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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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The aggregate market value of shares of Common Stock held by non-affiliates of the registrant was approximately $
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Documents Incorporated by Reference
Portions of the registrant’s Proxy Statement for the 2022 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.
CommScope Holding Company, Inc.
Form 10-K
December 31, 2021
Table of Contents
2
PART I
Unless the context otherwise requires, references to “CommScope Holding Company, Inc.,” “CommScope,” “the Company,” “Registrant,” “we,” “us,” or “our” are to CommScope Holding Company, Inc. and its direct and indirect subsidiaries on a consolidated basis.
This Annual Report on Form 10-K includes certain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our current views with respect to future events and financial performance. These forward-looking statements are generally identified by their use of such terms and phrases as “intend,” “goal,” “estimate,” “expect,” “project,” “projections,” “plans,” “anticipate,” “should,” “could,” “designed to,” “foreseeable future,” “believe,” “think,” “scheduled,” “outlook,” “target,” “guidance” and similar expressions, although not all forward-looking statements contain such terms. This list of indicative terms and phrases is not intended to be all-inclusive.
These statements are subject to various risks and uncertainties, many of which are outside our control. Item 1A, “Risk Factors,” of this Annual Report on Form 10-K sets forth more detailed information about the factors that may cause our actual results to differ, perhaps materially, from the views stated in such forward-looking statements. Although the information contained in this Annual Report on Form 10-K represents our best judgment as of the date of this report based on information currently available and reasonable assumptions, we can give no assurance that the expectations will be attained or that any deviation will not be material. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date made. We are not undertaking any duty or obligation to update any forward-looking statements to reflect developments or information obtained after the date of this Annual Report on Form 10-K, except to the extent required by law.
ITEM 1. BUSINESS
Company Overview
CommScope Holding Company, Inc. was incorporated in Delaware on October 22, 2010 and our initial public offering for our common stock was on October 25, 2013. Since our founding as an independent company in 1976, we have consistently played a significant role in many of the world’s leading communication networks. Our evolution has been driven by technological innovation and strategic acquisitions that expanded our product offerings and complemented our existing solutions. We are a global provider of infrastructure solutions for communication and entertainment networks. Our 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. Our solutions are supported by our broad array of services including technical support, systems design and integration. We are a leader in digital video and IP television (IPTV) distribution systems, broadband access infrastructure platforms and associated data and voice customer premises equipment. Our global leadership positions are built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale.
We have a team of over 30,000 people who serve our customers in over 150 countries through a network of world-class manufacturing and distribution facilities strategically located around the globe. Our customers include substantially all the leading global telecommunications operators, data center managers, cable television providers or multi-system operators (MSOs) and thousands of enterprise customers, including many Fortune 500 companies. We have long-standing, direct relationships with our customers and serve them through a direct sales force and a global network of channel partners.
In the first quarter of 2021, we announced a transformation initiative referred to as CommScope NEXT designed to drive shareholder value through three pillars: profitable growth, operational efficiency and portfolio optimization. We believe these efforts are critical to making us more competitive and allowing us to invest in growth, accelerate our de-leveraging effort and maximize stockholder and stakeholder value. We incurred $91.9 million of restructuring costs and $90.3 million of transaction, transformation and integration costs during the year ended December 31, 2021, primarily related to CommScope NEXT. We expect to continue to incur restructuring costs and transaction, transformation and integration costs related to CommScope NEXT and such costs could be material.
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As a step in the CommScope NEXT transformation plan, in April 2021, we announced a plan to spin-off the Home Networks business in 2022. After thorough consideration of the current supply chain environment and its impact on the Home Networks business, we have decided to delay the execution of the spin-off. We remain committed to the spin-off of the Home Networks business from CommScope, but we currently do not have a firm timeline for restarting the plan. Accordingly, management now analyzes the financial results of our "Core" business separately from Home Networks. These Core measures reflect the results of the Broadband Networks (Broadband), Outdoor Wireless Networks (OWN) and Venue and Campus Networks (VCN) segments, in the aggregate. Core financial measures exclude the results and performance of the Home Networks (Home) segment. See the Operating Segments section below for an illustration of the aggregation of our Core financial measures. These metrics represent the business segments as we have reported them. However, the ultimate definition of the Home Networks business that we expect to separate may vary, and future results may differ materially.
For the year ended December 31, 2021, our revenues were $8.59 billion and our net loss was $(462.6) million. For further discussion of our current and prior year financial results, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Operating Segments
We operate and report based on four operating segments: Broadband, OWN, VCN and Home. In the second quarter of 2021, we shifted certain product lines from our Broadband segment to our Home segment to better align with how those businesses are being managed. All prior period amounts have been recast to reflect these operating segment changes. Our Core segments include our Broadband, OWN and VCN segments and exclude our Home segment. The distribution of net revenues among our four segments was as follows:
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Year Ended December 31, |
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2021 |
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2020 |
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2019 |
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Broadband |
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36.7 |
% |
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33.8 |
% |
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27.8 |
% |
OWN |
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16.4 |
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14.7 |
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17.7 |
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VCN |
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25.4 |
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23.0 |
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23.6 |
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Core segments |
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78.5 |
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71.5 |
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69.1 |
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Home |
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21.5 |
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28.5 |
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30.9 |
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Total |
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
Broadband (2021 Net Sales of $3.1 billion)
Our Broadband segment combines our Network Cable and Connectivity (NCC) and Network and Cloud (N&C) businesses and provides an end-to-end product portfolio serving the telco and cable provider broadband market. The Broadband segment includes converged cable access platforms, passive optical networking, video systems, access technologies, fiber and coaxial cable, fiber and copper connectivity and hardened closures.
OWN Segment (2021 Net Sales of $1.4 billion)
Our OWN segment brings together our radio frequency (RF) products and Integrated Solutions businesses and focuses on the macro and metro cell wireless markets. The segment’s offerings include base station antennas, RF filters, tower connectivity, microwave antennas, metro cell products, cabinets, steel towers, accessories, Spectrum Access System and Comsearch. As our wireless operator customers shift a portion of their 5G capital expenditures from the macro tower to the metro cell, the OWN segment portfolio will strategically help make the transition smooth and cost-effective.
VCN Segment (2021 Net Sales of $2.2 billion)
Our VCN segment targets both public and private networks for campuses, venues, data centers, and buildings and includes our Ruckus Networks, Enterprise and Distributed Coverage and Capacity Systems (DCCS) businesses. The segment combines Wi-Fi and switching, distributed antenna systems (DAS), licensed and unlicensed small cells, and enterprise fiber and copper infrastructure.
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Home Segment (2021 Net Sales of $1.8 billion)
The Home segment offers broadband and video products. Home segment broadband offerings include devices and related software and management solutions that provide residential connectivity and services to subscribers, such as digital subscriber line and cable modems and telephony and data gateways which incorporate routing and Wi-Fi functionality. Video offerings include set top boxes and software that support cable, satellite and IPTV content delivery and include products such as digital video recorders, high definition set top boxes and hybrid set top devices. The Home segment also sells broadband solutions through major retailers in the United States (U.S.).
Industry Background
We participate in the large and growing global market for connectivity and essential communications infrastructure. This market is being driven by the growth in bandwidth demand associated with the continued demand of smartphones, tablets and machine-to-machine (M2M) communication as well as the proliferation of data centers, Big Data, cloud-based services, streaming media content and Internet of Things (IoT). In addition, video distribution over the broadband IP network is transforming how content is managed and consumed. IP facilitates new forms of video such as Over-the-Top (OTT) and interactive television. Over the last two years, due to the coronavirus (COVID-19) pandemic, we learned even more about business and consumer reliance on their network connectivity, as our products and services allowed a dramatic shift from working in offices to working in the home. We expect that as the world recovers from the COVID-19 pandemic we will continue to see a mix of connectivity needs in homes, in offices and while on the move. As part of the shift in how people are using the network, we have seen more dramatic upticks in upstream usage than downstream usage. Some of this will subside as people work less from home, but some recent network usage trends will also become the new normal, requiring network bandwidth capacities to be more symmetrical than in the past.
There are several major trends that we expect to drive network deployments and investment, including:
Evolving Network Architecture and Technology
The pace of change in networking has increased as consumers and data-driven businesses utilize more bandwidth and shift toward cloud and mobile applications. Exponential growth in video and mobile data consumption are revolutionizing how we connect to each other and changing the network architecture needed to support consumer demand. This trend requires better network coverage, greater broadband access, and increased capacity and data storage.
Our customers are working to transition their networks to become faster, more responsive, more efficient and more reliable. The work from home trend caused by the COVID-19 pandemic has accelerated many of these network trends. We believe the following key network trends will continue to impact CommScope and the industry during 2022 and beyond:
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Transition to 5G
5G wireless is evolving from an industry vision toward a tangible, next generation wireless technology. Many operators have begun a transition to 5G networks with countries like the U.S., South Korea, China, Switzerland and the Netherlands leading the way with further development across the globe expected in the coming years. The number of 5G-enabled devices is expected to continue to increase during 2022. The primary benefits of 5G are expected to include:
As described above, wireless operators will need to both acquire and launch new spectrum for 5G, as well as continue their strategy of re-allocation of spectrum from one generation to another. Some of this spectrum will be at much higher frequencies and will use new technologies to deliver exceptional amounts of bandwidth to subscribers. 5G also requires significant fiber infrastructure to connect wireless access points to each other to improve the response time of the network. As wireless operators transition toward 5G, they must also manage the fundamental network deployment issues of site acquisition, power, backhaul and in-building wireless proliferation.
In addition to investment required by wireless operators, the transition to 5G could also spark an investment cycle by cable operators as they upgrade their networks to compete with fixed wireless broadband, which could become a viable alternative to traditional broadband internet access. Many cable operators are already offering or planning to offer 5G wireless services on top of their wired cable services, and one approach under consideration employs convergence techniques that utilize wired networks, such as DOCSIS or passive optical networks (PON) to support xHaul to the more heavily-densified wireless access points and radio units of 5G. All of these transitions are expected to lead to increased investment.
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Fiber Deep Deployments
Residential and business bandwidth consumption continues to grow substantially. The proliferation of OTT video, multiscreen viewing, cloud services and social media are prompting operators to accelerate fiber deployment. Operators can increase network capacity by installing fiber deeper into their networks. Although consumer devices are increasingly connected to the network via a wireless connection such as LTE or Wi-Fi, these wireless access points must have abundant optical backhaul capacity available to provide consumers the experience they expect. Operators around the globe are deploying fiber deep to build next generation networks. These networks use the capabilities of fiber to enable consumers access to content at higher speeds with improved network response time.
As networks improve and deliver higher speed and greater reliability, many operators are choosing to provide both residential and business services over a common physical layer infrastructure, saving them time and money. In addition, with the deployments of metro cells, outdoor small cells and fixed wireless broadband to the home, these same service providers are planning to utilize this common physical layer infrastructure to provide connectivity to these wireless access points.
Ethernet passive optical networks (EPON) and XGS PON are both being included in the plans of network operators, and CommScope is developing optical line terminal (OLT) and optical network terminal (ONT) equipment for both technologies. CommScope’s broad PON product portfolio will include both node-based platforms and shelf-based platforms.
Shift in Enterprise Spending
Several trends in the enterprise market are expected to create opportunities and challenges for us. First, the shift toward mobility in business enterprises is expected to impact the amount and type of structured copper connectivity needed over the longer-term. As the bandwidth requirements for Wi-Fi, indoor cellular networks (private and public), and IoT devices increase, more access points will be needed throughout commercial buildings. As a result, enterprises are expected to adjust in-building cabling designs to deliver both power and high-speed data to those devices. Power-over-ethernet is expected to become increasingly important as the number of devices used for Wi-Fi and indoor cellular networks multiplies. While enterprises continue to need copper connectivity to power edge devices, enterprises are deploying fiber more extensively in data centers. Over the next several years, we expect the growing demand for fiber and Wi-Fi solutions to result in decelerating demand for copper solutions in networks.
Due to huge increases in data traffic and migration of applications to the cloud, enterprises are also shifting spending toward multi-tenant (co-located) data centers and hyperscale cloud service providers, which offer cloud data center services as a replacement for in-house corporate data centers. Multi-tenant and hyperscale data center managers are focused on ultra-low loss, high density, scalable fiber connectivity solutions.
Enterprises are also looking at using LTE and 5G for their own, private uses. It is expected that private networks will become far more important to an enterprise’s information technology plans and will provide a level of reliable connection that they have not been able to get from their Wi-Fi networks, further moving the demand of enterprise communications into the wireless domain.
Metro Cell, DAS and Small Cell Investment to Enhance and Expand Wireless Coverage and Capacity
As demand growth continues to outpace macro cell capacity growth, new solutions are required for densely populated areas. Metro cells and indoor networks have emerged as important layers of the network. Metro cells are smaller outdoor cell sites, located closer to the ground, having a lower power level than traditional macro cell sites. Metro cells blend into their environment and are often found integrated with traditional street furniture, which helps alleviate zoning restrictions that have made traditional deployments difficult.
Small cell and DAS solutions address the capacity and speed requirements from an indoor perspective. These systems provide coverage and capacity to the indoor environment and reduce the load from the macro and metro layers, which improves overall network performance. Small cell and DAS systems may range from small single operator, single-band, low-capacity systems for use in enterprise buildings to large multi-carrier, multi-technology, multi-band systems for use in high-capacity public venues.
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Transition to Wi-Fi 6E
Wi-Fi 6E (extended) is the next generation standard in Wi-Fi technology that builds on and improves the current Wi-Fi 6 standard. The Wi-Fi 6E standard will bring a new dimension to Wi-Fi 6 capacity through additional spectrum allocation in the 6 GHz frequency band. With tri-band enterprise grade access points (2.4/5/6Ghz), wireless bandwidth capacities will increase to support multiple Gbps services, requiring even higher bandwidth capacities on the wired networks that feed them. This is expected to drive investment in Wi-Fi networks and in the DOCSIS, PON and ethernet solutions that can provide the required connectivity.
Strategy
In the first quarter of 2021, we announced a transformation initiative, CommScope NEXT, designed to drive stockholder value through three pillars: profitable growth, operational efficiency and portfolio optimization. We believe these efforts are critical to making us more competitive and allowing us to invest in growth, accelerate our de-leveraging and maximize stockholder and stakeholder value.
Profitable Growth
Organic growth is fundamental to achieving the financial returns that investors expect from us. While acquisitions and inorganic growth can change the structure of a business and reset financial expectations resulting in short-term financial returns, the only reliable means for consistently producing long-term positive financial performance is strong organic growth. Our plan to achieve our growth opportunities are driven by five themes:
The underpinning of our growth opportunities is also optimizing pricing across our products and solutions. We are revamping our pricing processes, policies, tools and governance structure to simplify and create more ownership and accountability so that we can better react to changes in the market and maintain acceptable margins.
Operational Efficiency
We are pursuing strategic initiatives aimed at optimizing our utilization of resources by improving direct procurement processes, increasing transparency and control over indirect procurement spend, driving operational improvements to lower manufacturing costs and streamlining and optimizing our period overhead cost structure. Our management team has a strong track record of improving operational efficiency and successfully executing on formalized annual profit improvement plans, cost-savings initiatives and working capital improvements to drive future profitability and cash flow.
Portfolio Optimization
In addition to optimizing our portfolio with our commitment to spin-off the Home Networks business from Core CommScope, we will also reorganize our business structure in 2022 to align our portfolio of products and solutions more closely with the markets we serve and bring better performance clarity with our competitive peer set. Based on this new operating structure, we expect to report our results in the below five reportable segments beginning in the first quarter of 2022. However, work on reorganization of the new segments is still underway, and we have not yet finalized the exact segment composition.
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We have also moved to a general management model in our segments. This enables us to manage our portfolio more granularly, assign responsibilities and build a culture of accountability and ownership. We are continuing to review our portfolio and will look for other ways to better manage and optimize our product offerings.
The Future of CommScope
We are positioned as a leader in most of our Core segments already and will work to defend our leadership in the more mature parts of these markets, while also shifting resources towards our targeted growth choices within them. We believe that with CommScope NEXT, we will achieve the following:
With CommScope NEXT, we have begun to transform our organization into one that has better operational efficiency, speed and resilience and one that can better service our existing customers, as well as new ones. We expect CommScope NEXT to drive adjusted EBITDA expansion over the next several years that will enable us to significantly increase our cash flow to accelerate our de-leveraging and further invest in our growth.
Customers
Our customers include substantially all the leading global telecommunications operators, data center managers, cable television providers or MSOs and thousands of enterprise customers, including many Fortune 500 companies. Major customers and distributors include companies such as Altice USA, Inc.; America Movil, S.A.B. de C.V.; AT&T Inc.; Charter Communications, Inc.; Comcast Corporation (Comcast); Graybar Electric Co. Inc.; KGP Co.; Liberty Media Corporation; Purchase Power Exchange LLC; Talley Inc.; T-Mobile U.S. Inc.; Verizon Communications Inc.; Vodafone Group PLC; and Wesco International, Inc. (including Anixter International Inc.). For the year ended December 31, 2021, we derived approximately 13% of our consolidated net sales from our top two direct customers, but no single direct customer accounted for 10% or more of our net sales. For the year ended December 31, 2020 we derived approximately 11% of our consolidated net sales from Comcast. Net sales to Comcast accounted for approximately 13% of our consolidated net sales for the year ended December 31, 2019, after giving effect to the acquisition of ARRIS International plc (ARRIS) as if it had happened on January 1, 2019. Sales to Comcast originate from our VCN, Broadband and Home segments.
Products from our Broadband segment are primarily sold directly to wireline network service providers, such as telephone companies and cable television network providers, to be deployed into their service delivery networks. In some cases, we sell through specialized resellers and distributors who primarily provide logistics support and in certain circumstances post-sale service and support. Our customer service and engineering groups maintain close working relationships with these customers due to the significant amount of customization associated with some of these products. We sell these products to most of the wireline and satellite operators globally.
Products from our OWN segment are primarily sold directly to wireless operators, original equipment manufacturers (OEMs) that sell equipment to wireless operators and other service providers that deploy elements of wireless networks at the direction of wireless operators. Our customer service and engineering groups maintain close working relationships with these customers due to the significant amount of customization associated with some of these products. Although we sell to most wireless operators globally, we are dependent on a small number of large operators.
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Products from our VCN segment are primarily sold through independent distributors or system integrators for large telecommunications operators and to customers in a broad range of enterprise vertical markets, including hospitality, education, smart cities, government, venues and service providers indirectly through channel partners. We also sell directly to cable television system operators, broadband operators and service providers that deploy broadband networks. In certain circumstances, we sell VCN segment products directly to end customers, but it is a relatively small part of the overall business.
Products from our Home segment are primarily sold directly to wireline network service providers, such as telephone companies and cable television network providers, to be deployed by them into their subscribers’ homes and businesses. We sell some products to satellite video distributors who also deploy our products into their subscribers’ premises. In some cases, we sell through specialized resellers and distributors who primarily provide logistics support and, in certain circumstances, post-sale service and support. Our customer service and engineering groups maintain close working relationships with these customers due to the significant amount of customization associated with some of these products. We sell these products to most of the wireline and satellite operators globally. In the U.S., we also sell certain products directly to consumers over the internet and through brick and mortar retailers.
We generally have no minimum purchase commitments from any of our distributors, system integrators, channel partners, value-added resellers, wireless operators or OEM customers, and our contracts with these parties generally do not prohibit them from purchasing from our competitors or offering products or services that compete with ours. Although we maintain long-term relationships with these parties and have not historically lost key customers, we have experienced significant variability in the level of purchases by our key customers. Any significant reduction in sales to these customers, including as a result of the inability or unwillingness of these customers to continue purchasing our products, could materially and adversely affect our business, financial condition, results of operations and cash flows. See Part 1, Item 1A, “Risk Factors.”
Competition
The markets in which we participate are dynamic and highly competitive, requiring companies to react quickly to capitalize on opportunity. We retain skilled and experienced personnel and deploy substantial resources to meet the changing demands of the industry and to capitalize on change. The market for our products is highly competitive and subject to rapid technological change. We encounter significant domestic and international competition across all segments of our business.
Our competitors include large, diversified companies some of whom have substantially more assets and greater financial resources than we do. We also face competition from small to medium-sized companies and less diversified companies that have concentrated efforts in one or more areas of the markets we serve. Major competitors by segment include the following: Broadband segment – Cisco Systems, Inc., Corning Inc., Harmonic Inc., and Huawei Technologies Co., Ltd.; OWN segment – Comba Telecom Systems Holding Ltd., Telefonaktiebolaget LM Ericsson, Huawei Technologies Co., Ltd. and Rosenberger NA; VCN segment – Cisco Systems, Inc., Comba Telecom Systems Holding Ltd., Hewlett Packard Enterprise Development LP and Huawei Technologies Co., Ltd; and Home segment – Humax Co., Ltd., Sagemcom Broadband SAS and Technicolor S.A.
We compete primarily on the basis of delivering solutions, product specifications, quality, price, customer service and delivery time. We believe that we differentiate ourselves in many of our markets based on our market leadership, global sales channels, intellectual property, strong reputation with our customer base, the scope of our product offering, the quality and performance of our solutions, and our service and technical support.
Competitive Strengths
We are a global leader in connectivity and essential infrastructure solutions for communications and entertainment networks, and we believe we hold leading market positions in most of our segments. Since our founding in 1976, CommScope has been a leading brand in connectivity solutions for communications networks. In the cable television and video network equipment industry, both CommScope and ARRIS are longstanding market leaders, along with other brands we own such as RUCKUS, PACE, ADC and many smaller brands. In the wireless industry, ANDREW is one of the world’s most recognized brands and a global leader in RF solutions for wireless networks. In the enterprise market, SYSTIMAX, NETCONNECT and UNIPRISE are recognized as global market leaders in enterprise connectivity solutions for business enterprise and data center applications.
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We believe the following competitive strengths have been instrumental to our success and position us well for future
growth and strong financial performance:
Differentiated Solutions Supported by Ongoing Innovation and Significant Proprietary Intellectual Property
Our integrated solutions for building better networks are differentiated in the marketplace and are a significant global competitive advantage. We invested $683.2 million in research and development (R&D) during 2021 to advance product innovation and drive total cost of deployment and ownership down. Our ongoing innovation, supported by proprietary intellectual property and technology know-how, has allowed us to build and sustain a competitive advantage.
Established Sales Channels and Customer Relationships
We serve customers in over 150 countries and have become a trusted advisor to many of them through our industry expertise, quality products, leading technology and long-term relationships. These factors enable us to provide mission-critical connectivity solutions that our customers need to build and maintain high-performing communication networks. Our customers include substantially all the leading global telecommunications operators, data center managers, cable television providers or MSOs and thousands of enterprise customers, including many Fortune 500 companies. We are a key supplier within the wireless infrastructure market and enjoy established sales channels across all geographies and technologies. Our long-standing relationships with telecommunication operators enable us to work closely with them in providing highly customized solutions aligned with their technology roadmaps. We have a global sales force with sales representatives based in North America, Europe, Latin America, Asia and other regions, and an extensive global network of channel partners, including independent distributors, system integrators and value-added resellers. Our sales force has direct relationships with our customers and end users which generates demand for our products, with a significant portion of our sales fulfilled through channel partners. Our direct sales force and channel partner relationships give us extensive reach and distribution capabilities to customers globally.
Global Scale, Manufacturing Footprint and Quality
Our global manufacturing and distribution footprint and worldwide sales force give us significant scale within our addressable markets. We believe our scale, stability and quality make us an attractive strategic partner to our large global customers, and we have been repeatedly recognized by key customers for these attributes.
Our manufacturing and distribution facilities are strategically located to optimize service levels and product delivery times. We also utilize lower-cost geographies for high labor content products and largely automated plants in higher cost regions. Most of our manufacturing employees are in lower-cost geographies such as Mexico, China, India and the Czech Republic. The combination of our dynamic manufacturing organization, our global network of third-party manufacturers and our distribution organization allows us to:
Record of Operational Excellence
We have a history of strong operating cash flow and have generated over $1.2 billion in cumulative operating cash flow over the last three years, despite a challenging supply environment in 2021 that drove lower profitability and additional working capital investment. Over the past three years, our strong cash flow profile has allowed us to pay down $1.0 billion of debt, while also investing $2.0 billion in research and development aimed at both driving profit expansion and revenue growth. We continuously pursue strategic initiatives aimed at optimizing our resources, reducing manufacturing and distribution costs and lowering our overall cost structure.
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Manufacturing and Distribution
We maintain a balance of internal and external manufacturing providers to continue offering our customers a competitive combination of quality, cost and flexibility in meeting their needs. We develop, design, fabricate, manufacture and assemble many of our products and solutions in-house at our facilities located around the world. We have strategically located our manufacturing and distribution facilities to provide superior service levels to customers. We utilize lower-cost geographies for high labor content products while investing in largely automated plants in higher-cost regions close to customers. Most of our manufacturing employees are located in lower-cost geographies such as Mexico, China, India and the Czech Republic.
In addition, we utilize contract manufacturers located throughout the world, including in Brazil, China, Malaysia, Mexico, South Africa, Thailand, Vietnam and the U.S., for many of our product groups, including those in our Home segment, certain Broadband segment products, certain OWN segment products and all of our Ruckus products. There can be no guarantee that the Company will be able to extend or renew agreements with contract manufacturers on similar terms, or at all.
Our global footprint allows us to mitigate macroeconomic headwinds in an everchanging environment. We continuously evaluate and adjust operations to improve service, lower cost and improve the return on our capital investments, and we expect to continue modifying our global operations to adapt to changing product demand and business conditions.
Raw Materials and Components
Our products are manufactured or assembled from both standard components and parts that are unique to our specifications. Our internal manufacturing operations are largely process oriented and we use significant quantities of various raw materials, including aluminum, copper, steel, bimetals, optical fiber and plastics and other polymers, among others. We use significant volumes of aluminum, copper, steel and polymers in manufacturing coaxial and twisted pair cables and antennas. Other parts are produced using processes such as stamping, machining, molding and pressing from metals or plastics. Portions of the requirements for these materials are purchased under supply arrangements where some portion of the unit pricing may be indexed to commodity market prices for these metals. We may occasionally enter forward purchase commitments or otherwise secure availability for specific commodities to mitigate our exposure to price changes for a portion of our anticipated purchases. Certain of the raw materials utilized in our products may only be available from a few suppliers, and we may enter into longer term agreements to secure access to certain key inputs. We may, therefore, encounter significant price increases and/or availability issues for the materials we obtain from these suppliers, such as those that we have seen in 2021. These supply chain constraints have limited our ability to manufacture and deliver products to our customers in 2021 and we expect this to continue into 2022.
Our profitability has been and may continue to be materially affected by changes in the market price of our raw materials and components, most of which are linked to the commodity markets. Prices for aluminum, copper, plastics, silicon and certain other polymers derived from oil and natural gas have fluctuated substantially during the past several years. We have adjusted our prices for certain products and may have to adjust prices again. Delays in implementing price increases, failure to achieve market acceptance of price increases, or price reductions in response to a rapid decline in raw material costs, could have a material adverse impact on the results of our operations.
In addition, some of our products are assembled from specialized components and subassemblies manufactured by third-party suppliers. We depend upon sole suppliers for certain of these components, including capacitors, memory devices and silicon chips. Our results of operations have been and may continue to be materially affected if these suppliers cannot provide these components in sufficient quantity and quality on a timely and cost-efficient basis. We believe that our supply contracts and our supplier contingency plans mitigate some of this risk. Our supply agreements include technology licensing and component purchase contracts, and several of our competitors have similar supply agreements for these components. There can be no guarantee that the Company will be able to extend or renew these supply agreements on similar terms, or at all. In addition, we license software for operating network and security systems or sub-systems and a variety of routing protocols from different suppliers.
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Research and Development
We operate in an industry that is subject to rapid changes in technology, and our success is largely contingent upon anticipating and reacting to such changes. Accordingly, R&D is important to preserve and expand our position as a market leader and to provide the most technologically advanced solutions in the marketplace. We invested $683.2 million in research and development during 2021, and we expect to continue with substantial investments in future years. We intend to focus our major R&D activities on high-growth opportunities such as fiber optic connectivity for fiber-to-the-x (FTTX) and data centers, Wi-Fi 6E and 6GHz, CCAP, DAA, DOCSIS 4.0, gigabit passive optical network (GPON), active and passive base-station antennas and metro cell and small cell wireless solutions. We are also developing solutions that support the convergence of wireline and wireless networks in connection with the rollout of 5G. Several of our professionals are leaders and active contributors in standards-setting organizations, which helps ensure that our products can be formulated to achieve broad market acceptance.
Backlog and Seasonality
At December 31, 2021 and 2020, we had an order backlog of $3,953.9 million and $1,964.3 million, respectively. Orders typically fluctuate from quarter to quarter based on customer demand and general business conditions. Our backlog includes only orders that are believed to be firm. Sometimes, unfilled orders may be canceled prior to shipment of goods, but cancellations historically have not been material. However, our current order backlog may not guarantee future demand. We expect a majority of our backlog as of December 31, 2021 to be recognized as revenue during 2022.
Due to the variability of shipments under large contracts, customers’ seasonal installation considerations and variations in product mix and in profitability of individual orders, we can experience significant quarterly fluctuations in sales and operating income. Our operating performance is typically the weakest during the first quarter, and this pattern is expected to continue in the future. It may be more meaningful to focus on annual rather than interim results.
Patents and Trademarks
We pursue an active policy of seeking intellectual property protection, including patents and registered trademarks, for new products and designs. For technology that is not owned by us, we have a program for obtaining appropriate licenses to help ensure that we have the necessary license coverage for our products. In addition, we have formed strategic relationships with leading technology companies to provide us with early access to technology that we believe will help keep us at the forefront of our industry.
On a worldwide basis, as of December 31, 2021, we held over 16,000 patents and patent applications and approximately 3,000 registered trademarks and trademark applications. Over the next five years, approximately 2,200, or about 20%, of our issued patents will expire, while at the same time CommScope intends to seek patents protecting new innovations. We consider our patents and trademarks to be valuable assets, and although no single patent is material to our overall operations, we believe the COMMSCOPE, ARRIS, SURFBOARD, RUCKUS, SYSTIMAX, NETCONNECT, NOVUX, ERA, ONECELL and HELIAX trade names and related trademarks are critical assets to our business. We intend to rely on our intellectual property rights, including our proprietary knowledge, trade secrets and continuing technological innovation, to develop and maintain our competitive position. From time to time there are disputes with respect to the ownership of the technology used in our industry and accusations of patent infringements. We will continue to protect our key intellectual property rights.
Government Regulation
We are subject to various domestic and international government regulations. For example, our international operations expose us to increased challenges in complying with anti-corruption laws and regulations of the U.S. government and various other international jurisdictions. We are also subject to governmental export and import regulations and sanctions programs that could subject us to liability or impair our ability to compete in international markets. In addition, because of the nature of information that may pass through or is stored on our solutions or networks, we and our end customers may be subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Further, we are subject to various federal, state, local and foreign environmental laws and regulations governing, among other things, substances used in our products, discharges to air and water, management of regulated materials, handling and disposal of solid and hazardous waste, and investigation and remediation of contaminated sites. See Part I, Item 1A, “Risk Factors” for additional discussion of our risks related to government laws and regulations.
