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 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. See Note 2 for additional discussion of the Acquisition. As of January 1, 2020, the Company reorganized its internal management and reporting structure as part of the integration 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 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 condensed consolidated financial statements have been recast to reflect these operating segment changes. Basis of Presentation The accompanying condensed consolidated financial statements 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 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 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. 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, 2019 (the 2019 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 2019 Annual Report. Other than the enhancements described below to the allowance for doubtful accounts policy as a result of the adoption of Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments Accounts Receivable and Allowance for Doubtful Accounts Trade 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 measures the allowance for doubtful accounts 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 unbilled work in progress and have substantially the same risk characteristics as trade accounts receivable for the same types of contracts. Therefore, the Company has concluded that the expected loss rates for trade accounts receivables are a reasonable approximation of the loss rates for the contract assets. In calculating an allowance for doubtful accounts, the Company uses its historical experience, external 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 corresponding 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 the customers to settle their trade accounts receivable. Concentrations of Risk and Related Party Transactions Net sales to Comcast Corporation and affiliates (Comcast) accounted for 12% and 10% of the Company’s total net sales during the three and six months ended June 30, 2020, respectively. No other direct customer accounted for 10% or more of the Company’s total net sales. No direct customer accounted for 10% 10% The Company relies on sole suppliers or a limited group of suppliers for certain key components, 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. As of June 30, 2020, funds affiliated with Carlyle Partners VII S1 Holdings, L.P. (Carlyle) owned 100% of the Series A Convertible Preferred Stock (the Convertible Preferred Stock), which was issued to Carlyle to fund the Acquisition. See Note 11 for further discussion of the Convertible Preferred Stock. Other than transactions related to the Convertible Preferred Stock, there were no material related party transactions for the three or six months ended June 30, 2020. 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 various periods, depending upon 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. The following table summarizes the activity in the product warranty accrual, included in accrued and other liabilities and other noncurrent liabilities: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Product warranty accrual, beginning of period $ 57.3 $ 14.1 $ 61.0 $ 15.6 Obligation assumed under ARRIS acquisition — 57.4 — 57.4 Provision for warranty claims 3.4 6.5 7.4 6.0 Warranty claims paid (4.9 ) (11.5 ) (12.0 ) (12.4 ) Foreign exchange 0.1 0.1 (0.5 ) — Product warranty accrual, end of period $ 55.9 $ 66.6 $ 55.9 $ 66.6 Commitments and Contingencies The Company is party to certain intellectual property claims and 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 loss. As of June 30, 2020, the Company had a liability of $39.8 million recorded in accrued and other liabilities on the Condensed Consolidated Balance Sheets related to certain intellectual property assertions that have been settled or are in process of settlement. Of that amount, $27.1 million was attributed to periods prior to the Acquisition and was previously recorded as a liability on the opening balance sheet. For the three and six months ended June 30, 2020, $7.5 million and $12.8 million, respectively, was recorded as a charge to cost of sales in the Condensed Consolidated Statements of Operations impacting the Broadband and Home segments. One matter, making up $19.0 million of the total recorded liability, was settled in July 2020 and the settlement is payable in the second half of 2020. The Company is either 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. 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. See Notes 3 and 8 for discussion of goodwill impairment charges during the three and six months ended June 30, 2020. There were no goodwill impairments identified during the three or six months ended June 30, 2019. 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 adjusted to 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 six months ended June 30, 2020 or 2019. Income Taxes For the three and six months ended June 30, 2020, the Company’s effective tax rate was 4.5% and 8.8%, respectively, and the Company recognized a tax benefit of $15.1 million on a pretax loss of $336.2 million and $46.5 million on a pretax loss of $527.5 million, respectively. The Company’s tax benefit was less than the statutory rate of 21.0% in both the three and six months ended June 30, 2020 primarily due to a goodwill impairment charge of $206.7 million for which minimal tax benefits were recorded and $20.3 million and $21.9 million, respectively, of tax expense related to state valuation allowances. Excess tax costs of $3.7 million and $7.8 million related to equity compensation awards also impacted the tax benefit unfavorably for the three and six months ended June 30, 2020, respectively. For the three and six months ended June 30, 2019, the Company’s effective income tax rate was 10.1% and 9.6%, respectively, and the Company recognized a tax benefit of $37.5 million on a pretax loss of $371.5 million and a tax benefit of $35.9 million on a pretax loss of $372.2 million, respectively. The Company’s tax benefit was unfavorably impacted by the impact of U.S. anti-deferral provisions and foreign withholding taxes, but this impact was partially offset by the favorable impact of federal tax credits for the three and six months ended June 30, 2019. The impact of excess tax costs related to equity-based compensation awards was not material for the three and six months ended June 30, 2019. 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 Convertible Preferred 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 three and six months ended June 30, 2020, 17.0 million and 16.6 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 three and six months ended June 30, 2020, 4.3 million and 4.4 million shares, respectively, would have been considered dilutive if the Company had not been in a net loss position. For the three and six months ended June 30, 2019, 12.2 million shares and 8.9 million shares, respectively, 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 three and six months ended June 30, 2019, 2.2 million shares and 2.5 million shares, respectively, would have been considered dilutive if the Company had not been in a net loss position. For the three and six months ended June 30, 2020, 36.9 million and 36.6 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 EPS computations (in millions, except per share data): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Numerator: Net loss $ (321.1 ) $ (334.0 ) $ (481.0 ) $ (336.3 ) Dividends on Series A convertible preferred stock (13.9 ) (13.1 ) (27.7 ) (13.1 ) Deemed dividends on Series A convertible preferred stock — (3.0 ) — (3.0 ) Net loss attributable to common stockholders $ (335.0 ) $ (350.1 ) $ (508.7 ) $ (352.4 ) Denominator: Weighted average common shares outstanding - basic 195.9 193.6 195.4 193.2 Dilutive effect of as-if converted Series A convertible preferred stock — — — — Dilutive effect of equity-based awards — — — — Weighted average common shares outstanding - diluted 195.9 193.6 195.4 193.2 Loss per share: Basic $ (1.71 ) $ (1.81 ) $ (2.60 ) $ (1.82 ) Diluted $ (1.71 ) $ (1.81 ) $ (2.60 ) $ (1.82 ) Recent Accounting Pronouncements Adopted During the Six Months Ended June 30, 2020 On January 1, 2020, the Company adopted ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments and subsequent 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 incurred loss methodology with the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial 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 other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842. The Company adopted Topic 326 using the modified retrospective method for all financial assets measured at amortized cost, which are primarily trade accounts receivable and contract assets for the Company. Results for reporting periods beginning after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The impact of adopting Topic 326 as of January 1, 2020 was not material to the consolidated financial statements. Issued but Not Adopted In March 2020, the Financial Accounting Standards Board (FASB) 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. In January 2020, the FASB issued ASU No. 2020-01 , Investments - Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The new guidance is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. T he amendments in this guidance clarify the interaction of accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU No. 2020-01 is effective for the Company as of January 1, 202 1 and e arly adoption is permitted. The Company is evaluating the impact of the new guidance on the consolidated financial statements. In December 2019 the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . |