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 infrastructure solutions for the core, access and edge layers of communication networks. The Company’s solutions and services for wired and wireless networks enable high-bandwidth data, video and voice applications. CommScope’s global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale. Basis of Presentation The accompanying unaudited condensed consolidated financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The results of operations for these interim periods are not necessarily indicative of the results of operations to be expected for any future period or the full fiscal year. Certain prior year amounts have been reclassified to conform to the current year presentation. The unaudited 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. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the 2017 Annual Report). 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 2017 Annual Report. Other than the changes described below to revenue recognition policies as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, Revenue Recognition The Company recognizes revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. The majority of the Company’s revenue is from product sales. Revenue from product sales is recognized when control is transferred to the customer, typically upon either shipment or delivery. A minor portion of the Company’s revenue is derived from project contracts containing a combination of product and service obligations. Revenue from project contracts is recognized either at a point in time or over time using cost input methods, based on the specific terms of each contract. For project contracts containing multiple distinct performance obligations, the transaction price is allocated based on the relative standalone estimated selling price of each performance obligation. The relative standalone selling price is determined using current price lists and observable pricing in separate contracts with similar customers. For performance obligations recognized over-time, judgment is required to evaluate assumptions, including the total estimated costs to determine progress towards 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 loss is recognized in the period the loss becomes known. The cumulative effects on revenue from revisions to total estimated costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. The Company also recognizes revenue from other customer contract types, including licensing of intellectual property, software licensing and post-contract support (PCS) which may be sold as part of a bundled product offering or as a separate contract. For bundled product arrangements, the transaction price is allocated based on the relative standalone estimated selling price of each performance obligation. Distinct intellectual property obligations, including software, are considered functional in nature and are recognized as revenue at the point in time the customer receives the rights to use and benefit from the intellectual property or are determined using a usage-based royalty. PCS obligations are typically recognized over the term of the contract. Revenue is measured based on the consideration to which the Company expects to be entitled, based on customer contracts. For sales to distributors, system integrators and value-added resellers (primarily for the CommScope Connectivity Solutions (CCS) segment), revenue is adjusted for variable consideration amounts, including estimated discounts, returns, rebates and distributor price protection programs. These estimates are determined based upon historical experience, contract terms, inventory levels in the distributor channel and other related factors. Adjustments to variable consideration estimates are recorded when circumstances indicate revisions may be necessary. The Company records a contract asset for unbilled accounts receivable related to revenue that has been recognized in advance of consideration being unconditionally due from the customer, which is common for certain project contract performance obligations. Contract asset amounts are transferred to accounts receivable when the Company’s right to the consideration becomes unconditional, which varies by contract, but is generally based on achieving certain acceptance milestones. A contract liability for deferred revenue is recorded when consideration is received or is unconditionally due from a customer prior to transferring control of goods or services to the customer under the terms of a contract. Deferred revenue balances typically result from advance payments received from customers for product contracts or from billings in excess of revenue recognized on project or services arrangements. The Company includes shipping and handling costs billed to customers in net sales and includes the costs incurred to transport product to customers 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. Concentrations of Risk and Related Party Transactions Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 11% of the Company’s total net sales during both the three and nine months ended September 30, 2018. Net sales to Anixter accounted for 12% and 11% of the Company’s total net sales during the three and nine months ended September 30, 2017, respectively. Sales to Anixter primarily originate within the CCS segment. Other than Anixter, no direct customer accounted for 10% or more of the Company’s total net sales for the three or nine months ended September 30, 2018 or 2017. Accounts receivable from Anixter accounted for 12% of the Company’s accounts receivable as of September 30, 2018. Other than Anixter, no direct