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Corporate Responsibility and Sustainability
We believe that corporate responsibility and sustainability means making decisions that have a positive impact on our people, planet and bottom line. Our company-wide sustainability mission is to enable faster, smarter and more sustainable solutions while demonstrating the utmost respect for our human and natural resources. We are accomplishing this mission by utilizing innovative technology, intelligent engineering and energy efficient design to build more sustainable networks that make our customers more agile, while at the same time seeking to preserve the natural ecosystems from which we source our raw materials. While we may provide technological solutions, it is our people who make the real difference in our communities. Their commitment to our customers, fellow employees and the communities in which they live and work drives them to provide creative solutions, services and practices that are safe and sustainable for our environment and future generations.
We understand how important it is to consider the larger impact of our actions beyond the balance sheet. We are proud of CommScope’s prominent standing in one of the world’s most vital and dynamic industries. We push ourselves and our thinking for the purpose of creating a better and sustainable tomorrow. For the sake of our current and future generations, we will continue to grow as a sustainable, environmentally conscious business that benefits the whole planet.
For additional information, which is not incorporated by reference in this Annual Report on Form 10-K, see our Corporate Responsibility & Sustainability pages on the CommScope website: https://www.commscope.com/About-Us/Corporate-Responsibility-and-Sustainability/.
Human Capital Management
Our employees are at the center of everything we do at CommScope and are the driving force for our innovation and success. CommScope works to ensure it provides a safe, inclusive and positive employee experience and workplace environment for all its employees. We have a global team of over 30,000 employees with approximately 66% classified as manufacturing employees. The majority of these manufacturing employees are located in low-cost labor countries such as Mexico, China, India and the Czech Republic. Our U.S. workforce is a mix of manufacturing and non-manufacturing employees and makes up almost 20% of our employee base.
More than ever, our employees have continued to unite behind our common purpose to “Create Lasting Connections” all over the world. We collaborate and innovate to create the world’s most advanced networks and succeed by having people who come to work passionate about delivering on this vision every day. Core pillars underlying our Human Capital Management strategy focus on engagement; total rewards; training and development; inclusion, equality, and diversity; and health, safety and well-being.
Employee Engagement
CommScope prides itself on creating a culture where feedback and communication are vital in building an engaging, employee-centric organization. To that end, twice a year we “take the pulse” of our organization through a global engagement survey. This Pulse Survey obtains the voice of our employees worldwide and identifies strengths and development areas in our culture, workplace and management effectiveness to name a few. We have consistently seen strong results in past years in areas such as engagement, teamwork and collaboration, pride in working for CommScope as well as the strategic clarity of the business. CommScope has started the journey to further build out the total employee experience for our employees, in line with our purpose, vision and corporate values. This is done in a number of ways including through leveraging technology, enabling managers, introducing flexible work approaches and a relentless focus on communication throughout the organization.
Total Rewards
We compensate employees equitably, relative to experience and performance, regardless of gender, nationality or disability. Globally, we sustain our pay-for-performance compensation philosophy, regularly completing pay equity assessments to calculate the results of our pay practices. CommScope’s compensation plans and programs strive to attract and retain skilled, high-performing individuals; pay base salaries that are competitive in our industry and the local markets in each country where we operate; and provide short- and long-term incentives (when appropriate) that are tied to superior employee and company performance. The proportion of total rewards aligned with variable (incentive) pay increases with job level and is reflective of the job level’s influence on both short- and long-term results. Eligibility for the Annual Incentive Plan (AIP) or Sales Incentive Plan (SIP), which are both cash incentive plans, and the Long-Term Incentive Plan (LTIP), which is our equity-based compensation plan, is based on the job level and market competitiveness.
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We provide comprehensive market-aligned benefits at a country level, reviewing annually to validate against proprietary market data. Benefits typically include medical plans, life/disability and accident coverage, retirement benefits, paid time-off policies and other locally applicable benefits. CommScope also offered a COVID-19 Leave Policy, providing eligible employees additional paid leave, the equivalent of up to 10 workdays and even more in certain cases. With vaccines being widely available to our U.S. employees, we discontinued the policy in the U.S. in 2021, but it is still offered to our international employees.
Employee Education, Training and Development
We are committed to developing the careers and capabilities of our current and future employees. We have an Early Career Strategy aimed at recruiting great talent for internships, co-ops and graduate rotation programs, ensuring we are hiring the top early-in-career talent where and when they are needed. Once hired, our career development and learning philosophy is based on the belief that employees learn best through a combination of work experience, coaching, feedback, training and education.
We use an online solution to manage permanent employees’ performance and goals throughout the year, providing continuous development opportunities through coaching and feedback. We also maintain an online learning platform consisting of a wealth of work-related development topics, including product knowledge, leadership development, project management, general business content as well as ethics and diversity training. Growth is not only achieved through these learning platforms but also through our regular town halls, round tables and everyday interaction with our front-line managers. We focus heavily on interacting with our employees how, when and where it matters most.
Employee Inclusion, Equality, and Diversity
CommScope strives to create an inclusive environment that draws upon the strength of the diversity within our workforce to exceed the expectations of all our partners and stakeholders. CommScope’s global workforce comprises individuals of many races, cultures, backgrounds, geographies and experiences. Diversity is something we take pride in and work constantly to support. We know diversity makes us stronger and helps to further grow our company and create fully inclusive teams. CommScope has continued to strengthen the global Diversity & Inclusion Business Network that was established in 2020, providing employees with opportunities to network, learn and lead, grow their careers and support their communities. We focus not only on diversity but also equality in the workplace.
Employee Health, Safety and Well-being
At CommScope, our employees’ health, safety and well-being are our top priority. This has come more into focus than ever with the ongoing COVID-19 pandemic. In response, we have implemented rigorous health and safety protocols globally. Overall, our vision is to seek opportunities to protect the well-being of our employees, customers, suppliers, environment and communities.
A commitment to business practices that are innovative, safe and sustainable is key to our company’s success. To achieve this, we have established a robust Environment, Health & Safety (EHS) management system, set objectives and targets, provided necessary resources and created a comprehensive well-being and benefits program. All of this encourages ongoing improvement as we continue to unlock the greatest potential of our employees. The global EHS team has designed and implemented an integrated, companywide EHS management system based on the requirements of the International Standards of ISO45001 and ISO14001.
CommScope seeks to inspire a culture of proactive and productive health such that our employees make lifestyle decisions that lead to rewarding careers and balanced lives. To realize this goal, we support our workforce by providing tools, services and programs that help our employees achieve and maintain optimal personal health. We make a commitment in our benefits program to ensure we provide our employees and their family members with a compelling and competitive benefits package that offers value, choices and resources to help manage their well-being, including our GuidanceResources program, which provides physical, emotional, legal and financial well-being resources to employees.
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Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our web site at www.commscope.com under Company — Investor Relations as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. The information posted to our website is not incorporated elsewhere in this Annual Report on Form 10-K.
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ITEM 1A. RISK FACTORS
The following is a cautionary discussion of risks, uncertainties and assumptions that we believe are significant to our business. In addition to the factors discussed elsewhere in this Annual Report on Form 10-K, the following are some of the important factors that, individually or in the aggregate, we believe could make our results differ materially from those described in any forward-looking statements. It is impossible to predict or identify all such factors and, as a result, you should not consider the following factors to be a complete discussion of risks, uncertainties and assumptions related to us or our business.
Summary Risk Factors
The following is a summary of some of the risks, uncertainties and assumptions that could materially adversely affect our business, financial position, results of operations and cash flows. You should read this summary together with the more detailed description of each risk factor contained below.
Strategic Risks
Supply Chain Risks
Competitive Risks
Financial Risks
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Labor Related Risks
Business and Operational Risks
International Risks
Litigation and Regulatory Risks
General Risks
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Strategic Risks
The successful execution of our CommScope NEXT transformation plan is key to the long-term success of our business.
CommScope NEXT could result in changes to our business that may result in a number of risks and uncertainties, including the following: lost customers or reduced sales volumes if customers do not accept higher pricing, our new product offerings or if we discontinue or divest of product lines; higher onetime costs such as restructuring costs and transaction, transformation and integration costs; the loss of key management and other employees if we are not successful in getting employee buy-in for CommScope NEXT; and additional supply chain disruptions or higher costs of supplies if we do not successfully execute our projects related to direct and indirect procurement. The implementation of CommScope NEXT may take longer than anticipated, and once implemented, we may not realize, in full or in part, the anticipated benefits or such benefits may be realized more slowly than anticipated. The failure to realize benefits, which may be due to our inability to execute plans or delays in the implementation of CommScope NEXT, could have a material adverse effect on our business, financial condition, results of operations, cash flows and stock price.
Our plan to spin-off our Home Networks business from CommScope (the Spin-Off), or any other potential separation, discontinuance or divestiture of a business or product line, is subject to various risks and uncertainties and may not be completed within any specified time period or at all; may not achieve the expected benefits; and will involve significant time, expense and cash flows, which could disrupt or adversely affect our business.
As a step in the CommScope NEXT transformation plan, in April 2021, we announced a plan to spin-off the Home Networks business in 2022. After thorough consideration of the current supply chain environment and its impact on the Home Networks business, our Board of Directors has determined that it is in the best interests of both CommScope and a future independent Home Networks business to delay execution of the Spin-Off. We remain committed to the Spin-Off, but we currently do not have a firm timeline for restarting the plan.
The Spin-Off is complex in nature and has been and may continue to be affected by unanticipated developments or changes, including changes in the macroeconomic, regulatory or political environment, changes in credit or equity markets or changes in other market conditions. These or other unanticipated developments have delayed and could continue to delay or prevent the Spin-Off or cause the Spin-Off to occur on terms or conditions that are different than anticipated, including the failure of the Spin-Off to qualify as tax-free to our stockholders.
If the Spin-Off is completed, we cannot assure you or any of our stakeholders that each company will be successful or achieve the future performance levels expected or that we will achieve the expected benefits of the Spin-Off. The separation will result in CommScope and the new Home Networks company being smaller, less diversified companies with more limited businesses concentrated in their respective areas of focus. As a result, each company may be more vulnerable to changing market conditions. In addition, if the Spin-Off is completed, CommScope and the Home Networks company will incur ongoing costs, including costs of operating as independent companies, that the separated businesses will no longer be able to share. Those costs may exceed our estimates or could diminish the benefits we expect to realize from the Spin-Off. Further, there can be no assurance that the combined value of the common stock of the two publicly traded companies will be equal to or greater than what the value of our common stock would have been had the Spin-off not occurred.
Whether or not the Spin-Off is completed, our businesses may face risks and uncertainties, including, but not limited to:
Any of these factors could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We periodically evaluate our product lines and may consider the separation, divestiture or discontinuance of other product lines. Any such separation, divestiture or discontinuance of a product line also involves risks such as those described above and could adversely affect or our business, financial position, results of operation, cash flows and stock price.
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Our business strategy has historically relied, in part, on acquisitions to create growth. We may not fully realize anticipated benefits from past or future acquisitions or investments in other companies.
Our business strategy has historically relied, in part, on acquisitions to create growth, such as CommScope’s 2019 acquisition of ARRIS, ARRIS’ 2017 acquisition of Ruckus Wireless and the ICX Switch business, ARRIS’ 2016 combination with Pace plc and CommScope’s 2015 acquisition of TE Connectivity’s Broadband Network Solutions business. We anticipate that a portion of our future growth may be accomplished by acquiring existing businesses, products or technologies. We cannot guarantee that we will be able to identify suitable acquisition opportunities or obtain the necessary financing on acceptable terms to provide these future growth opportunities. We may spend time and money investigating and negotiating with potential acquisition or investment targets but not complete the transaction which may divert or waste resources.
All acquisitions involve risks, such as the assumption of additional liabilities and expenses, issuance of debt, incurrence of transaction and integration costs, diversion of management’s attention from other business concerns, assumption of unknown contingent liabilities, unanticipated litigation costs and falling short of growth expectations. There are also significant challenges to integrating an acquired operation into our business, including, but not limited to successfully managing the operations, manufacturing facilities and technology of the combined business; integrating the sales organizations; maintaining and increasing the customer base; retaining key employees, suppliers and distributors; integrating management information systems, including enterprise resource planning (ERP) systems; integrating inventory management and accounting activities; integrating R&D activities; navigating markets in which we potentially have limited or no prior experience; integrating and implementing effective disclosure controls and procedures and internal controls over financial reporting; and the impact of goodwill or other impairment charges, amortization costs for acquired intangible assets and acquisition accounting treatment, including the loss of deferred revenue and increases in the fair values of inventory and other acquired assets, on our GAAP financial condition and results of operations. Furthermore, such acquisitions may be dilutive to our financial results. Although we typically expect to realize strategic, operational and financial benefits as a result of our past and future acquisitions and investments, we cannot predict or guarantee whether and to what extent anticipated cost savings, synergies and growth prospects will be achieved. For example, we have not fully achieved the expected growth prospects associated with the ARRIS acquisition and that has had adverse effects on our financial condition, results of operations, cash flows and stock price.
Carlyle owns a substantial portion of our equity and its interests may not be aligned with yours.
Funding for the ARRIS acquisition included an investment by Carlyle in our Series A Convertible Preferred Stock. As a result, Carlyle owns approximately 16% of our common stock on an if-converted basis and has the right to designate up to two directors on our Board of Directors. In addition, certain of our existing directors are senior advisors to Carlyle. As a result, Carlyle has significant influence on our business. Circumstances may occur in which the interests of Carlyle could conflict with the interests of our other stockholders.
Difficulties may be encountered in the realignment of manufacturing capacity and capabilities among our global manufacturing facilities and our contract manufacturers that could adversely affect our ability to meet customer demand for our products.
We periodically realign manufacturing capacity among our global facilities and contract manufacturers in order to reduce costs by improving manufacturing efficiency and to strengthen our long-term competitive position. The implementation of these initiatives may include significant shifts of production capacity among facilities and contract manufacturers. We have done this in the past related to the integration of certain acquisitions, including the integration of the ARRIS business. Also, in prior years, with some of the uncertainties in the U.S. trade tariff environment, we transitioned manufacturing for certain impacted products to non-tariff countries. In addition, in response to intermittent shutdowns of our facilities during the COVID-19 pandemic, we transitioned certain manufacturing to less impacted facilities. These changes are time-consuming and costly, and changes in our contract manufacturers or manufacturing locations may cause significant interruptions in supply if the manufacturers have difficulty manufacturing products to our specifications. There are significant risks inherent in the implementation of these initiatives, including our failure to ensure the following: adequate inventory on hand or production capacity to meet customer demand while capacity is being shifted among facilities; maintaining product quality as a result of shifting capacity; adequate raw material and other service providers to meet the needs at the new production locations; ability to successfully remove, transport and re-install equipment; and availability of adequate supervisory, production and support personnel to accommodate the shifted production. In the event manufacturing realignment initiatives are not successfully implemented, we could experience lost future sales and increased operating costs, as well as customer relations problems, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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We may need to undertake additional restructuring actions in the future.
We have previously recognized restructuring charges to integrate acquisitions, in response to slowdowns in demand for our products and in conjunction with the implementation of initiatives to reduce costs and improve the efficiency of our operations. Most recently, we have implemented a business transformation initiative called CommScope NEXT designed to drive stakeholder value which has included the planned closure of a manufacturing facility as well as workforce reductions. In prior years, we have also undertaken a number of initiatives to support the integration of the ARRIS business, which included mostly workforce reductions. In the past, we have undertaken initiatives to support the integration of other acquisitions, which included the closure of certain domestic and international manufacturing facilities and various other workforce reductions. As a result of the continued efforts related to CommScope NEXT, changes in business conditions and other developments, we may need to initiate additional restructuring actions that could result in workforce reductions and restructuring charges, which could adversely and materially affect our cash flows.
Supply Chain Risks
Our dependence on commodities and certain components subjects us to cost volatility and potential availability constraints.
Our profitability may be materially affected by changes in the market price and availability of certain raw materials, most of which are linked to the commodity markets. The principal raw materials and components we purchase are aluminum, copper, steel, bimetals, optical fiber, plastics and other polymers, capacitors, memory devices and silicon chips. Prices for aluminum, copper, steel, silicon, fluoropolymers and certain other polymers have experienced significant volatility as a result of changes in the levels of global demand, supply disruptions, including port, transportation and distribution delays or interruptions, and other factors. As a result, we have seen a significant increase in costs that has negatively impacted our results of operations. We have adjusted our prices for certain products and plan to adjust prices for certain other products, but we may have to adjust prices again in the future. Delays in implementing price increases or a failure to achieve market acceptance of price increases has in the past, and could in the future, have a material adverse impact on our results of operations. Conversely, in an environment of falling commodities prices, we may be unable to sell higher-cost inventory before implementing price decreases, which could have a material adverse impact on our business, financial condition and results of operations.
We are dependent on a limited number of key suppliers for certain raw materials and components, and supply shortages or delays could limit our ability to manufacture products.
We are dependent on a limited number of key suppliers for certain of our raw material and component purchases, including certain semiconductors, memory and chip capacitors, polymers, copper rod, copper and aluminum tapes, fine aluminum wire, steel wire, optical fiber, circuit boards and other electronic components, subassemblies and modules. Certain of our suppliers are sole source suppliers and a number of our agreements with suppliers are short-term in nature.
Our reliance on sole or limited suppliers and our reliance on subcontractors involves several risks, including a potential inability to obtain an adequate supply of required materials, components and other products, and reduced control over pricing, quality, terms and conditions of purchase and timely delivery. Current limited supply of memory devices, capacitors and silicon chips have impacted and could continue to impact our ability to deliver on a timely basis due to extended lead times and have increased and could continue to increase overall product costs. The price of these components within our products may vary, and we may not be able to pass along all cost increases to customers. Key silicon providers may have significant power and ability to influence prices and supply. We are currently experiencing extended lead times from certain of our key suppliers which has affected our ability to deliver on a timely basis and could continue to affect our performance in the future. In some instances, we are purchasing components as much as fifteen months in advance of our expected need for such components, which may divert our working capital from other needs. The extended lead times also contribute to increased risk for excess and obsolescence of components which can lead to increases costs. Our key suppliers have experienced in the past, and could experience in the future, production, operational or financial difficulties, or there may be global shortages and pricing inflation of certain raw materials or components we use. Our inability to find sufficient sources of supply on reasonable terms could impact our ability to manufacture products in a cost-effective manner. We have adjusted our market prices for certain of our products as component prices have changed, but we may not be able to pass along all further cost increases to our customers, which could have a material adverse effect on our gross margin and results of operations. Our ability to ship products on a timely basis has been and may continue to be unfavorably impacted, which could damage relationships with current and prospective customers and potentially have a material adverse effect on our business. We also face the risk of our customers canceling their orders and moving them to our competitors who can ship more timely, which would not allow us to realize our backlog and would have a material adverse effect on our business.
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We also source many of our components from international markets. Any changes in the laws and policies of the U.S. or other countries affecting trade is a risk to us. To the extent there are unfavorable changes imposed by the U.S. or other countries and/or retaliatory actions taken by trading partners, such as the addition of new tariffs or trade restrictions, we may experience material adverse impacts on earnings. For a more complete discussion of our risks related to tariffs and trade restrictions, see the risk factor, “Additional tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products” under our “International Risk Factors” in this Item 1A. Risk Factors section.
If our integrated global manufacturing operations, including our contract manufacturers, suffer capacity constraints or production or shipping delays, we may have difficulty meeting customer demands.
Disruption of our ability to produce at or distribute from our manufacturing or contract manufacturing facilities could adversely affect our ability to manufacture products at our other manufacturing or contract manufacturing facilities in a cost-effective and timely manner. We have experienced lost sales opportunities in 2021 due to the lack of capacity to meet the demand for certain of our Broadband segment products. If we cannot ramp up capacity fast enough to meet customer demand, we may continue to experience lost sales opportunities, lose market share and experience customer relations problems, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Also, in 2020, the COVID-19 pandemic resulted in supply constraints primarily related to the temporary shutdown of certain of our facilities, which led to difficulty in meeting customer demands. In 2021, increased customer demand has also indirectly had unfavorable business impacts, including commodity inflation, logistics cost increases, extended lead times and certain component part shortages. Similar supply constraints, inflation, or delays in the future could have a material adverse effect on our business, financial condition, results of operations and cash flows. For a more complete discussion of our risks related to the COVID-19 pandemic, see the risk factor below under “General Risk Factors” in this Item 1A, “The current pandemic and new variants of COVID-19 and any other future public health crisis, could materially adversely affect our business, financial condition, results of operations and cash flows.”
We rely on unaffiliated contract manufacturers, both domestically and internationally, to produce certain products or key components of products. Our reliance on these contract manufacturers reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product supply and costs and timing. Any manufacturing disruption by our contract manufacturers could severely impair our ability to fulfill orders. Our reliance on outsourced manufacturers also increases the potential for infringement or misappropriation of our intellectual property. If we are unable to manage our relationships with our contract manufacturers effectively, or if our contract manufacturers suffer delays or disruptions in production or other operations for any reason, including financial instability, labor disturbances or shortages, fires, electrical outages, pandemics/epidemics, severe weather events, natural disasters, geopolitical instability, acts of violence or terrorism, shipping interruptions including port distribution delays or interruptions, increased manufacturing lead times, capacity constraints or quality control problems in their manufacturing operations, failure to meet our future requirements for timely delivery or some other catastrophic event, our ability to manufacture products at our manufacturing or contract manufacturer facilities and ship products to our customers in a cost-effective and timely manner could be impaired, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. These manufacturers typically fulfill our supply requirements on the basis of individual orders. In most cases, we do not have long-term contracts with our contract manufacturers that guarantee capacity, the continuation of particular pricing terms or the extension of credit limits. Accordingly, our contract manufacturers are not always obligated to continue to fulfill our supply requirements, which could result in supply shortages, and the prices we are charged for manufacturing services could be increased on short notice. If our manufacturers are unable or unwilling to continue manufacturing our products in required volumes, we will be required to identify one or more acceptable alternative manufacturers to satisfy our demand. There is no assurance that we would be able to identify suitable alternative manufacturing partners on a timely basis, on terms that are acceptable to us, or at all.
Some of our manufacturing and contract manufacturing facilities rely on aging production equipment and information technology infrastructure, and if we fail or our contract manufacturers fail to properly maintain or update this equipment, it could affect our ability to manufacture or ship products.
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Competitive Risks
Our business is dependent upon third party capital spending for data, communication and entertainment equipment, and reductions in such capital spending could adversely affect our business.
Our performance is dependent on third parties’ capital spending for constructing, rebuilding, maintaining or upgrading data, communication and entertainment networks, which can be volatile and difficult to forecast. Capital spending in the communications industry is cyclical and can be curtailed or deferred on short notice. We have experienced and may continue to experience significant quarterly fluctuations in sales and operating income due to the volatility in our industry. A variety of factors affect the timing and amount of capital spending in the communications industry, including:
We have previously experienced a decrease in demand for certain of our products as a result of the COVID-19 pandemic. Although we have had a recovery in demand of certain of our products during 2021, product demand could be negatively impacted in the near term as a result of new variants of COVID-19 or any other future public health crisis. For a more complete discussion of our risks related to COVID-19, see the risk factor under “General Risk Factors” in this Item 1A, Risk Factors section, “The current pandemic and new variants of COVID-19 and any other future public health crisis, could materially adversely affect our business, financial condition, results of operations and cash flows.”
As a result of these factors, we may not be able to maintain or increase our sales in the future, and our business, financial condition, results of operations and cash flows could be materially and adversely affected.
A substantial portion of our business is derived from a limited number of key customers and channel partners.
Our customer base includes direct customers, original equipment manufacturers (OEMs) and channel partners, which include distributors, system integrators, value-added resellers and sales representatives. For the year ended December 31, 2021, we derived approximately 13% of our consolidated net sales from our top two direct customers. The concentration of our net sales with these key customers subjects us to a variety of risks, including:
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We are also exposed to similar risks to the extent that we have significant indirect sales to one or more end-users of our products, who may also be a direct customer.
We generally have no minimum purchase commitments with any of our distributors, value-added resellers, operators or OEMs or other customers, and our contracts with these parties generally do not prohibit them from purchasing or offering products or services that compete with ours. We have historically experienced variability in the level of purchases by our key customers and expect similar variability that could affect future sales. Any significant reduction in sales to these customers, including as a result of the inability or unwillingness of these customers to continue purchasing our products, could materially and adversely affect our business, financial condition, results of operations and cash flows.
We face competitive pressures with respect to all our major product groups.
Competition in our industry depends on a number of factors, including: innovative product and service solution offerings; the ability to adapt to changing markets and customer preferences; product and service quality; timing of the introduction of new products and services; speed of delivery; pricing; and customer service, including the total customer experience. In each of our major product groups, we compete with a substantial number of foreign and domestic companies, some of which have greater financial, technical, marketing and other resources or lower operating costs. They may also have broader product offerings and market focus. This gives many of these enterprises a competitive advantage to withstand any significant reduction in capital spending by customers in our markets over the long term. Further, our industry continues to consolidate, and the combination of any of our competitors could further increase these advantages and result in competitors with broader market presence.
Some competitors may be able to bundle their products and services together and may be capable of delivering more complete solutions that better meet customer preferences than we are able to provide, which may cause us to lose sales opportunities and revenue. Competitors’ actions, such as price reductions, acceptance of high-risk contractual terms or the introduction of new, innovative products and services, and the use of exclusively price-driven auctions by customers have caused lost sales opportunities in the past and may cause us to lose sales opportunities in the future.
The rapid technological changes occurring in the communications industry could also lead to the entry of new competitors against whom we may not be able to compete successfully. For example, as networks become more virtualized, the functionality of our products is at risk of being subsumed by competitors who utilize software to provide the same functions as our products. A related trend that could affect us is the emerging interest in distributed access architecture (DAA), which disaggregates some of the functions of the converged cable access platform (CCAP) and the access and transport platforms to enable deployment of these functions in ways that could reduce traditional operator capital expenditures in hybrid fiber-coaxial. We have developed and deployed a line of DAA products, but some operators may not be aligned on the specific implementations of DAA and we could lose market share to competitors. Service providers also have the goal of virtualizing CCAP management and control functions as they deploy DAA, and although we are developing a fully virtualized CCAP product, this could potentially enable new competitors to enter the market and reduce operator dependence on our products. As there is technology evolution or transformation within the industry, be it DOCSIS 4.0, PON or Wi-Fi technology, there is a risk that our market position would be weakened. If any of our competitors’ products or technologies were to become the industry standard, our business would be negatively affected.
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The continued industry move toward open standards may result in an increase in competition for our products that may adversely impact our future revenues and margins. In addition, many of our customers participate in “technology pools” and increasingly request that we donate a portion of our source code used by customers to these pools, which may impact our ability to recapture the R&D investment made in developing such code. We believe that we will be increasingly required to work with third-party technology providers. As a result, we expect the shift to more open standards may require us to license software and other components indirectly to third parties via various open-source or royalty-free licenses. In some circumstances, our use of such open-source technology may include technology or protocols developed by standards settings bodies, other industry forums or third-party companies. The terms of the open-source licenses granted by such parties, or the granting of royalty-free licenses, may limit our ability to commercialize products that utilize such technology, which could have a material adverse effect on our results of operations.
In some instances, our customers themselves may also be our competition in other business areas. Some of our customers may develop their own software requiring support within our products and/or may design and develop products of their own that are produced to their own specifications directly by a contract manufacturer. Further, if we are unable to transform our business processes to support changing customer expectations and deliver a superior total customer experience, we may lose sales opportunities in the future. We are also facing significant and increased competition from original design manufacturers (ODMs) and contract manufacturers who are selling and attempting to sell their products directly to service providers.
We cannot assure you that we will continue to compete successfully with our existing competitors or with new competitors. If we are unable to compete in any of our markets at the same level as we have in the past or are forced to reduce the prices of our products in order to continue to be competitive, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Our ability to sell our products is highly dependent on the quality of our support services after the sale, and our inability to provide adequate support after the sale would have a material adverse effect on our business.
After our products are deployed, our channel partners and end customers depend on our support organization to resolve any issues relating to our products. A high level of support is important for the successful marketing and sale of our products. In many cases, our channel partners provide support directly to our end customers. We do not have complete control over the level or quality of support provided by our channel partners. These channel partners may also provide support for other third-party products, which may potentially distract resources from support for our products. If we and our channel partners do not effectively assist our end customers in deploying our products, quickly resolving post-deployment issues and provide effective ongoing support, it would adversely affect our ability to sell our products to existing end customers and could harm our reputation with potential end customers. In some cases, we guarantee a certain level of performance to our end customers, which could prove to be resource-intensive and expensive for us to fulfill if unforeseen technical problems arise.
Many of our service provider and large enterprise end customers have more complex networks and require higher levels of support than our smaller end customers. In addition, given the extent of our international operations, our support organization faces challenges, including those associated with delivering support, training and documentation in languages other than English. Our failure to maintain high-quality support and services could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Changes to the regulatory environment in which our customers operate and changes in or uncertainty about government funded programs may negatively impact our business.
The telecommunications and cable television industries are subject to significant and changing federal and state regulation, both in the U.S. and other countries. Many of our customers are subject to various rules and regulations as Internet service providers and changes to such rules and regulations could adversely impact our customers’ decisions regarding capital spending. We, as well as some of our customers, also participate in and benefit from government funded programs that encourage the development of network infrastructures. Changes in government programs in our industry or uncertainty regarding future changes could adversely impact our customers’ decisions regarding capital spending, which could decrease demand for our products and could materially and adversely affect our business, financial condition, results of operations and cash flows.
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Financial Risks
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our financial obligations.
As of December 31, 2021, we had approximately $9.6 billion of indebtedness. As of December 31, 2021, we had no outstanding loans under our asset-based revolving credit facility and the remaining availability was $684.1 million, reflecting a borrowing base of $777.6 million reduced by $93.5 million of outstanding letters of credit. Our ability to borrow under our revolving credit facility depends, in part, on inventory, accounts receivable and other assets that fluctuate from time to time and may further depend on lenders’ discretionary ability to impose reserves and availability blocks. We have entered into certain hedging agreements to reduce our exposure to variable rate debt.
Our substantial indebtedness could have important consequences. For example, it could:
Our variable rate indebtedness currently uses LIBOR as a benchmark for establishing the rate. On July 27, 2017, the authority that regulates LIBOR announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In November 2020, this deadline was extended for the LIBOR rates used in our variable rate indebtedness until June 2023. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is replacing U.S. dollar LIBOR with a newly created index, calculated with a broad set of short-term repurchase agreements backed by treasury securities, called the Secured Overnight Financing Rate. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom (U.K.), the U.S. or elsewhere. These changes could require us to renegotiate certain of our variable rate indebtedness to address changes in the benchmark rates, for example, but we are still evaluating the impact on our other agreements and contracts.
In addition, the indentures and credit agreements governing our indebtedness contain affirmative and negative covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.
Despite current indebtedness levels and restrictive covenants, we may still incur additional indebtedness that could further exacerbate the risks associated with our substantial financial leverage.
We may incur significant additional indebtedness in the future under the agreements governing our indebtedness. Although the indentures and the credit agreements governing our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of thresholds, qualifications and exceptions, and additional indebtedness incurred in compliance with these restrictions could be substantial. Additionally, these restrictions permit us to incur obligations that, although preferential to our common stock in terms of payment, do not constitute indebtedness.
