 81.8 | | | | 4.3 | | | | 86.1 | | | Additional expense | | | | 81.8 | | | | 4.3 | | | | 86.1 | | Cash paid | | | (60.9 | ) | | | (1.0 | ) | | | (61.9 | ) | | | (60.9 | ) | | | (1.0 | ) | | | (61.9 | ) | Foreign exchange and other non-cash items | | | (0.1 | ) | | | (1.3 | ) | | | (1.4 | ) | | Non-cash items | | | | (0.1 | ) | | | (1.3 | ) | | | (1.4 | ) | Balance at December 31, 2019 | | $ | 23.1 | | | $ | 2.0 | | | $ | 25.1 | | | | 23.1 | | | | 2.0 | | | | 25.1 | | Additional expense | | | | 78.3 | | | | 10.1 | | | | 88.4 | | Cash (paid) received | | | | (77.2 | ) | | | 3.0 | | | | (74.2 | ) | Non-cash items | | | | 0.2 | | | | (14.3 | ) | | | (14.1 | ) | Balance at December 31, 2020 | | | $ | 24.4 | | | $ | 0.8 | | | $ | 25.2 | |
The ARRIS integration actions include headcount reductions in manufacturing, sales, engineering, marketing and administrative functions. The Company expects to make cash payments of $21.4 million during 2021 and additional cash payments of $3.8 million in 2022 to settle the announced ARRIS integration initiatives. 106101
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The Company continues to implement certain facility consolidation actions as part of its ARRIS integration actions include headcount reductionsplans. During the year ended December 31, 2020, the Company completed the sale of its facility in sales, engineering, marketingForest, Virginia and administrative functions. Therecorded net proceeds of $4.8 million resulting in a gain on the sale of the facility of $2.1 million, which is included in restructuring costs, net on the Consolidated Statements of Operations. In addition, during the year ended December 31, 2020, the Company expectsrecorded $8.8 million of impairment of operating lease right of use assets related to make cash paymentsceasing use of $21.4certain leased facilities and $2.8 million during 2020 and additional cash payments of $3.7 million between 2021 and 2022 to settlefixed asset impairments as part of restructuring activities, which are both included in restructuring costs, net on the announced ARRIS integration initiatives. Consolidated Statements of Operations. Additional restructuring actions related to the ARRIS integration are expected to be identified and the resulting charges and cash requirements are expected to be material. Broadband Network Systems (BNS)BNS Integration Restructuring Actions
Following the acquisition of BNS,Broadband Network Solutions (BNS) business in 2015, the Company initiated a series of restructuring actions which are currently ongoing, to integrate and streamline operations and achieve cost synergies. The activity within the liability established for the BNS integration restructuring actions was as follows: | | Employee- Related Costs | | | Contractual Termination Costs | | | Fixed Asset Related Costs | | | Total | | Balance at December 31, 2016 | | $ | 32.7 | | | $ | 0.4 | | | $ | — | | | $ | 33.1 | | Additional charge recorded | | | 33.6 | | | | 1.3 | | | | 8.2 | | | | 43.1 | | Cash paid | | | (41.1 | ) | | | (0.6 | ) | | | (0.6 | ) | | | (42.3 | ) | Consideration received | | | — | | | | — | | | | 2.7 | | | | 2.7 | | Foreign exchange and other non-cash items | | | 0.4 | | | | — | | | | (10.3 | ) | | | (9.9 | ) | Balance at December 31, 2017 | | | 25.6 | | | | 1.1 | | | | — | | | | 26.7 | | Additional charge recorded | | | 41.0 | | | | 1.5 | | | | (0.8 | ) | | | 41.7 | | Cash paid | | | (37.1 | ) | | | (2.3 | ) | | | (0.8 | ) | | | (40.2 | ) | Consideration received | | | — | | | | — | | | | 11.1 | | | | 11.1 | | Foreign exchange and other non-cash items | | | (0.3 | ) | | | — | | | | (9.5 | ) | | | (9.8 | ) | Balance at December 31, 2018 | | | 29.2 | | | | 0.3 | | | | — | | | | 29.5 | | Additional charge recorded | | | 1.4 | | | | 0.3 | | | | (0.2 | ) | | | 1.5 | | Cash paid | | | (27.1 | ) | | | (0.6 | ) | | | (0.2 | ) | | | (27.9 | ) | Foreign exchange and other non-cash items | | | (0.2 | ) | | | — | | | | 0.4 | | | | 0.2 | | Balance at December 31, 2019 | | $ | 3.3 | | | $ | — | | | $ | — | | | $ | 3.3 | |
The BNS integration actions include the announced closures or reduction in activities at various U.S. and international facilities as well as headcount reductions in sales, marketing and administrative functions. The Company has recognized restructuring charges of $153.0 million since the BNS acquisition for integration actions. No additional restructuring actions are expected in connection with the BNS integration initiatives. The Company expects to make cash paymentshas accrued $0.8 million for these BNS integration restructuring actions as of December 31, 2020. The Company paid $2.5 million during the year ended December 31, 2020 and additionalexpects to make cash payments of $0.8 million between 2021 and 2022. 12. EMPLOYEE BENEFIT PLANS Defined Contribution Plans The Company and certain of its subsidiaries have defined contribution retirement savings plans, the most significant of which is a 401(k) plan in the U.S. With the acquisition of ARRIS, the Company assumed sponsorship of their U.S. 401(k) plan and various other domestic and international defined contribution retirement savings plans. These plans allow employees meeting certain requirements to contribute a portion of their compensation on a pretax and/or after-tax basis in accordance with guidelines established by the plans and the Internal Revenue Service or other tax authorities. The Company matches a percentage of the employee contributions up to certain limits. During the years ended December 31, 2020, 2019 2018 and 2017,2018, the Company made contributions to defined contribution retirement savings plans of $56.6 million, $41.8 million $24.0 million and $25.9$24.0 million, respectively. The Company also maintains noncontributory and contributory deferred compensation plans including some assumed with the acquisition of ARRIS.plans. During the years ended December 31, 2020, 2019 2018 and 2017,2018, the Company recognized pretax costs of $2.6 million, $3.5 million $0.7 million and $2.9$0.7 million, respectively, related to these plans. The liability related to these plans was $43.8$43.2 million and $32.6$43.8 million as of December 31, 20192020 and 2018,2019, respectively. 107102
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Pension Plans The Company sponsors defined benefit pension plans covering certain active and former domestic employees and certain current and former foreign employees. With the acquisition of ARRIS, the Company assumed sponsorship of various other domestic and international defined benefit pension plans covering current and former employees. Included in the defined benefit pension plans are both funded and unfunded plans. The following table summarizes information for the defined benefit pension plans: | | December 31, | | | December 31, | | | | U.S. Plans | | | | | Non-U.S. Plans | | | U.S. Plans | | | | | Non-U.S. Plans | | | | 2019 | | | 2018 | | | | 2019 | | | | | 2018 | | | 2020 | | | 2019 | | | | 2020 | | | | | 2019 | | Change in benefit obligation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefit obligation, beginning | | $ | 2.2 | | | $ | 156.7 | | | | $ | 208.8 | | | | $ | 240.7 | | | $ | 12.8 | | | $ | 2.2 | | | | $ | 251.5 | | | | $ | 208.8 | | Obligation assumed in ARRIS acquisition | | | 10.0 | | | | — | | 12.6 | | — | | | | — | | | | 10.0 | | — | | 12.6 | | Service cost | | | — | | | | — | | | | 4.0 | | | | 4.1 | | | | — | | | | — | | | | 4.3 | | | | 4.0 | | Interest cost | | | 0.3 | | | | 4.2 | | | | 5.2 | | | | 5.2 | | | | 0.3 | | | | 0.3 | | | | 4.0 | | | | 5.2 | | Actuarial loss (gain) | | | 0.9 | | | | (4.6 | ) | | | | 27.5 | | | | (18.0 | ) | | Actuarial loss | | | | 1.1 | | | | 0.9 | | | | 29.1 | | | | 27.5 | | Benefits paid | | | (0.6 | ) | | | (10.7 | ) | | | | (4.6 | ) | | | | (9.4 | ) | | | (0.7 | ) | | | (0.6 | ) | | | | (5.3 | ) | | | | (4.6 | ) | Settlements | | | — | | | | (143.4 | ) | | | | (6.4 | ) | | | | (0.8 | ) | | | — | | | | — | | | | (9.2 | ) | | | | (6.4 | ) | Foreign exchange and other | | | — | | | | — | | | | | 4.4 | | | | | (13.0 | ) | | | — | | | | — | | | | | 36.1 | | | | | 4.4 | | Benefit obligation, ending | | $ | 12.8 | | | $ | 2.2 | | $ | 251.5 | | $ | 208.8 | | | $ | 13.5 | | | $ | 12.8 | | $ | 310.5 | | $ | 251.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of plan assets, beginning | | $ | — | | | $ | 161.0 | | | | $ | 203.4 | | | | $ | 226.5 | | | $ | — | | | $ | — | | | | $ | 230.8 | | | | $ | 203.4 | | Assets assumed in ARRIS acquisition | | | — | | | | — | | 4.2 | | — | | | | — | | | | — | | — | | 4.2 | | Employer and plan participant contributions | | | 0.6 | | | | 1.7 | | | | 4.9 | | | | 5.6 | | | | 0.7 | | | | 0.6 | | | | 6.8 | | | | 4.9 | | Return on plan assets | | | — | | | | (8.6 | ) | | | | 25.0 | | | | (6.7 | ) | | | — | | | | — | | | | 23.2 | | | | 25.0 | | Benefits paid | | | (0.6 | ) | | | (10.7 | ) | | | | (4.6 | ) | | | | (9.4 | ) | | | (0.7 | ) | | | (0.6 | ) | | | | (5.3 | ) | | | | (4.6 | ) | Settlements | | | — | | | | (143.4 | ) | | | | (6.4 | ) | | | | (0.8 | ) | | | — | | | | — | | | | (9.2 | ) | | | | (6.4 | ) | Foreign exchange and other | | | — | | | | — | | | | | 4.3 | | | | | (11.8 | ) | | | — | | | | — | | | | | 32.8 | | | | | 4.3 | | Fair value of plan assets, ending | | $ | — | | | $ | — | | $ | 230.8 | | $ | 203.4 | | | $ | — | | | $ | — | | $ | 279.1 | | $ | 230.8 | | Funded status, net liability or (net asset) | | $ | 12.8 | | | $ | 2.2 | | $ | 20.7 | | $ | 5.4 | | | Funded status, net liability | | | $ | 13.5 | | | $ | 12.8 | | $ | 31.4 | | $ | 20.7 | |
The following table presents the balance sheet location of the Company's pension liabilities and assets: | | December 31, | | | December 31, | | | | U.S. Plans | | | Non-U.S. Plans | | | U.S. Plans | | | Non-U.S. Plans | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | Accrued and other liabilities | | $ | (0.8 | ) | | $ | (0.2 | ) | | $ | (0.5 | ) | | $ | (0.3 | ) | | $ | (0.8 | ) | | $ | (0.8 | ) | | $ | (0.5 | ) | | $ | (0.5 | ) | Other noncurrent liabilities | | | (12.0 | ) | | | (2.0 | ) | | | (23.2 | ) | | | (11.3 | ) | | | (12.7 | ) | | | (12.0 | ) | | | (34.4 | ) | | | (23.2 | ) | Other noncurrent assets | | | — | | | | — | | | | 3.0 | | | | 6.2 | | | | — | | | | — | | | | 3.5 | | | | 3.0 | |
The Company terminated a significant U.S. defined benefit pension plan in the fourth quarter of 2018 through the purchase of annuities. Upon termination, the Company recognized a pretax charge in other expense, net, of $34.5 million in 2018 primarily related to unrecognized net actuarial losses previously recorded in accumulated other comprehensive loss.
The accumulated benefit obligation for the Company’s U.S. defined benefit pension plans was $12.8$13.5 million and $2.2$12.8 million as of December 31, 20192020 and 2018,2019, respectively, and the accumulated benefit obligation for the Company’s non-U.S. defined benefit pension plans was $211.8$261.8 million and $174.6$211.8 million as of December 31, 20192020 and 2018,2019, respectively. 108103
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The following table summarizes information for the Company’s pension plans with an accumulated benefit obligation in excess of plan assets: | | December 31, | | | December 31, | | | | U.S. Plans | | | Non-U.S. Plans | | | U.S. Plans | | | Non-U.S. Plans | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | Projected benefit obligation | | $ | 12.8 | | | $ | 2.2 | | | $ | 30.9 | | | $ | 13.1 | | | $ | 13.5 | | | $ | 12.8 | | | $ | 51.5 | | | $ | 30.9 | | Accumulated benefit obligation | | | 12.8 | | | | 2.2 | | | | 26.1 | | | | 11.5 | | | | 13.5 | | | | 12.8 | | | | 48.5 | | | | 26.1 | | Fair value of plan assets | | | — | | | | — | | | | 8.5 | | | | 3.8 | | | | — | | | | — | | | | 26.1 | | | | 8.5 | |
The following table summarizes pretax amounts included in accumulated other comprehensive loss: | | December 31, | | | December 31, | | | | U.S. Plans | | | Non-U.S. Plans | | | U.S. Plans | | | Non-U.S. Plans | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | 2020 | | | 2019 | | Unrecognized net actuarial loss | | $ | (1.3 | ) | | $ | (0.4 | ) | | $ | (31.5 | ) | | $ | (22.8 | ) | | $ | (2.3 | ) | | $ | (1.3 | ) | | $ | (43.4 | ) | | $ | (31.5 | ) | Unrecognized prior service cost | | | — | | | | — | | | | (0.7 | ) | | | (0.7 | ) | | | — | | | | — | | | | (0.5 | ) | | | (0.7 | ) | Total | | $ | (1.3 | ) | | $ | (0.4 | ) | | $ | (32.2 | ) | | $ | (23.5 | ) | | $ | (2.3 | ) | | $ | (1.3 | ) | | $ | (43.9 | ) | | $ | (32.2 | ) |
Actuarial gains and losses are amortized using a corridor approach. The corridor is equal to 10% of the greater of the benefit obligation and the fair value of the assets. Gains and losses in excess of the corridor are generally amortized over the average remaining life of the plan participants. Pretax amounts for net periodic benefit cost and other amounts included in other comprehensive income (loss) for the defined benefit pension plans consisted of the following components: | | Year Ended December 31, | | | Year Ended December 31, | | | | U.S. Plans | | | | | Non-U.S. Plans | | | U.S. Plans | | | | | Non-U.S. Plans | | | | 2019 | | | 2018 | | | | | 2017 | | | | | 2019 | | | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | | 2020 | | | | | 2019 | | | 2018 | | Service cost | | $ | — | | | $ | — | | $ | — | | $ | 4.0 | | $ | 4.1 | | | $ | 4.9 | | | $ | — | | | $ | — | | | $ | — | | $ | 4.3 | | $ | 4.0 | | | $ | 4.1 | | Interest cost | | | 0.3 | | | | 4.2 | | | | 5.9 | | | | 5.2 | | | | 5.2 | | | | 5.3 | | | | 0.3 | | | | 0.3 | | | | 4.2 | | | | 4.0 | | | | 5.2 | | | | 5.2 | | Recognized actuarial loss | | | — | | | | 0.4 | | | | 0.7 | | | | 0.7 | | | | 1.3 | | | | 1.5 | | | | 0.1 | | | | — | | | | 0.4 | | | | 1.3 | | | | 0.7 | | | | 1.3 | | Expected return on plan assets | | | — | | | | (5.1 | ) | | | | (6.8 | ) | | | | (6.8 | ) | | | | (7.7 | ) | | | (7.6 | ) | | | — | | | | — | | | | (5.1 | ) | | | | (7.0 | ) | | | | (6.8 | ) | | | (7.7 | ) | Settlement loss | | | — | | | | 34.5 | | | | | — | | | | | 0.9 | | | | | — | | | | — | | | | — | | | | — | | | | 34.5 | | | | | 1.5 | | | | | 0.9 | | | | — | | Net periodic benefit cost (income) | | | 0.3 | | | | 34.0 | | | (0.2 | ) | | | 4.0 | | | 2.9 | | | | 4.1 | | | Net periodic benefit cost | | | | 0.4 | | | | 0.3 | | | | 34.0 | | | 4.1 | | | 4.0 | | | | 2.9 | | Changes in plan assets and benefit obligations included in other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in unrecognized net actuarial loss (gain) | | | 0.9 | | | | 8.7 | | | | (4.7 | ) | | | | 8.7 | | | | (5.6 | ) | | | (4.0 | ) | | | 1.0 | | | | 0.9 | | | | 8.7 | | | | 13.4 | | | | 9.6 | | | | (5.6 | ) | Change in unrecognized prior service cost | | | — | | | | — | | | | — | | | | — | | | | 0.3 | | | | 0.4 | | | | — | | | | — | | | | — | | | | (0.2 | ) | | | | — | | | | 0.3 | | Settlement | | | — | | | | (34.5 | ) | | | | | — | | | | | — | | | | | — | | | | — | | | | — | | | | — | | | | (34.5 | ) | | | | | (1.5 | ) | | | | | (0.9 | ) | | | — | | Total included in other comprehensive income (loss) | | | 0.9 | | | | (25.8 | ) | | | (4.7 | ) | | | 8.7 | | | (5.3 | ) | | | (3.6 | ) | | | 1.0 | | | | 0.9 | | | | (25.8 | ) | | | 11.7 | | | 8.7 | | | | (5.3 | ) | Total recognized in net periodic benefit cost and included in other comprehensive income (loss) | | $ | 1.2 | | | $ | 8.2 | | $ | (4.9 | ) | | $ | 12.7 | | $ | (2.4 | ) | | $ | 0.5 | | | $ | 1.4 | | | $ | 1.2 | | | $ | 8.2 | | $ | 15.8 | | $ | 12.7 | | | $ | (2.4 | ) |
The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs arising from the services rendered by the employee and records the other components of net periodic benefit cost in other expense, net. 109The Company terminated a significant U.S. defined benefit pension plan in the fourth quarter of 2018 through the purchase of annuities. Upon termination, the Company recognized a pretax charge in other expense, net, of $34.5 million in 2018 primarily related to unrecognized net actuarial losses previously recorded in accumulated other comprehensive loss.
104
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Assumptions Significant weighted average assumptions used in determining benefit obligations and net periodic benefit cost are as follows: | | U.S. Plans | | | | Non-U.S. Plans | | | | U.S. Plans | | | | Non-U.S. Plans | | | | | 2019 | | | | 2018 | | | | 2017 | | | | 2019 | | | | 2018 | | | | 2017 | | | | 2020 | | | | 2019 | | | | 2018 | | | | 2020 | | | | 2019 | | | | 2018 | | | Benefit obligations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | | 2.95 | | % | | | 3.70 | | % | | | 3.50 | | % | | | 1.65 | | % | | | 2.50 | | % | | | 2.23 | | % | | | 2.07 | | % | | | 2.95 | | % | | | 3.70 | | % | | | 1.02 | | % | | | 1.65 | | % | | | 2.50 | | % | Rate of compensation increase | | | — | | % | | | — | | % | | | — | | % | | | 3.74 | | % | | | 3.92 | | % | | | 3.92 | | % | | | — | | % | | | — | | % | | | — | | % | | | 3.59 | | % | | | 3.74 | | % | | | 3.92 | | % | Net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate | | | 3.70 | | % | | | 3.50 | | % | | | 3.94 | | % | | | 2.50 | | % | | | 2.23 | | % | | | 2.38 | | % | | | 2.95 | | % | | | 3.70 | | % | | | 3.50 | | % | | | 1.65 | | % | | | 2.50 | | % | | | 2.23 | | % | Rate of return on plan assets | | | — | | % | | | — | | % | | | 4.10 | | % | | | 3.03 | | % | | | 3.41 | | % | | | 3.49 | | % | | | — | | % | | | — | | % | | | — | | % | | | 2.33 | | % | | | 3.03 | | % | | | 3.41 | | % | Rate of compensation increase | | | — | | % | | | — | | % | | | — | | % | | | 3.92 | | % | | | 3.92 | | % | | | 4.04 | | % | | | — | | % | | | — | | % | | | — | | % | | | 3.74 | | % | | | 3.92 | | % | | | 3.92 | | % |
The Company considered the available yields on high-quality fixed-income investments with maturities corresponding to the Company’s expected benefit obligations to determine the discount rates at each measurement date. Plan Assets In developing the expected rate of return on plan assets, the Company considered the expected long-term rate of return on individual asset classes. Expected return on plan assets is based on the market value of the assets. A portion of the non-U.S. pension assets are managed by independent investment advisors with an objective of transitioning to a portfolio of fixed income and absolute return investments that matches the durations of the obligations as the funded status of each plan improves. The absolute return investment fund is a diversified portfolio designed to achieve long-term total returns. The remainder of the non-U.S. pension assets is invested with the objective of maximizing return. Mutual funds classified as Level 1 are valued at net asset value, which is based on the fair value of the funds’ underlying securities. Certain mutual funds are classified as Level 2 because a portion of the funds’ underlying assets are valued using significant other observable inputs. Other assets are primarily composed of fixed income investments (including insurance and real estate products) and are valued based on the investment’s stated rate of return, which approximates market interest rates. 105
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The Company had 0 U.S. defined benefit pension plan assets as of December 31, 20192020 or 2018.2019. The estimated fair values and the valuation input levels of the Company’s non-U.S. defined benefit pension plan assets are as follows: | | December 31, 2019 | | | | | Non-U.S. Plans | | | | | Level 1 Fair Value | | | Level 2 Fair Value | | | Mutual funds: | | | | | | | | | | International equity | | $ | 27.7 | | | $ | 16.4 | | | International debt | | | 37.7 | | | | 97.5 | | | Absolute return | | | — | | | | 33.8 | | | Other | | | 8.3 | | | | 9.4 | | | Total | | $ | 73.7 | | | $ | 157.1 | | |
110
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
| | December 31, 2018 | | | December 31, 2020 | | | | Non-U.S. Plans | | | Non-U.S. Plans | | | | Level 1 Fair Value | | | Level 2 Fair Value | | | Level 1 Fair Value | | | Level 2 Fair Value | | Mutual funds: | | | | | | | | | | | | | | | | | International equity | | $ | 22.6 | | | $ | 25.5 | | | $ | 31.7 | | | $ | 30.8 | | International debt | | | 36.1 | | | | 82.4 | | | | 42.2 | | | | 101.7 | | Absolute return | | | — | | | | 26.2 | | | | — | | | | 29.3 | | Other | | | 2.9 | | | | 7.7 | | | | 13.6 | | | | 29.8 | | Total | | $ | 61.6 | | | $ | 141.8 | | | $ | 87.5 | | | $ | 191.6 | | | | | | | | | | | | | | | December 31, 2019 | | | | | Non-U.S. Plans | | | | | Level 1 Fair Value | | | Level 2 Fair Value | | Mutual funds: | | | | | | | | | | International equity | | | $ | 27.7 | | | $ | 16.4 | | International debt | | | | 37.7 | | | | 97.5 | | Absolute return | | | | — | | | | 33.8 | | Other | | | | 8.3 | | | | 9.4 | | Total | | | $ | 73.7 | | | $ | 157.1 | |
Expected Cash Flows The Company expects to contribute $0.8 million to U.S defined benefit pension plans and $5.1$6.7 million to non-U.S. defined benefit pension plans during 2020.2021. The following table summarizes projected benefit payments from pension plans through 2029,2030, including benefits attributable to estimated future service (in millions): | U.S. Plans | | | Non-U.S. Plans | | U.S. Plans | | | Non-U.S. Plans | | 2020 | $ | 0.8 | | | $ | 7.4 | | | 2021 | | 0.8 | | | | 6.1 | | $ | 0.8 | | | $ | 9.0 | | 2022 | | 0.8 | | | | 6.8 | | | 0.8 | | | | 8.1 | | 2023 | | 0.9 | | | | 6.3 | | | 0.9 | | | | 6.4 | | 2024 | | 0.9 | | | | 9.0 | | | 0.9 | | | | 10.2 | | 2025-2029 | | 4.6 | | | | 52.7 | | | 2025 | | | 0.9 | | | | 10.1 | | 2026-2030 | | | 4.6 | | | | 56.6 | |
Other Postretirement Benefit Plans The Company sponsors postretirement health care and life insurance benefit plans that provide benefits to certain former U.S. employees and certain U.S. full-time employees who retire from the Company. The health care plans contain various cost-sharing features such as participant contributions, deductibles, coinsurance and caps, with Medicare as the primary provider of health care benefits for eligible retirees. The Company amended certain of the plans to terminate benefits as of December 31, 2018 and recognized a pre-tax gain of $9.7 million in other expense, net in 2018, primarily related to the reclassification of unrecognized prior service credits and unrecognized net actuarial gains from accumulated other comprehensive loss. The accounting for the remainder of the health care plans anticipates future cost-sharing changes that are consistent with the Company’s expressed intent to maintain a consistent level of cost sharing or capped benefits with retirees. There are no plan assets associated with these post-retirement health care and life insurance benefit plans. 106
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The benefit obligation for the remaining plans was $3.9$4.5 million and $4.2$3.9 million as of December 31, 20192020 and 2018,2019, respectively, primarily recorded in other noncurrent liabilities on the Consolidated Balance Sheets. The pretax gains recognized in accumulated other comprehensive loss were $2.3$4.5 million and $3.1$2.3 million for the years ended December 31, 20192020 and 2018,2019, respectively, mostly related to unrecognized actuarial gains. The net periodic benefit income of $1.3 million, $1.0 million and $7.4 million (excluding the gain discussed above related to the termination of certain benefits) and $4.7 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively, resulted primarily from the amortization of net actuarial gains and prior service credits. 111
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
13. INCOME TAXES Income (loss) before income taxes includes the results from domestic and international operations as follows: | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | U.S. companies | | $ | (1,112.7 | ) | | $ | 64.0 | | | $ | 89.2 | | | $ | (689.7 | ) | | $ | (1,112.7 | ) | | $ | 64.0 | | Non-U.S. companies | | | 38.7 | | | | 106.7 | | | | 120.6 | | | | 35.2 | | | | 38.7 | | | | 106.7 | | Income (loss) before income taxes | | $ | (1,074.0 | ) | | $ | 170.7 | | | $ | 209.8 | | | $ | (654.5 | ) | | $ | (1,074.0 | ) | | $ | 170.7 | |
The components of income tax expense (benefit) were as follows: | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Current: | | | | | | | | | | | | | | | | | | | | | | | | | Federal | | $ | 33.3 | | | $ | 9.6 | | | $ | 17.0 | | | $ | (0.1 | ) | | $ | 33.3 | | | $ | 9.6 | | Foreign | | | 72.3 | | | | 64.7 | | | | 64.8 | | | | 67.3 | | | | 72.3 | | | | 64.7 | | State | | | 10.7 | | | | 5.4 | | | | 5.7 | | | | 6.4 | | | | 10.7 | | | | 5.4 | | Current income tax expense | | $ | 116.3 | | | | 79.7 | | | | 87.5 | | | $ | 73.6 | | | $ | 116.3 | | | $ | 79.7 | | Deferred: | | | | | | | | | | | | | | | | | | | | | | | | | Federal | | $ | (198.2 | ) | | | (26.1 | ) | | | (58.0 | ) | | $ | (131.0 | ) | | $ | (198.2 | ) | | $ | (26.1 | ) | Foreign | | | (30.8 | ) | | | (20.5 | ) | | | (11.7 | ) | | | (7.1 | ) | | | (30.8 | ) | | | (20.5 | ) | State | | | (31.8 | ) | | | (2.6 | ) | | | (1.8 | ) | | | (16.6 | ) | | | (31.8 | ) | | | (2.6 | ) | Deferred income tax benefit | | | (260.8 | ) | | | (49.2 | ) | | | (71.5 | ) | | | (154.7 | ) | | | (260.8 | ) | | | (49.2 | ) | Total income tax expense (benefit) | | $ | (144.5 | ) | | $ | 30.5 | | | $ | 16.0 | | | $ | (81.1 | ) | | $ | (144.5 | ) | | $ | 30.5 | |
107
