Background and Basis of Presentation | 9 Months Ended |
Sep. 30, 2014 |
Accounting Policies [Abstract] | ' |
Background and Basis of Presentation | ' |
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1. BACKGROUND AND BASIS OF PRESENTATION |
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Background |
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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. |
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Basis of Presentation |
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The Condensed Consolidated Balance Sheet as of September 30, 2014, the Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013, and the Condensed Consolidated Statements of Cash Flows and Stockholders’ Equity for the nine months ended September 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. |
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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 nine months ended September 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. |
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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. |
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On October 4, 2013, the Company effected a 3-for-1 stock split of its common stock. All share and per share numbers and amounts have been revised to reflect the stock split. |
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Concentrations of Risk and Related Party Transactions |
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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 nine months ended September 30, 2014. Net sales to Anixter accounted for approximately 12% of the Company’s total net sales during the three and nine months ended September 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 nine months ended September 30, 2014 or 2013. |
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Accounts receivable from Anixter represented approximately 12% of accounts receivable as of September 30, 2014. Other than Anixter, no other direct customer accounted for 10% or more of the Company’s accounts receivable as of September 30, 2014. |
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As of September 30, 2014, the Company was 54% owned by funds affiliated with The Carlyle Group (Carlyle). The Company paid $0.8 million and $2.3 million of management and oversight fees to Carlyle in the three and nine months ended September 30, 2013, respectively. In October 2013, the Company paid Carlyle approximately $20.2 million to terminate the management agreement. |
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Product Warranties |
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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. |
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The following table summarizes the activity in the product warranty accrual, included in other accrued liabilities: |
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| | Three Months Ended | | | Nine Months Ended | |
September 30, | September 30, |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Product warranty accrual, beginning of period | | $ | 21,795 | | | $ | 24,127 | | | $ | 24,838 | | | $ | 26,005 | |
Provision for warranty claims | | | 2,504 | | | | 2,421 | | | | 7,435 | | | | 3,568 | |
Warranty claims paid | | | (4,776 | ) | | | (2,437 | ) | | | (12,750 | ) | | | (5,462 | ) |
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Product warranty accrual, end of period | | $ | 19,523 | | | $ | 24,111 | | | $ | 19,523 | | | $ | 24,111 | |
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Commitments and Contingencies |
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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. |
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As of September 30, 2014, the Company had commitments of $17.0 million to purchase metals that are expected to be consumed in normal production by the first quarter of 2015. In the aggregate, these commitments were at prices approximately 7% above market prices as of September 30, 2014. |
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Asset Impairments |
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Goodwill is tested for impairment on an annual basis or on an interim basis when events occur or circumstances indicate the carrying value may no longer be recoverable. During the third quarter of 2014, management began the annual planning process. For the Microwave Antenna Group (Microwave) reporting unit in the Wireless segment, management considered the lower than expected levels of sales and operating income during 2014 and the effect of market conditions on the projected future operations of the business. Based on this information, management determined that an indicator of possible impairment existed. A step one goodwill impairment test was performed using a discounted cash flow (DCF) valuation model. The significant assumptions in the DCF model are the annual revenue growth rate, the annual operating income margin and the discount rate used to determine the present value of the cash flow projections. The discount rate was based on the estimated weighted average cost of capital as of the test date for market participants in the industry in which the Microwave reporting unit operates. Based on the estimated fair values generated by the DCF model, the Microwave reporting unit did not pass step one of the goodwill impairment test. A preliminary step two analysis was performed and an estimated goodwill impairment charge of $7.0 million was recorded during the three months ended September 30, 2014. The step two valuation is expected to be finalized in the fourth quarter and any revision to the impairment charge will be recorded at that time. The goodwill impairment charge resulted primarily from lower projected operating results than those from the 2013 annual impairment test. The discount rate used in the impairment test was 11.0% compared to 11.5% used in the 2013 annual goodwill impairment test. During the three months ended September 30, 2013, the Company finalized its measurement of the goodwill impairment charge for the Broadband reporting unit and recorded a charge of $7.3 million. The total goodwill impairment charge for the Broadband segment for the nine months ended September 30, 2013 was $36.2 million. |
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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 written down to their estimated fair value. During the nine months ended September 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 nine months ended September 30, 2013, an impairment charge of $5.6 million was recorded in the Wireless segment related to certain real estate and production equipment. |
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Income Taxes |
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The effective income tax rate of 17.8% and 30.5% for the three and nine months ended September 30, 2014, respectively, was lower than the statutory rate of 35% primarily due to a reduction in tax expense related to the reduction in reserves for uncertain tax positions as a result of the lapse of the statutes of limitations on certain matters. The benefits to the income tax rate were partially offset by the impact of losses in certain jurisdictions where the Company did not recognize tax benefits due to the likelihood of them not being realizable and the provision for state income taxes. For the three months ended September 30, 2014, there was a slight decrease in valuation allowances while for the nine months ended September 30, 2014 there was a modest increase in valuation allowances as a result of changes in profitability in various jurisdictions. Earnings in foreign jurisdictions, which are generally taxed at rates lower than the U.S. statutory rate, reduce the effective tax rate. This reduction is largely offset by providing for the cost of repatriating the majority of these earnings. |
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The effective income tax rate for the three and nine months ended September 30, 2014 was also affected by the asset impairment charges recorded during those periods for which no tax benefit was recognized. In addition, gains in the three and nine months ended September 30, 2014, from the reduction in the estimated fair value of contingent consideration payable are not subject to tax. |
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The effective income tax rate of 73.8% and 75.5% for the three and nine months ended September 30, 2013, respectively, reflected net increases in valuation allowances related to (1) foreign tax credit carryforwards that the Company determined were not likely to be realized, primarily due to an increase in future interest expense expected as a result of 2013 borrowings and (2) net operating loss carryforwards in certain foreign jurisdictions as a result of changes in profitability. In addition to the impact of the valuation allowances, the effective income tax rate for the three and nine months ended September 30, 2013 was also affected by goodwill impairment charges for which no tax benefit was recognized, 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. |
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Earnings Per Share |
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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 (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 (2.5 million shares and 2.4 million shares for the three and nine months ended September 30, 2014, respectively, and 3.2 million shares for the three and nine months ended September 30, 2013). |
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The following table presents the basis for the earnings per share computations: |
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| | Three Months Ended | | | Nine Months Ended | |
September 30, | September 30, |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
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Net income for basic and diluted earnings per share | | $ | 96,431 | | | $ | 11,287 | | | $ | 188,961 | | | $ | 28,309 | |
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Weighted average shares outstanding - basic | | | 187,407 | | | | 154,885 | | | | 186,624 | | | | 154,883 | |
Dilutive effect of equity-based awards | | | 4,220 | | | | 4,179 | | | | 4,502 | | | | 3,125 | |
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Weighted average common shares outstanding - diluted | | | 191,627 | | | | 159,064 | | | | 191,126 | | | | 158,008 | |
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Recent Accounting Pronouncements |
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In May 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. |