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To service our indebtedness and pay dividends on our preferred stock, we will require a significant amount of cash, and our ability to generate sufficient cash depends on many factors beyond our control.
Our operations are conducted through our global subsidiaries and our ability to make cash payments on our indebtedness and pay cash dividends on our preferred stock will depend on the level of earnings and distributable funds from our subsidiaries. Certain of our subsidiaries may have limitations or restrictions on paying dividends and otherwise transferring funds to us. Our ability to make cash payments on and to refinance our indebtedness will depend upon our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to financial, business, legislative, regulatory and other factors beyond our control. We might not be able to achieve a level of cash flows from operating activities or transfer sufficient funds from our subsidiaries to permit us to pay the principal, premium, if any, and interest on our indebtedness and dividends on our preferred stock.
If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness or if we fail to comply with the various covenants in the instruments governing our indebtedness and we are unable to obtain waivers from the required lenders, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of our indebtedness could elect to declare all the funds borrowed to be due and payable, together with accrued and unpaid interest. The lenders under our revolving credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets. As a result, we could be forced into bankruptcy or liquidation.
We may need to recognize additional impairment charges related to goodwill, identified intangible assets, fixed assets and right of use assets.
We have substantial balances of goodwill and identified intangible assets. As of December 31, 2021, goodwill and identified intangible assets represented approximately 62% of our total assets. We are required to test goodwill for possible impairment on the same date each year and on an interim basis if there are indicators of a possible impairment. In the past, we have recognized significant impairment charges related to goodwill, some of them being significant, including $13.7 million in 2021, $206.7 million in 2020 and $376.1 million in 2019. As of the October 2021 annual impairment test, the fair value of certain reporting units only modestly exceeded their carrying value and slight changes in significant assumptions or business factors could result in material impairment. In the future, if we are unable to improve our results of operations and cash flows, or other indicators of impairment exist, such as a sustained significant decline in our share price and market capitalization, we may incur material charges against earnings relating to our remaining goodwill.
We are also required to evaluate identified intangible assets, fixed assets and right of use assets for impairment if there are indicators of a possible impairment. In the past, due to revisions in financial performance outlooks or deterioration in certain markets, we have recognized significant impairment charges on identified intangible assets and fixed assets. In the future, we may again determine that one or more of our long-lived assets is impaired and additional impairment charges may be recognized that could have a material adverse effect on our financial condition and results of operations.
The IRS may not agree ARRIS was a foreign corporation for U.S. federal income tax purposes.
Following the Pace combination, ARRIS was incorporated under the laws of England and Wales and a tax resident in the United Kingdom for U.K. tax purposes. There is a risk that the Internal Revenue Service does not agree that ARRIS was a foreign corporation for U.S. federal income tax purposes in periods prior to the acquisition and we could be subject to substantial additional U.S. taxes. For U.K. tax purposes, ARRIS was expected to be treated as a U.K. tax resident for all periods prior to the Acquisition and following the Pace combination, regardless of how ARRIS was treated in the U.S. Therefore, if ARRIS was treated as a U.S. corporation for U.S. federal income tax purposes, we could be liable for both U.S. and U.K. taxes in certain periods prior to the Acquisition, which could have a material adverse effect on our financial condition, results of operations and cash flows.
Labor Related Risks
We may not be able to attract and retain key employees.
Our business depends upon our continued ability to hire and retain key employees. Effective succession planning is important to our long-term success. We depend on our senior management team and other key employees for strategic success. Some of our key employees have retired or are at or near retirement age, including a disproportionate amount of our workforce in key geographic areas who will reach retirement age in the next decade. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution.
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Key employees include individuals in our sales force, operations management, engineers and skilled production workers at our operations around the world. Competition for skilled personnel and highly qualified managers in the industries in which we operate is intense. Our growth by acquisitions creates challenges in retaining employees as well. As the corporate culture evolves to incorporate new workforces, some employees may not find the new culture appealing. In addition, the pace of integration and transformation may cause retention issues with our workforce due to change fatigue.
Furthermore, as our workforce ages, we are challenged to find and attract a younger population to replace them. Younger generations are motivated by progression and opportunity, which may be limited by our current employee population. In addition, many of our employees are highly experienced, skilled individuals who have extensive knowledge or relationships in our industry. As these employees leave CommScope, we may not be able to easily replicate their experience, knowledge and relationships. Difficulties in attracting or retaining employees with the necessary management, technical and financial skills needed to achieve our business objectives may limit our growth potential and have had and may continue to have a material adverse effect on our business, financial condition and results of operations.
Labor unrest could have a material adverse effect on our business, results of operations and financial condition.
Although none of our U.S. employees are represented by unions, a significant portion of our international employees are members of unions or subject to works’ councils or similar statutory arrangements. We are required to consult with, and seek the consent or advice of, various employee groups or works’ councils that represent our employees for any changes to our activities or employee benefits. Based on requests from two separate works councils in the European Union, we are required to negotiate, and are currently negotiating, an agreement for the establishment of a European Works Council that would serve as a representative body of our European workforce. Requirements to consult with such groups could have a significant impact on our flexibility in managing costs and responding to market changes. In addition, many of our direct and indirect customers and vendors have unionized workforces. Strikes, work stoppages or slowdowns experienced by us at our international locations or experienced by our customers or vendors could have a negative impact on us. Organizations responsible for manufacturing or shipping our products may also be impacted by labor disruptions. Any interruption in the delivery of our products could harm our reputation with our customers, reduce demand for our products, increase costs and have a material adverse effect on us.
Business and Operational Risks
Our future success depends on our ability to anticipate and adapt to changes in technology and customer preferences and develop, implement and market innovative solutions.
Many of our markets are characterized by rapid advances in information processing and communications capabilities that require increased transmission speeds and density and greater bandwidth. These advances require significant investments in R&D in order to improve the capabilities of our products and services and develop new offerings or solutions that will meet the needs and preferences of our customers. There can be no assurance that our investments in R&D will yield marketable product or service innovations.
We may not be successful in our ongoing innovation efforts if, among other things, our products and services are not cost effective, brought to market in a timely manner, compliant with evolving industry standards, accepted in the market or recognized as meeting customer requirements. We could experience a material adverse effect on our business, financial condition, results of operations and cash flows if we are not successful in our ongoing innovation efforts.
As our products become more complex and customer preferences continue to change, we may encounter difficulties in meeting customer preferences, including performance, service and delivery expectations. Developing our products is expensive, complex and involves uncertainties. Each phase in the development of our products presents serious risks of failure, rework or delay, any one of which could impact the timing and cost-effective development of such product and could jeopardize end customer acceptance of the product. We have experienced in the past, and may in the future experience, design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. Any such difficulties or delays could have a material adverse effect on our results of operations, financial condition and cash flows.
If we do not stay current with product life cycle developments, our business may suffer.
To compete successfully, we must continue to innovate in anticipation of both our customers’ needs and developing industry trends, which require us to quickly design, develop, manufacture and sell new or enhanced products that provide increasingly higher levels of performance and reliability. If we do not have competitively priced, market-accepted products available to meet our customers’ planned roll-out of new technologies, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected.
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The introduction of new or enhanced products requires that we carefully manage the transition from older products to minimize disruption in customer ordering practices and ensure that new products can be timely delivered to meet our customers’ demand. If we are not able to support our customers in an effective and cost-efficient manner as they advance from older generation networks or as they expand the capacity of their networks, our business will suffer.
Furthermore, there are several major trends that we expect to continue to impact the enterprise market and product life cycles, including the shift to 5G, enterprises shifting toward mobility indoors and adjusting in-building cabling designs to support Wi-Fi, more access points and in-building cellular applications. Due to significant increases in data traffic and migrations of applications to the cloud, enterprises are also shifting spending toward multi-tenant data centers and hyperscale cloud service providers, which offer cloud data centers services as a replacement to in-house corporate data centers. As a result, there is growing demand for fiber solutions and decelerating demand for copper solutions. If we are unable to continue to support customers in these transitions, or if sales of copper products decline faster than expected, we could experience a material adverse effect on our business, financial condition, results of operations and cash flows.
In order to stay current with product life cycle developments, we have formed strategic relationships with leading technology companies to provide us with early access to technology that we believe will help keep us at the forefront of our industry. Our strategic alliances are generally based on business relationships that have not been the subject of written agreements expressly providing for the alliance to continue for a significant period of time, and the loss of any such strategic relationship could have a material adverse effect on our business and results of operations.
If our products do not effectively interoperate with cellular networks and mobile devices, future sales of our products could be negatively affected.
Many of our products are designed to interoperate with cellular networks and mobile devices using Wi-Fi technology. These networks and devices have varied and complex specifications. As a result, we must ensure that our products interoperate effectively with these existing and planned networks and devices. To meet these requirements, we must continue development and testing efforts that require significant capital and employee resources. We may not accomplish these development efforts quickly or cost-effectively, or at all. If our products do not interoperate effectively, orders for our products could be delayed or cancelled, which would harm our revenue, operating results and reputation, potentially resulting in the loss of existing and potential end customers. The failure of our products to interoperate effectively with cellular networks or mobile devices may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. In addition, our end customers may require our products to comply with new and rapidly evolving security or other certifications and standards. If our products are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors first achieve compliance with these certifications and standards, such end customers may not purchase our products, which would harm our business, operating results, financial condition and cash flows.
If our service offerings or products, including material purchased from our suppliers, have quality or performance issues, our business may suffer.
Our business depends on delivering products and services of consistently high quality. Many of our solutions are highly complex, and testing procedures used by us and our customers are limited to evaluating them under likely and foreseeable failure scenarios. Many of our products include both hardware and software components. It is not unusual for software, especially in earlier versions, to contain bugs that can unexpectedly interfere with expected operations. For various reasons, once deployed, our products may fail to perform as expected. Performance issues could result from faulty design, defective raw materials or components purchased from suppliers, problems in manufacturing or installation errors. We have experienced such performance issues in the past and remain exposed to such performance issues in the future. In some cases, recall of some or all affected products, product redesigns or additional capital expenditures may be required to correct a defect; and depending on the number of products affected, the cost of fixing or replacing such products could have a material impact on our results of operations and cash flows. Our agreements with our contract manufacturers and component suppliers may not cover all costs related to defects.
In some cases, we are dependent on a sole supplier for components used in our products. Defects in sole-sourced components subject us to additional risk of being unable to quickly address any product issues or failures experienced by our customers as a result of the component defect and could delay our ability to deliver new products until the defective components are corrected or a new supplier is identified and qualified. This could increase our costs in resolving the product issue, result in decreased sales of the impacted product or damage our reputation with customers, any of which could negatively impact our results of operations.
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Hardware or software defects could also permit unauthorized users to gain access to our customers’ networks and/or a consumer’s home network. In addition to potentially damaging our reputation with customers, such defects may also subject us to claims for damages under agreements with our customers and fines by regulatory authorities.
We offer warranties on most products, the terms and conditions of which depend upon the product subject to the warranty. In many cases, we also indemnify our customers against damages or losses that might arise from certain claims relating to our products and services. Future claims may have a material adverse effect on our business, financial condition, results of operations and cash flows. Any significant or systemic product or service failure could also result in lost future sales as a result of reputational damage.
Our products have been deployed in many different locations and user environments and are capable of providing services and connectivity to many different types of devices operating a variety of applications. The ability of our products to operate effectively can be negatively impacted by many different elements unrelated to our products. For example, a user’s experience may suffer from an incorrect setting in a Wi-Fi device. Although certain technical problems experienced by users may not be caused by our products, users often may perceive them to be the underlying cause of poor performance of the wireless network. This perception, even if incorrect, could harm our business and reputation. Similarly, a high-profile network failure may be caused by improper operation of the network or failure of a network component that we did not supply, but service providers may perceive that our products were implicated, which, even if incorrect, could harm our business, financial condition, results of operations and cash flows.
We depend on cloud computing infrastructure operated by third parties and any disruption in these operations could adversely affect our business.
For certain of our service offerings, in particular our Wi-Fi-related cloud services, we rely on third parties to provide cloud computing infrastructure that offers storage capabilities, data processing and other services. We currently operate our cloud-dependent services using Amazon Web Service (AWS), Google Compute Engine (GCE) or Microsoft Azure (Azure). We cannot easily switch our AWS, GCE or Azure operations to another cloud provider. Any disruption of or interference with our use of these cloud services would impact our operations and our business could be adversely impacted.
Problems faced by our third party cloud services with the telecommunications network providers with whom we or they contract or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our end customers. If AWS, GCE or Azure are unable to keep up with our needs for capacity, this could have an adverse effect on our business. Any changes in third party cloud services or any errors, defects, disruptions or other performance problems with our cloud-based applications, could adversely affect our reputation and may damage our end customers’ stored files or result in lengthy interruptions in our services. Interruptions in our services might adversely affect our reputation and operating results, cause us to issue refunds or service credits, subject us to potential liabilities or result in contract terminations.
Our business depends on effective management information systems.
We rely on effective management information systems for critical business operations, to support strategic business decisions and to maintain a competitive edge in the marketplace. We rely on our ERP systems to support critical business operations such as processing sales orders and invoicing, manufacturing, shipping, inventory control, purchasing and supply chain management, human resources and financial reporting. In 2020, we began the upgrade and integration of our ERP software to a newer, cloud-based version. The first phase was completed in early 2021 and the next phase is currently in the planning stage. We may experience difficulties as we transition to the upgraded systems, including loss or corruption of data, delayed shipments, decreases in productivity as personnel implement and become familiar with new systems and processes, unanticipated expenses (including increased costs of implementation or costs of conducting business) and lost revenue. Difficulties in implementing the upgrade or significant system failure could disrupt our operations, divert management’s attention and have an adverse effect on our capital resources, financial condition, results of operations or cash flows.
We also rely on management information systems to produce information for business decision-making and planning and to support e-commerce activities. Failure to maintain an adequate digital platform or to make additional investment in our digital platform to support e-commerce activities and improve our customer experience could have a material adverse impact on our business through lost sales opportunities.
If we are unable to maintain our management information systems, including our IT infrastructure, to support critical business operations, produce information for business decision-making activities and support digital customer experience activities, we could experience a material adverse impact on our business or an inability to timely and accurately report our financial results.
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Cyber-security incidents, including data security breaches, ransomware or computer viruses, could harm our business by exposing us to various liabilities, disrupting our delivery of products and services and damaging our reputation.
We rely extensively on our management information technology systems and those of third parties to operate our business and store proprietary information about our products and intellectual property. Additionally, we and others acting on our behalf receive, process, store and transmit confidential data, including “personally identifiable information,” with respect to employees, vendors, customers and others. As the continued rise in cybersecurity incidents around the world indicates, all management information technology systems are vulnerable. Despite the security controls we have in place, our facilities, systems and procedures, and those of our third party service providers, are at risk of security breaches, acts of vandalism, ransomware, software viruses, misplaced or lost data, programming and/or human errors or other similar events. In particular, unauthorized access to our computer systems or stored data could result in the theft or improper disclosure of proprietary, confidential, sensitive or personal information, the deletion or modification of records or interruptions in our operations. These cybersecurity risks increase when we transmit information from one location to another, including transmissions over the Internet or other electronic networks. Any future significant compromise or breach of our data security, whether external or internal, or misuse of employee, vendor, customer, or Company data, could result in significant costs, lost sales, fines, lawsuits, lost customers and damage to our reputation. We employ a variety of security breach countermeasures and security controls designed to mitigate these risks, but we cannot guarantee that all breach attempts can be successfully thwarted by these measures as the sophistication of attacks increases. As cyber threats continue to evolve, we may be required to expend additional resources to mitigate new and emerging threats while continuing to enhance our information security capabilities or to investigate and remediate security vulnerabilities.
In addition, defects in some of the hardware or software we develop and sell, including in our engineering or in their implementation by our customers, could also result in unauthorized access to our customers’ and/or consumers’ networks. Such unauthorized access could result in third parties gaining access to the private information of our customers, such as home health information, home cameras or other personal information or technology. Any such events could result in theft of personal information, trade secrets and intellectual property; give rise to legal proceedings; cause us to incur increased costs for insurance premiums, security, remediation and regulatory compliance; subject us to civil and criminal penalties; expose us to liabilities to our customers, employees, vendors, governmental authorities or other third parties; allow others to unfairly compete with us; disrupt our delivery of products and services; expose the confidential information of our clients and others; and have a negative impact on our reputation, all of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Climate change may have a long-term impact on our business.
There are inherent climate change risks wherever business is conducted. The potential physical impacts of climate change on our operations are highly uncertain and would be particular to the geographic circumstances in areas in which we operate. These may include changes in rainfall and storm patterns and intensities, water shortages, changing sea levels and changing temperatures. These impacts may adversely impact the cost, production and financial performance of our operations. Climate-related events, including the increasing frequency of extreme weather events and their impact on critical infrastructure in the regions in which we operate, have the potential to disrupt our business, our third-party suppliers, and/or the business of our customers and may cause us to experience higher attrition, losses and additional costs to maintain or resume operations. CommScope aligns with the Global Reporting Initiative (GRI) standard and makes use of the Carbon Disclosure Project (CDP) platform, which is committed to aligning with the Task Force on Climate Related Financial Disclosures (TCFD) recommendations to accurately assess, take potential proactive action and report as appropriate. For additional information, which is not incorporated by reference in this Annual Report on Form 10-K, see our Corporate Responsibility & Sustainability pages on the CommScope website: https://www.commscope.com/About-Us/Corporate-Responsibility-and-Sustainability.
International Risks
Our significant international operations expose us to economic, political, foreign exchange rate and other risks.
We have significant international sales, manufacturing, distribution and R&D operations. Our major international manufacturing, distribution and R&D facilities are located in Australia, Belgium, China, the Czech Republic, Germany, India, Ireland, Mexico, the Netherlands, Singapore and the United Kingdom. For the year ended December 31, 2021, international sales represented 42% of our consolidated net sales. In general, our international sales have lower gross profit percentages than our domestic sales. To the extent international sales increase as a percentage of our net sales, our overall gross profit percentages may decline.
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Our international sales, manufacturing, distribution and R&D operations are subject to the risks inherent in operating abroad, including, but not limited to, coordinating communications among and managing international operations; currency exchange rate fluctuations; economic and political destabilization; restrictive actions by foreign governments; wage inflation; nationalizations; the laws and policies of the U.S. and other countries affecting trade, anti-bribery, foreign investment and loans; foreign tax laws, including the ability to recover amounts paid as value-added and similar taxes; potential restrictions on the repatriation of cash; reduced protection of intellectual property; longer customer payment cycles; compliance with local laws and regulations; volatile geopolitical turmoil, including popular uprisings, regional conflicts, terrorism, and war; shipping interruptions; major health concerns (such as pandemics and infectious diseases); inflexible labor contracts or labor laws in the event of business downturns; and economic boycott for doing business in certain countries. While the Company maintains insurance coverage for certain types of losses, such insurance coverage may be insufficient to cover all losses that may arise.
A significant portion of our products sold in the U.S. are manufactured outside the U.S. To the extent there are changes in U.S. trade policies, such as significant increases in tariffs or duties for goods brought into the U.S., our competitive position may be adversely impacted and the resulting effect on our earnings could be material. For a more complete discussion of our risks related to trade policies, see the risk factor, “Additional tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products” under “International Risks” in this Item 1A, Risk Factors section. A significant portion of our products are manufactured in Asia. Availability of containers for shipping or port congestion may delay shipments of products to customers. Also, transportation costs may increase, and we may not be able to pass along all cost increases to customers.
Risks related to fluctuations in foreign currency rates can impact our sales, financial condition, results of operations and cash flows. Our foreign currency risk exposure is mainly concentrated in Chinese yuan, euro, British pound sterling, Mexican peso, Japanese yen, Canadian dollar, Australian dollar, Brazilian real, South African rand, Indian rupee and Czech koruna. We manage our foreign currency rate risks through regular operating and financing activities and use derivative financial instruments such as foreign exchange forward contracts. There can be no assurance that our risk management strategies will be effective or that the counterparties to our derivative contracts will be able to perform. In addition, foreign currency rates in many of the countries in which we operate have at times been extremely volatile and unpredictable. We may choose not to hedge or determine we are unable to effectively hedge the risks associated with this volatility. In such cases, we may experience declines in sales and adverse impacts on earnings and such changes could be material.
Additional tariffs or a global trade war could increase the cost of our products, which could adversely impact the competitiveness of our products.
There is uncertainty about the future relationship between the U.S. and various other countries, most significantly China, with respect to trade policies and tariffs. The former U.S. administration called for substantial changes to U.S. foreign trade policy with respect to China and other countries, including the possibility of imposing greater restrictions on international trade and significant increases in tariffs on goods imported into the U.S. The current administration could have a different approach to U.S. foreign trade policy with China as well as other countries but there remains uncertainty.
This uncertainty about the future relationship between the U.S. and certain of its trading partners may reduce trade between the U.S. and other nations, including countries in which we currently operate. Changes in policy or continued uncertainty could depress economic activity and restrict our access to suppliers or customers. The tariffs implemented on our products (or on materials, parts or components we use to manufacture our products) by the former U.S. administration increased the cost of our products manufactured in the U.S. and imported into the U.S. If additional tariffs or trade restrictions are implemented on our products (or on materials, parts or components we use to manufacture our products) by the U.S. or other countries, the cost of our products manufactured in China, Mexico or other countries and imported into the U.S. or other countries could increase further. We expect to continue to pass along some of these costs to our customers, but the increased cost could adversely affect the demand for products. We have been successful in the past in shifting the manufacturing locations for the impacted products, but this takes time and results in additional one-time costs and these alternative locations may have higher ongoing manufacturing costs. These cost increases could adversely affect the demand for our products and/or reduce margins, which could have a material adverse effect on our business and our earnings. In addition, a significant percentage of the component parts are manufactured in China and other southeastern Asian countries. The impact of tariffs or other geopolitical instability may limit our access and our manufacturing partners’ access to those components which would impact production and product costs.
32
Our international operations expose us to increased challenges in complying with anti-corruption laws and regulations of the U.S. government and various other international jurisdictions.
We are required to comply with the anti-corruption laws and regulations of the U.S. government and various other international jurisdictions, and our failure to comply with these laws and regulations may expose us to significant liabilities. These laws and regulations may apply to companies, individual directors, officers, employees and agents, and may restrict our operations, trade practices, investment decisions and partnering activities. In particular, we are subject to U.S. and foreign anti-corruption laws and regulations, such as the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. Violations of these legal requirements are punishable by significant criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts and other remedial measures. We have established policies, procedures and internal controls designed to assist us and our personnel in complying with applicable U.S. and international anti-corruption laws and regulations. However, our employees, subcontractors or channel partners could take actions that violate these requirements. In addition, some of the international jurisdictions in which we operate have elevated levels of corruption. As a result, we are exposed to an increased risk of violating anti-corruption laws. Violation of anti-corruption laws could adversely affect our reputation, business, financial condition, results of operations and cash flows, and such effects could be material.
We are subject to governmental export and import controls and sanctions programs that could subject us to liability or impair our ability to compete in international markets.
Certain of our products, including purchased components of such products, are subject to export controls and may be exported only with the required export license or through an export license exemption. In addition, we are required to comply with certain U.S. and foreign import and customs rules, sanctions and embargos. If we were to fail to comply with applicable export licensing, customs regulations, economic sanctions and other laws, we could be subject to substantial civil and criminal penalties, including fines, the incarceration of responsible employees and managers and the possible loss of export or import privileges. In addition, if our distributors fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected through reputational harm and penalties. Obtaining the necessary export license for a particular sale may be time-consuming and may result in a delay or loss of sales opportunities.
Furthermore, export control laws and economic sanctions prohibit the shipment of certain products to embargoed or sanctioned countries, governments and persons. While we train our employees to comply with these regulations and have systems in place designed to prevent compliance failures, we cannot assure you that a violation will not occur, whether knowingly or inadvertently. Any such shipment could have negative consequences, including government investigations, penalties, fines, civil and criminal sanctions and reputational harm.
Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations or change in the countries, governments, persons or technologies targeted by such regulations could result in our decreased ability to export, import or sell our products to existing or potential customers, particularly those with international operations. Any limitation on our ability to export, import or sell our products could adversely affect our business, financial condition, results of operations and cash flows, and such effects could be material.
Litigation and Regulatory Risks
We may not be successful in protecting our intellectual property and in defending against claims that we are infringing on the intellectual property of others, and any such actions may be costly.
We may encounter difficulties and significant costs in protecting our intellectual property rights or obtaining rights to additional intellectual property to permit us to continue or expand our business. Other companies, including some of our largest competitors, hold intellectual property rights in our industry and the intellectual property rights of others could inhibit our ability to introduce new products unless we secure necessary licenses on commercially reasonable terms.
33
In the past, we have initiated litigation in order to enforce patents issued or licensed to us or to determine the scope and/or validity of a third party’s patent or other proprietary rights, and we may initiate similar litigation in the future. We also have been and may in the future be subject to lawsuits by third parties seeking to enforce their own intellectual property rights, including against certain of the products or intellectual property that we have acquired through acquisitions. Any such litigation, regardless of outcome, could be costly and could subject us to significant liabilities or require us to cease using proprietary third party technology. In addition, the payment of any damages or any necessary licensing fees or indemnification costs associated with a patent infringement claim could be material and could also materially adversely affect our cash flows and operating results. Such litigation can also be a significant distraction to management.
In certain markets, we may be required to address counterfeit versions of our products. We may incur significant costs in pursuing the originators of such counterfeit products and, if we are unsuccessful in eliminating them from the market, we may experience a reduction in the value of our products and/or a reduction in our net sales.
Because of the nature of information that may pass through or be stored on certain of our solutions or networks, we, our vendors and our end customers may be subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other related matters.
Globally, there has been an increase in laws and regulatory action concerning privacy-related matters. Some of these laws impose requirements for the handling of personal data, including data of employees, consumers and business contacts. Several U.S. states have adopted legislation requiring companies to protect the security of personal information that they collect from consumers over the Internet, and more states may adopt similar legislation. For example, the California Consumer Privacy Act, which went into effect on January 1, 2020, subjects us to stricter obligations, greater fines and more private causes of action related to data security. The California Privacy Rights Act (CPRA), which is effective in 2023, amends and further expands the California Consumer Privacy Act. Virginia and Colorado also have similar laws going into effect in 2023. Also, many jurisdictions have enacted or are enacting laws requiring companies to notify regulators or individuals of data security incidents involving certain types of personal data. These mandatory disclosures regarding security incidents often lead to widespread negative publicity. Any security incident, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our data security measures, negatively impact our ability to attract or retain customers, or subject us to third party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect our business and operating results.
Foreign data protection, privacy and other laws and regulations can be more restrictive than those in the U.S. For example, the E.U.’s General Data Protection Regulation (GDPR), which became effective in May 2018, was designed to harmonize data privacy laws across Europe, to protect all E.U. citizens’ data privacy, empower E.U. citizens with respect to their personal data and to reshape the way organizations across the region approach data privacy. Compliance with GDPR has required changes to products and service offerings, internal and external software systems, including our websites, and changes to many company processes and policies. Failure to comply with GDPR could cause significant penalties and loss of business. Subsequent judicial rulings in Europe about GDPR have invalidated the E.U.-U.S. privacy shield framework, which was the mechanism relied upon by some of our vendors for personal data transfers out of the E.U. Additionally, these rulings require companies like ours to assess their personal data transfers from the E.U. to determine whether the protections in the U.S. or any country without an adequacy determination meet E.U. standards in the context of the specific transfer. A European data protection authority could disagree with our assessment of such transfers, resulting in penalties or required changes in how we transfer data within our company.
In addition, some countries are considering or have passed legislation requiring local storage and processing of data. For example, Brazil and India have each adopted such laws that became effective in January 2020. These new and proposed laws could increase the cost and complexity of offering our solutions or maintaining our business operations in those jurisdictions. The introduction of new solutions or expansion of our activities in certain jurisdictions may subject us to additional laws and regulations. Our channel partners and end customers also may be subject to such laws and regulations in the use of our products and services.
34
These U.S. federal and state and foreign laws and regulations, which often can be enforced by private parties or government entities, are constantly evolving. In addition, the application and interpretation of these laws and regulations are often uncertain, may be interpreted and applied inconsistently from jurisdiction to jurisdiction and may be contradictory with each other. For example, a government entity in one jurisdiction may demand the transfer of information forbidden from transfer by a government entity in another jurisdiction. If our actions were determined to be in violation of any of these disparate laws and regulations, in addition to the possibility of fines, we could be ordered to change our data practices, which could have an adverse effect on our business and results of operations and financial condition. There is also a risk that we, directly or as the result of a third party service provider we use, could be found to have failed to comply with the laws or regulations applicable in a jurisdiction regarding the collection, handling, transfer, disposal or consent to the use of personal data, which could subject us to fines or other sanctions, as well as adverse reputational impact.
Some states and countries are considering or have introduced laws and regulations requiring minimum or particular security controls be incorporated into devices that connect to the internet (so called “Internet of Things Security laws”). Where products we manufacture are considered in scope for some of these laws and regulations, compliance obligations or customer contracts may necessitate modification of existing product features and specifications or make inventory obsolete. Inconsistencies in these laws can introduce complexity into our design, manufacturing and inventory management processes.
Compliance with these existing and proposed laws and regulations can be costly and require significant management time and attention, and failure to comply can result in negative publicity and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices. Customers may demand or request additional functionality in our products or services that they believe are necessary or appropriate to comply with such laws and regulations, which can cause us to incur significant additional costs and can delay or impede the development of new solutions. In addition, there is a risk that failures in systems designed to protect private, personal or proprietary data held by us or our customers using our solutions will allow such data to be disclosed to or seen by others, resulting in application of regulatory penalties, enforcement actions, remediation obligations, private litigation by parties whose data were improperly disclosed or claims from our customers for costs or damages they incur. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. Our existing general liability insurance coverage and coverage for errors and omissions may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims, or our insurers may deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition, results of operations and cash flow.
Compliance with current and future environmental laws, efforts to mitigate climate change and potential environmental liabilities may have a material adverse impact on our business, financial condition and results of operations.
We are subject to various federal, state, local and foreign environmental laws and regulations governing, among other things, discharges to air and water, management of regulated materials, energy consumption, handling and disposal of solid and hazardous waste and investigation and remediation of contaminated sites. In addition, we are subject to laws and regulations regarding the types of substances allowable in certain of our products and the handling of our products at the end of their useful life. Because of the nature of our business, we have incurred and will continue to incur costs relating to compliance with or liability under these environmental laws and regulations and these costs could be material. In addition, new laws and regulations, new or different interpretations of existing laws and regulations, expansion of existing legal requirements related to our products, the discovery of previously unknown contamination or the imposition of new remediation or discharge requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our financial condition.
Certain environmental laws impose strict and, in some circumstances, joint and several liability on current or former owners or operators of a contaminated property, as well as companies that generated, disposed of or arranged for the disposal of hazardous substances at a contaminated property, for the costs of investigation and remediation of the contaminated property. Our present and past facilities have been in operation for many years and over that time, in the course of those operations, hazardous substances and wastes have been used, generated and occasionally disposed of at such facilities, and we have disposed of waste products either directly or through third parties at numerous disposal sites. Consequently, it has been necessary to undertake investigation and remediation projects at certain sites and we have been, and may in the future be, held responsible for a portion of the investigation and clean-up costs at these sites and our share of those costs may be material.