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The reconciliation of income taxes calculated at the statutory U.S. federal income tax rate to the Company’s provision for income taxes was as follows: | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Provision for income taxes at federal statutory rate | | $ | (225.6 | ) | | $ | 35.8 | | | $ | 73.4 | | | Provision (benefit) for income taxes at federal statutory rate | | | $ | (137.4 | ) | | $ | (225.6 | ) | | $ | 35.8 | | State income taxes, net of federal tax effect | | | (26.2 | ) | | | 7.6 | | | | 7.1 | | | | (21.6 | ) | | | (26.2 | ) | | | 7.6 | | Other permanent items | | | 6.2 | | | | 8.0 | | | | 4.5 | | | | 4.2 | | | | 6.2 | | | | 8.0 | | Equity-based compensation | | | 3.4 | | | | (4.6 | ) | | | (13.4 | ) | | | 16.1 | | | | 3.4 | | | | (4.6 | ) | U.S. tax reform | | | 1.6 | | | | (7.8 | ) | | | (22.3 | ) | | | 2.2 | | | | 1.6 | | | | (7.8 | ) | Other changes in tax laws or rates | | | 2.2 | | | | (0.2 | ) | | | (17.1 | ) | | Other changes in tax laws and tax rulings | | | | (38.2 | ) | | | 2.2 | | | | (0.2 | ) | Goodwill related items | | | 77.9 | | | | — | | | | — | | | | 42.8 | | | | 77.9 | | | | — | | Base erosion and anti-abuse tax | | | 13.5 | | | | — | | | | — | | | | — | | | | 13.5 | | | | — | | GILTI | | | — | | | | 6.0 | | | | — | | | | 0.8 | | | | — | | | | 6.0 | | Federal tax credits | | | (23.1 | ) | | | (2.3 | ) | | | (2.5 | ) | | | (23.4 | ) | | | (23.1 | ) | | | (2.3 | ) | Change in unrecognized tax benefits | | | (6.6 | ) | | | (22.2 | ) | | | (8.4 | ) | | | (2.6 | ) | | | (6.6 | ) | | | (22.2 | ) | Foreign dividends and Subpart F income, net of foreign tax credits | | | 20.9 | | | | 4.9 | | | | 8.6 | | | Withholding taxes and Subpart F income, net of foreign tax credits | | | | 23.6 | | | | 20.9 | | | | 4.9 | | Foreign earnings taxed at other than federal rate | | | 6.0 | | | | 1.1 | | | | (9.7 | ) | | | 20.9 | | | | 6.0 | | | | 1.1 | | Tax provision adjustments and revisions to prior years' returns | | | (3.4 | ) | | | (5.5 | ) | | | (6.6 | ) | | | 7.1 | | | | (3.4 | ) | | | (5.5 | ) | Change in valuation allowances | | | 8.7 | | | | 9.7 | | | | 2.4 | | | | 24.4 | | | | 8.7 | | | | 9.7 | | Total provision for income taxes | | $ | (144.5 | ) | | $ | 30.5 | | | $ | 16.0 | | | Total provision (benefit) for income taxes | | | $ | (81.1 | ) | | $ | (144.5 | ) | | $ | 30.5 | |
112108
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The components of deferred income tax assets and liabilities and the classification of deferred tax balances on the balance sheet were as follows: | | December 31, | | | December 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | Deferred tax assets: | | | | | | | | | | | | | | | | | Accounts receivable, inventory and warranty reserves | | $ | 130.2 | | | $ | 45.1 | | | $ | 114.3 | | | $ | 130.2 | | Employee benefits | | | 55.8 | | | | 28.7 | | | | 59.9 | | | | 55.8 | | Foreign net operating loss and tax credit carryforwards | | | 523.4 | | | | 85.8 | | | | 512.8 | | | | 523.4 | | Federal net operating loss and tax credit carryforwards | | | 152.0 | | | | 59.0 | | | | 159.5 | | | | 152.0 | | State net operating loss and tax credit carryforwards | | | 121.0 | | | | 18.5 | | | | 120.0 | | | | 121.0 | | Unrecognized tax benefits | | | 42.1 | | | | 8.0 | | | | 42.7 | | | | 42.1 | | Interest limitation | | | 43.3 | | | | 13.5 | | | | 9.3 | | | | 43.3 | | Capitalized research and development costs | | | 230.1 | | | | 12.6 | | | | 320.2 | | | | 230.1 | | Other | | | 72.2 | | | | 30.8 | | | | 68.3 | | | | 72.2 | | Total deferred tax assets | | | 1,370.1 | | | | 302.0 | | | | 1,407.0 | | | | 1,370.1 | | Valuation allowance | | | (596.6 | ) | | | (85.1 | ) | | | (583.9 | ) | | | (596.6 | ) | Total deferred tax assets, net of valuation allowance | | | 773.5 | | | | 216.9 | | | | 823.1 | | | | 773.5 | | | | | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | | | | | | Intangible assets | | | (815.7 | ) | | | (205.5 | ) | | | (690.7 | ) | | | (815.7 | ) | Property, plant and equipment | | | (43.8 | ) | | | (36.4 | ) | | | (34.6 | ) | | | (43.8 | ) | Undistributed foreign earnings | | | (22.6 | ) | | | (11.8 | ) | | | (14.7 | ) | | | (22.6 | ) | Other | | | (3.4 | ) | | | (3.7 | ) | | | (1.2 | ) | | | (3.4 | ) | Total deferred tax liabilities | | | (885.5 | ) | | | (257.4 | ) | | | (741.2 | ) | | | (885.5 | ) | Net deferred tax liability | | $ | (112.0 | ) | | $ | (40.5 | ) | | Net deferred tax asset (liability) | | | $ | 81.9 | | | $ | (112.0 | ) | | | | | | | | | | | | | | | | | | Deferred taxes recognized on the balance sheet: | | | | | | | | | | | | | | | | | Noncurrent deferred tax asset (included with other noncurrent assets) | | | 103.1 | | | | 42.8 | | | | 288.1 | | | | 103.1 | | Noncurrent deferred tax liability | | | (215.1 | ) | | | (83.3 | ) | | | (206.2 | ) | | | (215.1 | ) | Net deferred tax liability | | $ | (112.0 | ) | | $ | (40.5 | ) | | Net deferred tax asset (liability) | | | $ | 81.9 | | | $ | (112.0 | ) |
The deferred tax asset for foreign net operating loss and tax credit carryforwards as of December 31, 2020 includes foreign net operating loss carryforwards (net of federal tax effects) of $499.6 million, which will begin to expire in 2021, and foreign tax credit carryforwards (net of federal tax effects) of $13.2 million, which begin to expire in 2023. Certain of these foreign net operating loss carryforwards are subject to local restrictions limiting their utilization. Valuation allowances of $480.9 million have been established related to these foreign deferred tax assets. The deferred tax asset for federal net operating loss and tax credit carryforwards as of December 31, 20192020 relates to $8.4$7.5 million of net operating losses carryforwards, which begin to expire in 2028, $114.7$105.8 million of research and development credit carryforwards, which begin to expire in 20222024 and $28.9$46.2 million of U.S. foreign tax credit carryforwards, thatwhich begin to expire between 2023 and 2025.in 2023. A valuation allowance of $10.5$15.2 million has been established against these deferred tax assets. The deferred tax asset for state net operating loss and tax credit carryforwards as of December 31, 20192020 includes state net operating loss carryforwards (net of federal tax impact) of $65.0$60.2 million, which begin to expire in 2022, and state tax credit carryforwards (net of federal tax impact) of $56.0$59.8 million, which begin to expire in 2020.2021. A valuation allowance of $90.6$82.0 million has been established against these and other state income tax related deferred tax assets. The deferred tax assets for foreign net operating loss and tax credit carryforwards as of December 31, 2019 includes foreign net operating loss carryforwards (net of federal tax effects) of $509.2 million, which will begin to expire in 2020, and foreign tax credit carryforwards (net of federal tax effects) of $14.2 million, which begin to expire in 2023. Certain of these foreign net operating loss carryforwards are subject to local restrictions limiting their utilization. Valuation allowances of $489.9 million have been established related to these foreign deferred tax assets.
In addition to the valuation allowances detailed above, the Company has also established a valuation allowance of $5.6$5.8 million against other deferred tax assets. 113109
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Following enactment ofUnder current U.S. tax reform and the associated one-time transition tax,regulations, in general, repatriation of foreign earnings to the U.S. can be completed with no incremental U.S. tax. However, repatriation of foreign earnings could subject the Company to U.S. state and non-U.S. jurisdictional taxes (including withholding taxes) on distributions. As of December 31, 2019,2020, the Company has a deferred tax liability of $22.6$14.7 million for the estimated foreign and state tax costs associated with the expected repatriation of the Company’s undistributed foreign earnings. The unrecorded deferred tax liability for foreign and state tax costs associated with earnings considered permanently reinvested is not material as of December 31, 2019.2020.
The following table reflects a reconciliation of the beginning and end of period amounts of gross unrecognized tax benefits, excluding interest and penalties: | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Balance at beginning of period | | $ | 20.1 | | | $ | 46.6 | | | $ | 48.3 | | | $ | 191.9 | | | $ | 20.1 | | | $ | 46.6 | | Increase related to prior periods | | | 12.3 | | | | 4.0 | | | | 9.1 | | | | 2.5 | | | | 12.3 | | | | 4.0 | | Decrease related to prior periods | | | (1.2 | ) | | | (0.7 | ) | | | (0.7 | ) | | | (4.5 | ) | | | (1.2 | ) | | | (0.7 | ) | Increase related to current periods | | | 8.5 | | | | — | | | | 1.1 | | | | 5.0 | | | | 8.5 | | | | — | | Decrease related to settlements with taxing authorities | | | (1.9 | ) | | | (3.9 | ) | | | (0.8 | ) | | | (0.9 | ) | | | (1.9 | ) | | | (3.9 | ) | Decrease related to lapse in statutes of limitations | | | (15.0 | ) | | | (25.9 | ) | | | (10.4 | ) | | | (2.6 | ) | | | (15.0 | ) | | | (25.9 | ) | Increase related to acquisition | | | 169.1 | | | | — | | | | — | | | Increase (decrease) related to the Acquisition | | | | (0.9 | ) | | | 169.1 | | | | — | | Balance at end of period | | $ | 191.9 | | | $ | 20.1 | | | $ | 46.6 | | | $ | 190.5 | | | $ | 191.9 | | | $ | 20.1 | |
The Company’s liability for unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods was $147.2$145.7 million as of December 31, 2019.2020. The Company operates in numerous jurisdictions worldwide and is subject to routine tax audits on a regular basis. The determination of the Company’s unrecognized tax benefits involves significant management judgment regarding interpretation of relevant facts and tax laws in each of these jurisdictions. Unrecognized tax benefits are reviewed and evaluated on an ongoing basis and may be adjusted for changing facts and circumstances including the lapse of applicable statutes of limitation and closure of tax examinations. Although the timing and outcome of such events are difficult to predict, the Company estimates that the balance of unrecognized tax benefits, excluding the impact of accrued interest and penalties, may be reduced by up to $6.0$8.5 million within the next twelve months. The Company provides for interest and penalties related to unrecognized tax benefits as income tax expense. As of December 31, 20192020 and 2018,2019, the Company had accrued $10.5$9.2 million and $5.2$10.5 million, respectively, for interest and penalties. During the years ended December 31, 2020, 2019 2018 and 20172018 the net expense (benefit) for interest and penalties recognized through income tax expense (benefit) was $(1.3) million, $2.1 million $(3.8) million and $0.1$(3.8) million, respectively. The Company files federal, state and local tax returns with statutes of limitation generally ranging from 3 to 4 years. The Company is generally no longer subject to federal tax examinations for years prior to 20162017 or state and local tax examinations for years prior to 2015.2016. Tax returns filed by the Company’s significant foreign subsidiaries are generally subject to statutes of limitations of 3 to 7 years and are generally no longer subject to examination for years prior to 2014.2015. In many jurisdictions, tax authorities retain the ability to review prior years’ tax returns and to adjust any net operating loss or tax credit carryforwards from these years that are available to be utilized in subsequent periods. During 2019,2020, the Company recognized $16.9$3.5 million related to the lapse of applicable statutes of limitations and the conclusion of various domestic and foreign examinations. 114110
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The following table presents income tax expense (benefit) related to amounts presented in the other comprehensive income (loss): | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Foreign currency translation | | $ | (0.9 | ) | | $ | (1.9 | ) | | $ | (1.7 | ) | | $ | 1.4 | | | $ | (0.9 | ) | | $ | (1.9 | ) | Defined benefit plans | | | (8.4 | ) | | | 4.0 | | | | 0.7 | | | | (11.1 | ) | | | (8.4 | ) | | | 4.0 | | Available-for-sale securities | | | — | | | | — | | | | (1.6 | ) | | Total | | $ | (9.3 | ) | | $ | 2.1 | | | $ | (2.6 | ) | | $ | (9.7 | ) | | $ | (9.3 | ) | | $ | 2.1 | |
14. SERIES A CONVERTIBLE PREFERRED STOCK On April 4, 2019, the Company issued and sold 1,000,000 shares of the Convertible Preferred Stock to Carlyle Partners VII S1 Holdings, L.P. (Carlyle) for $1.0 billion, or $1,000 per share, pursuant to an Investment Agreement between the Company and The Carlyle Group (Carlyle), dated November 8, 2018 (the Investment Agreement). In connection with the issuance of the Convertible Preferred Stock, the Company incurred direct and incremental expenses of $3.0 million, including financial advisory fees, closing costs, legal expenses and other offering-related expenses on behalf of Carlyle, and therefore treated these incremental expenses as a deemed dividend during the year ended December 31, 2019. The Convertible Preferred Stock ranks senior to the shares of the Company’s common stock, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Convertible Preferred Stock has a liquidation preference of $1,000 per share. Holders of the Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 5.5% per year, payable quarterly in arrears. If CommScope does not declare and pay a dividend, the dividend rate will increase by 2.5% to 8.0% per year (and that rate will increase by an additional 0.50% every three months until such unpaid dividend is declared and paid, subject to a cap of 11.0% per year) until all accrued but unpaid dividends have been paid in full. Dividends can be paid in cash, in-kind through the issuance of additional shares of Convertible Preferred Stock or any combination of the two, at the Company’s option. During the year ended December 31, 2020, the Company paid dividends in-kind of $41.8 million, which was recorded as additional Convertible Preferred Stock on the Consolidated Balance Sheets, and cash dividends of $14.3 million. During the year ended December 31, 2019, the Company authorizedpaid cash dividends of $40.7 million in dividends due for the dividend payment dates in the second, third and fourth quarters of 2019. The dividends were paid on July 1, 2019, the first business day following the initial payment date, September 30, 2019, and December 31, 2019, pursuant to the terms of the Certificate of Designations.million. The Convertible Preferred Stock is convertible at the option of the holders at any time into shares of CommScope common stock at an initial conversion rate of 36.3636 shares of common stock per share of the Convertible Preferred Stock (equivalent to $27.50 per common share). The conversion rate is subject to customary anti-dilution and other adjustments. At any time after the third anniversary of the issuance of the Convertible Preferred Stock, if the volume weighted average price of CommScope’s common stock exceeds the conversion price of $49.50, as may be adjusted pursuant to the Certificate of Designations, for at least thirty trading days in any period of forty-five consecutive trading days (including the final five trading days of any such forty-five-trading day period) all of the Convertible Preferred Stock may be converted at the election of CommScope into the relevant number of shares of CommScope common stock. Pending shareholder approval, to the extent required under Nasdaq listing rules, the issuance of shares of CommScope common stock upon conversion of the Convertible Preferred Stock and the 2,100,000 shares of common stock issuable by CommScope from capacity assumed under the existing share plans of ARRIS in connection with the Acquisition is capped at 19.9% of the CommScope common stock outstanding immediately prior to the Acquisition. On any date during the three months following the eight year and six-month anniversary of the Investment Agreement closing date and the three months following each anniversary thereafter, holders of the Convertible Preferred Stock will have the right to require CommScope to redeem all or any portion of the Convertible Preferred Stock at 100% of the liquidation preference thereof plus all accrued and unpaid dividends. The redemption price is payable, at the Company’s option, in cash or a combination of cash and common stock, subject to certain restrictions. 115111
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) Upon certain change of control events involving CommScope, CommScope has the right, subject to the holder’s right to convert prior to such redemption, to redeem all of the Convertible Preferred Stock for the greater of (i) an amount in cash equal to the sum of the liquidation preference of the Convertible Preferred Stock, all accrued but unpaid dividends and, if the applicable redemption date is prior to the fifth anniversary of the first dividend payment date, the present value, discounted at a rate of 10%, of any remaining scheduled dividends through the five year anniversary of the first dividend payment date, assuming CommScope chose to pay such dividends in cash and (ii) the consideration the holders would have received if they had converted their shares of the Convertible Preferred Stock into CommScope common stock immediately prior to the change of control event. To the extent that CommScope does not exercise the redemption right described in the foregoing sentence, following the effective date of any such change of control event, the holders of the Convertible Preferred Stock can require CommScope to repurchase the Convertible Preferred Stock at the greater of (i) an amount in cash equal to 100% of the liquidation preference thereof plus all accrued but unpaid dividends and (ii) the consideration the holders would have received if they had converted their shares of the Convertible Preferred Stock into CommScope common stock immediately prior to the change of control event. Holders of the Convertible Preferred Stock are entitled to vote with the holders of the Company’s common stock on an as-converted basis. Holders of the Convertible Preferred Stock are entitled to a separate class vote with respect to, among other things, amendments to CommScope’s organizational documents that have an adverse effect on the Convertible Preferred Stock, issuances by CommScope of securities that are senior to, or equal in priority with, the Convertible Preferred Stock and issuances of shares of the Convertible Preferred Stock after the closing date of the Acquisition, other than shares issued as dividends with respect to shares of the Convertible Preferred Stock. 15. STOCKHOLDERS’ EQUITY Stock Repurchase Program
During the year ended December 31, 2017, the Company repurchased 4.8 million shares of its outstanding common stock at an average cost of $36.50 per share. The Company did 0t repurchase any of its common stock during the years ended December 31, 2019 or 2018.
Equity-Based Compensation Plans Effective June 21, 2019, the Company’s stockholders approved the 2019 Long-Term Incentive Plan (the 2019 Plan) authorizing 8.0 million shares for issuance, plus additional shares underlying awards outstanding under the predecessor plans, that are forfeited or cancelled afterand effective May 8, 2020, the effective date ofCompany’s stockholders approved the Amended and Restated 2019 Plan.Long-Term Incentive Plan (the 2019 Plan) authorizing an additional 6.8 million shares for issuance. Awards under the 2019 Plan may include stock options, stock appreciation rights, restricted stock, stock units (including restricted stock units (RSUs) and deferred stock units), performance awards (represents any of the awards already listed with a performance-vesting component), other stock-based awards and cash-based awards. Shares remaining available for grant under the predecessor plans were carried over into the 2019 Plan and all future equity awards will be made from the 2019 Plan. Awards granted prior to June 21, 2019 remain subject to the provisions of the predecessor plans. As of December 31, 2019,2020, there were 4.04.3 million shares available for future grants under the 2019 Plan. On October 1, 2020, in connection with appointment of the Company’s new President and Chief Executive Officer, the Company granted 0.5 million RSUs and 1.1 million performance share units (PSUs) as inducement awards outside of the 2019 Plan. These inducement awards were approved by the Compensation Committee of the Board of Directors of the Company and did not require stockholder approval in accordance with Nasdaq Listing Rule 5635(c). They are generally subject to the same terms and conditions as awards that are made under the 2019 Plan and are presented in combination with the equity-based compensation awards under the 2019 Plan in the information provided below. As of December 31, 2019, $166.92020, $113.8 million of total unrecognized compensation expense related to unvested stock options, restricted stock units (RSUs)RSUs and performance share units (PSUs)PSUs is expected to be recognized over a remaining weighted average period of 1.51.4 years. There were 0 significant capitalized equity-based compensation costs at December 31, 2019.2020. The following table shows a summary of the equity-based compensation expense included in the Statements of Operations:
| | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Selling, general and administrative | | $ | 55.1 | | | $ | 34.2 | | | $ | 31.8 | | Cost of sales | | | 13.5 | | | | 5.7 | | | | 5.3 | | Research and development | | | 22.2 | | | | 5.0 | | | | 4.7 | | Total equity-based compensation expense | | $ | 90.8 | | | $ | 44.9 | | | $ | 41.8 | |
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CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The following table shows a summary of the equity-based compensation expense included in the Consolidated Statements of Operations: | | | | | | | | Year ended December 31, | | | 2020 | | | 2019 | | | 2018 | | Selling, general and administrative | $ | 63.0 | | | $ | 55.1 | | | $ | 34.2 | | Cost of sales | | 18.5 | | | | 13.5 | | | | 5.7 | | Research and development | | 33.5 | | | | 22.2 | | | | 5.0 | | Total equity-based compensation expense | $ | 115.0 | | | $ | 90.8 | | | $ | 44.9 | |
The Company believes the valuation techniques and the approaches utilized to develop the underlying assumptions are appropriate in estimating the fair values of its equity-based compensation. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards. Subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company. Stock Options Stock options are awards that allow the recipient to purchase shares of the Company’s common stock at a fixed price. Stock options are granted at an exercise price equal to the Company’s stock price at the date of grant. In prior years, theseThese awards have generally vestedvest over three to five years following the grant date and have a contractual term of ten years. During 2019, the Company granted 7.4 million stock options that vest over five years with a contractual term of ten years. The awards also contain an accelerated vesting term for a qualifying retirement during the period. Half of these These awards vest based on a time-based component or a combination of time and the other half vest based on a performance-based component which is defined for each year but also includes a catchup feature over the five years. The number of shares that is expected to be issued is adjusted based on the probable achievement of the performance target. The final number of shares issued and the related compensation will be based on the final performance metrics.components.
The following table summarizes the stock option activity (in millions, except per share data and years): | | Shares | | | Weighted Average Option Exercise Price Per Share | | | Weighted Average Remaining Contractual Term in Years | | | Aggregate Intrinsic Value | | | Shares | | | Weighted Average Option Exercise Price Per Share | | | Weighted Average Remaining Contractual Term in Years | | | Aggregate Intrinsic Value | | Options outstanding at December 31, 2018 | | | 4.7 | | | $ | 15.51 | | | | | | | | | | | Granted | | | 7.4 | | | $ | 18.47 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Options outstanding at December 31, 2019 | | | | 9.6 | | | $ | 17.70 | | | | | | | | | | Exercised | | | (0.8 | ) | | $ | 6.16 | | | | | | | | | | | | (1.5 | ) | | $ | 5.92 | | | | | | | | | | Expired | | | (0.1 | ) | | $ | 30.04 | | | | | | | | | | | | (0.2 | ) | | $ | 30.31 | | | | | | | | | | Forfeited | | | (1.6 | ) | | $ | 19.47 | | | | | | | | | | | | (1.7 | ) | | $ | 19.05 | | | | | | | | | | Options outstanding at December 31, 2019 | | | 9.6 | | | $ | 17.70 | | | | 7.0 | | | $ | 18.8 | | | Options vested at December 31, 2019 | | | 3.3 | | | $ | 14.10 | | | 2.8 | | | $ | 18.8 | | | Options unvested at December 31, 2019 | | | 6.3 | | | $ | 19.63 | | | 9.3 | | | $ | — | | | Options outstanding at December 31, 2020 | | | | 6.2 | | | $ | 19.86 | | | | 6.6 | | | $ | 5.6 | | Options vested at December 31, 2020 | | | | 2.7 | | | $ | 21.31 | | | | 4.5 | | | $ | 5.7 | | Options unvested at December 31, 2020 | | | | 3.5 | | | $ | 18.72 | | | | 8.2 | | | $ | 0.1 | |
The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018 and 2017 was $7.1 million, $9.8 million $12.7 million and $31.2$12.7 million, respectively. The exercise prices of outstanding options at December 31, 20192020 were in the following ranges (in millions, except per share data and years): | | Options Outstanding | | | Options Exercisable | | Range of Exercise Prices | | Shares | | | Weighted Average Remaining Contractual Life in years | | | Weighted Average Exercise Price Per Share | | | Shares | | | Weighted Average Exercise Price Per Share | | $2.96 to $5.74 | | | 2.1 | | | | 1.1 | | | $ | 5.74 | | | | 2.1 | | | $ | 5.74 | | $5.75 to $22.99 | | | 6.0 | | | | 9.2 | | | $ | 18.18 | | | | 0.1 | | | $ | 8.68 | | $23.00 to $42.32 | | | 1.5 | | | | 6.7 | | | $ | 33.11 | | | | 1.1 | | | $ | 31.31 | | $2.96 to $42.32 | | | 9.6 | | | | 7.0 | | | | | | | | 3.3 | | | $ | 14.10 | |
| | Options Outstanding | | | Options Exercisable | | Range of Exercise Prices | | Shares | | | Weighted Average Remaining Contractual Life in Years | | | Weighted Average Exercise Price Per Share | | | Shares | | | Weighted Average Exercise Price Per Share | | $5.50 to $18.50 | | | 0.9 | | | | 1.7 | | | $ | 7.02 | | | | 0.8 | | | $ | 6.09 | | $18.51 to $30.00 | | | 4.4 | | | | 8.1 | | | $ | 19.06 | | | | 1.1 | | | $ | 20.41 | | $30.01 to $45.00 | | | 0.9 | | | | 6.1 | | | $ | 36.45 | | | | 0.8 | | | $ | 36.31 | | $5.50 to $45.00 | | | 6.2 | | | | 6.6 | | | $ | 19.86 | | | | 2.7 | | | $ | 21.31 | |
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CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The Company uses the Black-Scholes model to estimate the fair value of stock option awards at the date of grant. Key inputs and assumptions used in the model include the grant date fair value of common stock, exercise price of the award, the expected option term, the risk-free interest rate, stock price volatility and the Company’s projected dividend yield. The expected term represents the period over which the Company’s employees are expected to hold their options. The risk-free interest rate reflects the yield on zero-coupon U.S. treasury securities with a term equal to the option’s expected term. Expected volatility is derived based on the historical volatility of the Company’s stock. The Company’s projected dividend yield is 0. The Company believes There were no stock option grants during the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in estimating the fair values of its stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards. Subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company. year ended December 31, 2020. The following table presents the weighted average assumptions used to estimate the fair value of stock option awards granted:granted for the years ended December 31, 2019 and 2018: | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | Expected option term (in years) | | | 6.5 | | | | 6.0 | | | | 6.0 | | | | 6.5 | | | | 6.0 | | Risk-free interest rate | | | 2.2 | % | | | 2.7 | % | | | 2.0 | % | | | 2.2 | % | | | 2.7 | % | Expected volatility | | | 40.0 | % | | | 35.0 | % | | | 40.0 | % | | | 40.0 | % | | | 35.0 | % | Weighted average exercise price | | $ | 18.47 | | | $ | 38.34 | | | $ | 38.00 | | | $ | 18.47 | | | $ | 38.34 | | Weighted average fair value at grant date | | $ | 8.00 | | | $ | 14.83 | | | $ | 15.72 | | | $ | 8.00 | | | $ | 14.83 | |
Restricted Stock Units RSUs entitle the holder to shares of common stock after a vesting period that generally ranges from one to three years. The fair value of the awards is determined on the grant date based on the Company’s stock price. On April 4, 2019, the Company granted 3.6 million RSUs to ARRIS employees to replace a portion of their outstanding awards under ARRIS equity-compensation plans as of the Acquisition date. These awards assumed the same terms and vesting schedule as the ARRIS RSUs they replaced. In general, these awards are time-vesting over a four-year period, but they contain several provisions that are not in the standard CommScope awards, including restrictive covenants and special age-based provisions for some participants. These awards also contain a provision that accelerates vesting in the event of termination of employment without cause (and for executives, resignation for good reason) within one year following the closing of the Acquisition.
