BACKGROUND AND BASIS OF PRESENTATION | 6 Months Ended |
Jun. 30, 2014 |
Accounting Policies [Abstract] | ' |
BACKGROUND AND BASIS OF PRESENTATION | ' |
1. BACKGROUND AND BASIS OF PRESENTATION |
Background |
CommScope Holding Company, Inc., along with its direct and indirect subsidiaries (CommScope or the Company), is a global provider of essential infrastructure solutions for wireless, business enterprise and residential broadband networks. The Company’s solutions and services for wired and wireless networks enable high-bandwidth data, video and voice applications. CommScope’s global position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions and global manufacturing and distribution scale. |
Basis of Presentation |
The Condensed Consolidated Balance Sheet as of June 30, 2014, the Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2014 and 2013, and the Condensed Consolidated Statements of Cash Flows and Stockholders’ Equity for the six months ended June 30, 2014 and 2013 are unaudited and reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. |
The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and are presented in accordance with the applicable requirements of Regulation S-X. Accordingly, these financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. The significant accounting policies followed by the Company are set forth in Note 2 within the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the 2013 Annual Report). There were no changes in the Company’s significant accounting policies during the three and six months ended June 30, 2014. In addition, the Company reaffirms the use of estimates in the preparation of the financial statements as set forth in the audited consolidated financial statements. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements. |
As of January 1, 2014, the Company adopted new accounting guidance that requires an entity to net its liability for uncertain tax positions as a reduction to deferred tax balances related to net operating loss carryforwards, similar tax losses or tax credit carryforwards when settlement in this manner is available under the tax law. The provisions of this new guidance did not have a material impact on the Company’s financial statements. |
On October 4, 2013, the Company effected a 3-for-1 stock split of its common stock. All share and per share numbers have been revised to reflect the stock split. |
Concentrations of Risk and Related Party Transactions |
Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for approximately 11% of the Company’s total net sales during the three and six months ended June 30, 2014. Net sales to Anixter accounted for approximately 12% of the Company’s total net sales during the three and six months ended June 30, 2013. Sales to Anixter primarily originate within the Enterprise segment. Other than Anixter, no direct customer accounted for 10% or more of the Company’s total net sales for the three or six months ended June 30, 2014 or 2013. |
Accounts receivable from Anixter represented approximately 12% of accounts receivable as of June 30, 2014. Other than Anixter, no direct customer accounted for 10% or more of the Company’s accounts receivable as of June 30, 2014. |
As of June 30, 2014, the Company was 54% owned by funds affiliated with The Carlyle Group (Carlyle). The Company paid $0.8 million and $1.5 million of management and oversight fees to Carlyle in the three and six months ended June 30, 2013, respectively. In October 2013, the Company paid Carlyle approximately $20.2 million to terminate the management agreement. |
|
Product Warranties |
The Company recognizes a liability for the estimated claims that may be paid under its customer warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products. These product warranties extend over periods ranging from one to twenty-five years from the date of sale, depending upon the product subject to the warranty. The Company records a provision for estimated future warranty claims as cost of sales based upon the historical relationship of warranty claims to sales and specifically-identified warranty issues. The Company bases its estimates on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Such revisions may be material. |
The following table summarizes the activity in the product warranty accrual, included in other accrued liabilities: |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
June 30, | June 30, |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Product warranty accrual, beginning of period | | $ | 22,938 | | | $ | 25,325 | | | $ | 24,838 | | | $ | 26,005 | |
Provision for warranty claims | | | 2,662 | | | | 187 | | | | 4,931 | | | | 1,147 | |
Warranty claims paid | | | (3,805 | ) | | | (1,385 | ) | | | (7,974 | ) | | | (3,025 | ) |
| | | | | | | | | | | | | | | | |
Product warranty accrual, end of period | | $ | 21,795 | | | $ | 24,127 | | | $ | 21,795 | | | $ | 24,127 | |
| | | | | | | | | | | | | | | | |
Commitments and Contingencies |
The Company is either a plaintiff or a defendant in pending legal matters in the normal course of business. Management believes none of these legal matters will have a material adverse effect on the Company’s business or financial condition upon final disposition. |
As of June 30, 2014, the Company had commitments of $23.6 million to purchase metals that are expected to be consumed in normal production by the fourth quarter of 2014. In the aggregate, these commitments were at prices approximately 1% above market prices as of June 30, 2014. |