35
Efforts to regulate emissions of greenhouse gases (GHGs), such as carbon dioxide, are continuing to evolve in the U.S. and other countries where we operate, and this could increase the cost of raw materials, production processes and transportation of our products. If we are unable to comply with such regulations or sufficiently increase prices or otherwise reduce costs to offset the increased costs of compliance, GHG regulation could have a material adverse effect on our business, financial condition, results of operations and cash flow.
A number of governments or governmental bodies have also introduced or are contemplating regulatory changes in response to various climate change interest groups and the potential impact of climate change. Legislation and increased regulation regarding climate change could impose significant costs on us and our suppliers, including costs related to increased energy requirements, capital equipment, environmental monitoring and reporting, and other costs to comply with such regulations. Any adopted future climate change regulations could also negatively impact our ability to compete with companies situated in areas not subject to such limitations. Given the political significance around and uncertainty about how to best mitigate climate change, we cannot predict how legislation and regulation will affect our financial condition, operating performance and ability to compete. Furthermore, even without such regulation, increased awareness and any adverse publicity in the global marketplace about potential impacts on climate change by us or other companies in our industry could harm our reputation.
General Risk Factors
The current pandemic and new variants of COVID-19 and any other future public health crisis, could materially adversely affect our business, financial condition, results of operations and cash flows.
In March 2020, the World Health Organization declared a new strain of coronavirus (COVID-19) a pandemic and the U.S. declared a national emergency with respect to COVID-19. The COVID-19 pandemic has negatively impacted regional and global economies, disrupted global supply chains and created significant volatility and disruption of financial markets, and new variants of COVID-19 or another pandemic in the future could have similar negative consequences. The impact of the COVID-19 pandemic on our operational and financial performance included temporary closures of our facilities and the facilities of certain of our customers, suppliers and other vendors in our supply chain, as well as disruptions and restrictions on our employees’ ability to travel. Although we have experienced recovery in demand of certain of our products and the negative impact of COVID-19 on our financial performance eased during 2021, the COVID-19 pandemic continues to negatively impact many industries directly or indirectly.
The COVID-19 pandemic has had, and new variants of COVID-19 or a future pandemic could have, material and adverse effects on our ability to successfully operate and on our financial condition, results of operations and cash flows due to, among other factors:
36
The extent to which COVID-19 or another future public health crisis impacts our operations and those of our customers and suppliers will depend on the scope, severity, duration and spread of the health crisis, the actions taken to contain it or mitigate its impact, and the direct and indirect economic effects of the crisis and containment measures, among others, all of which are uncertain and cannot be predicted with confidence. The continued fluidity of the COVID-19 pandemic precludes any prediction as to its full adverse impact. Nevertheless, the COVID-19 pandemic presents material uncertainty and risk. An extended period of global supply chain and economic disruption could materially affect our business, financial condition, results of operations, cash flows and access to sources of liquidity.
We may experience significant variability in our quarterly or annual effective income tax rate.
We have a large and complex international tax profile and a significant level of tax credit carryforwards in the U.S. and other carryforwards in various jurisdictions. Variability in the mix and profitability of domestic and international activities, identification and resolution of various tax uncertainties and the inability to realize tax credits and other carryforwards included in deferred tax assets, among other matters, have impacted our effective income tax rate in the past and may impact our effective income tax rate in the future. Tax law changes in the U.S. and certain other countries have also impacted our effective income tax rate in the past and may impact our effective tax rate in the future, including the implementation of any global minimum tax for corporations. A significant increase in our quarterly or annual effective income tax rate could have a material adverse impact on our results of operations. The enactment of tax reform legislation, including legislation implementing changes in taxation of international business activities, could adversely impact our financial position and results of operations.
We are commonly audited by various tax authorities, and some jurisdictions, both in the U.S. and abroad, have become more aggressive in their approach to audits and their enforcement of their applicable tax laws. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Significant judgment is required in determining our worldwide provision for income taxes. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our financial statements in the period or periods for which that determination is made and on our overall effective income tax rate.
The full realization of our deferred tax assets may be affected by a number of factors, including future earnings and the feasibility of on-going planning strategies. We have deferred tax assets including state and foreign net operating loss carryforwards, accruals not yet deductible for tax purposes, employee benefit items and other items. We have established valuation allowances to reduce the deferred tax assets to an amount that is more likely than not to be realized. Our ability to utilize the deferred tax assets depends in part upon our ability to generate future taxable income within each respective jurisdiction during the periods in which these temporary differences reverse or our ability to carryback any losses created by the deduction of these temporary differences. We expect to realize the deferred tax assets over an extended period. If we are unable to generate sufficient future taxable income in the U.S. and/or certain foreign jurisdictions, or if there is a significant change in the time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowances against our deferred tax assets. Our effective tax rate would increase if we were required to increase our valuation allowances against our deferred tax assets.
We do not intend to pay dividends on our common stock and, consequently, the ability of investors to achieve a return on their investment will depend on appreciation in the price of our common stock.
We do not intend to declare and pay dividends on our common stock for the foreseeable future. The payment of future dividends will be at the discretion of our Board of Directors; however, the indentures and the credit agreements governing our indebtedness place limitations on our ability to pay dividends. We currently intend to invest our future earnings, if any, to reduce our debt and fund our growth and our Board of Directors may choose to provide returns to our stockholders through share repurchases. The success of an investment in our common stock will largely depend upon future appreciation in value, and there can be no guarantee that our common stock will appreciate in value.
37
Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, as a result, depress the trading price of our common stock.
Our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company and may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if the provisions are viewed as discouraging takeover attempts in the future. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors of their choosing and cause us to take corporate actions other than those our stockholders may desire.
38
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our facilities are used primarily for manufacturing, distribution and administration. Facilities primarily used for manufacturing may also be used for distribution, engineering, research and development, storage, administration, sales and customer service. Facilities primarily used for administration may also be used for research and development, sales and customer service. As of December 31, 2021, our principal facilities, grouped according to the facility’s primary use, were as follows:
Location |
|
Approximate |
|
|
Principal segments |
|
Owned or leased |
|
Administrative facilities: |
|
|
|
|
|
|
|
|
Hickory, NC (1) |
|
|
84,000 |
|
|
Corporate headquarters |
|
Owned |
Horsham, PA |
|
|
325,000 |
|
|
Corporate |
|
Owned |
Suwanee, GA |
|
|
103,000 |
|
|
Corporate |
|
Leased |
Shakopee, MN |
|
|
177,000 |
|
|
VCN |
|
Leased |
Bangalore, India |
|
|
151,000 |
|
|
Home & Broadband |
|
Leased |
Saltaire, UK |
|
|
112,000 |
|
|
Home |
|
Leased |
Lowell, MA |
|
|
144,000 |
|
|
Broadband |
|
Leased |
Santa Clara, CA |
|
|
132,000 |
|
|
Broadband & Home |
|
Leased |
Richardson, TX |
|
|
100,000 |
|
|
OWN |
|
Leased |
Richardson, TX (1) (2) |
|
|
100,000 |
|
|
OWN |
|
Owned |
Manufacturing and distribution facilities: |
|
|
|
|
|
|||
Catawba, NC (1) |
|
|
1,000,000 |
|
|
Broadband |
|
Owned |
Claremont, NC (1) |
|
|
589,000 |
|
|
VCN & Broadband |
|
Owned |
Kessel-Lo, Belgium |
|
|
431,000 |
|
|
Broadband |
|
Owned |
Suzhou, China (3) |
|
|
400,000 |
|
|
OWN & VCN |
|
Owned |
Suzhou, China (3) |
|
|
363,000 |
|
|
Broadband |
|
Owned |
Goa, India (3) |
|
|
353,000 |
|
|
OWN & VCN |
|
Owned |
Juarez, Mexico |
|
|
327,000 |
|
|
VCN |
|
Owned |
Santa Teresa, NM |
|
|
300,000 |
|
|
Broadband & VCN |
|
Leased |
Brno, Czech Republic |
|
|
281,000 |
|
|
Broadband |
|
Leased |
Reynosa, Mexico |
|
|
279,000 |
|
|
OWN |
|
Owned |
Veenendaal, Netherlands |
|
|
215,000 |
|
|
OWN & VCN |
|
Leased |
Greensboro, NC (4) |
|
|
196,000 |
|
|
VCN |
|
Leased |
Juarez, Mexico |
|
|
189,000 |
|
|
Broadband |
|
Leased |
Cary, NC |
|
|
151,000 |
|
|
Home & Broadband |
|
Owned |
Mission, TX |
|
|
150,000 |
|
|
VCN |
|
Leased |
Suzhou, China |
|
|
225,000 |
|
|
Broadband, VCN & OWN |
|
Leased |
Delicias, Mexico |
|
|
139,000 |
|
|
VCN |
|
Owned |
Campbellfield, Australia |
|
|
133,000 |
|
|
OWN |
|
Leased |
Bray, Ireland |
|
|
130,000 |
|
|
VCN |
|
Owned |
Tijuana, Mexico |
|
|
128,000 |
|
|
Broadband & VCN |
|
Leased |
Buchdorf, Germany |
|
|
109,000 |
|
|
VCN |
|
Owned |
Vacant facilities and properties: |
|
|
|
|
|
|
|
|
Joliet, IL (5) |
|
|
690,000 |
|
|
Corporate |
|
Leased |
Sorocaba, Brazil (6) |
|
|
157,000 |
|
|
OWN |
|
Owned |
Orland Park, IL (7) |
|
|
— |
|
|
Corporate |
|
Owned |
39
We believe that our facilities and equipment generally are well maintained, in good condition and suitable for our purposes and adequate for our present operations. While we currently have excess manufacturing capacity in certain of our facilities, utilization is subject to change based on customer demand. We can give no assurances that we will not have excess manufacturing capacity or encounter capacity constraints over the long term.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain intellectual property claims and also 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. The outcome of these claims and notices is uncertain and a reasonable estimate of the loss from unfavorable outcomes in certain of these matters either cannot be determined or is estimated at the minimum amount of a range of estimates. The actual loss could be material and may vary significantly from our estimates.
The Company is also either a plaintiff or a defendant in certain other pending legal matters in the normal course of business. Management believes none of these 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
40
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
Our common stock is traded on the Nasdaq Global Select Market under the symbol COMM. As of February [4], 2022, all of our outstanding shares of common stock are held by one stockholder of record, Cede & Co., as nominee for the Depository Trust Company. Many brokers, banks and other institutions hold shares of common stock as nominees for beneficial owners that deposit these shares of common stock in participant accounts at the Depository Trust Company.
Issuer Purchases of Equity Securities
The following table summarizes the stock purchase activity for the three months ended December 31, 2021:
Period |
|
Total Number |
|
|
Average |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
Maximum Value of Shares that May Yet be Purchased Under the Plans or Programs |
|
||||
October 1, 2021 - October 31, 2021 |
|
|
102,262 |
|
|
$ |
13.52 |
|
|
|
— |
|
|
$ |
— |
|
November 1, 2021 - November 30, 2021 |
|
|
2,325 |
|
|
$ |
11.03 |
|
|
|
— |
|
|
$ |
— |
|
December 1, 2021 - December 31, 2021 |
|
|
27,026 |
|
|
$ |
10.19 |
|
|
|
— |
|
|
$ |
— |
|
Total |
|
|
131,613 |
|
|
$ |
12.79 |
|
|
|
— |
|
|
|
|
|
41
Stock Performance Graph
The following graph compares cumulative total return on $100 invested on December 31, 2016 in each of CommScope’s Common Stock, the Standard & Poor’s 500 Stock Index (S&P 500 Index) and the Standard & Poor’s 1500 Communications Equipment Index (S&P 1500 Communications Equipment). The return of the Standard & Poor’s indices is calculated assuming reinvestment of dividends. CommScope has not paid any dividends on its common stock over this period.
|
|
Base |
|
|
INDEXED RETURNS |
|
||||||||||||||||||
|
|
Period |
|
|
Period Ending |
|
||||||||||||||||||
Company / Index |
|
12/31/2016 |
|
|
12/31/2017 |
|
|
12/31/2018 |
|
|
12/31/2019 |
|
|
12/31/2020 |
|
|
12/31/2021 |
|
||||||
CommScope Holding Company, Inc. |
|
|
100 |
|
|
|
101.69 |
|
|
|
44.06 |
|
|
|
38.15 |
|
|
|
36.02 |
|
|
|
29.68 |
|
S&P 500 Index |
|
|
100 |
|
|
|
121.83 |
|
|
|
116.49 |
|
|
|
153.17 |
|
|
|
181.35 |
|
|
|
233.41 |
|
S&P 1500 Communications Equipment |
|
|
100 |
|
|
|
122.46 |
|
|
|
137.85 |
|
|
|
157.35 |
|
|
|
158.95 |
|
|
|
236.51 |
|
ITEM 6. RESERVED
42
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations is for the year ended December 31, 2021 compared with the year ended December 31, 2020. This comparison should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" included in Part I, Item 1A or in other parts of this Annual Report on Form 10-K. For a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2020 compared to December 31, 2019, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2020 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 17, 2021.
OVERVIEW
We are a global provider of infrastructure solutions for communication and entertainment networks. Our 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. Our solutions are complemented by a broad array of services including technical support, systems design and integration. We are a leader in digital video and IP Television distribution systems, broadband access infrastructure platforms and equipment that delivers data and voice networks to homes. Our global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale.
In the first quarter of 2021, we announced a transformation initiative referred to as CommScope NEXT designed to drive shareholder value through three pillars: profitable growth, operational efficiency and portfolio optimization. We believe these efforts are critical to making us more competitive and allowing us to invest in growth and maximize stockholder and stakeholder value. We have incurred $91.9 million of restructuring costs and $90.3 million of transaction, transformation and integration costs during the year ended December 31, 2021, both primarily related to CommScope NEXT. We expect to continue to incur restructuring costs and transaction, transformation and integration costs related to CommScope NEXT and such costs could be material.
As a step in the CommScope NEXT transformation plan, in April 2021, we announced a plan to spin-off the Home Networks business in 2022. After thorough consideration of the current supply chain environment and its impact on the Home Networks business, we have decided to delay the execution of the spin-off. We remain committed to the spin-off of the Home Networks business from CommScope, but we currently do not have a firm timeline for restarting the plan. Accordingly, management now analyzes the financial results of our "Core" business separately from Home Networks. These supplementary Core financial measures reflect the results of our Broadband Networks (Broadband), Outdoor Wireless Networks (OWN) and Venue and Campus Networks (VCN) segments, in the aggregate. Our Core financial measures exclude the results and performance of our Home Networks (Home) segment. See the Segment Results section below for illustration of the aggregation of our Core financial measures. These metrics represent the business segments as we have reported them. However, the ultimate definition of the Home Networks business that we expect to separate may vary, and future results may differ materially.
In the second quarter of 2021, we shifted certain product lines from our Broadband segment to our Home segment to better align with how those businesses are being managed. All prior period amounts have been recast to reflect these operating segment changes.
COVID-19 Update
The COVID-19 outbreak had an adverse impact on our financial performance in 2020 primarily related to decreased demand, supply constraints due to the temporary shutdown of certain of our facilities and increased business continuity costs. We took a variety of actions in 2020 to help mitigate the financial impacts such as headcount reductions, lower capital spending and lower discretionary spending. The negative impact of COVID-19 on our financial performance has eased during 2021, with network strain driving increased demand for our Broadband segment products in particular. The recovery in demand has also indirectly had unfavorable business impacts, including commodity inflation (primarily copper and resins), logistics cost increases, extended lead times and certain component part shortages. We expect certain of these unfavorable impacts to continue into 2022.
43
The extent of the negative impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, including new variants, the effectiveness and adoption of vaccines and related actions taken by domestic and international jurisdictions to maintain and prevent disease spread, and the extent of any financial recession resulting from the pandemic, all of which are uncertain and cannot be predicted.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) in the United States (U.S.). The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and their underlying assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other objective sources. Management bases its estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when changes in events or circumstances indicate that revisions may be necessary.
The following critical accounting policies and estimates reflected in our financial statements are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events. While we have generally not experienced significant deviations from our critical estimates in the past, it is reasonably possible that these estimates may ultimately differ materially from actual results. See Note 2 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a description of all our significant accounting policies.
Asset Impairment Reviews
Impairment Reviews of Goodwill
We test goodwill at the reporting unit level for impairment annually as of October 1 and on an interim basis when events occur or circumstances exist that indicate the carrying value may no longer be recoverable. We compare the fair value of our reporting units with the carrying amount, including goodwill. We recognize an impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value.
We estimate the fair value of a reporting unit using a discounted cash flow (DCF) method or, as appropriate, a combination of the DCF method and a market approach known as the guideline public company method. Under the DCF method, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. The significant assumptions in the DCF model primarily include, but are not limited to, forecasts of annual revenue growth rates, annual operating income margin, the terminal growth rate and the discount rate used to determine the present value of the cash flow projections. When determining these assumptions and preparing these estimates, we consider historical performance trends, industry data, insight derived from customers, relevant changes in the reporting unit’s underlying business and other market trends that may affect the reporting unit. The discount rate is based on the estimated weighted average cost of capital as of the test date of market participants in the industry in which the reporting unit operates and is commensurate with the risk and uncertainty inherent in each reporting unit and in internally developed forecasts. Under the guideline public company method, we estimate the fair value based upon market multiples of revenue and earnings derived from publicly traded companies with similar operating and investment characteristics as the reporting unit. The weighting of the fair value derived from the market approach may vary depending on the level of comparability of these publicly-traded companies to the reporting unit. When comparable public companies are not meaningful or not available, we may estimate the fair value of a reporting unit using only the DCF method.
Estimating the fair value of a reporting unit involves uncertainties because it requires management to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry economic factors and future business strategy. Changes in projected revenue growth rates, projected operating income margins or estimated discount rates due to uncertain market conditions, loss of one or more key customers, changes in our strategy, changes in technology or other factors could negatively affect the fair value in one or more of our reporting units and result in a material impairment charge in the future.
To assess the reasonableness of the calculated fair values of our reporting units, we also compare the sum of the reporting units’ fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting units’ fair values over the market capitalization). If the implied control premium is not reasonable, we will reevaluate the fair value estimates of the reporting units by adjusting the discount rates and/or other assumptions.
44
2021 Interim and Annual Goodwill Analysis
During the second quarter of 2021, we realigned certain of our product lines that changed the composition of our reporting units and resulted in the reallocation of $13.7 million of goodwill from the Network and Cloud (N&C) reporting unit to the Home Networks reporting unit. Goodwill was assessed for impairment due to a change in the composition of reporting units. We performed impairment testing immediately before and after the change and determined that no goodwill impairment existed.
The annual test of goodwill impairment was performed for each of the reporting units with goodwill balances as of October 1, 2021. For the 2021 annual goodwill test, we determined the fair value of each reporting unit using a DCF model and a guideline public company approach, with 75% of the value determined using the DCF model and 25% of the value determined using the market approach. The range of discount rates used in our annual tests were 9.0% to 12.0% for 2021. During the annual impairment test performed in the fourth quarter of 2021 and in conjunction with the development of our 2022 and long range plans, we identified further weakness in our Home Networks reporting unit forecast resulting from a continuing decline in demand for video products from both U.S. and international service providers as well as the negative impact of supply shortages and delays on our ability to meet customer demand for video products. As a result, we determined the goodwill balance in the Home Networks reporting unit was impaired and recorded a $13.7 million impairment charge. See Note 3 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion.
The following table provides summary information regarding our reporting units with goodwill balances as of December 31, 2021 that have the lowest level of headroom. The table presents key assumptions used in our annual goodwill analysis, along with sensitivity analysis showing the effect of a change in certain key assumptions, assuming all other assumptions remain constant, to the resulting fair value using an income approach. Accordingly, if performance is worse than anticipated for these reporting units, future impairment tests could result in impairment charges that could be material to our results of operations. The Enterprise reporting unit is in our VCN segment and the N&C reporting unit is in our Broadband segment.
|
|
Key Assumptions |
|
|
Goodwill |
|
|
Excess of Fair Value to Carrying Value |
|
|||||||||||||||||||||||
Reporting |
|
Discount |
|
|
Terminal |
|
|
Balance at December 31, 2021 |
|
|
% of |
|
|
Result of Annual Goodwill Test as of October 1, 2021 |
|
|
Decrease of 10% |
|
|
Decrease of 0.5% in Long-term Growth Rate |
|
|
Increase of 0.5% |
|
||||||||
Enterprise |
|
|
10.5 |
% |
|
|
1.5 |
% |
|
$ |
979.6 |
|
|
|
7.4 |
% |
|
$ |
519.0 |
|
|
$ |
377.2 |
|
|
$ |
475.6 |
|
|
$ |
440.9 |
|
N&C |
|
|
9.5 |
% |
|
|
2.0 |
% |
|
|
2,007.1 |
|
|
|
15.1 |
% |
|
|
436.1 |
|
|
|
156.8 |
|
|
|
312.7 |
|
|
|
239.9 |
|
Definite-Lived Intangible Assets and Other Long-Lived Assets
Management reviews definite-lived intangible assets and other long-lived assets for impairment when events or changes in circumstances indicate that their carrying values may not be fully recoverable. This analysis differs from our goodwill impairment analysis in that an intangible or other long-lived asset impairment is only deemed to have occurred if the sum of the forecasted undiscounted future net cash flows related to the assets being evaluated is less than the carrying value of the assets. If the forecasted net cash flows are less than the carrying value, then the asset is written down to its estimated fair value. Other than certain assets impaired as a result of restructuring actions, we did not identify any impairments of definite-lived intangible assets or other long-lived assets in 2021, including the finite lived assets in our Home Network reporting unit for which a goodwill impairment was recognized in the fourth quarter of 2021. Changes in the estimates of forecasted net cash flows may result in future asset impairments that could be material to our results of operations.
Revenue Recognition
We recognize revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. Our revenue is generated primarily from product or equipment sales. We also generate revenue from custom design and installation services as well as bundled sales arrangements that include product, software and services. Revenue is recognized when performance obligations in a contract are satisfied through the transfer of control of the good or service at the amount of consideration expected to be received. The following are required before revenue is recognized:
45
Product sales represent over 90% of our revenue. For these sales, revenue is recognized when control of the product has transferred to the customer, which is generally at the point in time when products have been shipped, right to payment has been obtained and risk of loss has been transferred. Certain of our product performance obligations include proprietary operating system software, which typically is not considered separately identifiable. Therefore, sales of these products and the related software are considered one performance obligation.
License contracts include revenue recognized for the licensing of intellectual property, including software, sold separately without products. Functional intellectual property licenses do not meet the criteria for revenue to be recognized over time and revenue is most commonly recognized upon delivery of the license/software to the customer.
Certain customer transactions may be project based and include multiple performance obligations based on the bundling of equipment, software and services. When a multiple performance obligation arrangement exists, the transaction price is allocated to the performance obligations based on the relative standalone selling price, and revenue is recognized upon transfer of control of each deliverable. To determine the standalone selling price, we first look to establish the standalone selling price through an observable price when the good or service is sold separately in similar circumstances. If the standalone selling price cannot be established through an observable price, we will make an estimate based on market conditions, customer specific factors and customer class. We may use a combination of approaches to estimate the standalone selling price.
Other customer contract types include a variety of post-contract support service offerings, which are generally recognized over time as the services are provided, including the following: maintenance and support services provided under annual service-level agreements; “Day 2” professional services to help customers maximize their utilization of deployed systems; and installation services related to the routine installation of equipment ordered by the customer at the customer’s site.
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.
Revenue is measured based on the consideration to which we expect to be entitled based on customer contracts. For sales to distributors, system integrators and value-added resellers, revenue is adjusted for variable consideration amounts, including but not limited to 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.
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.
46
Unbilled receivables are recorded when revenues are recognized in advance of invoice issuance. A contract asset is any portion of unbilled receivables for which the right to consideration is conditional on a factor other than the passage of time, which is common for certain performance obligations related to project contracts. These assets are presented on a combined basis with accounts receivable and are converted to accounts receivable once our right to the consideration becomes unconditional, which varies by contract but is generally based on achieving certain acceptance milestones. We recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset would be one year or less.
We include shipping and handling costs billed to customers in net sales and include the costs incurred to transport product to customers as well as certain internal handling costs, which relate to activities to prepare goods for shipment, 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.
Contingencies and Litigation
We are a party to lawsuits, claims and proceedings incident to the operation of our business, including intellectual property infringement matters, those pertaining to labor and employment contracts and other matters, some of which allege substantial monetary damages. We assess these matters in order to determine if a contingent liability should be recorded. In making this determination, management may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. We expense legal fees associated with consultations and defense of lawsuits as incurred. We accrue for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability.
Litigation outcomes are difficult to predict and are often resolved over long periods of time, making our estimates highly judgmental. Estimating probable losses requires the analysis of multiple possible outcomes that often depend on judgments about potential actions by third parties, such as future changes in facts and circumstances, differing interpretations of the law, assessments of the amount of damages and other factors beyond our control. There is the potential for a material adverse effect on our results of operation and cash flows if one or more matters are resolved in a particular period in an amount materially in excess of what we anticipated. Alternatively, if the judgments and estimates made by management are incorrect and a particular contingent loss does not occur, the contingent loss recorded would be reversed, thereby favorably impacting our results of operations.
Inventory Reserves
We maintain reserves to reduce the value of inventory based on the lower of cost or net realizable value, including allowances for excess and obsolete inventory. These reserves are based on management’s assumptions about and analysis of relevant factors including current levels of orders and backlog, forecasted demand, market conditions and new products or innovations that diminish the value of existing inventories. If actual market conditions deteriorate from those anticipated by management, additional allowances for excess and obsolete inventory could be required and may be material to our results of operations.
Product Warranty Reserves
We recognize a liability for the estimated claims that may be paid under our customer assurance-type warranty agreements to remedy potential deficiencies of quality or performance of our products. The product warranties extend over various periods, depending upon the product subject to the warranty and the terms of the individual agreements. We record a provision for estimated future warranty claims based upon the historical relationship of warranty claims to sales and specifically identified warranty issues. We base our estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revise our estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is reasonably possible that they may ultimately differ materially from actual results, including in the case of a significant product failure, and may be material to our results of operations.
47
Tax Valuation Allowances and Liabilities for Unrecognized Tax Benefits
We establish an income tax valuation allowance when available evidence indicates that it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider the amounts, character, source and timing of expected future deductions or carryforwards as well as sources of taxable income and tax planning strategies that may enable utilization. We maintain an existing valuation allowance until sufficient positive evidence exists to support its reversal. Changes in the amount or timing of expected future deductions or taxable income may have a material impact on the level of income tax valuation allowances. If we determine that we will not be able to realize all or part of a deferred tax asset in the future, an increase to an income tax valuation allowance would be charged to earnings in the period such determination was made.
We recognize income tax benefits related to particular tax positions only when it is considered more likely than not that the tax position will be sustained if examined on its technical merits by tax authorities. The amount of benefit recognized is the largest amount of tax benefit that is evaluated to be greater than 50% likely to be realized. Considerable judgment is required to evaluate the technical merits of various positions and to evaluate the likely amount of benefit to be realized. Lapses in statutes of limitations, developments in tax laws, regulations and interpretations, and changes in assessments of the likely outcome of uncertain tax positions could have a material impact on the overall tax provision.
We establish deferred tax liabilities for the estimated tax cost associated with foreign earnings that we do not consider permanently reinvested (primarily foreign withholding and state income taxes). These liabilities are subject to adjustment if there is a change in the assertion of whether the foreign earnings are considered to be permanently reinvested.
We also establish allowances related to value-added and similar recoverable taxes when it is considered probable that those assets are not recoverable. Changes in the probability of recovery or in the estimates of the amount recoverable are recognized in the period such determination is made and may be material to our net income (loss).
48
RESULTS OF OPERATIONS
Comparison of results of operations for the year ended December 31, 2021 with the year ended December 31, 2020
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
|
|
|||||||||||||||
|
|
Amount |
|
|
% of Net |
|
|
Amount |
|
|
% of Net |
|
|
$ |
|
|
% |
|
||||||
|
|
(dollars in millions, except per share amounts) |
|
|||||||||||||||||||||
Net sales |
|
$ |
8,586.7 |
|
|
|
100.0 |
% |
|
$ |
8,435.9 |
|
|
|
100.0 |
% |
|
$ |
150.8 |
|
|
|
1.8 |
% |
Core net sales (1) |
|
|
6,737.4 |
|
|
|
78.5 |
|
|
|
6,028.4 |
|
|
|
71.5 |
|
|
|
709.0 |
|
|
|
11.8 |
|
Gross profit |
|
|
2,684.3 |
|
|
|
31.3 |
|
|
|
2,747.8 |
|
|
|
32.6 |
|
|
|
(63.5 |
) |
|
|
(2.3 |
) |
Operating income (loss) |
|
|
48.6 |
|
|
|
0.6 |
|
|
|
(51.8 |
) |
|
|
(0.6 |
) |
|
|
100.4 |
|
|
NM |
|
|
Core operating income (1) |
|
|
263.5 |
|
|
|
3.9 |
|
|
|
223.6 |
|
|
|
2.7 |
|
|
|
39.9 |
|
|
|
17.8 |
|
Non-GAAP adjusted EBITDA (2) |
|
|
1,117.0 |
|
|
|
13.0 |
|
|
|
1,215.2 |
|
|
|
14.4 |
|
|
|
(98.2 |
) |
|
|
(8.1 |
) |
Core adjusted EBITDA (1) |
|
|
1,091.5 |
|
|
|
16.2 |
|
|
|
1,083.9 |
|
|
|
12.8 |
|
|
|
7.6 |
|
|
|
0.7 |
|
Net loss |
|
|
(462.6 |
) |
|
|
(5.4 |
) |
|
|
(573.4 |
) |
|
|
(6.8 |
) |
|
|
110.8 |
|
|
|
(19.3 |
) |
Diluted loss per share |
|
$ |
(2.55 |
) |
|
|
|
|
$ |
(3.20 |
) |
|
|
|
|
$ |
0.65 |
|
|
|
(20.3 |
) |
||
NM – Not meaningful
Net sales
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
Year Ended December 31, |
|
|
$ |
|
|
% |
|
|||||||
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Net sales |
|
$ |
8,586.7 |
|
|
$ |
8,435.9 |
|
|
$ |
150.8 |
|
|
|
1.8 |
% |
Domestic |
|
|
4,960.5 |
|
|
|
5,185.3 |
|
|
|
(224.8 |
) |
|
|
(4.3 |
) |
International |
|
|
3,626.2 |
|
|
|
3,250.6 |
|
|
|
375.6 |
|
|
|
11.6 |
|
Net sales in 2021 increased $150.8 million, or 1.8%, compared to the prior year. Core net sales in 2021 increased $709.0 million, or 11.8%, compared to the prior year with increases in the Broadband segment of $300.6 million, the VCN segment of $241.9 million and the OWN segment of $166.5 million. Net sales in 2021 in the Home segment decreased $558.2 million compared to the prior year. In 2021, all of our segments experienced supply shortages and extended lead times for certain materials that negatively affected our ability to meet customer demand for our products. We expect these shortages and delays to persist into 2022. In addition, our Broadband segment faced capacity constraints that negatively affected net sales in 2021. For further details by segment, see the discussion of Segment Results below.