The following table summarizes the RSU activity (in millions, except per share data): | | Restricted Stock Units | | | Weighted Average Grant Date Fair Value Per Share | | | Restricted Stock Units | | | Weighted Average Grant Date Fair Value Per Share | | Non-vested share units at December 31, 2018 | | | 2.0 | | | $ | 35.43 | | | Non-vested share units at December 31, 2019 | | | | 7.7 | | | $ | 22.30 | | Granted | | | 8.4 | | | $ | 20.29 | | | | 10.2 | | | $ | 10.49 | | Vested and shares issued | | | (1.9 | ) | | $ | 28.78 | | | | (3.3 | ) | | $ | 23.09 | | Forfeited | | | (0.8 | ) | | $ | 25.48 | | | | (1.4 | ) | | $ | 15.91 | | Non-vested share units at December 31, 2019 | | | 7.7 | | | $ | 22.30 | | | Non-vested share units at December 31, 2020 | | | | 13.2 | | | $ | 13.62 | |
The weighted average grant date fair value per unit of these awards granted during the years ended December 31, 2020, 2019 and 2018 was $10.49, $20.29 and 2017 was $20.29, $37.87, and $37.90, respectively. The total fair value of RSUs that vested during the years ended December 31,2020, 2019 and 2018 and 2017 was $76.0 million, $56.0 million $42.1 million and $42.9$42.1 million, respectively. 118
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Performance Share Units PSUs are stock awards in which the number of shares ultimately received by the employee depends on Company performance against specified targets. SuchCertain of the Company’s PSU awards are based on an internal performance condition and such awards typically vest over three years, andwith the number of shares issued can varyvarying from 0% to 200% of the number of PSUs granted, depending on performance. The fair value of each PSU is determined on the date of grant based on the Company’s stock price. The ultimate number of shares issued andFor PSUs granted in 2018 that had a cumulative three-year revenue performance measure, the related compensation cost recognized is based on the final performance metrics comparedwas below minimum resulting in a negative share performance adjustment that was not material to the targets specified in the grants.non-vested share units as of December 31, 2020. 114
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) In October 2019, the Company awarded 2.3 million PSUs under a special incentive plan based on the Company’s performance for the second half of 2019. The special awards vestvested over one year andin October 2020. As of December 31, 2020, 0 PSUs with an internal performance condition remained outstanding. During the year ended December 31, 2020, the Company granted PSU awards with a market condition. Performance for these awards is based on achievement of certain CommScope stock price milestones as well as a service condition. The number of shares could varythat can be issued under these awards varies from 0% to 130%100% of the number of PSUs granted, depending on performance. A better than target earnings performance was achieved for theseThe Company uses a Monte Carlo simulation model to estimate the fair value of PSUs resultingwith a market condition at the date of grant. Key assumptions used in the model include the risk-free interest rate, which reflects the yield on zero-coupon U.S. treasury securities, and stock price volatility which is derived based on the historical volatility of the Company’s stock. The following table presents the weighted average assumptions used in the valuation and the fair value of PSU awards granted with a favorable performance adjustment.market condition: | | | Year Ended December 31, | | | | | 2020 | | Risk-free interest rate | | | | 0.2 | % | Expected volatility | | | | 51.7 | % | Weighted average fair value at grant date | | | $ | 4.03 | |
The following table summarizes the PSU activity (in millions, except per share data): | | Performance Share Units | | | Weighted Average Grant Date Fair Value Per Share | | | Performance Share Units | | | Weighted Average Grant Date Fair Value Per Share | | Non-vested share units at December 31, 2018 | | | 0.3 | | | $ | 33.52 | | | Non-vested share units at December 31, 2019 | | | | 2.7 | | | $ | 12.47 | | Granted | | | 2.3 | | | $ | 11.19 | | | | 1.6 | | | $ | 4.63 | | Vested and shares issued | | | (0.1 | ) | | $ | 25.10 | | | | (2.5 | ) | | $ | 7.29 | | Forfeited | | | (0.1 | ) | | $ | 18.42 | | | | (0.3 | ) | | $ | 12.10 | | Performance adjustment | | | 0.3 | | | $ | 11.19 | | | Non-vested share units at December 31, 2019 | | | 2.7 | | | $ | 12.47 | | | Non-vested share units at December 31, 2020 | | | | 1.5 | | | $ | 4.03 | |
The weighted average grant date fair value per unit of these awards granted during the years ended December 31, 2020, 2019 and 2018 was $4.63, $11.19 and 2017 was $11.19, $38.34, and $38.00, respectively. The total fair value of PSUs that vested during the years ended December 31, 2020, 2019 and 2018 and 2017 was $18.4 million, $2.7 million, $7.9 million, and $2.4$7.9 million, respectively. 16. COMMITMENTS AND CONTINGENCIES The following table summarizes the activity in the product warranty accrual, included in accrued and other liabilities and other noncurrent liabilities: | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Product warranty accrual, beginning of period | | $ | 15.6 | | | $ | 16.9 | | | $ | 21.6 | | | $ | 61.0 | | | $ | 15.6 | | | $ | 16.9 | | Obligation assumed in ARRIS acquisition | | | 57.4 | | | | — | | | | — | | | Obligation assumed under ARRIS acquisition | | | | — | | | | 57.4 | | | | — | | Provision for warranty claims | | | 18.4 | | | | 6.2 | | | | 4.3 | | | | 30.9 | | | | 18.4 | | | | 6.2 | | Warranty claims paid | | | (30.4 | ) | | | (7.4 | ) | | | (9.1 | ) | | | (32.4 | ) | | | (30.4 | ) | | | (7.4 | ) | Foreign exchange | | | — | | | | (0.1 | ) | | | 0.1 | | | | — | | | | — | | | | (0.1 | ) | Product warranty accrual, end of period | | $ | 61.0 | | | $ | 15.6 | | | $ | 16.9 | | | $ | 59.5 | | | $ | 61.0 | | | $ | 15.6 | |
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CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) 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. 119
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Legal Proceedings The Company is a party to certain intellectual property claims and also periodically receives notices asserting that its products infringe on another party’s patents and other intellectual property rights. These claims and assertions, whether against the Company directly or against its customers, could require the Company to pay damages, royalties, stop offering the relevant products and/or cease other activities. The Company may also be called upon to indemnify certain customers for costs related to products sold to such customers. While the outcome of these claims and notices is uncertain and a reasonable estimate of the loss from unfavorable outcomes in certain of these matters cannot be determined, an adverse outcome could result in a material loss. As of December 31, 2020, the Company had a liability of $27.7 million recorded in accrued and other liabilities on the Consolidated Balance Sheets related to certain intellectual property assertions that have been settled or are in the process of settlement. Of that amount, $21.7 million was assumed in the Acquisition. The Company paid $109.0 million during the year ended December 31, 2020 to settle intellectual property assertions. For the year ended December 31, 2020, the Company recorded a charge to cost of sales in the Consolidated Statements of Operations of $7.8 million related to these intellectual property assertions. These amounts are primarily reflected in the results of the Home and VCN segments. The Company is also a plaintiff or a defendant in certain other pending legal matters in the normal course of business. Management believes none of these other pending legal matters will have a material adverse effect on the Company’s business or financial condition upon final disposition. On October 15, 2018, the Company intervened as a defendant in Fractus, S.A. (Fractus) v. CommScope Technologies LLC, T-Mobile U.S., Inc., T-Mobile USA, Inc., Verizon Communications, Inc. and Cello Partnership d/b/a Verizon Wireless, which is a consolidated patent infringement action brought by Fractus, in the U.S. District Court for the Eastern District of Texas alleging that the defendants infringed on Fractus’ patents on cellular base station antenna technologies (the Fractus Litigation). The jury trial began in October 2019. In order to minimize risk, and without admitting liability, on October 9, 2019, the Company reached an agreement with Fractus for $55.0 million, with $30.0 million payable in January 2020 and $25.0 million payable in June 2020 (the Settlement Payment). Fractus agreed, among other things, to dismiss the Fractus Litigation and release CommScope from all liabilities relating to any claims of infringement of any patents or patent applications owned by Fractus as of October 9, 2019 or within five years thereafter. The Settlement Payment is recorded in accrued and other liabilities in the Consolidated Balance Sheets as of December 31, 2019, and the expense is recorded in cost of sales for the year ended December 31, 2019 in the Consolidated Statements of Operations.
17. INDUSTRY SEGMENTS, MAJOR CUSTOMERS, RELATED PARTY TRANSACTIONS AND GEOGRAPHIC INFORMATION Segment Information Following the Acquisition,As of January 1, 2020, the Company hasreorganized its internal management and reporting structure as part of the following 5integration of the 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 based on 4 reportable segments: Broadband, Home, OWN and VCN. These reportable segments which alignare based upon the nature of the products and services they offer.
The Broadband segment provides an end-to-end product portfolio serving the telco and cable provider broadband market. The segment brings together the Network Cable and Connectivity business with the manner in whichNetwork and Cloud business and includes converged cable access platform, passive optical networking, video systems, access technologies, fiber and coaxial cable, fiber and copper connectivity and hardened closures. The Home segment comprises the business is managed: Connectivity Solutions (Connectivity), Mobility Solutions (Mobility), Customerformer Consumer Premises Equipment (CPE), Network & Cloud (N&C)business and Ruckus Networks (Ruckus). The Connectivity segment provides innovative fiber optic and copper cable and connectivity solutions for use in data centers and business enterprise, telecommunications, cable television and residential broadband networks. The Connectivity portfolio includes network solutions for indoor and outdoor network applications. Indoor network solutions include optical fiber and twisted pair structured cable solutions, intelligent infrastructure management hardware and software and network rack and cabinet enclosures. Outdoor network solutions are used in both local-area and wide-area networks and “last mile” fiber-to-the-home installations, including deployments of fiber-to-the-node, fiber-to-the-premises and fiber-to-the-distribution point to homes, businesses and cell sites.
The Mobility segment provides the integral building blocks for cellular base station sites and related connectivity; indoor, small cell and distributed antenna wireless systems; and wireless network backhaul planning and optimization products and services. Macro cell solutions can be found at wireless tower sites and on rooftops. Metro cell solutions can be found on street poles and on other urban structures. Distributed antenna systems and small cell indoor solutions allow wireless operators to increase spectral efficiency and enhance cellular coverage and capacity in challenging network conditions such as commercial buildings, urban areas, stadiums and transportation systems.
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CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The CPE segment includes subscriber-based solutions that support broadband and video applications connecting cable, telecommunications and satellite service providers to a customer’s home and adds wireless connectivity or other wired connections integrating in-home devices together to enableapplications. The broadband offerings in the consumption of internet-based services and the delivery of broadcast, streamed and stored video to televisions and other connected devices. Broadband offeringsHome segment include devices that provide residential connectivity to a service provider’s network, such as digital subscriber line (DSL) and cable modems and telephony and data gateways which incorporate routing and Wi-Fi functionality. Video offerings include set top boxes that support cable, satellite and IPTVInternet Protocol television content delivery and include products such as digital video recorders, (DVRs), high definition set top boxes and hybrid set top devices.
116
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The OWN segment focuses on the macro and metro cell markets. The segment includes base station antennas, RF filters, tower connectivity, microwave antennas, metro cell products, cabinets, steel, accessories, Spectrum Access System and Comsearch. As the Company’s wireless operator customers shift a portion of their 5G capital expenditures from the macro tower to the metro cell, the portfolio will strategically help to make the transition smooth and cost-effective. The N&C segment’s product solutions include cable modem termination system, video infrastructure, distributionVCN segment targets both public and transmission equipment and cloud solutions that enable facility-based service providers to construct a state-of-the-art residential and metro distribution network. The portfolio also includes a full suite of global services that offer technical support, professional services and system integration to enable solutions sales of the Company’s end-to-end product portfolio. Our Ruckus segment provides converged wired (local area network (LAN)) and wireless (WLAN)private networks for enterprisescampuses, venues, data centers and service providers. Product offerings include indoor and outdoorbuildings. The segment combines Wi-Fi and LTE access points, accessswitching, distributed antenna systems, licensed and aggregation switches; an Internet of Things (IoT) suite, on-premisesunlicensed small cells and cloud-based controlenterprise fiber and management systems; and software and software-as-a-service (SaaS) applications addressing security, location, reporting and analytics.copper infrastructure.