customer accounted for 10% or more of the Company’s accounts receivable as of September 30, 2018. Product Warranties The Company recognizes a liability for the estimated claims that may be paid under its customer warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products. These product warranties extend over periods ranging from one to twenty-five years from the date of sale, depending upon the product subject to the warranty. The Company records a provision for estimated future warranty claims as cost of sales based upon the historical relationship of warranty claims to sales and specifically identified warranty issues. The Company bases its estimates on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Such revisions may be material. The following table summarizes the activity in the product warranty accrual, included in other accrued liabilities: Three Months Ended Nine Months Ended September 30, September 30, 2018 2017 2018 2017 Product warranty accrual, beginning of period $ 14,846 $ 20,283 $ 16,928 $ 21,631 Provision for warranty claims 1,296 284 3,174 4,515 Warranty claims paid (1,660 ) (2,033 ) (5,573 ) (7,751 ) Foreign exchange (11 ) (62 ) (58 ) 77 Product warranty accrual, end of period $ 14,471 $ 18,472 $ 14,471 $ 18,472 Commitments and Contingencies The Company is either a plaintiff or a defendant in certain pending legal matters in the normal course of business. The Company may also be called upon to indemnify certain customers for costs related to products or services sold to such customers. Management believes none of these legal matters will have a material adverse effect on the Company’s business or financial condition upon final disposition. In addition, the Company is subject to various federal, state, local and foreign laws and regulations governing the use, discharge, disposal and remediation of hazardous materials. Compliance with current laws and regulations has not had, and is not expected to have, a materially adverse effect on the Company’s financial condition or results of operations. Asset Impairments Goodwill is tested for impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of the reporting unit may exceed its fair value. During the three months ended September 30, 2018, through the annual planning process, the Company determined that an indicator of impairment existed for certain reporting units as a result of reductions in expected sales and operating income. The Company performed a step one goodwill impairment test as of September 30, 2018, and all reporting units passed step one. The Company identified no goodwill impairments during the three or nine months ended September 30, 2018 or 2017. Property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable, based on the undiscounted cash flows expected to be derived from the use and ultimate disposition of the assets. Assets identified as impaired are carried at estimated fair value. Equity investments without readily determinable fair values are evaluated each reporting period for impairment based on a qualitative assessment and are then measured at fair value if an impairment is determined to exist. Other than certain assets impaired as a result of restructuring actions, there were no definite-lived intangible or other long-lived asset impairments identified during the three or nine months ended September 30, 2018 or 2017. Income Taxes On December 22, 2017, the United States (U.S.) government enacted tax reform legislation that reduced the corporate income tax rate from 35% to 21% and included a broad range of complex provisions affecting the taxation of businesses. Generally, financial statement recognition of the new legislation would be required to be completed in the period of enactment; however, in response to the complexities of this new legislation, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118 to provide companies with transitional relief. Specifically, when the initial accounting for items under the new legislation is incomplete, the guidance allows the recognition of provisional amounts when reasonable estimates can be made or the continued application of the prior tax law if a reasonable estimate of the effect cannot be made. The SEC staff has provided up to one year from the date of enactment for companies to finalize the accounting for the effects of this new legislation. During the three and nine months ended September 30, 2018, the Company recognized a $2.5 million tax benefit related to changes made to the provisional amounts, primarily related to the Company’s transition tax and from revaluing the Company’s U.S. deferred tax assets and liabilities. The Company expects to continue to refine the calculations as additional analysis is completed and as additional guidance and interpretations are available. Any changes made could be material to income tax expense. The effective income tax rate of 2.7% for the three months ended September 30, 2018 was lower than the statutory rate of 21.0% due to a reduction in tax expense of $24.1 million related to the expiration of statutes of limitations on various uncertain tax positions. The effective income tax rate of 23.9% for the nine months ended September 30, 2018 was higher than the statutory rate of 21.0% primarily due to the effect of the provision for state income taxes, the impact of earnings in foreign jurisdictions that are taxed at rates higher than the U.S. statutory rate, the impact of the new U.S. anti-deferral provisions and the impact of repatriation taxes. These increases to the effective tax rate were partially offset by a reduction in tax expense related to the expiration of statutes of limitations on various uncertain tax positions discussed above and the favorable impact of $4.7 million of excess tax benefits related to equity-based compensation awards for the nine months ended September 30, 2018. The effective income tax rate of 24.8% and 23.6% for the three and nine months ended September 30, 2017, respectively, was lower than the statutory rate of 35.0% primarily due to a reduction in tax expense related to the expiration of statutes of limitations on various uncertain tax positions. In addition, the effective income tax rate was favorably impacted by $0.4 million and $13.5 million of excess tax benefits related to equity-based compensation awards for the three and nine months ended September 30, 2017, respectively. Offsetting these decreases for the three and nine months ended September 30, 2017 was the effect of the provision for state income taxes. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on net income divided by the weighted average number of common shares outstanding plus the effect of potentially dilutive common shares using the treasury stock method. Potentially dilutive common shares include outstanding equity-based awards (stock options, restricted stock units and performance share units). Certain outstanding equity-based awards were not included in the computation of diluted earnings per share because the effect was either antidilutive or the performance conditions were not met (2.5 million shares and 1.8 million shares for the three and nine months ended September 30, 2018, respectively, and 1.7 million shares and 1.3 million shares for the three and nine months ended September 30, 2017, respectively). The following table presents the basis for the earnings per share computations (in thousands, except per share data): Three Months Ended Nine Months Ended September 30, September 30, 2018 2017 2018 2017 Numerator: Net income for basic and diluted earnings per share $ 63,843 $ 51,157 $ 163,500 $ 140,183 Denominator: Weighted average common shares outstanding - basic 192,219 191,824 191,920 192,973 Dilutive effect of equity-based awards 3,140 3,991 3,450 4,414 Weighted average common shares outstanding - diluted 195,359 195,815 195,370 197,387 Earnings per share: Basic $ 0.33 $ 0.27 $ 0.85 $ 0.73 Diluted $ 0.33 $ 0.26 $ 0.84 $ 0.71 Recent Accounting Pronouncements Adopted During the Nine Months Ended September 30, 2018 The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, Revenue recognition for the Company’s product sales remained generally consistent with historical practice. However, the adoption of ASU No. 2014-09 resulted in acceleration of revenue recognition for certain project contracts containing integrated product and service obligations, primarily within the CommScope Mobility Solutions (CMS) segment. These multi-element contracts represented less than 2.0% of total net sales for the three and nine months ended September 30, 2018 and 2017. For these contracts, certain performance obligations are recognized over time using cost-based input methods, which recognize revenue and cost of sales based on the relationship between actual costs incurred compared to the total estimated cost for the performance obligation. Based on contracts in effect at January 1, 2018, the Company recorded a cumulative effect adjustment, net of tax, of $3.4 million, which reduced the accumulated deficit on the Condensed Consolidated Balance Sheets. This adjustment reflects an acceleration of revenues of $8.0 million. The impact of adoption of the new revenue recognition standard on the condensed consolidated financial statements was as follows: Three Months Ended September 30, 2018 Nine Months Ended September 30, 2018 As Reported Amounts Without Adoption of ASU No. 2014-09 Effect of Change Increase / (Decrease) As Reported Amounts Without Adoption of ASU No. 2014-09 Effect of Change Increase / (Decrease) Net sales $ 1,150,405 $ 1,148,956 $ 1,449 $ 3,510,778 $ 3,511,013 $ (235 ) Cost of sales 726,531 726,314 217 2,204,194 2,203,498 696 Operating income 132,225 130,993 1,232 400,639 401,570 (931 ) Income tax expense 1,763 1,483 280 51,367 51,625 (258 ) Net income 63,843 62,891 952 163,500 164,173 (673 ) As of September 30, 2018 As Reported Amounts Without Adoption of ASU No. 2014-09 Effect of Change Increase / (Decrease) Assets: Accounts receivable, less allowance for doubtful accounts $ 901,096 $ 896,592 $ 4,504 Inventories, net 490,767 494,647 (3,880 ) Liabilities: Other accrued liabilities 323,211 325,328 (2,117 ) Equity: Retained earnings (accumulated deficit) (226,494 ) (229,235 ) 2,741 The Company adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (except those accounted for under the equity method of accounting) The Company adopted ASU No. 2016-16, Accounting for Income Taxes, Intra-Entity Asset Transfers of Assets Other than Inventory, The Company adopted ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost The Company adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities Issued but Not Adopted In August 2018, the Financial Accounting Standards Board (FASB) issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement (CCA) that is a Service Contract, In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework: Changes to the Disclosure Requirements for Defined Benefit Plans, In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test of Goodwill Impairment In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments In February 2016, the FASB issued ASU No. 2016-02, Leases supersedes the current leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize assets and lease liabilities for the rights and obligations created by leased assets previously classified as operating leases |