From a regional perspective, net sales increased in 2021 in the Asia Pacific (APAC) region by $141.4 million, the Europe, Middle East and Africa (EMEA) region by $90.4 million, the Caribbean and Latin America (CALA) region by $88.7 million and Canada by $55.1 million. The increases in international net sales in 2021 were partially offset by a decrease of $224.8 million in the U.S. Net sales to customers located outside of the U.S. comprised 42.2% for 2021 compared to 38.5% for 2020. Foreign exchange rate changes impacted net sales favorably by approximately 1% for 2021 compared to the prior year. For additional information on regional sales by segment, see discussion of Segment Results below and Note 16 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
49
Gross profit, SG&A expense and R&D expense
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
Year Ended December 31, |
|
|
$ |
|
|
% |
|
|||||||
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Gross profit |
|
$ |
2,684.3 |
|
|
$ |
2,747.8 |
|
|
$ |
(63.5 |
) |
|
|
(2.3 |
)% |
As a percent of sales |
|
|
31.3 |
% |
|
|
32.6 |
% |
|
|
|
|||||
SG&A expense |
|
|
1,233.9 |
|
|
|
1,170.7 |
|
|
|
63.2 |
|
|
|
5.4 |
|
As a percent of sales |
|
|
14.4 |
% |
|
|
13.9 |
% |
|
|
|
|||||
R&D expense |
|
|
683.2 |
|
|
|
703.3 |
|
|
|
(20.1 |
) |
|
|
(2.9 |
) |
As a percent of sales |
|
|
8.0 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
||
Gross profit (net sales less cost of sales)
Despite higher consolidated net sales, gross profit decreased in 2021 compared to the prior year primarily due to significantly higher material and freight costs. We also experienced substantial sales volume declines in our Home segment and pricing pressures related to certain of our OWN segment products. Increased pricing on certain of our VCN segment products more than offset the OWN segment pricing pressures. In addition, we recorded charges of $48.6 million that reduced gross profit in 2021 related to the settlement of intellectual property assertions, but these charges were partially offset by the recovery of $17.1 million related to a warranty indemnification litigation matter of ARRIS International plc (ARRIS), which was acquired by CommScope in 2019.
Selling, general and administrative expense
In the first quarter of 2021, we announced a transformation initiative called CommScope NEXT, and as a step in our transformation, we announced our commitment to spin-off our Home Networks business from CommScope. As a result of these transformation and separation efforts, we incurred $90.3 million of transaction, transformation and integration costs during 2021 that were recorded in selling, general and administrative (SG&A) expense. During 2020, we incurred $24.9 million of transaction, transformation and integration costs that were mainly focused on the integration of the ARRIS business. We continue to focus on integrating the ARRIS business, including our work to combine our enterprise resource planning systems. We expect to continue to incur transaction, transformation and integration costs related to CommScope NEXT, the spin-off of the Home Networks business from CommScope, and the integration of the ARRIS business, and such costs could be material.
For 2021, excluding transaction, transformation and integration costs, SG&A expense decreased by $2.4 million compared to 2020. The decrease was primarily due to cost savings initiatives, but the favorable impact of cost savings initiatives was partially offset by higher variable incentive compensation expense of $13.5 million and higher bad debt expense, which was driven by a $30.3 million charge related to a certain value-added reseller customer in the Home segment. We reserved the entire balance due from this customer due to changes in their risk profile, and we are pursuing legal action. Excluding transaction, transformation and integration costs, SG&A as a percentage of net sales was 13.3% and 13.6% for 2021 and 2020, respectively.
Research and development expense
Research and development (R&D) expense for 2021 decreased due to lower spending on Home segment products that was partially offset by increased spending on Core segment products. R&D activities generally relate to ensuring that our products are capable of meeting the evolving technological needs of our customers, bringing new products to market and modifying existing products to better serve our customers.
Amortization of purchased intangible assets, Restructuring costs, net and Asset impairments
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
Year Ended December 31, |
|
|
$ |
|
|
% |
|
|||||||
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Amortization of purchased intangible assets |
|
$ |
613.0 |
|
|
$ |
630.5 |
|
|
$ |
(17.5 |
) |
|
|
(2.8 |
%) |
Restructuring costs, net |
|
|
91.9 |
|
|
|
88.4 |
|
|
|
3.5 |
|
|
|
4.0 |
|
Asset impairments |
|
|
13.7 |
|
|
|
206.7 |
|
|
|
(193.0 |
) |
|
|
(93.4 |
) |
50
Amortization of purchased intangible assets
The amortization of purchased intangible assets was lower in 2021 compared to the prior year because certain of our intangible assets became fully amortized.
Restructuring costs, net
The restructuring costs recorded in 2021 reflected actions initiated during 2021 and included $90.7 million related to CommScope NEXT and $1.2 million related to integrating the ARRIS business. The restructuring costs recorded during 2020 were primarily related to integrating the ARRIS business. From a cash perspective, we paid $31.6 million to settle restructuring liabilities during 2021 and expect to pay an additional $69.0 million between 2022 and 2023 related to restructuring actions that have been initiated. Additional restructuring actions related to CommScope NEXT are expected to be identified and the resulting charges and cash requirements could be material. The Company does not expect to identify significant additional restructuring actions related to the ARRIS integration.
Asset impairments
We recorded goodwill impairment charges of $13.7 million and $206.7 million during 2021 and 2020, respectively, related to our Home Networks reporting unit within our Home segment. See the discussion above under "Critical Accounting Policies" for more information regarding the annual goodwill impairment test performed during 2021.
Other expense, net
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
Year Ended December 31, |
|
|
$ |
|
|
% |
|
|||||||
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Foreign currency loss |
|
$ |
(4.4 |
) |
|
$ |
(19.2 |
) |
|
$ |
14.8 |
|
|
|
(77.1 |
)% |
Other expense, net |
|
|
(19.4 |
) |
|
|
(10.1 |
) |
|
|
(9.3 |
) |
|
|
92.1 |
|
Foreign currency loss
Foreign currency loss includes the net foreign currency gains and losses resulting from the settlement of receivables and payables, foreign currency contracts and short-term intercompany advances in a currency other than the subsidiary’s functional currency. The foreign currency loss in 2020 was primarily driven by certain unhedged currencies.
Other expense, net
For 2021, other expense, net was driven by the redemption fee of $34.4 million related to the refinancing of our 5.50% senior secured notes due March 2024 (the 2024 Secured Notes) as further described in Note 7 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. The redemption fee was partially offset by income of $8.1 million on equity method investments and other miscellaneous investments. We also recognized a gain of $2.9 million during the year ended December 31, 2021 related to the sale of an investment accounted for under the cost method. In addition, we recognized a curtailment gain in other expense, net of $2.5 million reflecting the impacts of a restructuring action on an international defined benefit plan. For 2020, other expense, net was driven by redemption fees of $17.9 million related to the refinancing of our 5.00% senior notes due 2021 (the 2021 Notes) and 5.50% senior notes due June 2024 (the 2024 Notes) and the redemption of $100.0 million of our 6.00% senior notes due 2025 (the 2025 Notes), offset partially by income on equity method investments and other miscellaneous investments.
Interest expense, Interest income and Income taxes
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
Year Ended December 31, |
|
|
$ |
|
|
% |
|
|||||||
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Interest expense |
|
$ |
(561.2 |
) |
|
$ |
(577.8 |
) |
|
$ |
16.6 |
|
|
|
(2.9 |
%) |
Interest income |
|
|
1.9 |
|
|
|
4.4 |
|
|
|
(2.5 |
) |
|
|
(56.8 |
) |
Income tax benefit |
|
|
71.9 |
|
|
|
81.1 |
|
|
|
(9.2 |
) |
|
|
(11.3 |
) |
51
Interest expense and interest income
In 2021, we wrote off $9.9 million of debt issuance costs related to the refinancing of the 2024 Secured Notes as further described in Note 7 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. For 2020, we wrote off $7.6 million related to the refinancing of the 2021 Notes and 2024 Notes and the partial redemption of the 2025 Notes. Excluding the write-off of debt issuance costs, interest expense decreased in 2021 due to lower variable interest rates on our senior secured term loan due 2026 (the 2026 Term Loan). Our weighted average effective interest rate on outstanding borrowings, including the impact of interest rate swaps and the amortization of debt issuance costs and original issue discount, was 5.74% at December 31, 2021 and 5.86% at December 31, 2020.
Income tax benefit
For 2021, our effective tax rate was 13.5% and we recognized a tax benefit of $71.9 million on a pretax loss of $534.5 million. Our tax benefit was lower than the statutory rate of 21.0% in 2021 primarily due to the impact of $37.4 million of tax expense related to a foreign tax rate change. See Note 12 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for more discussion of our income tax benefit.
For 2020, our effective tax rate was 12.4% and we recognized a tax benefit of $81.1 million on a pretax loss of $654.5 million. Our tax benefit was less than the statutory rate primarily due to a goodwill impairment charge of $206.7 million, for which minimal tax benefits were recorded. Our tax rate was also impacted unfavorably by excess tax costs of $14.0 million related to equity compensation awards as well as U.S. anti-deferral provisions and foreign withholding taxes. These unfavorable impacts were offset partially by favorable impacts related to federal tax credits and foreign tax rate changes.
52
Segment Results
|
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
2021 |
|
|
|
2020 |
|
|
|
|
|||||||||||||||||
|
|
Amount |
|
|
% of Net |
|
|
|
Amount |
|
|
% of Net |
|
|
|
$ |
|
|
% |
|
|
||||||
Net sales by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Broadband |
|
$ |
3,148.8 |
|
|
|
36.7 |
|
% |
|
$ |
2,848.2 |
|
|
|
33.8 |
|
% |
|
$ |
300.6 |
|
|
|
10.6 |
|
% |
OWN |
|
|
1,410.2 |
|
|
|
16.4 |
|
|
|
|
1,243.7 |
|
|
|
14.7 |
|
|
|
|
166.5 |
|
|
|
13.4 |
|
|
VCN |
|
|
2,178.4 |
|
|
|
25.4 |
|
|
|
|
1,936.5 |
|
|
|
23.0 |
|
|
|
|
241.9 |
|
|
|
12.5 |
|
|
Core net sales (1) |
|
|
6,737.4 |
|
|
|
78.5 |
|
|
|
|
6,028.4 |
|
|
|
71.5 |
|
|
|
|
709.0 |
|
|
|
11.8 |
|
|
Home |
|
|
1,849.3 |
|
|
|
21.5 |
|
|
|
|
2,407.5 |
|
|
|
28.5 |
|
|
|
|
(558.2 |
) |
|
|
(23.2 |
) |
|
Consolidated net sales |
|
$ |
8,586.7 |
|
|
|
100.0 |
|
% |
|
$ |
8,435.9 |
|
|
|
100.0 |
|
% |
|
$ |
150.8 |
|
|
|
1.8 |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Operating income (loss) by |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Broadband |
|
$ |
120.1 |
|
|
|
3.8 |
|
% |
|
$ |
157.2 |
|
|
|
5.5 |
|
% |
|
$ |
(37.1 |
) |
|
|
(23.6 |
) |
% |
OWN |
|
|
199.0 |
|
|
|
14.1 |
|
|
|
|
181.1 |
|
|
|
14.6 |
|
|
|
|
17.9 |
|
|
|
9.9 |
|
|
VCN |
|
|
(55.6 |
) |
|
|
(2.6 |
) |
|
|
|
(114.7 |
) |
|
|
(5.9 |
) |
|
|
|
59.1 |
|
|
|
(51.5 |
) |
|
Core operating income (1) |
|
|
263.5 |
|
|
|
3.9 |
|
|
|
|
223.6 |
|
|
|
3.7 |
|
|
|
|
39.9 |
|
|
|
17.8 |
|
|
Home |
|
|
(214.9 |
) |
|
|
(11.6 |
) |
|
|
|
(275.4 |
) |
|
|
(11.4 |
) |
|
|
|
60.5 |
|
|
|
(22.0 |
) |
% |
Consolidated operating income (loss) |
|
$ |
48.6 |
|
|
|
0.6 |
|
% |
|
$ |
(51.8 |
) |
|
|
(0.6 |
) |
% |
|
$ |
100.4 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Adjusted EBITDA by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Broadband |
|
$ |
629.9 |
|
|
|
20.0 |
|
% |
|
$ |
625.4 |
|
|
|
22.0 |
|
% |
|
$ |
4.5 |
|
|
|
0.7 |
|
% |
OWN |
|
|
267.9 |
|
|
|
19.0 |
|
|
|
|
278.5 |
|
|
|
22.4 |
|
|
|
|
(10.6 |
) |
|
|
(3.8 |
) |
|
VCN |
|
|
193.7 |
|
|
|
8.9 |
|
|
|
|
180.0 |
|
|
|
9.3 |
|
|
|
|
13.7 |
|
|
|
7.6 |
|
|
Core adjusted EBITDA (1) |
|
|
1,091.5 |
|
|
|
16.2 |
|
|
|
|
1,083.9 |
|
|
|
18.0 |
|
|
|
|
7.6 |
|
|
|
0.7 |
|
|
Home |
|
|
25.5 |
|
|
|
1.4 |
|
|
|
|
131.3 |
|
|
|
5.5 |
|
|
|
|
(105.8 |
) |
|
|
(80.6 |
) |
|
Non-GAAP consolidated |
|
$ |
1,117.0 |
|
|
|
13.0 |
|
% |
|
$ |
1,215.2 |
|
|
|
14.4 |
|
% |
|
$ |
(98.2 |
) |
|
|
(8.1 |
) |
% |
NM – Not meaningful
Broadband Networks Segment
Net sales increased in 2021 compared to the prior year due to increased demand for our products and services as service providers enhanced their networks to keep pace with broadband demand. We are experiencing capacity constraints and supply shortages with certain of our network cable products, which hindered our ability to meet customer demand for our Broadband segment products in 2021. We are investing to alleviate our capacity constraints and began to see benefits from the expanded capacity in the fourth quarter of 2021. We expect the supply shortages to extend into 2022. From a regional perspective, in 2021, net sales increased in the U.S. by $137.8 million, the CALA region by $111.2 million, the EMEA region by $62.6 million and Canada by $6.3 million but decreased in the APAC region by $17.3 million. Foreign exchange rate changes impacted Broadband segment net sales favorably by approximately 1% during 2021 compared to the prior year.
53
For 2021, Broadband segment operating income and adjusted EBITDA both benefitted from increased sales volumes and favorable geographic and product mix. However, these benefits were largely offset by higher material and freight costs and increased expenses to expand capacity to meet demand. Compared to 2020, Broadband segment operating income in 2021 was unfavorably impacted by a $52.0 million increase in restructuring expense related to the planned closure of an international manufacturing facility and an intellectual property litigation settlement charge of $20.0 million. The intellectual property litigation settlement was partially offset by the recovery of $17.1 million related to a warranty indemnification litigation matter. Restructuring expense and litigation settlements are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.
Outdoor Wireless Networks Segment
For 2021, OWN segment net sales increased compared to the prior year primarily due to an increase in customer spending on both macro and metro cell solutions. Although OWN segment net sales increased year over year for 2021, net sales were negatively affected by supply shortages of certain materials that hindered our ability to meet customer demand. From a regional perspective, in 2021, OWN segment net sales increased in the U.S. by $71.3 million, the APAC region by $58.3 million, the EMEA region by $25.1 million and Canada by $21.4 million but decreased in the CALA region by $9.6 million. Foreign exchange rate changes impacted OWN segment net sales favorably by approximately 1% during 2021 compared to the prior year.
For 2021, OWN segment operating income increased by $17.9 million but adjusted EBITDA decreased by $10.6 million compared to the prior year. Both operating income and adjusted EBITDA for the OWN segment benefitted from increased sales volumes, but this favorable impact was more than offset by pricing pressures on certain products and higher freight and material costs. In addition, OWN segment operating income for 2021 increased as a result of a $12.3 million reduction in amortization expense and a $12.2 million reduction in restructuring expense compared to the prior year. Amortization expense and restructuring expense are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.
Venue and Campus Networks Segment
For 2021, VCN segment net sales increased compared to the prior year as higher net sales of our Building and Data Center Connectivity and Ruckus products were partially offset by lower net sales of our Indoor Cellular Networks products. Net sales of Ruckus products were unfavorably impacted in 2021 due to shortages of certain materials that negatively affected our ability to meet customer demand. We expect this supply shortage to continue into 2022. From a regional perspective, in 2021, net sales for the VCN segment were higher across all regions with increases in the U.S. of $90.7 million, the APAC region of $60.6 million, the EMEA region of $51.8 million, the CALA region of $27.3 million and Canada of $11.5 million. Foreign exchange rate changes impacted VCN segment net sales favorably by approximately 1% during 2021 compared to the prior year.
For 2021, VCN segment operating loss decreased and adjusted EBITDA increased compared to the prior year primarily due to favorable pricing impacts on certain products and higher sales volumes. These benefits were partially offset by higher material and freight costs and higher selling expenses. In addition, VCN segment operating loss for 2021 benefitted from a $14.9 million reduction in restructuring expense and a $13.4 million reduction in intellectual property litigation charges compared to the prior year. Restructuring expense and intellectual property litigation charges are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.
Home Networks Segment
Net sales for the Home segment decreased in 2021 primarily due to the continuing decline in demand for video products from both U.S. and international service providers as well as the negative impact of supply shortages and delays on our ability to meet customer demand. From a regional perspective, in 2021, net sales decreased in the U.S. by $524.6 million, the EMEA region by $49.1 million and the CALA region by $40.2 million and increased in the APAC region by $39.8 million and Canada by $15.9 million. Foreign exchange rate changes impacted Home segment net sales favorably by approximately 1% during 2021 compared to the prior year.
54
Excluding goodwill impairment charges in 2021 and 2020 of $13.7 million and $206.7 million, respectively, Home segment operating loss increased and adjusted EBITDA decreased in 2021 compared to the prior year primarily due to lower sales volumes. The Home segment also experienced higher material costs and higher bad debt expense, driven by a $30.3 million reserve related to a certain value-added reseller customer. These higher costs were partially offset by favorable pricing impacts on certain products and benefits from cost savings initiatives in R&D. Home segment operating loss was also unfavorably impacted in 2021 by increases of $41.6 million in transaction, transformation and integration costs and $28.8 million in intellectual property litigation charges, but these were partially offset by a decrease of $21.4 in restructuring expense compared to the prior year. During 2020, the Home segment benefitted from the release of a $23.6 million accrual related to an intellectual property royalty matter that was settled for less than anticipated. Of the $23.6 million accrual release in the prior year, $15.1 million related to pre-acquisition sales and was excluded from the calculation of adjusted EBITDA; the remaining $8.5 million release provided a benefit to Home segment adjusted EBITDA in 2020. Home segment transaction, transformation and integration costs were primarily related to the announced commitment to separate the Home Networks business from CommScope. Transaction, transformation and integration costs, restructuring expense and intellectual property settlements are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.
Liquidity and Capital Resources
The following table summarizes certain key measures of our liquidity and capital resources:
|
|
December 31, |
|
|
|
|
|
|
|
|
|||||||
|
|
2021 |
|
|
2020 |
|
|
$ Change |
|
|
% Change |
|
|
||||
|
|
(dollars in millions) |
|
|
|||||||||||||
Cash and cash equivalents |
|
$ |
360.3 |
|
|
$ |
521.9 |
|
|
$ |
(161.6 |
) |
|
|
(31.0 |
) |
% |
Working capital (1), excluding cash and cash |
|
|
1,068.9 |
|
|
|
911.2 |
|
|
|
157.7 |
|
|
|
17.3 |
|
|
Availability under revolving credit facility |
|
|
684.1 |
|
|
|
735.1 |
|
|
|
(51.0 |
) |
|
|
(6.9 |
) |
|
Long-term debt, including current portion |
|
|
9,510.5 |
|
|
|
9,520.6 |
|
|
|
(10.1 |
) |
|
|
(0.1 |
) |
|
Total capitalization (2) |
|
|
10,410.0 |
|
|
|
10,917.4 |
|
|
|
(507.4 |
) |
|
|
(4.6 |
) |
|
Long-term debt as a percentage of total capitalization |
|
|
91.4 |
% |
|
|
87.2 |
% |
|
|
|
|
|
|
|
||
Our principal sources of liquidity on a short-term basis are cash and cash equivalents, cash flows provided by operations and availability under our credit facilities. On a long-term basis, our potential sources of liquidity also include raising capital through the issuance of additional equity and/or debt.
The primary uses of liquidity include debt service requirements, voluntary debt repayments or redemptions, working capital requirements, capital expenditures, business separation transaction costs, transformation costs, acquisition integration costs, dividends related to the Convertible Preferred Stock if we elect to pay such dividends in cash, litigation settlements, income tax payments and other contractual obligations. Our interest payments on long-term debt are expected to total $2,564.2 million over the duration of the debt, with $505.1 million due in 2022. For additional information regarding our long-term debt obligations, see Note 7 in the Notes to Consolidated Financial Statements and our discussion of our interest rate risk in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this Annual Report on Form 10-K. For additional information regarding our obligations under our operating lease and restructuring agreements, see Notes 5 and 10, respectively, in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
During the normal course of business, to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with our contract manufacturers and suppliers that allow them to produce and procure inventory based upon our forecasted requirements. We estimate our obligations under these agreements to be $415.7 million due in 2022.
55
We have $140.5 million in unrecognized tax benefits; however, the timing of the related tax payments is highly uncertain. We anticipate a reduction of up to $6.0 million of unrecognized tax benefits during the next twelve months. See Note 12 in the Notes to Consolidated Financial Statements included elsewhere in the Annual Report on Form 10-K for further discussion.
We are contingently liable under open standby letters of credit issued by our banks in favor of third parties that totaled $50.0 million as of December 31, 2021. These letters of credit primarily support performance obligations of a third-party contractor. These amounts represent our estimate of the maximum amounts we would expect to incur upon the contractual non-performance of the contractor, but we also have cross-indemnities in place that may enable us to recover some or all of our losses in the event of the contractor's non-performance. We believe the likelihood of having to perform under these guarantees is remote. There were no material amounts recorded in our consolidated financial statements related to third-party guarantee agreements as of December 31, 2021 or 2020.
We believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our senior secured revolving credit facilities (the Revolving Credit Facility), will be sufficient to meet our presently anticipated future cash needs. We may experience volatility in cash flows between periods due to, among other reasons, variability in the timing of vendor payments and customer receipts. We may, from time to time, borrow additional amounts under the Revolving Credit Facility or issue debt or equity securities, if market conditions are favorable, to meet future cash needs or to reduce our borrowing costs.
Although there are no financial maintenance covenants under the terms of our senior notes, there is a limitation, among other limitations, on certain future borrowings based on an adjusted leverage ratio or a fixed charge coverage ratio. These ratios are based on financial measures similar to non-GAAP adjusted EBITDA as presented in the “Reconciliation of Non-GAAP Measures” section below, but also give pro forma effect to certain events, including acquisitions, synergies and savings from cost reduction initiatives such as facility closures and headcount reductions. For the year ended December 31, 2021, our non-GAAP pro forma adjusted EBITDA, as measured pursuant to the indentures governing our notes, was $1,182.6 million, which included annualized synergies expected to be realized within the next year ($2.6 million) and annualized savings expected from cost reduction initiatives ($63.0 million) so that the impact of the synergies and cost reduction initiatives is fully reflected in the twelve-month period used in the calculation of the ratios. In addition to limitations under these indentures, our senior secured credit facilities contain customary negative covenants based on similar financial measures. We believe we are in compliance with the covenants under our indentures and senior secured credit facilities at December 31, 2021.
Cash and cash equivalents decreased during 2021 primarily driven by cash paid for capital expenditures of $131.4 million, costs related to the debt refinancing of $46.4 million, cash dividends paid for the Convertible Preferred Stock of $43.0 million, tax withholding payments for vested equity-based compensation awards of $26.4 million and a payment to settle a net investment hedge of $18.0 million, partially offset by cash generated from operating activities of $122.3 million. As of December 31, 2021, approximately 72% of our cash and cash equivalents were held outside the U.S.
Working capital, excluding cash and cash equivalents and the current portion of long-term debt, increased during 2021 primarily due to higher inventory balances as a result of rising material costs and increases in stock as we build inventory waiting for certain materials or components to complete our products for sale. Partially offsetting the increase in inventory was an increase in accounts payable mainly driven by higher inventory balances. During 2021, we sold approximately $45 million of accounts receivable under customer-sponsored supplier financing agreements; however, only $14.0 million of that amount impacted working capital, excluding cash and cash equivalents and the current portion of long-term debt, as of December 31, 2021. Under these agreements, we are able to sell accounts receivable to a bank, and we retain no interest in and have no servicing responsibilities for the accounts receivable sold.
The net reduction in total capitalization during 2021 reflected the net loss for the year and foreign currency translation losses.
Cash Flow Overview
|
|
Year Ended December 31, |
|
|
$ |
|
|
% |
|
|||||||
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|
Change |
|
||||
|
|
(dollars in millions) |
|
|||||||||||||
Net cash generated by operating activities |
|
$ |
122.3 |
|
|
$ |
436.2 |
|
|
$ |
(313.9 |
) |
|
|
(72.0 |
)% |
Net cash used in investing activities |
|
|
(136.8 |
) |
|
|
(120.2 |
) |
|
|
(16.6 |
) |
|
|
13.8 |
|
Net cash used in financing activities |
|
|
(139.5 |
) |
|
|
(383.8 |
) |
|
|
244.3 |
|
|
|
(63.7 |
) |
56
Operating Activities
|
|
Year Ended December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
|
|
(in millions) |
|
|||||
Net loss |
|
$ |
(462.6 |
) |
|
$ |
(573.4 |
) |
Adjustments to reconcile net loss to net cash generated by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
786.3 |
|
|
|
823.3 |
|
Equity-based compensation |
|
|
79.6 |
|
|
|
115.0 |
|
Deferred income taxes |
|
|
(147.5 |
) |
|
|
(154.7 |
) |
Asset impairments |
|
|
13.7 |
|
|
|
206.7 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
(59.6 |
) |
|
|
228.4 |
|
Inventories |
|
|
(359.8 |
) |
|
|
(100.5 |
) |
Prepaid expenses and other current assets |
|
|
3.2 |
|
|
|
(17.2 |
) |
Accounts payable and other accrued liabilities |
|
|
256.0 |
|
|
|
(175.2 |
) |
Other noncurrent liabilities |
|
|
8.4 |
|
|
|
(4.0 |
) |
Other noncurrent assets |
|
|
(45.5 |
) |
|
|
28.8 |
|
Other |
|
|
50.1 |
|
|
|
59.0 |
|
Net cash generated by operating activities |
|
$ |
122.3 |
|
|
$ |
436.2 |
|
During 2021, operating cash flows decreased compared to the prior year primarily as a result of lower operating performance and increases in working capital in the current year due to improved net sales, higher inventory costs and the building of inventory as we wait for certain materials or components to complete our products for sale.
Investing Activities
|
|
Year Ended December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
|
|
(in millions) |
|
|||||
Additions to property, plant and equipment |
|
$ |
(131.4 |
) |
|
$ |
(121.2 |
) |
Proceeds from sale of property, plant and equipment |
|
|
13.1 |
|
|
|
5.0 |
|
Cash paid for Cable Exchange acquisition |
|
|
— |
|
|
|
(3.5 |
) |
Payments upon settlement of net investment hedge |
|
|
(18.0 |
) |
|
|
— |
|
Other |
|
|
(0.5 |
) |
|
|
(0.5 |
) |
Net cash used in investing activities |
|
$ |
(136.8 |
) |
|
$ |
(120.2 |
) |
During 2021, the increase in cash used in investing activities was driven by a payment made to settle a net investment hedge of $18.0 million and an increase of $10.2 million in our investment in property, plant and equipment that primarily related to supporting improvements in manufacturing operations, including expanding production capacity and investing in information technology, including software developed for internal use. These were partially offset by an increase in proceeds from the sale of property, plant and equipment mainly driven by proceeds of $10.5 million related to the sale of a manufacturing location.
Financing Activities
|
|
Year Ended December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
|
|
(in millions) |
|
|||||
Long-term debt repaid |
|
$ |
(1,282.0 |
) |
|
$ |
(1,282.0 |
) |
Long-term debt proceeds |
|
|
1,250.0 |
|
|
|
950.0 |
|
Debt issuance costs |
|
|
(12.0 |
) |
|
|
(11.7 |
) |
Debt extinguishment costs |
|
|
(34.4 |
) |
|
|
(17.9 |
) |
Dividends paid on Series A convertible preferred stock |
|
|
(43.0 |
) |
|
|
(14.3 |
) |
Proceeds from the issuance of common shares under equity-based compensation plans |
|
|
5.6 |
|
|
|
9.0 |
|
Tax withholding payments for vested equity-based compensation awards |
|
|
(26.4 |
) |
|
|
(16.9 |
) |
Other |
|
|
2.7 |
|
|
|
— |
|
Net cash used in financing activities |
|
$ |
(139.5 |
) |
|
$ |
(383.8 |
) |
57
In 2021, we issued $1,250.0 million of 4.75% senior secured notes due 2029 (the 2029 Secured Notes) and used the net proceeds from the offering, together with cash on hand, to redeem and retire $1,250.0 million outstanding under the 2024 Secured Notes. In connection with the issuance of the 2029 Secured Notes, we paid $12.0 million of debt issuance costs. We paid a redemption premium of $34.4 million to retire the 2024 Secured Notes. We also paid four quarterly scheduled amortization payments totaling $32.0 million on the senior secured term loan due in 2026 (the 2026 Term Loan). We may continue to look for favorable opportunities to refinance portions of our existing debt to lower borrowing costs, extend the term or adjust the total amount of fixed-rate or floating-rate debt.
In 2020, we issued $700.0 million of 7.125% senior notes due 2028 (the 2028 Notes) and used the net proceeds from the offering to redeem and retire the $700.0 million outstanding under the 2021 Notes and the 2024 Notes. We incurred $11.7 million of debt issuance costs in connection with the issuance of the 2028 Notes. In addition, we redeemed $100.0 million aggregate principal amount of the 2021 Notes, redeemed $100.0 million aggregate principal amount of the 2025 Notes and paid four quarterly scheduled amortization payments totaling $32.0 million on the 2026 Term Loan. We paid redemption premiums of $11.9 million to retire the 2024 Notes and $6.0 million to partially redeem the 2025 Notes. Also during 2020, we borrowed and repaid $250.0 million under our senior secured asset-based revolving credit facility (the Revolving Credit Facility).
As of December 31, 2021, we had no outstanding borrowings under the Revolving Credit Facility and the remaining availability was $684.1 million, reflecting a borrowing base of $777.6 million reduced by $93.5 million of letters of credit issued under the Revolving Credit Facility.
Also impacting cash used in financing activities for the year ended December 31, 2021 was the increase of $28.7 million in cash dividends paid for the Convertible Preferred Stock. In 2021, the dividends for the Convertible Preferred Stock were paid in cash for three of the four quarters, while in the prior year, the dividends were paid in additional shares of the Convertible Preferred Stock for three of the four quarters. During 2021, we received proceeds of $5.6 million related to the exercise of stock options compared to $9.0 million in the prior year. During 2021, employees surrendered shares of our common stock to satisfy their tax withholding requirements on vested restricted stock units and performance share units, which reduced cash flows by $26.4 million compared to $16.9 million in the prior year.
Reconciliation of Non-GAAP Measures
We believe that presenting certain non-GAAP financial measures enhances an investor’s understanding of our financial performance. We further believe that these financial measures are useful in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business. We also use certain of these financial measures for business planning purposes and in measuring our performance relative to that of our competitors.
We believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the term non-GAAP adjusted EBITDA may vary from that of others in our industry. This financial measure should not be considered as an alternative to operating income (loss), net income (loss) or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance, operating cash flows or liquidity.
Although there are no financial maintenance covenants under the terms of our senior notes, there is a limitation, among other limitations, on certain future borrowings based on an adjusted leverage ratio or a fixed charge coverage ratio. These ratios are based on financial measures similar to non-GAAP adjusted EBITDA as presented in this section, but also give pro forma effect to certain events, including acquisitions and savings from cost reduction initiatives such as facility closures and headcount reductions.
58
Consolidated
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
||||||
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
|
|
(in millions) |
|
|||||||||
Net loss |
|
$ |
(462.6 |
) |
|
$ |
(573.4 |
) |
|
$ |
(929.5 |
) |
Income tax benefit |
|
|
(71.9 |
) |
|
|
(81.1 |
) |
|
|
(144.5 |
) |
Interest income |
|
|
(1.9 |
) |
|
|
(4.4 |
) |
|
|
(18.1 |
) |
Interest expense |
|
|
561.2 |
|
|
|
577.8 |
|
|
|
577.2 |
|
Other expense, net |
|
|
23.8 |
|
|
|
29.3 |
|
|
|
6.4 |
|
Operating income (loss) |
|
$ |
48.6 |
|
|
$ |
(51.8 |
) |
|
$ |
(508.5 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|||
Amortization of purchased intangible assets |
|
|
613.0 |
|
|
|
630.5 |
|
|
|
593.2 |
|
Restructuring costs, net |
|
|
91.9 |
|
|
|
88.4 |
|
|
|
87.7 |
|
Equity-based compensation |
|
|
79.6 |
|
|
|
115.0 |
|
|
|
90.8 |
|
Asset impairments |
|
|
13.7 |
|
|
|
206.7 |
|
|
|
376.1 |
|
Transaction, transformation and integration costs (1) |
|
|
90.3 |
|
|
|
24.9 |
|
|
|
195.3 |
|
Acquisition accounting adjustments (2) |
|
|
11.5 |
|
|
|
20.6 |
|
|
|
264.2 |
|
Patent claims and litigation settlements |
|
|
31.7 |
|
|
|
16.3 |
|
|
|
55.0 |
|
Executive severance |
|
|
— |
|
|
|
6.3 |
|
|
|
— |
|
Depreciation |
|
|
136.7 |
|
|
|
158.3 |
|
|
|
143.7 |
|
Non-GAAP adjusted EBITDA |
|
$ |
1,117.0 |
|
|
$ |
1,215.2 |
|
|
$ |
1,297.5 |
|
59
Reconciliation of Segment Adjusted EBITDA
Segment adjusted EBITDA is provided as a performance measure in Note 16 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. Below we reconcile segment adjusted EBITDA for each segment individually to operating income (loss) for that segment to supplement the reconciliation of the total segment adjusted EBITDA to consolidated operating (loss) in that footnote.
Broadband Networks Segment
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
|
|
(in millions) |
|
|||||||||
Operating income (loss) |
|
$ |
120.1 |
|
|
$ |
157.2 |
|
|
$ |
(341.7 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|||
Amortization of purchased intangible assets |
|
|
322.1 |
|
|
|
323.1 |
|
|
|
273.2 |
|
Restructuring costs, net |
|
|
69.8 |
|
|
|
17.8 |
|
|
|
36.9 |
|
Equity-based compensation |
|
|
32.6 |
|
|
|
44.4 |
|
|
|
34.8 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
142.1 |
|
Transaction, transformation and integration costs |
|
|
20.4 |
|
|
|
7.9 |
|
|
|
120.2 |
|
Acquisition accounting adjustments |
|
|
4.8 |
|
|
|
11.4 |
|
|
|
135.8 |
|
Patent claims and litigation settlements |
|
|
2.9 |
|
|
|
3.0 |
|
|
|
— |
|
Executive severance |
|
|
— |
|
|
|
2.2 |
|
|
|
— |
|
Depreciation |
|
|
57.2 |
|
|
|
58.4 |
|
|
|
55.1 |
|
Adjusted EBITDA |
|
$ |
629.9 |
|
|
$ |
625.4 |
|
|
$ |
456.5 |
|
Outdoor Wireless Networks Segment
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
|
|
(in millions) |
|
|||||||||
Operating income |
|
$ |
199.0 |
|
|
$ |
181.1 |
|
|
$ |
200.3 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|||
Amortization of purchased intangible assets |
|
|
33.5 |
|
|
|
45.8 |
|
|
|
49.5 |
|
Restructuring costs, net |
|
|
3.5 |
|
|
|
15.7 |
|
|
|
6.9 |
|
Equity-based compensation |
|
|
8.3 |
|
|
|
13.6 |
|
|
|
12.9 |
|
Transaction, transformation and integration costs |
|
|
8.4 |
|
|
|
4.2 |
|
|
|
19.1 |
|
Patent claims and litigation settlements |
|
|
— |
|
|
|
— |
|
|
|
55.0 |
|
Executive severance |
|
|
— |
|
|
|
1.2 |
|
|
|
— |
|
Depreciation |
|
|
15.2 |
|
|
|
17.0 |
|
|
|
17.5 |
|
Adjusted EBITDA |
|
$ |
267.9 |
|
|
$ |
278.5 |
|
|
$ |
361.2 |
|
Venue and Campus Networks Segment
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
|
|
(in millions) |
|
|||||||||
Operating loss |
|
$ |
(55.6 |
) |
|
$ |
(114.7 |
) |
|
$ |
(186.7 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|||
Amortization of purchased intangible assets |
|
|
153.6 |
|
|
|
157.7 |
|
|
|
166.6 |
|
Restructuring costs, net |
|
|
10.0 |
|
|
|
24.9 |
|
|
|
20.7 |
|
Equity-based compensation |
|
|
25.4 |
|
|
|
34.9 |
|
|
|
28.3 |
|
Asset impairments |
|
|
— |
|
|
|
— |
|
|
|
41.2 |
|
Transaction, transformation and integration costs |
|
|
13.8 |
|
|
|
6.7 |
|
|
|
58.3 |
|
Acquisition accounting adjustments |
|
|
4.6 |
|
|
|
7.3 |
|
|
|
100.6 |
|
Patent claims and litigation settlements |
|
|
0.3 |
|
|
|
13.7 |
|
|
|
— |
|
Executive severance |
|
|
— |
|
|
|
1.7 |
|
|
|
— |
|
Depreciation |
|
|
41.6 |
|
|
|
47.8 |
|
|
|
40.4 |
|
Adjusted EBITDA |
|
$ |
193.7 |
|
|
$ |
180.0 |
|
|
$ |
269.3 |
|
60
Home Networks Segment
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
|
|
(in millions) |
|
|||||||||
Operating loss |
|
$ |
(214.9 |
) |
|
$ |
(275.4 |
) |
|
$ |
(180.4 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|||
Amortization of purchased intangible assets |
|
|
103.9 |
|
|
|
103.9 |
|
|
|
103.9 |
|
Restructuring costs, net |
|
|
8.6 |
|
|
|
30.0 |
|
|
|
23.2 |
|
Equity-based compensation |
|
|
13.4 |
|
|
|
22.1 |
|
|
|
14.8 |
|
Asset impairments |
|
|
13.7 |
|
|
|
206.7 |
|
|
|
192.8 |
|
Transaction, transformation and integration costs |
|
|
47.8 |
|
|
|
6.2 |
|
|
|
(2.3 |
) |
Acquisition accounting adjustments |
|
|
1.9 |
|
|
|
1.9 |
|
|
|
27.8 |
|
Patent claims and litigation settlements |
|
|
28.5 |
|
|
|
(0.3 |
) |
|
|
— |
|
Executive severance |
|
|
— |
|
|
|
1.2 |
|
|
|
— |
|
Depreciation |
|
|
22.7 |
|
|
|
35.1 |
|
|
|
30.7 |
|
Adjusted EBITDA |
|
$ |
25.5 |
|
|
$ |
131.3 |
|
|
$ |
210.5 |
|
Note: Components may not sum to total due to rounding
Recent Accounting Pronouncements
See Note 2 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.
Effects of Inflation and Changing Prices
We continually attempt to minimize the effect of inflation on earnings by controlling our operating costs and adjusting our selling prices. The principal raw materials and components purchased by us (aluminum, copper, steel, bimetals, optical fiber, plastics and other polymers, capacitors, memory devices and silicon chips) are subject to changes in market price as they are influenced by commodity markets and other factors. Prices for these items have, at times, been volatile. As a result, we have adjusted our prices for certain products and may have to adjust prices again in the future. To the extent that we are unable to pass on cost increases to customers without a significant decrease in sales volume or must implement price reductions in response to a rapid decline in raw material costs, these cost changes could have a material adverse impact on the results of our operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to changes in interest rates, foreign currency exchange rates and commodity prices. We may utilize derivative financial instruments, among other methods, to hedge some of these exposures. We do not use derivative financial instruments for speculative or trading purposes.
61
Interest Rate Risk
The table below summarizes the expected interest and principal payments associated with our variable rate debt outstanding at December 31, 2021 (mainly the $3.1 billion variable rate senior secured term loan due 2026 (the 2026 Term Loan) and our asset-based revolving credit facility). The principal payments presented below are based on scheduled maturities and assume no borrowings under our asset-based revolving credit facility. The interest payments presented below assume the interest rates in effect as of December 31, 2021 (see Note 7 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K). The impact of a 1% increase in the interest rate index on projected future interest payments on the variable rate debt is also included in the table below.
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
There- |
|
||||||
Principal and interest payments on |
|
$ |
139.8 |
|
|
$ |
138.7 |
|
|
$ |
135.4 |
|
|
$ |
133.2 |
|
|
$ |
3,012.6 |
|
|
$ |
— |
|
Average cash interest rate |
|
|
3.47 |
% |
|
|
3.47 |
% |
|
|
3.39 |
% |
|
|
3.35 |
% |
|
|
3.35 |
% |
|
|
— |
|
Impact of 1% increase in interest rate |
|
$ |
31.1 |
|
|
$ |
30.8 |
|
|
$ |
30.5 |
|
|
$ |
30.2 |
|
|
$ |
3.7 |
|
|
$ |
— |
|
We also have $6.5 billion aggregate principal amount of fixed rate senior notes. The table below summarizes our expected interest and principal payments related to our fixed rate debt at December 31, 2021.
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
There- |
|
||||||
Principal and interest payments on |
|
$ |
397.3 |
|
|
$ |
397.3 |
|
|
$ |
397.3 |
|
|
$ |
1,658.2 |
|
|
$ |
1,774.2 |
|
|
$ |
4,008.1 |
|
Average cash interest rate |
|
|
6.11 |
% |
|
|
6.11 |
% |
|
|
6.11 |
% |
|
|
6.12 |
% |
|
|
6.16 |
% |
|
|
5.34 |
% |
As part of our hedging strategy to mitigate a portion of the exposure to changes in cash flows resulting from the variable interest rate on the 2026 Term Loan, in March 2019, we entered into and designated pay-fixed, receive-variable interest rate swap derivatives as cash flow hedges of interest rate risk. The total notional amount of the interest rate swap derivatives as of December 31, 2021 was $600 million with outstanding maturities of up to twenty-seven months. As of December 31, 2021, the combined fair value of the interest rate swaps was an $11.8 million loss. The table above excludes the impact of these interest rate swap derivatives. See Note 8 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion of these contracts.
Foreign Currency Risk
Approximately 42% and 39% of net sales for 2021 and 2020, respectively, were to customers located outside the U.S. Significant changes in foreign currency exchange rates could adversely affect our international sales levels and the related collection of amounts due. In addition, a significant decline in the value of currencies used in certain regions of the world as compared to the U.S. dollar could adversely affect product sales in those regions because our products may become more expensive for those customers to pay for in their local currency. Conversely, significant increases in the value of foreign currencies as compared to the U.S. dollar could adversely affect profitability as certain product costs increase relative to a U.S. dollar-denominated sales price. The foreign currencies to which we have the greatest exposure include the Chinese yuan, euro, British pound sterling, Mexican peso, Japanese yen, Canadian dollar, Australian dollar, Brazilian real, South African rand, Indian rupee and Czech koruna. Local manufacturing provides a partial natural hedge and we continue to evaluate additional alternatives to help us reasonably manage the market risk related to foreign currency exposures.
62
We use derivative instruments such as forward exchange contracts to manage the risk of fluctuations in the value of certain foreign currencies. As of December 31, 2021, we had foreign exchange contracts with a net unrealized gain of $4.9 million, with maturities of up to eight months and aggregate notional value of $520.9 million (based on exchange rates as of December 31, 2021). These contracts are not designated as hedges for accounting purposes and are marked to market each period through earnings and, as such, there were no unrecognized gains or losses as of December 31, 2021 or 2020. In addition, we held certain foreign exchange forward contracts and cross currency swaps designated as net investment hedges to mitigate a portion of the foreign currency risk on the euro net investment in a foreign subsidiary which matured in the second quarter of 2021. As of December 31, 2021, we did not have derivative instruments designated as net investment hedges. Our derivative instruments are not leveraged and are not held for trading or speculation. See Note 8 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion of these contracts. We continuously evaluate the amount and type of derivative instruments utilized to manage the market risk related to foreign currency exposures.
Commodity Price Risk
Materials account for a large portion of our cost of sales. These materials, such as aluminum, copper, steel, bimetals, optical fiber, plastics and other polymers, capacitors, memory devices and silicon chips, are subject to changes in market price as they are influenced by commodity markets and supply and demand levels, among other factors. Management attempts to mitigate these risks through effective requirements planning and by working closely with key suppliers to obtain the best possible pricing and delivery terms. We may also enter into agreements with certain suppliers to guarantee our access to certain key components. As of December 31, 2021, we had forward purchase commitments outstanding under take-or-pay contracts for certain metals of approximately $9.7 million that we expect to consume in the normal course of operations through the second quarter of 2022. We continuously evaluate the amount and type of derivative instruments utilized to manage commodity price risk.
63
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
|
Index to Financial Statements |
|
Reports of Independent Registered Public Accounting Firm (PCAOB ID: |
65 |
68 |
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69 |
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70 |
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71 |
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72 |
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73 |
64
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of CommScope Holding Company, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CommScope Holding Company, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 16, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
|
Valuation of Goodwill |
Description of the Matter |
As more fully described in Note 3 to the consolidated financial statements, at December 31, 2021, the Company’s goodwill was $5,231.7 million. The Company’s goodwill is initially assigned to its reporting units as of the acquisition date. Goodwill is tested for impairment at the reporting unit level annually, or more frequently if indicators of potential goodwill impairment exist. The Company performed its annual goodwill impairment test for all reporting units in the fourth quarter of 2021 using both a discounted cash flow model and a guideline public company approach. As a result of the annual goodwill impairment test, the Company recorded a $13.7 million impairment charge in the Home Networks reporting unit, which reflects a full impairment of the goodwill of that reporting unit, as its estimated fair value was less than the carrying value.
Auditing management’s goodwill impairment test was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting units. In particular, the fair value estimates were sensitive to changes in significant assumptions, such as the estimated discount rates, projected revenue growth rates and projected operating income margins, which are affected by expectations about future market or economic conditions. |
65
How We Addressed the Matter in Our Audit |
We evaluated the Company’s assessment of the impairment of goodwill. We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the goodwill impairment test, including controls over management’s development and review of the significant assumptions discussed above.
To test the estimated fair value of the reporting units, we performed audit procedures with the assistance of our valuation specialists that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We evaluated the Company’s estimated discount rate methodology and developed independent ranges of reasonable discount rates. We compared the significant assumptions of projected revenue growth rates and projected operating income margins used by management to current industry and economic trends, changes to the Company’s business model, customer base or product mix and other relevant factors. We also evaluated the reasonableness of the guideline public companies used to develop the fair value estimates of the reporting units. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions. In addition, we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the Company. We also recalculated the goodwill impairment charge and evaluated the related goodwill disclosures included in Note 3 to the consolidated financial statements. |
|
Incomes Taxes - Valuation Allowance |
Description of the Matter |
As more fully described in Notes 2 and 12 to the consolidated financial statements, at December 31, 2021, the Company recognized deferred tax assets related to deductible temporary differences and carryforwards of $898.9 million, net of valuation allowances of $706.7 million. Deferred tax assets are reduced by a valuation allowance if, based on the weight of all available evidence, in management’s judgment it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.
Auditing management’s assessment of the realizability of deferred tax assets involved especially challenging and subjective auditor judgment in determining whether the reversal of existing taxable temporary differences and the generation of sufficient future taxable income supports the realization of the Company’s existing deferred tax assets before expiration. |
How We Addressed the Matter in Our Audit |
We evaluated the Company’s assessment of the realizability of deferred tax assets, with the assistance of our income tax professionals. We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the realizability of deferred tax assets, including controls over management’s development and review of the estimated future taxable income discussed above.
To test the realizability of deferred tax assets, we performed audit procedures with the assistance of our income tax professionals that included, among others, evaluating whether the sources of management’s estimated taxable income were of the appropriate character and would be sufficient to utilize the deferred tax assets under the relevant tax laws. We tested the forecasted timing of the reversal of existing taxable temporary differences by evaluating the projected sources of taxable income and considering the nature of the temporary differences. We also evaluated the significant assumptions used by the Company to develop estimates of future taxable income and tested the completeness and accuracy of the underlying data. For example, we compared management’s estimates of future taxable income with current industry and economic trends, the actual results of prior periods, and other forecasted financial information prepared by the Company. We also evaluated the related income tax disclosures included in Notes 2 and 12 to the consolidated financial statements. |
/s/
We have served as the Company’s auditor since 2008.
February 16, 2022
66
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of CommScope Holding Company, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited CommScope Holding Company, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, CommScope Holding Company, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 16, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Charlotte, North Carolina
February 16, 2022
67
CommScope Holding Company, Inc.
Consolidated Statements of Operations
(In millions, except per share amounts)
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Year Ended December 31, |
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2021 |
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2020 |
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2019 |
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Net sales |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Research and development |
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Amortization of purchased intangible assets |
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Restructuring costs, net |
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Asset impairments |
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Total operating expenses |
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Operating income (loss) |
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( |
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( |
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Other expense, net |
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( |
) |
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( |
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( |
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Interest expense |
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( |
) |
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( |
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( |
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Interest income |
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Loss before income taxes |
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( |
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( |
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( |
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Income tax benefit |
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Net loss |
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( |
) |
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( |
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( |
) |
Series A convertible preferred stock dividend |
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(57.3 |
) |
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( |
) |
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( |
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Deemed dividend on Series A convertible preferred stock |
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— |
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— |
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( |
) |
Net loss attributable to common stockholders |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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Loss per share: |
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Basic |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
Diluted |
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$ |
( |
) |
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$ |
( |
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$ |
( |
) |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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See notes to consolidated financial statements. |
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68
CommScope Holding Company, Inc.
Consolidated Statements of Comprehensive Loss
(In millions)
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Year Ended December 31, |
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2021 |
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2020 |
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2019 |
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Comprehensive loss: |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation gain (loss) |
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( |
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( |
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Defined benefit plans: |
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Change in unrecognized actuarial gain (loss) |
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( |
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( |
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Change in unrecognized net prior service credit |
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( |
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( |
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Gain (loss) on hedging instruments |
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( |
) |
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( |
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Total other comprehensive income (loss), net of tax |
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( |
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( |
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Total comprehensive loss |
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$ |
( |
) |
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$ |
( |
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$ |
( |
) |
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See notes to consolidated financial statements. |
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69
CommScope Holding Company, Inc.
Consolidated Balance Sheets
(In millions, except share amounts)
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December 31, |
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2021 |
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2020 |
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Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, less allowance for doubtful accounts |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net of accumulated depreciation |
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Goodwill |
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Other intangible assets, net |
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Other noncurrent assets |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders' Equity (Deficit) |
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Accounts payable |
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$ |
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$ |
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Accrued and other liabilities |
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Current portion of long-term debt |
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Total current liabilities |
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Long-term debt |
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Deferred income taxes |
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Other noncurrent liabilities |
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Total liabilities |
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Series A convertible preferred stock, $ |
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Stockholders' equity (deficit): |
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Preferred stock, $ |
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Issued and outstanding shares: |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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( |
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Accumulated other comprehensive loss |
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( |
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( |
) |
Treasury stock, at cost: |
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( |
) |
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( |
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Total stockholders' equity (deficit) |
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( |
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Total liabilities and stockholders' equity (deficit) |
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$ |
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$ |
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See notes to consolidated financial statements.
70
CommScope Holding Company, Inc.
Consolidated Statements of Cash Flows
(In millions)
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Year Ended December 31, |
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2021 |
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2020 |
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2019 |
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Operating Activities: |
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Net loss |
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$ |
( |
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$ |
( |
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$ |
( |
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Adjustments to reconcile net loss to net cash generated by operating activities: |
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Depreciation and amortization |
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Equity-based compensation |
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Deferred income taxes |
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( |
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( |
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( |
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Asset impairments |
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Changes in assets and liabilities: |
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Accounts receivable |
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( |
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Inventories |
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( |
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( |
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Prepaid expenses and other current assets |
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( |
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Accounts payable and other accrued liabilities |
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( |
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( |
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Other noncurrent liabilities |
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( |
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Other noncurrent assets |
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( |
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Other |
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Net cash generated by operating activities |
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Investing Activities: |
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Additions to property, plant and equipment |
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( |
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( |
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( |
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Proceeds from sale of property, plant and equipment |
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Proceeds from sale of long-term investments |
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Cash paid for ARRIS acquisition, net of cash acquired |
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( |
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Cash paid for Cable Exchange acquisition |
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( |
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( |
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Payments upon settlement of net investment hedge |
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( |
) |
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Other |
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( |
) |
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( |
) |
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Net cash used in investing activities |
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( |
) |
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( |
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( |
) |
Financing Activities: |
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Long-term debt repaid |
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( |
) |
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( |
) |
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( |
) |
Long-term debt proceeds |
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Debt issuance costs |
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( |
) |
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( |
) |
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( |
) |
Debt extinguishment costs |
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( |
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( |
) |
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Series A convertible preferred stock proceeds |
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Dividends paid on Series A convertible preferred stock |
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( |
) |
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( |
) |
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( |
) |
Deemed dividend paid on Series A convertible preferred stock |
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( |
) |
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Proceeds from the issuance of common shares under equity-based compensation plans |
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Tax withholding payments for vested equity-based compensation awards |
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( |
) |
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( |
) |
|
|
( |
) |
Other |
|
|
|
|
|
|
|
|
|
|||
Net cash generated by (used in) financing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Change in cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Cash and cash equivalent at beginning of period |
|
|
|
|
|
|
|
|
|
|||
Cash and cash equivalents at end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
See notes to consolidated financial statements. |
|
|||||||||||
71
CommScope Holding Company, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(In millions, except share amounts)
|
|
|
|
|||||||||
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
|
|
|
|
|
|
|
|
|||
Issuance of shares under equity-based compensation plans |
|
|
|
|
|
|
|
|
|
|||
Shares surrendered under equity-based compensation plans |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at end of period |
|
|
|
|
|
|
|
|
|
|||
Common stock: |
|
|
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Issuance of shares under equity-based compensation plans |
|
|
|
|
|
|
|
|
— |
|
||
Balance at end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Additional paid-in capital: |
|
|
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Issuance of shares under equity-based compensation plans |
|
|
|
|
|
|
|
|
|
|||
Equity-based compensation |
|
|
|
|
|
|
|
|
|
|||
Equity-based compensation assumed |
|
|
— |
|
|
|
— |
|
|
|
|
|
Dividend on Series A convertible preferred stock |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Deemed dividend on Series A convertible preferred stock |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Balance at end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Accumulated deficit: |
|
|
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income (loss), net of tax |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Balance at end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Treasury stock, at cost: |
|
|
|
|
|
|
|
|
|
|||
Balance at beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Net shares surrendered under equity-based compensation plans |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Total stockholders' equity (deficit) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|||
See notes to consolidated financial statements. |
|
|||||||||||
72
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)
1. BACKGROUND AND DESCRIPTION OF THE BUSINESS
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 (IPTV) 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.
In the second quarter of 2021, management shifted certain product lines from the Company’s Broadband Networks (Broadband) segment to its Home Networks (Home) segment to better align with how the business is being managed. All prior period amounts in these consolidated financial statements have been recast to reflect these operating segment changes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include CommScope Holding Company, Inc., along with its direct and indirect subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates in the Preparation of the Financial Statements
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S.) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and their underlying assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other objective sources. The Company bases its estimates on historical experience and 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. Significant accounting estimates reflected in the Company’s financial statements include the allowance for doubtful accounts; reserves for sales returns, discounts, allowances, rebates and distributor price protection programs; inventory excess and obsolescence reserves; product warranty reserves and other contingent liabilities; tax valuation allowances; liabilities for unrecognized tax benefits; purchase price allocations; impairment reviews for investments, property, plant and equipment, goodwill and other intangible assets; and pension and other postretirement benefit costs and liabilities. Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is at least reasonably possible that they may ultimately differ materially from actual results.
Cash and Cash Equivalents
Cash and cash equivalents represent deposits in banks and cash invested temporarily in various instruments with a maturity of three months or less at the time of purchase.
73
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
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. Accounts are written off against the allowance account when they are determined to be no longer collectible.
Inventories
Inventories are stated at the lower of cost or net realizable value. Inventory cost is determined on a first-in, first-out (FIFO) basis. Costs such as idle facility expense, excessive scrap and re-handling costs are expensed as incurred. The Company maintains reserves to reduce the value of inventory to the lower of cost or net realizable value, including reserves for excess and obsolete inventory.
Long-Lived Assets
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Upon application of acquisition accounting, property, plant and equipment are measured at estimated fair value as of the acquisition date to establish a new historical cost basis. Provisions for depreciation are based on estimated useful lives of the assets using the straight-line method. Useful lives generally range from
Goodwill and Other Intangible Assets
Goodwill is assigned to reporting units based on the difference between the purchase price as allocated to the reporting units and the estimated fair value of the identified net assets acquired as allocated to the reporting units. Purchased intangible assets with finite lives are carried at their estimated fair values at the time of acquisition less accumulated amortization and any impairment charges. Amortization is recognized on a straight-line basis over the estimated useful lives of the respective assets, which approximates the pattern that the economic benefits are realized by the Company.
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. Property, plant and equipment, intangible assets with finite lives and right of use 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 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. See Notes 3 and 9 for discussion of asset impairment charges.
74
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Income Taxes
Deferred income taxes reflect the future tax consequences of differences between the financial reporting and tax basis of assets and liabilities. The Company records a valuation allowance, when appropriate, to reduce deferred tax assets to an amount that is more likely than not to be realized.
Tax benefits that result from uncertain tax positions may be recognized only if they are considered more likely than not to be sustainable, based on their technical merits. The amount of benefit to be recognized is the largest amount of tax benefit that is at least
In addition, the Company does not provide for U.S. taxes related to the foreign currency remeasurement gains and losses on its long-term intercompany loans with foreign subsidiaries. These loans are not expected to be repaid in the foreseeable future, and the foreign currency gains and losses are therefore recorded to accumulated other comprehensive loss.
The Company records the income tax effects related to the activity of its defined benefit plans and hedging instruments in accumulated other comprehensive loss at the currently enacted tax rate and reclassifies it to net income (loss) in the same period that the related pre-tax accumulated comprehensive income (loss) reclassifications are recognized.
Revenue Recognition
The Company recognizes revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. The Company’s revenue is generated primarily from product or equipment sales. The Company also generates revenue from custom design and installation services as well as bundled sales arrangements that include product, software and services. Revenue is recognized when performance obligations in a contract are satisfied through the transfer of control of the good or service at the amount of consideration expected to be received. The following are required before revenue is recognized:
Product sales represent over
License contracts include revenue recognized for the licensing of intellectual property, including software, sold separately without products. Functional intellectual property licenses do not meet the criteria for revenue to be recognized over time and revenue is most commonly recognized upon delivery of the license/software to the customer.
75
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Certain customer transactions may be project based and include multiple performance obligations based on the bundling of equipment, software and services. When a multiple performance obligation arrangement exists, the transaction price is allocated to the performance obligations based on their relative standalone selling price, and revenue is recognized upon transfer of control of each deliverable. To determine the standalone selling price, the Company first looks to establish the standalone selling price through an observable price when the good or service is sold separately in similar circumstances. If the standalone selling price cannot be established through an observable price, the Company will make an estimate based on market conditions, customer specific factors and customer class. The Company may use a combination of approaches to estimate the standalone selling price.
Other customer contract types include a variety of post-contract support service offerings, which are generally recognized over time as the services are provided, including the following: maintenance and support services provided under annual service-level agreements; “Day 2” professional services to help customers maximize their utilization of deployed systems; and installation services related to the routine installation of equipment ordered by the customer at the customer’s site.
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.
Revenue is measured based on the consideration the Company expects to be entitled based on customer contracts. For sales to distributors, system integrators and value-added resellers, revenue is adjusted for variable consideration amounts, including but not limited to 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.
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.
Unbilled receivables are recorded when revenues are recognized in advance of invoice issuance. A contract asset is any portion of unbilled receivables for which the right to consideration is conditional on a factor other than the passage of time, which is common for certain performance obligations related to project contracts. These assets are presented on a combined basis with accounts receivable and are converted to accounts receivable once the Company’s right to the consideration becomes unconditional, which varies by contract but is generally based on achieving certain acceptance milestones. The Company recognizes the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset would be one year or less.
The Company includes shipping and handling costs billed to customers in net sales and includes the costs incurred to transport product to customers as well as certain internal handling costs, which relate to activities to prepare goods for shipment, 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.
Leases
The Company determines if a contract is a lease or contains a lease at inception. Right of use assets related to operating type leases are reported in other noncurrent assets and the present value of remaining lease obligations is reported in accrued and other liabilities and other noncurrent liabilities on the Consolidated Balance Sheets. For the periods presented, CommScope does not have any financing type leases.
76
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The majority of the Company’s leases do not provide an implicit rate; therefore, the Company uses the incremental borrowing rates applicable to the economic environment and the duration of the lease, based on the information available at commencement date, in determining the present value of future payments. The right of use asset for operating leases is measured using the lease liability adjusted for the impact of lease payments made prior to commencement, lease incentives received, initial direct costs incurred and any asset impairments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company remeasures and reallocates the consideration in a lease when there is a modification of the lease that is not accounted for as a separate contract. The lease liability is remeasured when there is a change in the lease term or a change in the assessment of whether the Company will exercise a lease option. The Company assesses right of use assets for impairment in accordance with its long-lived asset impairment policy.
The Company accounts for lease agreements with contractually required lease and non-lease components on a combined basis. Lease payments made for cancellable leases, variable amounts that are not based on an observable index and lease agreements with an original duration of less than twelve months are recorded directly to lease expense.
Restructuring
The Company records restructuring charges associated with management-approved restructuring plans, which could include the elimination of job functions, closure or relocation of facilities, reorganization of operations, changes in management structure, workforce reductions or other actions. Restructuring charges may include ongoing and enhanced termination benefits related to employee separations, contract termination costs, impairment of certain assets and other related costs associated with exit or disposal activities. Severance benefits are provided to employees primarily under the Company’s ongoing benefit arrangements. These severance costs are accrued once management commits to a plan of termination and it becomes probable that employees will be separated and entitled to benefits at amounts that can be reasonably estimated. In some instances, the Company enhances its ongoing termination benefits with one-time termination benefits, which are recognized when employees are notified of their enhanced termination benefits.
Tax Collected from Customers
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, which are collected by the Company from customers, are excluded from net sales.
Product Warranties
The Company recognizes a liability for the estimated claims that may be paid under its customer assurance-type warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products.
Advertising Costs
Advertising costs are expensed in the period in which they are incurred and are reflected in selling, general and administrative expense on the Consolidated Statements of Operations. Advertising expense was $
77
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Research and Development
Research and development (R&D) costs are expensed in the period in which they are incurred. R&D costs include materials and equipment that have no alternative future use, depreciation on equipment and facilities currently used for R&D purposes, personnel costs, contract services and reasonable allocations of indirect costs, if clearly related to an R&D activity. Expenditures in the pre-production phase of an R&D project are recorded as R&D expense. However, costs incurred in the pre-production phase that are associated with output actually used in production are recorded in cost of sales. A project is considered finished with pre-production efforts when management determines that it has achieved acceptable levels of scrap and yield, which vary by project. Expenditures related to ongoing production are recorded in cost of sales.
Derivative Instruments and Hedging Activities
CommScope is exposed to risks resulting from adverse fluctuations in commodity prices, interest rates and foreign currency exchange rates. CommScope’s risk management strategy includes the use of derivative financial instruments whenever management determines their use to be reasonable and practical. This strategy does not permit the use of derivative financial instruments for trading or speculation.
The Company periodically uses forward contracts to hedge a portion of its balance sheet foreign exchange re-measurement risk and to hedge certain planned foreign currency expenditures. Unrealized gains and losses resulting from these contracts are recognized in other expense, net and partially offset corresponding foreign exchange gains and losses on the balances and expenditures being hedged. These instruments are not designated as hedges for hedge accounting purposes and are marked to market each period through earnings.
The Company periodically designates certain foreign currency contracts as net investment hedges to mitigate a portion of the foreign currency risk on the euro net investment in a foreign subsidiary. Hedge effectiveness is assessed each quarter based on the net investment in the foreign subsidiary designated as the hedged item and the changes in the fair value of designated foreign currency contracts based on spot rates. For hedges that meet the effectiveness requirements, changes in fair value are recorded as a component of other comprehensive income (loss), net of tax. Amounts excluded from hedge effectiveness at inception under the spot method for designated forward contracts are recognized on a straight-line basis over the life of each contract and for designated cross-currency swap contracts are recognized as interest accrues.
The Company also has a hedging strategy to mitigate a portion of the exposure to changes in cash flows resulting from variable interest rates on the senior secured term loan due 2026 which are based on the one-month LIBOR benchmark rate (see Note 7). Hedge effectiveness is assessed each quarter, and for hedges that meet the effectiveness requirements, changes in fair value are recorded as a component of other comprehensive income (loss), net of tax, and are reclassified to interest expense as interest payments are made on the Company’s variable rate debt.
The Company has elected and documented the use of the normal purchases and sales exception for normal purchase and sales contracts that meet the definition of a derivative financial instrument. See Note 8 for further disclosure related to the derivative instruments and hedging activities.
Foreign Currency Translation
For the years ended December 31, 2021, 2020 and 2019, approximately
78
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Aggregate foreign currency gains and losses, such as those resulting from the settlement of receivables or payables, foreign currency contracts and short-term intercompany advances in a currency other than the subsidiary’s functional currency, are recorded currently in earnings (included in other expense, net) and resulted in losses of $
Equity-Based Compensation
The estimated fair value of stock awards is recognized as expense over the requisite service periods. Forfeitures of stock awards are recognized as they occur. The Company records deferred tax assets related to compensation expense for awards that are expected to result in future tax deductions for the Company, based on the amount of compensation cost recognized and the Company’s statutory tax rate in the jurisdiction in which it expects to receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and actual tax deductions reported on the Company’s income tax return are recorded in the Consolidated Statements of Operations within income tax expense (benefit).
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 Series A convertible preferred stock (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 years ended December 31, 2021, 2020 and 2019,
For the years ended December 31, 2021, 2020 and 2019,
|
|
|
|
|||||||||
|
|
Year ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Numerator: |
|
|
|
|
|
|
|
|
|
|||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Dividends on Series A convertible preferred stock |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Deemed dividends on Series A convertible preferred stock |
|
|
|
|
|
|
|
|
( |
) |
||
Net loss attributable to common stockholders |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|||
Denominator: |
|
|
|
|
|
|
|
|
|
|||
Weighted average common shares outstanding - basic |
|
|
|
|
|
|
|
|
|
|||
Dilutive effect of as-if converted Series A convertible preferred stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Dilutive effect of equity-based awards |
|
|
|
|
|
|
|
|
|
|||
Weighted average common shares outstanding - diluted |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Loss per share: |
|
|
|
|
|
|
|
|
|
|||
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
79
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Business Combinations
The Company uses the acquisition method of accounting for business combinations which requires the tangible and intangible assets acquired and liabilities assumed to be recorded at their respective fair market value as of the acquisition date. Goodwill represents the excess of the consideration transferred over the fair value of the net assets acquired. The fair values of the assets acquired and liabilities assumed are determined based upon the Company’s valuation and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date. The Company uses a measurement period following the acquisition date to gather information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities assumed. The measurement period ends once all information is obtained, but no later than one year from the acquisition date.
Concentrations of Risk
Non-derivative financial instruments used by the Company in the normal course of business include letters of credit and commitments to extend credit, primarily accounts receivable. The Company generally does not require collateral on its accounts receivable. These financial instruments involve risk, including the credit risk of nonperformance by the counterparties to those instruments, and the actual loss may exceed the reserves provided in the Company’s Consolidated Balance Sheets. See Note 16 for further discussion of customer-related concentrations of risk.
The Company manages its exposures to credit risk associated with accounts receivable using such tools as credit approvals, credit limits and monitoring procedures. CommScope estimates the allowance for doubtful accounts based on the actual payment history and individual circumstances of significant customers as well as the age of receivables. In management’s opinion, as of December 31, 2021, the Company did not have significant unreserved risk of credit loss due to the non-performance of customers or other counterparties related to amounts receivable. However, an adverse change in financial condition of a significant customer or group of customers or in the telecommunications industry could materially affect the Company’s estimates related to doubtful accounts.
The principal raw materials and components purchased by CommScope (aluminum, copper, steel, bimetals, optical fiber, plastics and other polymers, capacitors, memory devices and silicon chips) are subject to changes in market price as these materials are linked to various commodity markets. The Company attempts to mitigate these risks through effective requirements planning and by working closely with its key suppliers to obtain the best possible pricing and delivery terms.
The Company relies on sole suppliers or a limited group of suppliers for certain key components (memory devices, capacitors and silicon chips), 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.
Recent Accounting Pronouncements
Adopted in 2021
On January 1, 2021, the Company adopted Accounting Standards Update (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 improve comparability in accounting for these transactions. The 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. The impact of adopting this new guidance was not material to the consolidated financial statements.
On January 1, 2021, the Company adopted ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance. The impact of adopting this new guidance was not material to the consolidated financial statements.
80
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Issued but Not Adopted
In November 2021, the Financial Accounting Standards Board (FASB) issued ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The new guidance is expected to clarify requirements regarding the recognition, measurement, presentation and disclosure of government assistance received by business entities. ASU No. 2021-10 is effective for the Company as of January 1, 2022. The Company is currently evaluating the impact of the new guidance on the consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new guidance is expected to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability, as well as payment terms which affect subsequent revenue recognized by the acquirer. According to the guidance, at the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if the acquirer had originated the contracts. ASU No. 2021-08 is effective for the Company as of January 1, 2023 and early adoption is permitted. Upon adoption, the guidance will be applied prospectively to business combinations occurring on or after the adoption date. The Company will continue to evaluate the impact of this guidance, which will depend on future business combinations.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The new guidance simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share, along with expanded disclosures. ASU No. 2020-06 is effective for the Company as of January 1, 2022. The adoption of ASU 2020-06 is not expected to have a material impact on the Company’s financial statements or disclosures.
In March 2020 and January 2021, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, respectively. Together, the ASUs provide 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 through December 31, 2022. As of December 31, 2021, the Company had not utilized any of the expedients discussed within this ASU; however, it continues to assess its agreements to determine whether the expedients would be utilized through the allowed period of December 31, 2022.
3
The following table presents details of the Company’s intangible assets other than goodwill as of December 31, 2021 and 2020:
|
2021 |
|
|
2020 |
|
||||||||||||||||||
|
Gross Carrying |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
|
Gross Carrying |
|
|
Accumulated Amortization |
|
|
Net Carrying Amount |
|
||||||
Customer base |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Trade names and trademarks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Patents and technologies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total intangible assets |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
There were
81
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Amortization expense for intangible assets was $
|
Estimated |
|
|
2022 |
$ |
|
|
2023 |
|
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
Thereafter |
|
|
|
The following table presents the activity in goodwill by reportable segment.
|
|
December 31, 2020 |
|
|
Activity |
|
|
December 31, 2021 |
|
|||||||||||||||||||||||||||
|
|
Goodwill |
|
|
Accumulated Impairment Losses |
|
|
Total |
|
|
Additions (Deductions) |
|
|
Impairment |
|
|
Foreign Exchange and Other |
|
|
Goodwill |
|
|
Accumulated Impairment Losses |
|
|
Total |
|
|||||||||
Broadband |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
OWN |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||||||
VCN |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||||||
Home |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
|
|
December 31, 2019 |
|
|
Activity |
|
|
December 31, 2020 |
|
|||||||||||||||||||||||||||
|
|
Goodwill |
|
|
Accumulated Impairment Losses |
|
|
Total |
|
|
Additions (Deductions) |
|
|
Impairment |
|
|
Foreign Exchange and Other |
|
|
Goodwill |
|
|
Accumulated Impairment Losses |
|
|
Total |
|
|||||||||
Broadband |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||||
OWN |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||||||
VCN |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||||
Home |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
In the second quarter of 2021, management shifted certain product lines from the Company’s Broadband segment to its Home segment to better align the Home segment with how the business is being managed. The realignment of product lines changed the composition of the Company’s reporting units which resulted in the reallocation of $
Additions (deductions) for the year ended December 31, 2020 reflect the final measurement period adjustments from the ARRIS acquisition. During the second quarter of 2020, the Company recorded a $
For the year ended December 31, 2019, the Company recorded goodwill impairment charges totaling $
82
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Estimating the fair value of a reporting unit involves uncertainties because it requires management to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry economic factors and future business strategy. Changes in projected revenue growth rates, projected operating income margins or estimated discount rates due to uncertain market conditions, loss of one or more key customers, changes in the Company’s strategy, changes in technology or other factors could negatively affect the fair value in one or more of the Company’s reporting units and result in a material impairment charge in the future.
4
Disaggregated Net Sales
The majority of the Company’s net sales are product sales that are recognized at a point in time. The Company does have customer arrangements where net sales are recognized over time, but this does not represent a significant portion of consolidated net sales. Contracts with net sales recognized over time are primarily concentrated in the Broadband and Venue and Campus Networks (VCN) segments. In the first quarter of 2021, the Company determined that the geographic disaggregation of net sales by segment is a more meaningful disaggregation of net sales than net sales disaggregated based on the timing of the transfer of goods, given the relatively low level of net sales recognized over time. Therefore, the presentation of net sales by geographic region in Note 16 has been expanded to include segments and the presentation of net sales based on the timing of the transfer of goods has been eliminated.
Allowance for Doubtful Accounts
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Allowance for doubtful accounts, beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Provision |
|
|
|
|
|
|
|
|
|
|||
Write-offs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Foreign exchange and other |
|
|
( |
) |
|
|
|
|
|
|
||
Allowance for doubtful accounts, end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
During the year ended December 31, 2021, the Company recorded an allowance for $
Customer Contract Balances
The following table provides the balance sheet location and amounts of contract assets, or unbilled accounts receivable, and contract liabilities, or deferred revenue, from contracts with customers as of December 31, 2021 and December 31, 2020.
|
|
|
|
December 31, |
|
|||||
Contract Balance Type |
|
Balance Sheet Location |
|
2021 |
|
|
2020 |
|
||
Unbilled accounts receivable |
|
Accounts receivable, less allowance for doubtful |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
||
Deferred revenue - current |
|
Accrued and other liabilities |
|
$ |
|
|
$ |
|
||
Deferred revenue - noncurrent |
|
Other noncurrent liabilities |
|
|
|
|
|
|
||
Total contract liabilities |
|
|
|
$ |
|
|
$ |
|
||
There were no material changes to contract asset balances for the year ended December 31, 2021 as a result of changes in estimates or impairments. The change in the contract liability balance from December 31, 2020 to December 31, 2021 was primarily due to upfront support billings recognized over the support term. During the year ended December 31, 2021, the Company recognized $
83
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
5
The Company has operating type leases for real estate, equipment and vehicles both in the U.S. and internationally. As of December 31, 2021 and 2020, the Company had
The Company occasionally subleases all or a portion of certain unutilized real estate facilities. As of December 31, 2021, the Company’s sublease arrangements were classified as operating type leases and the income amounts were not material for the years ended December 31, 2021, 2020 and 2019, respectively.
Supplemental cash flow information related to operating leases:
|
Year Ended December 31, |
|
||||||||
|
2021 |
|
|
2020 |
|
2019 |
|
|||
Operating cash paid to settle lease liabilities |
$ |
|
|
$ |
|
$ |
|
|||
Right of use asset additions in exchange for lease liabilities |
|
|
|
|
|
|
|
|||
Supplemental balance sheet information related to operating leases:
|
|
|
December 31, |
|
|||||
|
Balance Sheet Location |
|
2021 |
|
|
2020 |
|
||
Other noncurrent assets |
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
||
Accrued and other liabilities |
|
$ |
|
|
$ |
|
|||
Other noncurrent liabilities |
|
|
|
|
|
|
|||
Total lease liabilities |
|
|
$ |
|
|
$ |
|
||
Weighted average remaining lease term (in years) |
|
|
|
Weighted average discount rate |
|
% |
Future minimum lease payments under non-cancellable leases as of December 31, 2021 are as follows:
|
Operating Leases |
|
|
2022 |
|
|
|
2023 |
|
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
Thereafter |
|
|
|
Total minimum lease payments |
$ |
|
|
Less: imputed interest |
|
( |
) |
Total |
$ |
|
|
84
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
6
Inventories
|
|
December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in process |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
Property, Plant and Equipment
|
|
December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Land and land improvements |
|
$ |
|
|
$ |
|
||
Buildings and improvements |
|
|
|
|
|
|
||
Machinery and equipment |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
$ |
|
|
$ |
|
||
Accrued and Other Liabilities
|
|
December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Compensation and employee benefit liabilities |
|
$ |
|
|
$ |
|
||
Accrued interest |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
Product warranty accrual |
|
|
|
|
|
|
||
Operating lease liabilities |
|
|
|
|
|
|
||
Restructuring liabilities |
|
|
|
|
|
|
||
Patent claims and litigation settlements |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
85
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Accumulated Other Comprehensive Loss
The following table presents changes in accumulated other comprehensive loss (AOCL), net of tax:
|
|
Year Ended December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Foreign currency translation |
|
|
|
|
|
|
||
Balance at beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income (loss) |
|
|
( |
) |
|
|
|
|
Amounts reclassified from AOCL |
|
|
|
|
|
|
||
Balance at end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
||
Defined benefit plan activity |
|
|
|
|
|
|
||
Balance at beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income (loss) |
|
|
|
|
|
( |
) |
|
Amounts reclassified from AOCL |
|
|
( |
) |
|
|
( |
) |
Balance at end of period |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
||
Hedging instruments |
|
|
|
|
|
|
||
Balance at beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income (loss) |
|
|
|
|
|
( |
) |
|
Balance at end of period |
|
$ |
( |
) |
|
$ |
( |
) |
Net AOCL at end of period |
|
$ |
( |
) |
|
$ |
( |
) |
Amounts reclassified from net AOCL related to foreign currency translation and defined benefit plans are recorded in other expense, net in the Consolidated Statements of Operations.
Cash Flow Information
|
|
|
|
|
|
|
||||||
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|||
Income taxes, net of refunds |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Interest |
|
|
|
|
|
|
|
|
|
|||
86
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
7
|
|
December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|||
|
|
|
|
|
— |
|
||
|
|
|
|
|
|
|||
|
|
— |
|
|
|
|
||
Senior secured term loan due |
|
|
|
|
|
|
||
Senior secured revolving credit facility |
|
|
— |
|
|
|
— |
|
Total principal amount of debt |
|
$ |
|
|
$ |
|
||
Less: Original issue discount, net of amortization |
|
|
( |
) |
|
|
( |
) |
Less: Debt issuance costs, net of amortization |
|
|
( |
) |
|
|
( |
) |
Less: Current portion |
|
|
( |
) |
|
|
( |
) |
Total long-term debt |
|
$ |
|
|
$ |
|
||
Senior Notes
On August 23, 2021, CommScope, Inc., a wholly owned subsidiary of the Company issued $
In connection with issuing the 2029 Secured Notes, the Company incurred costs of $
In addition to the 2029 Secured Notes, as of December 31, 2021, the Company had outstanding $
The indentures governing the Senior Notes contain covenants that restrict the ability of CommScope, Inc. and its restricted subsidiaries to, among other things, incur additional debt, make certain payments, including payment of dividends (except, in the case of the CommScope, Inc. Notes and the Secured Notes, with respect to the Convertible Preferred Stock) or repurchases of equity interests of CommScope, Inc. or the applicable issuer, make loans or acquisitions or capital contributions and certain investments, incur certain liens, sell assets, merge or consolidate or liquidate other entities and enter into certain transactions with affiliates.
87
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
There are no financial maintenance covenants in the indentures governing the Senior Notes. Events of default under the indentures governing the Senior Notes include, among others, non-payment of principal or interest when due, covenant defaults, bankruptcy and insolvency events and cross acceleration to material debt.
The 2029 Secured Notes mature on
The Secured Notes may be redeemed prior to maturity under certain circumstances. Upon certain change of control events, the Secured Notes may be redeemed at the option of the holders at
88
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
7.125% Senior Notes due 2028 and 8.25% Senior Notes due 2027 (the CommScope, Inc. Notes)
The 2028 Notes mature on
The CommScope, Inc. Notes may be redeemed prior to maturity under certain circumstances. Upon certain change of control events, the CommScope, Inc. Notes may be redeemed at the option of the holders at
5.00% Senior Notes due 2027 and 6.00% Senior Notes due 2025 (the CommScope Technologies Notes)
The
The CommScope Technologies Notes are guaranteed on a senior unsecured basis by CommScope, Inc. and each of CommScope, Inc.’s existing and future wholly owned domestic restricted subsidiaries (other than CommScope Technologies) that is an obligor under the senior secured credit facilities or certain other capital markets debt, subject to certain exceptions. The CommScope Technologies Notes and the related guarantees rank senior in right of payment to all of CommScope Technologies’ and the guarantors’ subordinated indebtedness and equally in right of payment with all of CommScope Technologies’ and the guarantors’ senior indebtedness (without giving effect to collateral arrangements), including the senior secured credit facilities and the other Senior Notes. The CommScope Technologies Notes and the related guarantees are effectively junior to all of CommScope Technologies’ and the guarantors’ existing and future secured indebtedness, including the Secured Notes and the senior secured credit facilities, to the extent of the value of the assets securing such secured indebtedness. In addition, the CommScope Technologies Notes and related guarantees are structurally subordinated to all existing and future liabilities (including trade payables) of CommScope, Inc.’s subsidiaries that do not guarantee the CommScope Technologies Notes.
The CommScope Technologies Notes may be redeemed prior to maturity under certain circumstances. Upon certain change of control events, the CommScope Technologies Notes may be redeemed at the option of the holders at
89
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Senior Secured Credit Facilities
Senior Secured Term Loan due 2026
The senior secured term loan due 2026 (the 2026 Term Loan) has scheduled amortization payments of $
Subject to certain conditions, the 2026 Term Loan may be increased or a new incremental term loan facility may be added to increase the capacity by up to the sum of the greater of $
CommScope, Inc. may voluntarily prepay loans under the 2026 Term Loan, subject to minimum amounts, with prior notice but without premium or penalty. CommScope, Inc. must prepay the 2026 Term Loan with the net cash proceeds of certain asset sales, the incurrence or issuance of specified refinancing indebtedness and, commencing with the fiscal year ending in December 2020,
CommScope, Inc.’s obligations under the 2026 Term Loan are guaranteed by the Company and each of CommScope, Inc.’s direct and indirect wholly owned U.S. subsidiaries (subject to certain permitted exceptions based on immateriality thresholds of aggregate assets and revenues of excluded U.S. subsidiaries). The 2026 Term Loan is secured by a lien on substantially all of CommScope, Inc.’s and the guarantors’ current and fixed assets (subject to certain exceptions), and the 2026 Term Loan will have a first-priority lien on all fixed assets and a second-priority lien on all current assets (second in priority to the liens securing the Revolving Credit Facility), in each case, subject to other permitted liens.
The 2026 Term Loan contains customary negative covenants consistent with those applicable to the New Notes, including, but not limited to, restrictions on the ability of CommScope, Inc. and its subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, pay dividends (except with respect to the Convertible Preferred Stock) or make other restricted payments, sell or otherwise transfer assets or enter into certain transactions with affiliates.
The 2026 Term Loan provides that, upon the occurrence of certain events of default, the obligations thereunder may be accelerated. Such events of default will include payment defaults, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy proceedings, material money judgments, material pension-plan events, change of control and other customary events of default.
During the year ended December 31, 2021, the Company made scheduled amortization payments totaling $
90
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Senior Secured Revolving Credit Facility
The Company’s asset-based revolving credit facility (the Revolving Credit Facility) provides borrowing capacity of up to $
Letters of credit under the Revolving Credit Facility are limited to the lesser of (x) $
Borrowings under the Revolving Credit Facility are limited by borrowing base calculations based on the sum of specified percentages of eligible accounts receivable and eligible inventory, minus the amount of any applicable reserves. Borrowings will bear interest at a floating rate, which can be either an adjusted Eurodollar rate plus an applicable margin of
The obligations of the Revolving Borrowers under the Revolving Credit Facility are guaranteed by the Company, CommScope, Inc. and each of CommScope, Inc.’s direct and indirect wholly owned U.S. subsidiaries (subject to certain permitted exceptions based on immateriality thresholds of aggregate assets and revenues of excluded U.S. subsidiaries). The Revolving Credit Facility is secured by a lien on substantially all of the Revolving Borrowers’ and the guarantors’ current and fixed assets (subject to certain exceptions). The Revolving Credit Facility has a first-priority lien on all current assets and a second-priority lien on all fixed assets (second in priority to the liens securing the 2029 Secured Notes, the 2026 Secured Notes and the 2026 Term Loan), in each case, subject to other permitted liens.
The Revolving Borrowers will be required to make prepayments under the Revolving Credit Facility at any time when, and to the extent that, the aggregate amount of the outstanding loans and letters of credit under the Revolving Credit Facility exceeds the lesser of the aggregate amount of commitments in respect of the Revolving Credit Facility and the borrowing base.
The Revolving Credit Facility contains customary covenants, including, but not limited to, restrictions on the ability of CommScope, Inc. and its subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends (except with respect to the Convertible Preferred Stock), sell or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness, enter into certain transactions with affiliates or change lines of business.
91
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The Revolving Credit Facility provides that, upon the occurrence of certain events of default, the obligations thereunder may be accelerated and the lending commitments terminated. Such events of default include payment defaults, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy proceedings, material money judgments, material pension-plan events, certain change of control events and other customary events of default.
Other Matters
The following table summarizes scheduled maturities of long-term debt as of December 31, 2021:
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
Thereafter |
|
||||||
Scheduled maturities of long-term debt |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
The Company’s non-guarantor subsidiaries held $
The Company is dependent upon the earnings and cash flow of its subsidiaries to make certain payments, including debt and interest payments. Certain subsidiaries may have limitations or restrictions on transferring funds to other subsidiaries that may be necessary to meet those requirements.
The weighted average effective interest rate on outstanding borrowings, including the impact of the interest rate swap, and the amortization of debt issuance costs and original issue discount, was
8. DERIVATIVES AND HEDGING ACTIVITIES
Derivatives Not Designated As Hedging Instruments
The Company uses forward contracts to hedge a portion of its balance sheet foreign exchange re-measurement risk and to hedge certain planned foreign currency expenditures. As of December 31, 2021, the Company had foreign exchange contracts outstanding with maturities of up to
The following table presents the balance sheet location and fair value of the Company’s derivatives not designated as hedging instruments:
|
|
|
|
|
|
|||||
|
|
|
|
December 31, |
|
|||||
Contract Type |
|
Location of Asset (Liability) |
|
2021 |
|
|
2020 |
|
||
Foreign currency contracts |
|
Prepaid expenses and other current assets |
|
$ |
|
|
$ |
|
||
Foreign currency contracts |
|
Accrued and other liabilities |
|
|
( |
) |
|
|
( |
) |
Total derivatives not designated as |
|
|
|
$ |
|
|
$ |
|
||
The pretax impact of the foreign currency forward contracts, both matured and outstanding, on the Consolidated Statements of Operations is as follows:
|
|
Year Ended December 31, |
|
|||||||||
Location of Gain (Loss) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Other expense, net |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
92
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Derivative Instruments Designated As Net Investment Hedges
The Company periodically uses a hedging strategy to designate certain foreign currency contracts as net investment hedges to mitigate a portion of the foreign currency risk on the euro net investment in a foreign subsidiary. The foreign currency contracts matured in the second quarter of 2021, and as of December 31, 2021, there were no derivative instruments designated as net investment hedges. There was no ineffectiveness on the instruments designated as net investment hedges for the years ended December 31, 2021, 2020 or 2019.
The following table presents the balance sheet location and fair value of the derivative instruments designated as net investment hedges:
|
|
|
|
|
|
|||||
|
|
|
|
December 31, |
|
|||||
Contract Type |
|
Location of Asset (Liability) |
|
2021 |
|
|
2020 |
|
||
Foreign currency contracts |
|
Accrued and other liabilities |
|
$ |
— |
|
|
$ |
( |
) |
Total derivatives designated as net |
|
|
|
$ |
— |
|
|
$ |
( |
) |
The after-tax impact of the forward contracts designated as net investment hedging instruments, both matured and outstanding, on the Consolidated Statements of Comprehensive Loss is as follows:
|
|
Year Ended December 31, |
|
|||||||||
Location of Gain (Loss) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Other comprehensive income (loss), net of tax |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Derivative Instruments Designated As Cash Flow Hedges of Interest Rate Risk
The Company has a hedging strategy to mitigate a portion of the exposure to changes in cash flows resulting from variable interest rates on the 2026 Term Loan. The total notional amount of the interest rate swap derivatives as of December 31, 2021 was $
The following table presents the balance sheet location and fair value of the derivative instruments designated as cash flow hedges of interest rate risk:
|
|
|
|
|
|
|||||
|
|
|
|
December 31, |
|
|||||
Contract Type |
|
Location of Asset (Liability) |
|
2021 |
|
|
2020 |
|
||
Interest rate swap contracts |
|
Accrued and other liabilities |
|
$ |
( |
) |
|
$ |
|
|
Interest rate swap contracts |
|
Other noncurrent liabilities |
|
|
( |
) |
|
|
( |
) |
Total derivatives designated as net |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
The impact of the effective portion of the interest rate swap contracts designated as cash flow hedging instruments on the Consolidated Statements of Comprehensive Loss is as follows:
|
|
Year Ended December 31, |
|
|||||||||
Location of Gain (Loss) |
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Other comprehensive income (loss), net of tax |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
93
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
9. FAIR VALUE MEASUREMENTS
The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, debt instruments, interest rate derivatives and foreign currency contracts. For cash and cash equivalents, trade receivables and trade payables, the carrying amounts of these financial instruments as of December 31, 2021 and December 31, 2020 were considered representative of their fair values due to their short terms to maturity. The fair values of the Company’s debt instruments, interest rate derivatives and foreign currency contracts were based on indicative quotes.
Fair value measurements using quoted prices in active markets for identical assets and liabilities fall within Level 1 of the fair value hierarchy, measurements using significant other observable inputs fall within Level 2, and measurements using significant unobservable inputs fall within Level 3.
The carrying amounts, estimated fair values and valuation input levels of the Company’s debt instruments, interest rate derivatives and foreign currency contracts as of December 31, 2021 and 2020, are as follows:
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
|
|
||||||||||
|
|
Carrying |
|
|
Fair Value |
|
|
Carrying |
|
|
Fair Value |
|
|
Valuation |
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency contracts |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Level 2 |
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
7.125% senior notes due 2028 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Level 2 |
||||
5.00% senior notes due 2027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
8.25% senior notes due 2027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
6.00% senior notes due 2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
4.75% senior secured notes due 2029 |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Level 2 |
||
6.00% senior secured notes due 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
5.50% senior secured notes due 2024 |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Level 2 |
||
Senior secured term loan due 2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
Foreign currency contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
Interest rate swap contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
||||
Non-Recurring Fair Value Measurements
During the annual impairment test in the fourth quarter of 2021, a goodwill impairment charge of $
During the second quarter of 2020, the Company recorded a pretax goodwill impairment charge of $
During the fourth quarter of 2019, the Company recorded a pretax goodwill impairment charge of $
94
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
These fair value estimates are based on pertinent information available to management as of the valuation date. Although management is not aware of any factors that would significantly affect these fair value estimates, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from the amounts presented.
10
The Company incurs costs associated with restructuring initiatives intended to improve overall operating performance and profitability. The costs related to restructuring actions are generally cash-based and primarily consist of employee-related costs, which include severance and other one-time termination benefits.
In addition to the employee-related costs, the Company records other costs associated with restructuring actions such as the gain or loss on the sale of facilities and impairment costs arising from unutilized real estate or equipment. The Company attempts to sell or lease this unutilized space but additional impairment charges may be incurred related to these or other excess assets.