Asset Impairments |
Property, plant and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable, based on the undiscounted cash flows expected to be derived from the use and ultimate disposition of the assets. Assets identified as impaired are carried at their estimated fair value. During the three months ended June 30, 2014, as a result of revisions to the business plan for a particular product line, the Company determined that certain intangible assets in the Broadband segment were no longer recoverable and a $7.2 million impairment charge was recorded. During the three months ended June 30, 2013, a goodwill impairment charge of $28.8 million was recorded in the Broadband segment primarily as a result of lower projected operating results than those used in the 2012 annual impairment test. During the six months ended June 30, 2013, the Company also recorded pretax impairment charges in the Wireless segment of $5.6 million related to certain real estate and production equipment. |
Income Taxes |
The effective income tax rate of 46.4% and 40.1% for the three and six months ended June 30, 2014, respectively, was higher than the statutory rate of 35% primarily due to increases in valuation allowances for foreign tax credit carryforwards, losses in certain jurisdictions where the Company did not recognize tax benefits due to the likelihood of them not being realizable, the provision for state income taxes and certain tax costs associated with repatriation of foreign earnings. In addition, no tax benefit was recognized on the $7.2 million asset impairment charge recorded during the second quarter of 2014. These items were partially offset by gains of $6.6 million and $12.0 million in the three and six months ended June 30, 2014, respectively, that resulted from the reduction in the estimated fair value of contingent consideration payable, which is not subject to tax. The Company also recognized a reduction in tax expense during the six months ended June 30, 2014 related to uncertain tax positions for which the statutes of limitations had lapsed. |
The effective income tax rate for the three and six months ended June 30, 2013 was higher than the statutory rate of 35% primarily due to the establishment of a valuation allowance of $29.5 million related to foreign tax credit carryforwards that was partially offset by the reversal of a previously established valuation allowance of $8.3 million related to net operating loss carryforwards in a foreign jurisdiction as a result of improved profitability. In addition, no tax benefit was recognized on the $28.8 million goodwill impairment charge recorded during the second quarter of 2013. The effective tax rate for the three and six months ended June 30, 2013 was also impacted by losses in certain foreign jurisdictions where the Company did not recognize tax benefits due to the likelihood of them not being realizable, tax costs associated with repatriation of foreign earnings and adjustments related to prior years’ tax returns in various jurisdictions. |
Earnings Per Share |
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on net income divided by the weighted average number of common shares outstanding plus the dilutive effect of potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding equity-based awards such as stock options and restricted stock units. Certain outstanding equity-based awards were not included in the computation of diluted earnings per share because the effect was either antidilutive or the performance condition was not met (2.2 million shares and 1.9 million shares for the three and six months ended June 30, 2014, respectively, and 2.5 million shares and 2.4 million shares for the three and six months ended June 30, 2013, respectively). The following table presents the basis for the earnings per share computations: |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Numerator: | | | | | | | | | | | | | | | | |
Net income for basic and diluted earnings per share | | $ | 28,043 | | | $ | 1,121 | | | $ | 92,530 | | | $ | 17,021 | |
| | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted average shares outstanding - basic | | | 186,509 | | | | 154,885 | | | | 186,226 | | | | 154,883 | |
Dilutive effect of equity-based awards | | | 4,475 | | | | 3,431 | | | | 4,468 | | | | 2,597 | |
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding - diluted | | | 190,984 | | | | 158,316 | | | | 190,694 | | | | 157,480 | |
| | | | | | | | | | | | | | | | |
Recent Accounting Pronouncements |
On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 Revenue from Contracts with Customers, which establishes a single comprehensive model for revenue recognition. Under the new guidance, revenue will be recognized when control over goods or services has been transferred to a customer. When multiple goods or services are sold under a single arrangement, revenue will be allocated based on the relative standalone selling prices of the various elements. The Company will be required to adopt the standard as of January 1, 2017 and early adoption is not permitted. Transition alternatives include full retrospective adoption or a modified retrospective adoption. The Company has not determined the transition approach that will be utilized or estimated the impact of adopting the new accounting standard. |