Background and Basis of Presentation | 3 Months Ended |
Mar. 31, 2015 |
Accounting Policies [Abstract] | |
Background and Basis of Presentation | 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 leadership 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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In January 2015, the Company announced an agreement to acquire TE Connectivity’s Telecom, Enterprise and Wireless business, also referred to as Broadband Network Solutions (BNS), in an all-cash transaction valued at approximately $3.0 billion. This business provides fiber optic connectivity for wireline and wireless networks and generated annual revenues of approximately $1.9 billion in its fiscal year ended September 26, 2014. The acquisition is expected to be financed using a combination of cash on hand and approximately $2.75 billion of additional net debt. The transaction is expected to close by the end of 2015, subject to consummation of contemplated financing, regulatory approvals and other customary closing conditions. For the three months ended March 31, 2015, transaction and integration costs of $11.4 million, primarily related to the proposed acquisition, were included in selling, general and administrative expenses. |
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Basis of Presentation |
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The Condensed Consolidated Balance Sheet as of March 31, 2015, the Condensed Consolidated Statements of Operations and Comprehensive Income, Cash Flows and Stockholders’ Equity for the three months ended March 31, 2015 and 2014 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, 2014 (the 2014 Annual Report). There were no changes in the Company’s significant accounting policies during the three months ended March 31, 2015. 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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Concentrations of Risk and Related Party Transactions |
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Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 13% and 11% of the Company’s total net sales during the three months ended March 31, 2015 and 2014, respectively. Sales to Anixter primarily originate within the Enterprise segment. Other than Anixter, no other direct customer accounted for 10% or more of the Company’s total net sales for the three months ended March 31, 2015 or 2014. |
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Accounts receivable from Anixter represented approximately 12% of accounts receivable as of March 31, 2015. Other than Anixter, no other direct customer accounted for more than 10% of the Company’s accounts receivable as of March 31, 2015. |
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As of March 31, 2015, funds affiliated with The Carlyle Group owned 42.9% of the outstanding shares of CommScope. |
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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 | |
| | March 31, | |
| | 2015 | | | 2014 | |
Product warranty accrual, beginning of period | | $ | 17,054 | | | $ | 24,838 | |
Provision for warranty claims | | | 1,542 | | | | 2,269 | |
Warranty claims paid | | | (3,230 | ) | | | (4,169 | ) |
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Product warranty accrual, end of period | | $ | 15,366 | | | $ | 22,938 | |
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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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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. |
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Asset Impairments |
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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. There were no asset impairments identified during the three months ended March 31, 2015 or 2014. |
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Income Taxes |
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The effective income tax rate of 34.7% for the three months ended March 31, 2015 was lower than the statutory rate of 35% primarily due to the impact of earnings in foreign jurisdictions that the Company does not plan to repatriate. Such earnings are generally taxed at rates lower than the U.S. statutory rate. In addition, the effective income tax rate was also affected by the provision for state income taxes as well as losses in certain jurisdictions where the Company did not recognize tax benefits due to the likelihood of them not being realizable. |
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The effective income tax rate of 36.9% for the three months ended March 31, 2014 was higher than the statutory rate of 35% primarily due to losses in certain jurisdictions where the Company did not recognize tax benefits due to the likelihood of them not being realizable, increases in valuation allowances on certain tax attributes, the provision for state income taxes and certain tax costs associated with repatriation of foreign earnings. These items were partially offset by benefits related to uncertain tax positions for which the statutes had lapsed and the $5.4 million pretax reduction in the estimated fair value of contingent consideration payable, which is not subject to tax. |
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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, performance share units 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 conditions were not met (1.3 million shares and 3.0 million shares for the three months ended March 31, 2015 and 2014, respectively). |
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The following table presents the basis for the earnings per share computations: |
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| | Three Months Ended | |
| | March 31, | |
| | 2015 | | | 2014 | |
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Net income for basic and diluted earnings per share | | $ | 39,476 | | | $ | 64,487 | |
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Weighted average shares outstanding - basic | | | 188,480 | | | | 185,942 | |
Dilutive effect of equity-based awards | | | 4,657 | | | | 4,980 | |
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Weighted average common shares outstanding - diluted | | | 193,137 | | | | 190,922 | |
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Earnings per share: | | | | | | | | |
Basic | | $ | 0.21 | | | $ | 0.35 | |
Diluted | | $ | 0.2 | | | $ | 0.34 | |
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Recent Accounting Pronouncements |
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In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. The ASU requires that debt issuance costs related to a recognized debt liability be reported as a direct deduction from the carrying amount of that debt liability. The Company will be required to adopt this guidance as of January 1, 2016 and apply it retrospectively to all prior periods presented. Early adoption is permitted. The adoption of this accounting guidance will reduce the Company’s other noncurrent assets and long-term debt by the amount of unamortized debt issuance costs. As of March 31, 2015 and December 31, 2014, this amount was $40.7 million and $43.2 million, respectively. |
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In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This guidance defines how companies report revenues from contracts with customers, and also requires enhanced disclosures. The Company will be required to adopt the standard as of January 1, 2017 and early adoption is not permitted. In April 2015, the FASB announced a proposal to defer the effective date by one year, with early adoption on the original effective date permitted. The Company has not determined the transition approach that will be utilized or estimated the impact of adopting the new accounting standard. |