The following table provides summary financial information by reportable segment: | | December 31, | | | December 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | Identifiable segment-related assets: | | | | | | | | | | | | | | | | | Connectivity | | $ | 4,188.5 | | | $ | 4,258.1 | | | Mobility | | | 1,886.5 | | | | 1,871.3 | | | CPE | | | 2,178.7 | | | | — | | | N&C | | | 4,473.5 | | | | — | | | Ruckus | | | 1,003.1 | | | | — | | | Broadband | | | $ | 6,451.6 | | | $ | 6,681.1 | | Home | | | | 1,698.5 | | | | 2,178.7 | | OWN | | | | 1,264.4 | | | | 1,394.1 | | VCN | | | | 3,352.3 | | | | 3,476.4 | | Total identifiable segment-related assets | | | 13,730.3 | | | | 6,129.4 | | | | 12,766.8 | | | | 13,730.3 | | Reconciliation to total assets: | | | | | | | | | | | | | | | | | Cash and cash equivalents | | | 598.2 | | | | 458.2 | | | | 521.9 | | | | 598.2 | | Deferred income tax assets | | | 103.1 | | | | 42.9 | | | | 288.1 | | | | 103.1 | | Total assets | | $ | 14,431.6 | | | $ | 6,630.5 | | | $ | 13,576.8 | | | $ | 14,431.6 | |
In the first quarter of 2019, the Company changed its measure
The Company’s measurement of segment performance from adjusted operating income tois adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization). The Company defines adjusted EBITDA as operating income, adjusted to exclude depreciation, amortization of intangible assets, restructuring costs, asset impairments, equity-based compensation, transaction and integration costs and other items that the Company believes are useful to exclude in the evaluation of operating performance from period to period because these items are not representative of the Company’s core business. 121117
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) The following table provides net sales, adjusted EBITDA, depreciation expense and additions to property, plant and equipment by reportable segment: | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Net sales: | | | | | | | | | | | | | Connectivity | | $ | 2,557.4 | | | $ | 2,812.7 | | | $ | 2,809.8 | | Mobility | | | 1,754.2 | | | | 1,755.8 | | | | 1,750.8 | | CPE | | | 2,539.0 | | | | — | | | | — | | N&C | | | 1,073.6 | | | | — | | | | — | | Ruckus | | | 420.9 | | | | — | | | | — | | Consolidated net sales | | $ | 8,345.1 | | | $ | 4,568.5 | | | $ | 4,560.6 | | | | | | | | | | | | | | | Segment adjusted EBITDA | | | | | | | | | | | | | Connectivity | | $ | 462.1 | | | $ | 575.2 | | | $ | 581.8 | | Mobility | | | 380.1 | | | | 338.4 | | | | 376.6 | | CPE | | | 193.7 | | | | — | | | | — | | N&C | | | 237.0 | | | | — | | | | — | | Ruckus | | | 24.6 | | | | — | | | | — | | Total segment adjusted EBITDA | | | 1,297.5 | | | | 913.6 | | | | 958.4 | | Amortization of intangible assets | | | (593.2 | ) | | | (264.6 | ) | | | (271.0 | ) | Restructuring costs, net | | | (87.7 | ) | | | (44.0 | ) | | | (43.8 | ) | Equity-based compensation | | | (90.8 | ) | | | (44.9 | ) | | | (41.8 | ) | Asset impairments | | | (376.1 | ) | | | (15.0 | ) | | | — | | Transaction and integration costs | | | (195.3 | ) | | | (19.5 | ) | | | (48.0 | ) | Depreciation | | | (143.7 | ) | | | (75.6 | ) | | | (81.7 | ) | Purchase accounting adjustments | | | (264.2 | ) | | | — | | | | — | | Patent litigation settlement | | | (55.0 | ) | | | — | | | | — | | Consolidated operating income (loss) | | $ | (508.5 | ) | | $ | 450.0 | | | $ | 472.0 | | | | | | | | | | | | | | | Depreciation expense: | | | | | | | | | | | | | Connectivity | | $ | 49.9 | | | $ | 53.4 | | | $ | 58.5 | | Mobility | | | 22.2 | | | | 22.2 | | | | 23.2 | | CPE | | | 30.2 | | | | — | | | | — | | N&C | | | 30.6 | | | | — | | | | — | | Ruckus | | | 10.8 | | | | — | | | | — | | Consolidated depreciation expense | | $ | 143.7 | | | $ | 75.6 | | | $ | 81.7 | | | | | | | | | | | | | | | Additions to property, plant and equipment: | | | | | | | | | | | | | Connectivity | | $ | 58.8 | | | $ | 59.4 | | | $ | 45.0 | | Mobility | | | 24.0 | | | | 22.9 | | | | 23.7 | | CPE | | | 6.5 | | | | — | | | | — | | N&C | | | 12.8 | | | | — | | | | — | | Ruckus | | | 2.0 | | | | — | | | | — | | Consolidated additions to property, plant and equipment | | $ | 104.1 | | | $ | 82.3 | | | $ | 68.7 | | | | | | | | | | | | | | |
| | | | | | | | | | Year Ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | Net sales: | | | | | | | | | | | | | Broadband | | $ | 2,895.7 | | | $ | 2,363.8 | | | $ | 1,448.8 | | Home | | | 2,360.0 | | | | 2,539.0 | | | | — | | OWN | | | 1,243.7 | | | | 1,475.0 | | | | 1,490.5 | | VCN | | | 1,936.5 | | | | 1,967.3 | | | | 1,629.2 | | Consolidated net sales | | $ | 8,435.9 | | | $ | 8,345.1 | | | $ | 4,568.5 | | | | | | | | | | | | | | | Segment adjusted EBITDA: | | | | | | | | | | | | | Broadband | | $ | 640.5 | | | $ | 473.3 | | | $ | 309.4 | | Home | | | 116.2 | | | | 193.7 | | | | — | | OWN | | | 278.5 | | | | 361.2 | | | | 323.6 | | VCN | | | 180.0 | | | | 269.3 | | | | 280.6 | | Total segment adjusted EBITDA | | | 1,215.2 | | | | 1,297.5 | | | | 913.6 | | Amortization of intangible assets | | | (630.5 | ) | | | (593.2 | ) | | | (264.6 | ) | Restructuring costs, net | | | (88.4 | ) | | | (87.7 | ) | | | (44.0 | ) | Equity-based compensation | | | (115.0 | ) | | | (90.8 | ) | | | (44.9 | ) | Asset impairments | | | (206.7 | ) | | | (376.1 | ) | | | (15.0 | ) | Transaction and integration costs | | | (24.9 | ) | | | (195.3 | ) | | | (19.5 | ) | Acquisition accounting adjustments | | | (20.6 | ) | | | (264.2 | ) | | | — | | Patent claims and litigation settlements | | | (16.3 | ) | | | (55.0 | ) | | | — | | Executive severance | | | (6.3 | ) | | | — | | | | — | | Depreciation | | | (158.3 | ) | | | (143.7 | ) | | | (75.6 | ) | Consolidated operating income (loss) | | $ | (51.8 | ) | | $ | (508.5 | ) | | $ | 450.0 | | | | | | | | | | | | | | | Depreciation expense: | | | | | | | | | | | | | Broadband | | $ | 59.2 | | | $ | 55.6 | | | $ | 29.3 | | Home | | | 34.3 | | | | 30.2 | | | | — | | OWN | | | 17.0 | | | | 17.5 | | | | 17.4 | | VCN | | | 47.8 | | | | 40.4 | | | | 28.9 | | Consolidated depreciation expense | | $ | 158.3 | | | $ | 143.7 | | | $ | 75.6 | | | | | | | | | | | | | | | Additions to property, plant and equipment: | | | | | | | | | | | | | Broadband | | $ | 55.2 | | | $ | 42.5 | | | $ | 49.0 | | Home | | | 19.0 | | | | 6.5 | | | | — | | OWN | | | 15.9 | | | | 16.7 | | | | 19.7 | | VCN | | | 31.1 | | | | 38.4 | | | | 13.6 | | Consolidated additions to property, plant and equipment | | $ | 121.2 | | | $ | 104.1 | | | $ | 82.3 | |
Customer Information Net sales to Comcast Corporation and affiliates (Comcast) accounted for 11% of the Company’s net sales during both of the yearyears ended December 31, 2020 and 2019. Net sales to Comcast are derived from the Broadband, Home and VCN segments. Other than Comcast, 0 direct customer accounted for 10% or more of the Company’s total net sales during the yearyears ended December 31, 2020 or 2019. NaN direct customers accounted for 10% or more of the Company’s accounts receivable as of December 31, 2019. 122
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 11% of the Company’s total net sales during each of the yearsyear ended December 31, 2018 and 2017.2018. Net sales to Anixter primarily originate in the VCN segment. Other than Anixter, 0 direct customer accounted for 10% or more of the Company’s total net sales duringfor the yearsyear ended December 31, 20182018. 118
CommScope Holding Company, Inc. Notes to Consolidated Financial Statements-(Continued) (In millions, unless otherwise noted) NaN direct customers accounted for 10% or 2017.more of the Company’s accounts receivable as of December 31, 2020 or 2019. Related Party Transactions See Note 14 for a discussion of our Series A convertible preferred stockthe Convertible Preferred Stock issued to Carlyle to finance the Acquisition. Other than transactions related to the Series A convertible preferred stock,Convertible Preferred Stock, there were no material related party transactions for the years ended December 31, 2020, 2019 2018 or 2017.2018. Geographic Information Sales to customers located outside of the U.S. comprised 41%39%, 44%41% and 46%44% of total net sales during the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. Sales by geographic region, based on the destination of product shipments or service provided, were as follows: | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | United States | | $ | 4,923.3 | | | $ | 2,539.2 | | | $ | 2,449.4 | | | $ | 5,185.3 | | | $ | 4,923.3 | | | $ | 2,539.2 | | Europe, Middle East and Africa (EMEA) | | | 1,543.6 | | | | 963.0 | | | | 942.5 | | | | 1,530.2 | | | | 1,543.6 | | | | 963.0 | | Asia Pacific (APAC) | | | 919.7 | | | | 735.6 | | | | 828.3 | | | | 797.2 | | | | 919.7 | | | | 735.6 | | Caribbean and Latin America (CALA) | | | 650.7 | | | | 242.9 | | | | 245.6 | | | | 610.3 | | | | 650.7 | | | | 242.9 | | Canada | | | 307.8 | | | | 87.8 | | | | 94.8 | | | | 312.9 | | | | 307.8 | | | | 87.8 | | Consolidated net sales | | $ | 8,345.1 | | | $ | 4,568.5 | | | $ | 4,560.6 | | | $ | 8,435.9 | | | $ | 8,345.1 | | | $ | 4,568.5 | |
Long-lived assets, excluding intangible assets, consist substantially of property, plant and equipment and right of use assets. The Company’s long-lived assets, excluding intangible assets, located in the U.S., EMEA, APAC and CALA regions represented the following percentages of such long-lived assets: 62%, 15%, 17% and 6%, respectively, as of both December 31, 20192020 and 56%, 18%, 19%, and 7%, respectively, as of December 31, 2018. 18. SUBSEQUENT EVENTS
On February 7, 2020, the Company informed holders of the 2021 Notes that it would redeem $100.0 million aggregate principal amount of the 2021 Notes on February 17, 2020. The redemption price included the accrued and unpaid interest up to the date of the redemption. Following the redemption, $50.0 million aggregate principal amount of the 2021 Notes remained outstanding.
123
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
| | First Quarter 2019 | | | Second Quarter 2019 | | | Third Quarter 2019 | | | Fourth Quarter 2019 | | Net sales | | $ | 1,099.5 | | | $ | 2,566.7 | | | $ | 2,380.2 | | | $ | 2,298.7 | | Gross profit | | | 398.0 | | | | 660.0 | | | | 609.9 | | | | 736.2 | | Operating income (loss) (1)(2)(3)(4)(5) | | | 90.7 | | | | (209.2 | ) | | | (50.8 | ) | | | (339.2 | ) | Net loss | | | (2.3 | ) | | | (334.0 | ) | | | (156.5 | ) | | | (436.7 | ) | Net loss attributable to common stockholders | | | (2.3 | ) | | | (350.1 | ) | | | (170.3 | ) | | | (450.5 | ) | Basic loss per share | | $ | (0.01 | ) | | $ | (1.81 | ) | | $ | (0.88 | ) | | $ | (2.32 | ) | Diluted loss per share | | $ | (0.01 | ) | | $ | (1.81 | ) | | $ | (0.88 | ) | | $ | (2.32 | ) | | | | | | | | | | | | | | | | | | | | First Quarter 2018 | | | Second Quarter 2018 | | | Third Quarter 2018 | | | Fourth Quarter 2018 | | Net sales | | $ | 1,120.5 | | | $ | 1,239.9 | | | $ | 1,150.4 | | | $ | 1,057.7 | | Gross profit | | | 397.8 | | | | 457.2 | | | | 409.7 | | | | 368.6 | | Operating income (1)(2)(3)(5) | | | 103.7 | | | | 164.7 | | | | 132.2 | | | | 49.4 | | Net income (loss) (6) | | | 33.7 | | | | 65.9 | | | | 63.8 | | | | (23.2 | ) | Net income (loss) attributable to common stockholders | | | 33.7 | | | | 65.9 | | | | 63.8 | | | | (23.2 | ) | Basic earnings (loss) per share | | $ | 0.18 | | | $ | 0.34 | | | $ | 0.33 | | | $ | (0.12 | ) | Diluted earnings (loss) per share | | $ | 0.17 | | | $ | 0.34 | | | $ | 0.33 | | | $ | (0.12 | ) |
(1)
| Operating income (loss) for the first, second, third and fourth quarters in 2019 included charges related to restructuring costs of $12.4, $46.4, $19.5 and $9.4, respectively. Operating income for the first, second, third and fourth quarters in 2018 included charges related to restructuring costs of $5.5, $7.2, $7.1 and $24.2, respectively.
|
(2)
| Operating income (loss) for the first, second, third and fourth quarters in 2019 included charges related to transaction and integration costs of $20.8, $167.0, $2.2 and $5.3, respectively. Operating income for the first, second, third and fourth quarters in 2018 included charges related to transaction and integration costs of $1.6, $1.0, $2.7 and $14.2, respectively.
|
(3)
| Operating income (loss) for the first, second, third and fourth quarters in 2019 included amortization of purchased intangibles of $59.3, $164.1, $163.9 and $205.9. Operating income for the first, second, third and fourth quarter in 2018 included amortization of purchased intangibles of $67.2, $66.4, $65.8 and $65.2.
|
(4)
| Operating income (loss) for the second, third and fourth quarters in 2019 included purchase accounting adjustments of $164.1, $108.7 and $(8.6), respectively, and a patent litigation settlement of $55.0 for the third quarter in 2019.
|
(5)
| Operating income (loss) for the fourth quarter in 2019 included asset impairment charges of $376.1. Operating income for the fourth quarter in 2018 included an asset impairment charge of $15.0.
|
(6)
| Net income (loss) for the fourth quarter in 2018 included employee defined benefit plan termination charges of $24.8 and foreign currency losses of $14.0 resulting from an entity liquidation.
|
2019.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable. ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures Our management, with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective and operating to provide reasonable assurance that information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting The management of CommScope is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: | • | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements. |
CommScope’s management assessed the effectiveness of CommScope’s internal control over financial reporting as of December 31, 2019.2020. In making this assessment, CommScope’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on this assessment, management concluded that, as of December 31, 2019,2020, CommScope’s internal control over financial reporting is effective based on the COSO internal control criteria. CommScope’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of CommScope’s internal control over financial reporting, which is included herein.in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting In conjunction with the integration of ARRIS, the Company is making changes to processes, policies and other components of its internal control over financial reporting, including the consolidation of such operations into the Company’s financial statements. Management continues to make changes to the design of the control procedures relating to ARRIS and assess their effectiveness. Except for the activities described above, thereThere have been no changes in the Company’s internal controlcontrols over financial reporting during the quarter ended December 31, 20192020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting Because of their inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not prevent all material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to risks, including that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. ITEM 9B. | OTHER INFORMATION |
None. PART III ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 20202021 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Code of Ethics for Principal Executive and Senior Financial and Accounting Officers We have adopted the CommScope Holding Company, Inc. Code of Ethics for Principal Executive and Senior Financial and Accounting Officers (the Senior Officer Code of Ethics), a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. The Senior Officer Code of Ethics is publicly available on our web site at www.commscope.com. If we make an amendment to, or grant a waiver from, a provision of the Senior Officer Code of Ethics, we will disclose the nature of such waiver or amendment on our web site. ITEM 11. | EXECUTIVE COMPENSATION |
The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 20202021 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 20202021 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2021 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 13.14. | CERTAIN RELATIONSHIPSPRINCIPAL ACCOUNTANT FEES AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCESERVICES
|
The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2020 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 14.
| PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 20202021 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
PART IV ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (a) | Documents Filed as Part of this Report: |
| 1. | Audited Consolidated Financial Statements |
The following consolidated financial statements of CommScope Holding Company, Inc. are included under Part II, Item 8: Reports of Independent Registered Public Accounting Firm Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 2018 and 20172018 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019 2018 and 20172018 Consolidated Balance Sheets as of December 31, 20192020 and 20182019 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 2018 and 20172018 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020, 2019 2018 and 20172018 Notes to Consolidated Financial Statements | 2. | Financial Statement Schedules |
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. | 3. | List of Exhibits. See Index of Exhibits included herein. |
Index of Exhibits | | Exhibit No. | | Description | | | | | | * | | 2.1 | | Stock and Asset Purchase Agreement, dated January 27, 2015, by and among CommScope Holding Company, Inc., CommScope, Inc. and TE Connectivity Ltd. (Incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on January 28, 2015). | * | | 2.2 | | Bid Conduct Agreement, dated November 8, 2018, among CommScope Holding Company, Inc. and ARRIS International plc (the Bid Conduct Agreement) (Incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on November 8, 2018). | * | | 2.3 | | First Amendment to Bid Conduct Agreement, dated January 2, 2019, between CommScope Holding Company, Inc. and ARRIS International plc (Incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on January 3, 2019). | * | | 3.1 | | Amended and Restated Certificate of Incorporation of CommScope Holding Company, Inc. (Incorporated by reference to Exhibit 3.1 of the Registrant’s Form 10-Q (File No. 001-36146), filed with the SEC on November 7, 2013). | * | | 3.2 | | Fourth Amended and Restated By-Laws of CommScope Holding Company, Inc. (as adopted December 13, 2016) (Incorporated by reference to Exhibit 3.13.2 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on December 14, 2016). | * | | 3.3 | | Certificate of Designations Designating Series A Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Company’sRegistrant’s Current Report on Form 8-K filed with the SEC on April 4, 2019). | * | | 4.1 | | Indenture governing the 5.000% Senior Notes due 2021 by and among CommScope, Inc. as Issuer, the subsidiary guarantors named therein and Wilmington Trust, National Association, as trustee, dated as of May 30, 2014, (including form of 5.000% Senior Note due 2021) (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on June 2, 2014).
| *
| | 4.2
| | Indenture governing the 5.500% Senior Notes due 2024 by and among CommScope, Inc. as Issuer, the subsidiary guarantors named therein and Wilmington Trust, National Association, as trustee, dated as of May 30, 2014, (including form of 5.500% Senior Note due 2024) (Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on June 2, 2014).
| *
| | 4.3
| | Indenture governing the 6.000% Senior Notes due 2025 by and between the CommScope Technologies Finance LLC and Wilmington Trust, National Association, as trustee, dated as of June 11, 2015 (including form of 6.000% Senior Note due 2025) (Incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on June 12, 2015). | * | | 4.44.2
| | First Supplemental Indenture, dated August 28, 2015, by and among CommScope Technologies LLC, the Guarantors party thereto and Wilmington Trust, National Association, as trustee (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on August 28, 2015). | * | | 4.54.3
| | Indenture governing the 5.000% Senior Notes due 2027, by and among CommScope Technologies LLC, the guarantors named therein and Wilmington Trust, National Association, as trustee and as collateral agent, dated as of March 13, 2017, (including form of 5.000% Senior Note due 2027) (Incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on March 13, 2017). |
* | | Exhibit No.
| | Description
| *
| | 4.64.4
| | Indenture, dated as of February 19, 2019, by and between the Escrow Issuer and Wilmington Trust, National Association, as trustee, including the form of 8.25% Senior Note due 2027 (Incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on February 19, 2019). | * | | 4.74.5
| | First Supplemental Indenture, dated as of April 4, 2019, by and among CommScope, Inc., the guarantors party thereto and Wilmington Trust, National Association, as trustee (Incorporated by reference to Exhibit 4.2 to the Company’sRegistrant’s Current Report on Form 8-K filed with the SEC on April 4, 2019). |
*
| | 4.8Exhibit No.
| | Description | * | | 4.6 | | Indenture, dated as of February 19, 2019, by and between the Escrow Issuer and Wilmington Trust, National Association, as trustee and collateral agent, including the form of 5.50% Senior Secured Note due 2024 and form of 6.00% Senior Secured Note due 2026 (Incorporated by reference to Exhibit 4.3 of the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on February 19, 2019). | * | | 4.94.7
| | First Supplemental Indenture, dated as of April 4, 2019, by and among CommScope, Inc., CommScope Holding Company, Inc., the other guarantors party thereto, Wilmington Trust, National Association, as trustee, and Wilmington Trust, National Association, as collateral agent (Incorporated by reference to Exhibit 4.4 to the Company’sRegistrant’s Current Report on Form 8-K filed with the SEC on April 4, 2019). | * | | 4.8 | | Indenture, dated as of July 1, 2020, by and between Wilmington Trust, National Association, as trustee, including the form of 7.125% Senior Note due 2028 (Incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on July 2, 2020). | * | | 4.104.9
| | Description of Securities Registered Pursuant to Section 12 of the Exchange Act.Act (Incorporated by reference to Exhibit 4.10 to the Registrant’s Annual Report on Form 10-K filed with the SEC on February 20, 2020). | * | | 10.1 | | Revolving Credit and Guaranty Agreement, dated as of January 14, 2011, by and among Cedar I Holding Company, Inc. (now CommScope Holding Company, Inc.), CommScope, Inc., as Parent Borrower, the U.S. Co-Borrowers and European Co-Borrowers named therein, the guarantors named therein, the Lenders from time to time party thereto, J.P. Morgan Securities LLC, as Lead Arranger and Bookrunner, JPMorgan Chase Bank, N.A., as US Administrative Agent, and J.P. Morgan Europe Limited, as European Administrative Agent and the Senior Managing Agents and Documentation Agents named therein (the Revolving Credit Facility) (Incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.2 | | Amendment No. 1 to the Revolving Credit Facility, dated as of March 9, 2012, among CommScope, Inc., as Parent Borrower, the U.S. Borrowers, European Co-Borrowers and Guarantors named therein, the Lenders party thereto, JPMorgan Chase Bank, N.A., as U.S. Administrative Agent, and J.P. Morgan Europe Limited, as European Administrative Agent (Incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.3 | | Amendment No. 2 to the Revolving Credit Facility, dated as of May 21, 2015, among CommScope, Inc., as Parent Borrower, CommScope Holding Company, Inc., as Holdings, the US Co-Borrowers and European Co-Borrowers named therein, the Lenders party thereto, JPMorgan Chase Bank, N.A., as U.S. Administrative Agent, and J.P. Morgan Europe Limited, as European Administrative Agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), originally filed with the SEC on May 22, 2015). | * | | 10.4 | | Revolving Credit Facility Pledge and Security Agreement, dated as of January 14, 2011, among CommScope, Inc. (as successor by merger to Cedar I Merger Sub, Inc.) and the additional Grantors party thereto, in favor of JPMorgan Chase Bank, N.A., as collateral agent and as administrative agent for the Secured Parties referred to therein (Incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.5 | | Patent Security Agreement, dated as of January 14, 2011, made by Allen Telecom LLC, Andrew LLC and CommScope, Inc. of North Carolina in favor of JPMorgan Chase Bank, N.A., as Collateral Agent (Incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). |
| | Exhibit No. | | Description | * | | 10.7 | | Copyright Security Agreement, dated as of January 14, 2011, made by Allen Telecom LLC, Andrew LLC and CommScope, Inc. of North Carolina in favor of JPMorgan Chase Bank, N.A., as Collateral Agent (Incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.8 | | Credit Agreement, dated as of January 14, 2011, among CommScope, Inc. (as successor by merger to Cedar I Merger Sub, Inc.), as Borrower, CommScope Holding Company, Inc.(as successor by merger to Cedar I Holding Company, Inc.), the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent and J.P. Morgan Securities LLC as Arranger and Sole Bookrunner (Incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.8.1 | | Amendment Agreement, dated as of March 7, 2012, among CommScope, Inc., as Borrower, CommScope Holding Company, Inc., the subsidiary guarantors party thereto, the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent and J.P. Morgan Securities LLC as Arranger and Sole Bookrunner (Incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.8.2 | | Amendment Agreement, dated as of March 8, 2013, among CommScope, Inc., as Borrower, CommScope Holding Company, Inc., the subsidiary guarantors party thereto, the Lenders from time to time party thereto, JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent , J.P. Morgan Securities LLC and Deutsche Bank Trust Company Americas, as syndication agent (Incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.8.3 | | Amendment No. 3, dated as of December 3, 2013, to the Credit Agreement, dated as of January 14, 2011, among CommScope, Inc., as Borrower, CommScope Holding Company, Inc., the subsidiary guarantors named therein, the several banks and other financial institutions or entities from time to time parties thereto as Lenders, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent and the other agents and arrangers party thereto. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on December 3, 2013). | * | | 10.8.4 | | Amendment Agreement, dated as of October 31, 2016, to the Credit Agreement, dated as of January 11, 2011, among CommScope, Inc., as Borrower, CommScope Holding Company, Inc., as Holdings, the several banks and other financial institutions or entities from time to time parties thereto as Lenders, JPMorgan Chase Bank, N.A., as Administrative Agent and the other agents and arrangers party thereto. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on October 31, 2016). | * | | 10.8.5 | | Amendment Agreement, dated as of May 31, 2017, to the Credit Agreement, dated as of January 11, 2011, among CommScope, Inc., as Borrower, CommScope Holding Company, Inc., as Holdings, the several banks and other financial institutions or entities from time to time parties thereto as Lenders, JPMorgan Chase Bank, N.A., as Administrative Agent and the other agents and arrangers party thereto. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on May 31, 2017). |
| | Exhibit No.
| | Description
| * | | 10.9 | | Term Loan Credit Facility Pledge and Security Agreement, dated as of January 14, 2011, among CommScope, Inc. (as successor by merger to Cedar I Merger Sub, Inc.) and the additional Grantors party thereto, in favor of JPMorgan Chase Bank, N.A., as collateral agent and as administrative agent for the Secured Parties referred to therein (Incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). |
| | Exhibit No. | | Description | * | | 10.10 | | Patent Security Agreement, dated as of January 14, 2011, made by Allen Telecom LLC, Andrew LLC and CommScope, Inc. of North Carolina in favor of JPMorgan Chase Bank, N.A., as Collateral Agent (Incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.11 | | Trademark Security Agreement, dated as of January 14, 2011, made by Allen Telecom LLC, Andrew LLC and CommScope, Inc. of North Carolina in favor of JPMorgan Chase Bank, N.A., as Collateral Agent (Incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.12 | | Copyright Security Agreement, dated as of January 14, 2011, made by Allen Telecom LLC, Andrew LLC and CommScope, Inc. of North Carolina in favor of JPMorgan Chase Bank, N.A., as Collateral Agent (Incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | | | | | | * | | 10.13 | | Holdings Guaranty, dated as of January 14, 2011, by CommScope Holding Company, Inc. in favor of the Secured Parties referred to therein (Incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.14 | | Subsidiary Guaranty, dated as of January 14, 2011, from the Subsidiary Guarantors named therein in favor of the Secured Parties referred to therein (Incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.15 | | Intercreditor Agreement, dated as of January 14, 2011, by and among CommScope Inc., CommScope Holding Company, Inc., certain Subsidiaries party thereto as a Guarantor, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent for the holders of Revolving Credit Obligations, and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent for the holders of Initial Fixed Asset Obligations (Incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), originally filed with the SEC on August 2, 2013). | * | | 10.16 | | Incremental Joinder Agreement, dated August 28, 2015, by and among CommScope, Inc., as Borrower, CommScope Holding Company, Inc., as Holdings, the Subsidiary Guarantors party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent, and JPMorgan Chase Bank, N.A., as Escrow Administrative Agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on August 28, 2015). | * | | 10.17 | | Notes Pledge and Security Agreement, dated as of June 11, 2015, among CommScope, Inc., as a Grantor and the additional Grantors party thereto, in favor of Wilmington Trust, National Association, as collateral agent under the Indenture referred to therein (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on June 12, 2015). | * | | 10.18 | | Amended and Restated Employment Agreement between Frank M. Drendel and CommScope, Inc., dated January 14, 2011, as amended on September 12, 2013 (Incorporated by reference to Exhibit 10.18 of Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), filed with the SEC on September 12, 2013).*** |
| | Exhibit No.
| | Description
| * | | 10.19 | | Employment Agreement between Marvin S. Edwards, Jr. and CommScope, Inc., dated January 14, 2011, as amended on September 12, 2013 (Incorporated by reference to Exhibit 10.20 of Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), filed with the SEC on September 12, 2013). *** | * | | 10.20 | | Employment Agreement between Mark A. Olson and CommScope, Inc., dated January 21, 2014 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on January 23, 2014). *** |
| | Exhibit No. | | Description | * | | 10.21 | | Amended and Restated Employment Agreement between Charles L. Treadway and CommScope, Inc., dated as of August 23, 2016, by and between ARRIS Group, Inc. and Mr. McClellandOctober 1, 2020 (Incorporated by reference to Exhibit 10.1 to the Company’sRegistrant’s Current Report on Form 8-K/A8-K (File No. 001-36146), filed with the SEC on April 4, 2019)October 1, 2020).** ***
| * | | 10.22 | | Employment Agreement between Claudius E. Watts IV and CommScope, Inc., dated October 1, 2020 (Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on October 1, 2020). *** | * | | 10.23 | | Form of Amended and Restated Severance Protection Agreement between CommScope, Inc. and certain executive officers entered into prior to 2013 (Incorporated by reference to Exhibit 10.21 of Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), filed with the SEC on September 12, 2013). *** | * | | 10.2310.24
| | Form of Amendment, effective June 3, 2016, to Severance Protection Agreement between CommScope, Inc. and certain executive officers entered into prior to 2013 (Incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on July 28, 2016). *** | * | | 10.2410.25
| | Form of Amended and Restated Severance Protection Agreement between CommScope, Inc. and certain executive officers entered into after 2015 (Incorporated by reference to Exhibit 10.23 of the Registrant’s Annual Report on Form 10-K (File No. 001-36146), filed with the SEC on February 20, 2019). *** | * | | 10.2510.26
| | Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.22 of Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), filed with the SEC on September 12, 2013). *** | * | | 10.2610.27
| | Amended and Restated CommScope, Inc. 2006 Long Term Incentive Plan (as amended and restated effective February 28, 2007) (Incorporated by reference to Exhibit 10.25 of Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), filed with the SEC on September 12, 2013). *** | * | | 10.2710.28
| | Amended and Restated CommScope Holding Company, Inc. 2011 Incentive Plan (as amended and restated effective February 19, 2013) (Incorporated by reference to Exhibit 10.26 of Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), filed with the SEC on September 12, 2013). *** | * | | 10.2810.29
| | Forms of Nonqualified Stock Option Certificate under the Amended and Restated CommScope Holding Company, Inc. 2011 Incentive Plan (Incorporated by reference to Exhibit 10.31 of Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), filed with the SEC on September 12, 2013). *** | * | | 10.2910.30
| | CommScope Holding Company, Inc. Amended and Restated 2013 Long-Term Incentive Plan (as amended and restated effective February 21, 2017) (Incorporated by reference to Exhibit 10.28 of the Registrant’s Annual Report on Form 10-K (File No. 001-36146), filed with the SEC on February 23, 2017). *** | * | | 10.30
| | Form of Restricted Stock Unit Award Certificate under the CommScope Holding Company, Inc. 2013 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on April 30, 2015). ***
| *
| | 10.31 | | Form of Performance Share Unit Award Certificate under the CommScope Holding Company, Inc. 2013 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on April 30, 2015). ***
|
| | Exhibit No.
| | Description
| *
| | 10.32
| | Form of Non-Qualified Stock Option Certificate under the CommScope Holding Company, Inc. 2013 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on April 30, 2015). *** | * | | 10.3310.32
| | CommScope Holding Company, Inc. Amendment to Outstanding Options, effective March 7, 2016 (Incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on April 28, 2016). *** | * | | 10.3410.33
| | Form of Restricted Stock Unit Award Certificate under the CommScope Holding Company, Inc. 2013 Long-Term Incentive Plan (for grants in 2016 and later) (Incorporated by reference to Exhibit 10.2 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on April 28, 2016). *** |
*
| | 10.35Exhibit No.
| | Description | * | | 10.34 | | Form of Performance Share Unit Award Certificate under the CommScope Holding Company, Inc. 2013 Long-Term Incentive Plan (for grants in 2016 and later) (Incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on April 28, 2016). *** | * | | 10.3610.35
| | Form of Non-Qualified Stock Option Certificate under the CommScope Holding Company, Inc. 2013 Long-Term Incentive Plan (for grants in 2016 and later) (Incorporated by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on April 28, 2016). *** | * | | 10.3710.36
| | CommScope Holding Company, Inc. Annual Incentive Plan, as amended February 17, 2016 (Incorporated by reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on April 28, 2016). *** | * | | 10.3810.37
| | Amended and Restated CommScope, Inc. Supplemental Executive Retirement Plan (as amended and restated effective April 9, 2009) (Incorporated by reference to Exhibit 10.30 of Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), filed with the SEC on September 12, 2013). *** | * | | 10.3910.38
| | First Amendment, dated January 12, 2011, to Amended and Restated CommScope, Inc. Supplemental Executive Retirement Plan (Incorporated by reference to Exhibit 10.32 of Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-190354), filed with the SEC on September 12, 2013). *** | * | | 10.4010.39
| | CommScope Holding Company, Inc. Non-Employee Director Compensation Plan, as amended on November 28, 2017 (Incorporated by reference to Exhibit 10.39 of the Registrant’s Annual Report on Form 10-K (File No. 001-36146), filed with the SEC on February 15, 2018). | * | | 10.4110.40
| | Form of Restricted Stock Unit Award Certificate under the CommScope Holding Company, Inc. Non-Employee Director Compensation Plan, which is operated as a subplan of the CommScope Holding Company, Inc. 2013 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.34 of the Registrant’s Annual Report on Form 10-K (File No. 001-36146), filed with the SEC on February 20, 2014). | * | | 10.4210.41
| | Form of Non-Qualified Stock Option Certificate under the CommScope Holding Company, Inc. Amended and Restated 2013 Long-Term Incentive Plan (for grants to senior executive officers in 2019) (Incorporated by reference to Exhibit 10.5 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on August 8, 2019). *** | * | | 10.42 | | Form of Restricted Stock Unit Award Certificate under the CommScope Holding Company, Inc. Amended and Restated 2019 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on October 1, 2020). *** | * | | 10.43 | | Form of Performance Share Unit Award Certificate under the CommScope Holding Company, Inc. Amended and Restated 2019 Long-Term Incentive Plan (service and average stock price vesting) (Incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on October 1, 2020). *** | * | | 10.44 | | CommScope Holding Company, Inc. Deferred Compensation Plan (as amended and restated effective January 1, 2017) ((Incorporated by reference to Exhibit 10.41 of the Registrant’s Annual Report on Form 10-K (File No. 001-36146), filed with the SEC on February 23, 2017). *** | * | | 10.4410.45
| | CommScope Holding Company, Inc. 2019 Long-Term Incentive Plan (Incorporated by reference to Exhibit 99.1 to the Company’sRegistrant’s Registration Statement on Form S-8 (File No. 333-232354), filed with the Commission on June 26, 2019).** *** |
*
| | 10.46Exhibit No.
| | Description | * | | 10.47 | | Commitment Letter, dated November 8, 2018, by and among CommScope Holding Company, Inc., CommScope, Inc., JPMorgan Chase Bank, N.A., Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank AG New York Branch, Deutsche Bank AG Cayman Islands Branch and Deutsche Bank Securities Inc. (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (File No. 001-36146), filed with the SEC on November 8, 2018). | * | | 10.4710.48
| | Registration Rights Agreement, dated as of April 4, 2019, by and between CommScope Holding Company, Inc. and Carlyle Partners VII S1 Holdings, L.P. (Incorporated by reference to Exhibit 10.1 to the Company’sRegistrant’s Current Report on Form 8-K filed with the SEC on April 4, 2019). | * | | 10.4810.49
| | Revolving Credit Agreement, dated as of April 4, 2019, among CommScope Holding Company, Inc., CommScope, Inc., the co-borrowers named therein, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the other agents and lenders party thereto (Incorporated by reference to Exhibit 10.2 to the Company’sRegistrant’s Current Report on Form 8-K filed with the SEC on April 4, 2019). | * | | 10.4910.50
| | Term Loan Credit Agreement, dated as of April 4, 2019, among CommScope, Inc., as the borrower, CommScope Holding Company, Inc., as holdings, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the other agents and lenders party thereto (Incorporated by reference to Exhibit 10.3 to the Company’sRegistrant’s Current Report on Form 8-K filed with the SEC on April 4, 2019). | * | | 18.1 | | Preferability Letter from Ernst & Young LLP, Independent Registered Public Accounting Firm (Incorporated by Reference to Exhibit 18.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on May 4, 2017).
| *
| | 18.2
| | Preferability Letter from Ernst & Young LLP, Independent Registered Public Accounting Firm (Incorporated by Reference to Exhibit 18.1 of the Registrant’s Quarterly Report on Form 10-Q (File No. 001-36146), filed with the SEC on August 8, 2019). | ** | | 21.1 | | List of Subsidiaries | ** | | 23.1 | | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | ** | | 31.1 | | Certification of Principal Executive Officer pursuant to Rule 13a-14(a). | | | | | | ** | | 31.2 | | Certification of Principal Financial Officer pursuant to Rule 13a-14(a). | | | | | | ± | | 32.1 | | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32)(ii) of Regulation S-K). | | | | | | † | | 101.INS | | Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | | | | | | † | | 101.SCH | | Inline XBRL Schema Document, furnished herewith. | | | | | | † | | 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | | | | | | † | | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. | | | | | | † | | 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document, | | | | | | † | | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| | Exhibit No.
| | Description
| | | | | | | | 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document). | | | | | | | | | | | | | | | |
*** Management contract or compensatory plan or arrangement. † | In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
± | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certification furnished in Exhibit 32.1 hereto is deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certification will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | | | | | | | | | | | | | COMMSCOPE HOLDING COMPANY, INC | | | | | | | | | | | | | DATE: February 20, 202016, 2021 | | | BY: /s/ MARVIN S. EDWARDS, JR.Charles L. Treadway | | | | | | | | Marvin S. Edwards, Jr.Charles L. Treadway | | | | | | | | | President and Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. | | | | | | | | | Signature | | Title | | Date | | | | | | /s/ MARVIN S. EDWARDS, JR.CHARLES L. TREADWAY | | President, Chief Executive | | February 20, 202016, 2021 | Marvin S. Edwards, Jr.Charles L. Treadway
| | Officer and Director (Principal Executive Officer) | | | | | | | | /s/ ALEXANDER W. PEASE | | Executive Vice President and | | February 20, 202016, 2021 | Alexander W. Pease | | Chief Financial Officer (Principal Financial Officer) | | | | | | | | /s/ BROOKE B. CLARK | | Senior Vice President and | | February 20, 202016, 2021 | Brooke B. Clark | | Chief Accounting Officer (Principal Accounting Officer) | | | | /s/ FRANK M. DRENDELCLAUDIUS E. WATTS IV | | Director and Chairman of the | | February 20, 202016, 2021 | Frank M. DrendelClaudius E. Watts IV
| | Board | | | | | | | | | | | | | /s/ AUSTIN A. ADAMS | | Director | | February 20, 202016, 2021 | Austin A. Adams | | | | | | | | | | /s/ DANIEL F. AKERSONMARY S. CHAN | | Director | | February 20, 202016, 2021 | Daniel F. AkersonMary S. Chan
| | | | | | | | | | | | | | | /s/ CAMPBELL R. DYERFRANK M. DRENDEL | | Director and Chairman | | February 20, 202016, 2021 | Campbell R. Dyer
Frank M. Drendel | | | | | | | Emeritus | | | /s/ STEPHEN C. GRAY | | Director | | February 20, 202016, 2021 | Stephen C. Gray | | | | | | | | | | | | | | | /s/ L. WILLIAM KRAUSE | | Director | | February 20, 202016, 2021 | L. William Krause | | | | | | | | | | | | | | | /s/ JOANNE M. MAGUIRE | | Director | | February 20, 202016, 2021 | Joanne M. Maguire | | | | | | | | | |
| | | | | | | | | | /s/ THOMAS J. MANNING | | Director | | February 20, 202016, 2021 | Thomas J. Manning | | | | | | | | | | | | | | | /s/ CLAUDIUS E. WATTS IVPATRICK R. MCCARTER | | Director | | February 20, 202016, 2021 | Claudius E. Watts IVPatrick R. McCarter
| | | | | | | | | | | | | | | /s/ TIMOTHY T.YATES | | Director | | February 20, 202016, 2021 | Timothy T. Yates | | | | | | | | | |
137131
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