The Company’s net pretax restructuring activity included in restructuring costs, net on the Consolidated Statements of Operations, by segment, were as follows:
|
|
|
|
|
|
|
||||||
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Broadband |
|
$ |
|
|
$ |
|
|
$ |
|
|||
OWN |
|
|
|
|
|
|
|
|
|
|||
VCN |
|
|
|
|
|
|
|
|
|
|||
Home |
|
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Restructuring liabilities were included in the Company’s Consolidated Balance Sheets as follows:
|
|
December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Accrued and other liabilities |
|
$ |
|
|
$ |
|
||
Other noncurrent liabilities |
|
|
|
|
|
|
||
Total restructuring liabilities |
|
$ |
|
|
$ |
|
||
CommScope NEXT Restructuring Actions
In the first quarter of 2021, the Company announced and began implementing a business transformation initiative called CommScope NEXT. This initiative is designed to drive shareholder value through three pillars: profitable growth, operational efficiency and portfolio optimization.
|
|
Employee- |
|
|
Other |
|
|
Total |
|
|||
Balance at December 31, 2020 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Additional expense, net |
|
|
|
|
|
|
|
|
|
|||
Cash paid |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Foreign exchange and other non-cash items |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance at December 31, 2021 |
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
95
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
CommScope NEXT actions to date have included employee costs related to the planned closure of an international manufacturing facility as well as other headcount reductions in manufacturing, engineering, marketing, sales and administrative functions. Asset impairment charges related to real estate or equipment that are affected by restructuring activities are included in the other category of restructuring costs for the year ended December 31, 2021.
The Company expects to make cash payments of $
ARRIS Integration Restructuring Actions
In anticipation of and following the acquisition of ARRIS, the Company initiated a series of restructuring actions to integrate and streamline operations and achieve cost synergies.
|
|
Employee- |
|
|
Other |
|
|
Total |
|
|||
Balance at December 31, 2019 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Additional expense, net |
|
|
|
|
|
|
|
|
|
|||
Cash (paid) received |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Foreign exchange and other non-cash items |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Balance at December 31, 2020 |
|
|
|
|
|
|
|
|
|
|||
Additional expense (reversal), net |
|
|
( |
) |
|
|
|
|
|
|
||
Cash (paid) received |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Foreign exchange and other non-cash items |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at December 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The ARRIS integration actions included headcount reductions in manufacturing, sales, engineering, marketing and administrative functions. The Company has recognized restructuring charges of $
During the year ended December 31, 2021, the Company completed the sale of its facility in Greensboro, North Carolina and recorded net proceeds of $
The Company expects to make cash payments of $
11. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company and certain of its subsidiaries have defined contribution retirement savings plans, the most significant of which is a 401(k) plan in the U.S. These plans allow employees meeting certain requirements to contribute a portion of their compensation on a pretax and/or after-tax basis in accordance with guidelines established by the plans and the Internal Revenue Service or other tax authorities. The Company matches a percentage of the employee contributions up to certain limits. During the years ended December 31, 2021, 2020 and 2019, the Company made contributions to defined contribution retirement savings plans of $
The Company also maintains noncontributory and contributory deferred compensation plans. During the years ended December 31, 2021, 2020 and 2019, the Company recognized pretax costs of $
96
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Pension Plans
The Company sponsors defined benefit pension plans covering certain active and former domestic and foreign employees. Included in the defined benefit pension plans are both funded and unfunded plans.
|
|
December 31, |
|
|||||||||||||
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Benefit obligation, beginning |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Service cost |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Actuarial loss (gain) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Benefits paid |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Settlements |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Curtailment |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Foreign exchange and other |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
Benefit obligation, ending |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fair value of plan assets, beginning |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
Employer and plan participant contributions |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Return on plan assets |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Benefits paid |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Settlements |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Foreign exchange and other |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
|
|
Fair value of plan assets, ending |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
||
Funded status, net liability or (net asset) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
The following table presents the balance sheet location of the Company's pension liabilities and assets:
|
|
December 31, |
|
|||||||||||||
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Accrued and other liabilities |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other noncurrent liabilities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other noncurrent assets |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
The accumulated benefit obligation for the Company’s U.S. defined benefit pension plans was $
The following table summarizes information for the Company’s pension plans with an accumulated benefit obligation in excess of plan assets:
|
|
December 31, |
|
|||||||||||||
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Projected benefit obligation |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Accumulated benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fair value of plan assets |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
97
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The following table summarizes pretax amounts included in accumulated other comprehensive loss:
|
|
December 31, |
|
|||||||||||||
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Unrecognized net actuarial loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Unrecognized prior service cost |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Actuarial gains and losses are amortized using a corridor approach. The corridor is equal to
|
|
Year Ended December 31, |
|
|||||||||||||||||||||
|
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
||||||
Service cost |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Recognized actuarial loss |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||||
Expected return on plan assets |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Settlement loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Curtailment gain |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
Net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Changes in plan assets and benefit obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Change in unrecognized net actuarial loss (gain) |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
Change in unrecognized prior service cost |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
Curtailment and settlements |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total included in other comprehensive income (loss) |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
Total recognized in net periodic benefit cost and |
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
||||
During the year ended December 31, 2021, the Company recorded a curtailment gain of $
Assumptions
Significant weighted average assumptions used in determining benefit obligations and net periodic benefit cost are as follows:
|
|
U.S. Plans |
|
|
|
Non-U.S. Plans |
|
|
||||||||||||||||||||||
|
|
2021 |
|
|
|
2020 |
|
|
|
2019 |
|
|
|
2021 |
|
|
|
2020 |
|
|
|
2019 |
|
|
||||||
Benefit obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Discount rate |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
||||||
Rate of compensation increase |
|
|
— |
|
% |
|
|
— |
|
% |
|
|
— |
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|||
Net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Discount rate |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
||||||
Rate of return on plan assets |
|
|
— |
|
% |
|
|
— |
|
% |
|
|
— |
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|||
Rate of compensation increase |
|
|
— |
|
% |
|
|
— |
|
% |
|
|
— |
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|||
98
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The Company considered the available yields on high-quality fixed-income investments with maturities corresponding to the Company’s expected benefit obligations to determine the discount rates at each measurement date.
Plan Assets
In developing the expected rate of return on plan assets, the Company considered the expected long-term rate of return on individual asset classes. Expected return on plan assets is based on the market value of the assets. The majority of the non-U.S. pension assets are managed by independent investment advisors. In general, the investment strategy is designed to accumulate a diversified portfolio among markets, asset classes or individual securities in order to reduce market risk and assure that the pension assets are available to pay benefits as they come due.
Mutual funds classified as Level 1 are valued at net asset value, which is based on the fair value of the funds’ underlying securities. Certain mutual funds are classified as Level 2 because a portion of the funds’ underlying assets are valued using significant other observable inputs. Other assets are primarily composed of fixed income investments (including insurance and real estate products) and are valued based on the investment’s stated rate of return, which approximates market interest rates.
The Company had
|
|
December 31, 2021 |
|
|||||
|
|
Non-U.S. Plans |
|
|||||
|
|
Level 1 |
|
|
Level 2 |
|
||
Mutual funds: |
|
|
|
|
|
|
||
International equity |
|
$ |
|
|
$ |
|
||
International debt |
|
|
|
|
|
|
||
Absolute return |
|
|
— |
|
|
|
|
|
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
|
|
December 31, 2020 |
|
|||||
|
|
Non-U.S. Plans |
|
|||||
|
|
Level 1 |
|
|
Level 2 |
|
||
Mutual funds: |
|
|
|
|
|
|
||
International equity |
|
$ |
|
|
$ |
|
||
International debt |
|
|
|
|
|
|
||
Absolute return |
|
|
— |
|
|
|
|
|
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Expected Cash Flows
The Company expects to contribute $
99
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The following table summarizes projected benefit payments from pension plans through 2031, including benefits attributable to estimated future service (in millions):
|
U.S. Plans |
|
|
Non-U.S. Plans |
|
||
2022 |
$ |
|
|
$ |
|
||
2023 |
|
|
|
|
|
||
2024 |
|
|
|
|
|
||
2025 |
|
|
|
|
|
||
2026 |
|
|
|
|
|
||
2027-2031 |
|
|
|
|
|
||
Other Postretirement Benefit Plans
The Company sponsors postretirement health care and life insurance benefit plans that provide benefits to certain former U.S. employees and certain U.S. full-time employees who retire from the Company. The health care plans contain various cost-sharing features such as participant contributions, deductibles, coinsurance and caps, with Medicare as the primary provider of health care benefits for eligible retirees. There are no plan assets associated with these post-retirement health care and life insurance benefit plans.
The benefit obligation for the plans was $
12. INCOME TAXES
L
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
U.S. companies |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Non-U.S. companies |
|
|
|
|
|
|
|
|
|
|||
Loss before income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
The components of income tax benefit were as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Current: |
|
|
|
|
|
|
|
|
|
|||
Federal |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|||
State |
|
|
|
|
|
|
|
|
|
|||
Current income tax expense |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Deferred: |
|
|
|
|
|
|
|
|
|
|||
Federal |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Foreign |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
State |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Deferred income tax benefit |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total income tax benefit |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
100
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The reconciliation of income taxes calculated at the statutory U.S. federal income tax rate to the Company’s benefit for income taxes was as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Benefit for income taxes at federal statutory rate |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
State income taxes, net of federal tax effect |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other permanent items |
|
|
|
|
|
|
|
|
|
|||
Equity-based compensation |
|
|
|
|
|
|
|
|
|
|||
Other changes in tax laws and tax rulings |
|
|
|
|
|
( |
) |
|
|
|
||
Goodwill related items |
|
|
|
|
|
|
|
|
|
|||
Base erosion and anti-abuse tax |
|
|
|
|
|
|
|
|
|
|||
Foreign-derived intangible income deduction |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Federal tax credits |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Change in unrecognized tax benefits |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Withholding taxes and Subpart F income, net of foreign tax credits |
|
|
|
|
|
|
|
|
|
|||
Foreign earnings taxed at other than federal rate |
|
|
|
|
|
|
|
|
|
|||
Tax provision adjustments and revisions to prior years' returns |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Change in valuation allowances |
|
|
|
|
|
|
|
|
|
|||
Total benefit for income taxes |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
The components of deferred income tax assets and liabilities and the classification of deferred tax balances on the balance sheet were as follows:
|
|
December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
||
Accounts receivable, inventory and warranty reserves |
|
$ |
|
|
$ |
|
||
Employee benefits |
|
|
|
|
|
|
||
Foreign net operating loss and tax credit carryforwards |
|
|
|
|
|
|
||
Federal net operating loss and tax credit carryforwards |
|
|
|
|
|
|
||
State net operating loss and tax credit carryforwards |
|
|
|
|
|
|
||
Unrecognized tax benefits |
|
|
|
|
|
|
||
Interest limitation |
|
|
|
|
|
|
||
Capitalized research and development costs |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total deferred tax assets |
|
|
|
|
|
|
||
Valuation allowance |
|
|
( |
) |
|
|
( |
) |
Total deferred tax assets, net of valuation allowance |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Deferred tax liabilities: |
|
|
|
|
|
|
||
Intangible assets |
|
$ |
( |
) |
|
$ |
( |
) |
Property, plant and equipment |
|
|
( |
) |
|
|
( |
) |
Undistributed foreign earnings |
|
|
( |
) |
|
|
( |
) |
Other |
|
|
( |
) |
|
|
( |
) |
Total deferred tax liabilities |
|
|
( |
) |
|
|
( |
) |
Net deferred tax asset |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Deferred taxes recognized on the balance sheet: |
|
|
|
|
|
|
||
Noncurrent deferred tax asset (included with other noncurrent assets) |
|
$ |
|
|
$ |
|
||
Noncurrent deferred tax liability |
|
|
( |
) |
|
|
( |
) |
Net deferred tax asset |
|
$ |
|
|
$ |
|
||
101
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The deferred tax asset for foreign net operating loss and tax credit carryforwards as of December 31, 2021 includes foreign net operating loss carryforwards (net of federal tax effects) of $
The deferred tax asset for federal net operating loss and tax credit carryforwards as of December 31, 2021 relates to $
The deferred tax asset for state net operating loss and tax credit carryforwards as of December 31, 2021 includes state net operating loss carryforwards (net of federal tax impact) of $
In addition to the valuation allowances detailed above, the Company has also established a valuation allowance of $
Under current U.S. tax regulations, in general, repatriation of foreign earnings to the U.S. can be completed with no incremental U.S. tax. However, repatriation of foreign earnings could subject the Company to U.S. state and non-U.S. jurisdictional taxes (including withholding taxes) on distributions. As of December 31, 2021, the Company has a deferred tax liability of $
The following table reflects a reconciliation of the beginning and end of period amounts of gross unrecognized tax benefits, excluding interest and penalties:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Balance at beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Increase related to prior periods |
|
|
|
|
|
|
|
|
|
|||
Decrease related to prior periods |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Increase related to current periods |
|
|
|
|
|
|
|
|
|
|||
Decrease related to settlements with taxing authorities |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Decrease related to lapse in statutes of limitations |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Increase (decrease) related to the ARRIS acquisition |
|
|
— |
|
|
|
( |
) |
|
|
|
|
Balance at end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The Company’s liability for unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods was $
Unrecognized tax benefits are reviewed and evaluated on an ongoing basis and may be adjusted for changing facts and circumstances including the lapse of applicable statutes of limitation and closure of tax examinations. Although the timing and outcome of such events are difficult to predict, the Company estimates that the balance of unrecognized tax benefits, excluding the impact of accrued interest and penalties, may be reduced by up to $
102
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The Company provides for interest and penalties related to unrecognized tax benefits as income tax expense. The Company accrued $
The Company files federal, state and local tax returns with statutes of limitation generally ranging from
The following table presents income tax expense (benefit) related to amounts presented in other comprehensive income (loss):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Foreign currency translation |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Defined benefit plans |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
13. SERIES A CONVERTIBLE PREFERRED STOCK
On April 4, 2019, the Company issued and sold
In connection with the issuance of the Convertible Preferred Stock, the Company incurred direct and incremental expenses of $
Dividend Rights
The Convertible Preferred Stock ranks senior to the shares of the Company’s common stock, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Convertible Preferred Stock has a liquidation preference of $ per share.
During the years ended December 31, 2021 and 2020, the Company paid cash dividends of $
103
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Conversion Features
The Convertible Preferred Stock is convertible at the option of the holders at any time into shares of CommScope common stock at an initial conversion rate of
Redemption Rights
On any date during the three months following the eight year and six-month anniversary of the Investment Agreement closing date and the three months following each anniversary thereafter, holders of the Convertible Preferred Stock will have the right to require CommScope to redeem all or any portion of the Convertible Preferred Stock at 100% of the liquidation preference thereof plus all accrued and unpaid dividends. The redemption price is payable, at the Company’s option, in cash or a combination of cash and common stock, subject to certain restrictions.
Upon certain change of control events involving CommScope, CommScope has the right, subject to the holder’s right to convert prior to such redemption, to redeem all of the Convertible Preferred Stock for the greater of (i) an amount in cash equal to the sum of the liquidation preference of the Convertible Preferred Stock, all accrued but unpaid dividends and, if the applicable redemption date is prior to the fifth anniversary of the first dividend payment date, the present value, discounted at a rate of
To the extent that CommScope does not exercise the redemption right described above, following the effective date of any such change of control event, the holders of the Convertible Preferred Stock can require CommScope to repurchase the Convertible Preferred Stock at the greater of (i) an amount in cash equal to
Voting Rights
Holders of the Convertible Preferred Stock are entitled to vote with the holders of the Company’s common stock on an as-converted basis. Holders of the Convertible Preferred Stock are entitled to a separate class vote with respect to, among other things, amendments to CommScope’s organizational documents that have an adverse effect on the Convertible Preferred Stock, issuances by CommScope of securities that are senior to, or equal in priority with, the Convertible Preferred Stock and issuances of shares of the Convertible Preferred Stock after the closing date of the Acquisition, other than shares issued as dividends with respect to shares of the Convertible Preferred Stock.
14. STOCKHOLDERS’ EQUITY
Equity-Based Compensation Plans
In 2019, the Company’s stockholders approved the 2019 Long-Term Incentive Plan authorizing
104
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
As of December 31, 2021, $
During the year ended December 31, 2021, the Company’s stockholders approved the termination of certain executive performance stock options, which is reflected as forfeited stock options below, and the grant of selective performance-based retention equity awards, which is reflected in PSUs granted below. The impact under modification accounting was not material to the consolidated financial statements.
The following table shows a summary of the equity-based compensation expense included in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
||||||
|
|
December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Selling, general and administrative |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Research and development |
|
|
|
|
|
|
|
|
|
|||
Cost of sales |
|
|
|
|
|
|
|
|
|
|||
Total equity-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The Company believes the valuation techniques and the approaches utilized to develop the underlying assumptions are appropriate in estimating the fair values of its equity-based compensation. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards. Subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.
Stock Options
Stock options are awards that allow the recipient to purchase shares of the Company’s common stock at a fixed price. Stock options are granted at an exercise price equal to the Company’s stock price at the date of grant. These awards generally vest over
The following table summarizes the stock option activity (in millions, except per share data and years):
|
|
Shares |
|
|
Weighted |
|
|
Weighted |
|
|
Aggregate |
|
||||
Options outstanding at December 31, 2020 |
|
|
|
|
$ |
|
|
|
|
|
|
|
||||
Exercised |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Forfeited |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Expired |
|
|
( |
) |
|
$ |
|
|
|
|
|
|
|
|||
Options outstanding at December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Options vested at December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Options unvested at December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
The total intrinsic value of options exercised during the years ended December 31, 2021, 2020 and 2019 was $
105
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The exercise prices of outstanding options at December 31, 2021 were in the following ranges (in millions, except per share data and years):
|
|
Options Outstanding |
|
|
Options Exercisable |
|
||||||||||||||
Range of Exercise Prices |
|
Shares |
|
|
Weighted Average |
|
|
Weighted |
|
|
Shares |
|
|
Weighted |
|
|||||
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||
The Company uses the Black-Scholes model to estimate the fair value of stock option awards at the date of grant. Key inputs and assumptions used in the model include the exercise price of the award, the expected option term, the risk-free interest rate, stock price volatility and the Company’s projected dividend yield. The expected term represents the period over which the Company’s employees are expected to hold their options. The risk-free interest rate reflects the yield on zero-coupon U.S. treasury securities with a term equal to the option’s expected term. Expected volatility is derived based on the historical volatility of the Company’s stock. The Company’s projected dividend yield is
There were
|
|
Year Ended December 31, 2019 |
|
|
Expected option term (in years) |
|
|
|
|
Risk-free interest rate |
|
|
% |
|
Expected volatility |
|
|
% |
|
Weighted average exercise price |
|
$ |
|
|
Weighted average fair value at grant date |
|
$ |
|
|
Restricted Stock Units
RSUs entitle the holder to shares of common stock after a vesting period that generally ranges from to
The following table summarizes the RSU activity (in millions, except per share data):
|
|
Restricted |
|
|
Weighted |
|
||
Non-vested share units at December 31, 2020 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Vested and shares issued |
|
|
( |
) |
|
$ |
|
|
Forfeited |
|
|
( |
) |
|
$ |
|
|
Non-vested share units at December 31, 2021 |
|
|
|
|
$ |
|
||
The weighted average grant date fair value per unit of these awards granted during the years ended December 31, 2021, 2020 and 2019 was $
106
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Performance Share Units
PSUs are stock awards in which the number of shares ultimately received by the employee depends on a performance measure and can vary depending on the achievement against the performance measure. Certain of CommScope’s PSUs have an internal performance measure vesting at the end of three years. The number of shares issued under these awards can vary between
Certain of CommScope's PSUs have a market condition performance measure based on stock price milestones as well as a service condition. The number of shares issued under these awards can vary between
|
|
Year Ended December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Risk-free interest rate |
|
|
% |
|
|
% |
||
Expected volatility |
|
|
% |
|
|
% |
||
Weighted average fair value at grant date |
|
$ |
|
|
$ |
|
||
The following table summarizes the PSU activity (in millions, except per share data):
|
|
Performance |
|
|
Weighted |
|
||
Non-vested share units at December 31, 2020 |
|
|
|
|
$ |
|
||
Granted |
|
|
|
|
$ |
|
||
Vested and shares issued |
|
|
( |
) |
|
$ |
|
|
Forfeited |
|
|
( |
) |
|
$ |
|
|
Non-vested share units at December 31, 2021 |
|
|
|
|
$ |
|
||
The weighted average grant date fair value per unit of these awards granted during the years ended December 31, 2021, 2020 and 2019 was $
In October 2019, the Company awarded
107
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
15. COMMITMENTS AND CONTINGENCIES
The following table summarizes the activity in the product warranty accrual, included in accrued and other liabilities and other noncurrent liabilities:
|
|
|
|
|
|
|
||||||
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Product warranty accrual, beginning of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Obligation assumed under ARRIS acquisition |
|
|
|
|
|
|
|
|
|
|||
Provision for warranty claims |
|
|
|
|
|
|
|
|
|
|||
Warranty claims paid |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Foreign exchange |
|
|
( |
) |
|
|
|
|
|
|
||
Product warranty accrual, end of period |
|
$ |
|
|
$ |
|
|
$ |
|
|||
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.
Third-Party Guarantees
The Company was contingently liable under open standby letters of credit issued by its banks in favor of third parties that totaled $
Legal Proceedings
The Company is a party to certain intellectual property claims and also 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. The outcome of these claims and notices is uncertain and a reasonable estimate of the loss from unfavorable outcomes in certain of these matters either cannot be determined or is estimated at the minimum amount of a range of estimates. The actual loss could be material and may vary significantly from the Company's estimates. Gain contingencies, if any, are recognized when they are realized.
As of December 31, 2021, the Company had a liability of $
During the year ended December 31, 2021, the Company received $
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.
108
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
16. INDUSTRY SEGMENTS, MAJOR CUSTOMERS, RELATED PARTY TRANSACTIONS AND GEOGRAPHIC INFORMATION
Segment Information
The Company has
The Broadband Networks (Broadband) segment provides an end-to-end product portfolio serving the telco and cable provider broadband market. The segment includes converged cable access platform, passive optical networking, video systems, access technologies, fiber and coaxial cable, fiber and copper connectivity and hardened closures.
The Outdoor Wireless Networks (OWN) segment focuses on the macro and metro cell markets. The segment includes base station antennas, RF filters, tower connectivity, microwave antennas, metro cell products, cabinets, steel towers, accessories, Spectrum Access Systems and Comsearch.
The Venue and Campus Networks (VCN) segment targets both public and private networks for campuses, venues, data centers and buildings. The segment combines Wi-Fi and switching, distributed antenna systems, licensed and unlicensed small cells and enterprise fiber and copper infrastructure.
The Home Networks (Home) segment includes subscriber-based solutions that support broadband and video applications. The broadband offerings in the Home segment include devices and related software and management solutions that provide residential connectivity and services to subscribers, such as digital subscriber line and cable modems and telephony and data gateways which incorporate routing and Wi-Fi functionality. Video offerings include set top boxes and services that support cable, satellite and IPTV content delivery and include products such as digital video recorders, high definition set top boxes and hybrid set top devices. The Home segment also sells broadband solutions through major retailers in the U.S.
In the second quarter of 2021, management shifted certain product lines from the Company’s Broadband segment to its Home segment to better align with how those businesses are being managed. All prior period amounts in these consolidated financial statements have been recast to reflect these operating segment changes.
The following table provides summary financial information by reportable segment:
|
|
December 31, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Identifiable segment-related assets: |
|
|
|
|
|
|
||
Broadband |
|
$ |
|
|
$ |
|
||
OWN |
|
|
|
|
|
|
||
VCN |
|
|
|
|
|
|
||
Home |
|
|
|
|
|
|
||
Total identifiable segment-related assets |
|
|
|
|
|
|
||
Reconciliation to total assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
|
|
|
|
|
||
Deferred income tax assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
109
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The Company’s measurement of segment performance is adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization). The Company defines adjusted EBITDA as operating income (loss), adjusted to exclude depreciation, amortization of intangible assets, restructuring costs, asset impairments, equity-based compensation, transaction, transformation and integration costs and other items that the Company believes are useful to exclude in the evaluation of operating performance from period to period because these items are not representative of the Company’s core business.
The following table provides net sales, adjusted EBITDA, depreciation expense and additions to property, plant and equipment by reportable segment:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2021 |
|
|
2020 |
|
|
2019 |
|
|||
Net sales: |
|
|
|
|
|
|
|
|
|
|||
Broadband |
|
$ |
|
|
$ |
|
|
$ |
|
|||
OWN |
|
|
|
|
|
|
|
|
|
|||
VCN |
|
|
|
|
|
|
|
|
|
|||
Home |
|
|
|
|
|
|
|
|
|
|||
Consolidated net sales |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Segment adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|||
Broadband |
|
$ |
|
|
$ |
|
|
$ |
|
|||
OWN |
|
|
|
|
|
|
|
|
|
|||
VCN |
|
|
|
|
|
|
|
|
|
|||
Home |
|
|
|
|
|
|
|
|
|
|||
Total segment adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|||
Amortization of intangible assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Restructuring costs, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Equity-based compensation |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Asset impairments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Transaction, transformation and integration costs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Acquisition accounting adjustments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Patent claims and litigation settlements |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Executive severance |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
Depreciation |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Consolidated operating income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|||
Depreciation expense: |
|
|
|
|
|
|
|
|
|
|||
Broadband |
|
$ |
|
|
$ |
|
|
$ |
|
|||
OWN |
|
|
|
|
|
|
|
|
|
|||
VCN |
|
|
|
|
|
|
|
|
|
|||
Home |
|
|
|
|
|
|
|
|
|
|||
Consolidated depreciation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Additions to property, plant and equipment: |
|
|
|
|
|
|
|
|
|
|||
Broadband |
|
$ |
|
|
$ |
|
|
$ |
|
|||
OWN |
|
|
|
|
|
|
|
|
|
|||
VCN |
|
|
|
|
|
|
|
|
|
|||
Home |
|
|
|
|
|
|
|
|
|
|||
Consolidated additions to property, plant and equipment |
|
$ |
|
|
$ |
|
|
$ |
|
|||
110
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Customer and Supplier Information
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.
Related Party Transactions
See Note 13 for a discussion of the Convertible Preferred Stock issued to Carlyle to finance the ARRIS acquisition. Other than transactions related to the Convertible Preferred Stock, there were
Geographic Information
Sales to customers located outside of the U.S. comprised
|
|
Year Ended December 31, |
|
|||||||||||||||||||||||||||||||||||||
|
|
Broadband |
|
|
OWN |
|
|
VCN |
|
|
Home |
|
|
Total |
|
|||||||||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||||||||
Geographic Region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
United States |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||||
Europe, Middle East |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Asia Pacific (APAC) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Caribbean and Latin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Consolidated net |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||||||
Long-lived assets, excluding intangible assets, consist substantially of property, plant and equipment and right of use assets. The Company’s long-lived assets, excluding intangible assets, located in the U.S., EMEA, APAC and CALA regions represented the following percentages of such long-lived assets:
111
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report.
Based on this evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were effective and operating to provide reasonable assurance that information that we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
The management of CommScope is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
CommScope’s management assessed the effectiveness of CommScope’s internal control over financial reporting as of December 31, 2021. In making this assessment, CommScope’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013). Based on this assessment, management concluded that, as of December 31, 2021, CommScope’s internal control over financial reporting is effective based on the COSO internal control criteria.
CommScope’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of CommScope’s internal control over financial reporting, which is included in Item 8 of this Annual Report on Form 10-K.
112
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting
Because of their inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not prevent all material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to risks, including that the controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2022 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Code of Ethics for Principal Executive and Senior Financial and Accounting Officers
We have adopted the CommScope Holding Company, Inc. Code of Ethics for Principal Executive and Senior Financial and Accounting Officers (the Senior Officer Code of Ethics), a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. The Senior Officer Code of Ethics is publicly available on our web site at www.commscope.com. If we make an amendment to, or grant a waiver from, a provision of the Senior Officer Code of Ethics, we will disclose the nature of such waiver or amendment on our web site.
ITEM 11. EXECUTIVE COMPENSATION
The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2022 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2022 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2022 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
113
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information responsive to this item is incorporated herein by reference to our Proxy Statement for our 2022 annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of CommScope Holding Company, Inc. are included under Part II, Item 8:
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
114
Index of Exhibits
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
* |
|
2.2 |
|
|
* |
|
2.3 |
|
* |
|
3.1 |
|
|
* |
|
3.2 |
|
|
* |
|
3.3 |
|
Certificate of Amendment of Amended and Restated Certificate of Incorporation of CommScope Holding Company, Inc. (Incorporated by reference to Exhibit 3.2 of the Registrant’s Registration Statement on Form S-8 (File No. 333-256539), filed with the SEC on May 27, 2021). |
* |
|
3.4 |
|
|
* |
|
4.1 |
|
|
* |
|
4.2 |
|
|
* |
|
4.3 |
|
|
* |
|
4.4 |
|
|
* |
|
4.5 |
|
115
* |
|
4.6 |
|
|
* |
|
4.7 |
|
|
* |
|
4.8 |
|
|
* |
|
4.9 |
|
|
* |
|
4.10 |
|
|
* |
|
10.1 |
|
|
* |
|
10.2 |
|
|
* |
|
10.3 |
|
|
* |
|
10.4 |
|
|
* |
|
10.5 |
|
|
* |
|
10.6 |
|
|
* |
|
10.7 |
|
116
* |
|
10.8 |
|
|
* |
|
10.9 |
|
|
* |
|
10.10 |
|
|
* |
|
10.11 |
|
|
* |
|
10.12 |
|
|
* |
|
10.13 |
|
|
* |
|
10.14 |
|
|
* |
|
10.15 |
|
|
* |
|
10.16 |
|
|
* |
|
10.17 |
|
|
* |
|
10.18 |
|
|
* |
|
10.19 |
|
|
* |
|
10.20 |
|
117
* |
|
10.21 |
|
|
* |
|
10.22 |
|
|
* |
|
10.23 |
|
|
* |
|
10.24 |
|
|
* |
|
10.25 |
|
|
* |
|
10.26 |
|
|
* |
|
10.27 |
|
|
* |
|
10.28 |
|
|
* |
|
10.29 |
|
|
* |
|
10.30 |
|
|
* |
|
10.31 |
|
|
* |
|
10.32 |
|
118
* |
|
18.1 |
|
|
** |
|
21.1 |
|
|
** |
|
23.1 |
|
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm |
** |
|
31.1 |
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a). |
|
|
|
|
|
** |
|
31.2 |
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a). |
|
|
|
|
|
± |
|
32.1 |
|
|
|
|
|
|
|
† |
|
101.INS |
|
Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
|
|
|
|
|
† |
|
101.SCH |
|
Inline XBRL Schema Document, furnished herewith. |
|
|
|
|
|
† |
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
|
|
|
† |
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
|
|
|
† |
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document, |
|
|
|
|
|
† |
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document). |
|
|
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|
* Previously filed
** Filed herewith
*** Management contract or compensatory plan or arrangement.
† In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections.
± In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certification furnished in Exhibit 32.1 hereto is deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certification will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
119
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
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|
|
COMMSCOPE HOLDING COMPANY, INC |
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||
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|
DATE: February 16, 2022 |
|
|
BY: /s/ Charles L. Treadway |
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|||||
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|
|
Charles L. Treadway |
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||
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|
President and Chief Executive Officer |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
|
Title |
|
Date |
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|
|
/s/ CHARLES L. TREADWAY |
|
President, Chief Executive Officer and Director (Principal Executive Officer) |
|
February 16, 2022 |
Charles L. Treadway |
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|
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|
|
/s/ KYLE D. LORENTZEN |
|
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
|
February 16, 2022 |
Kyle D. Lorentzen |
|
|
||
|
|
|
|
|
/s/ BROOKE B. CLARK |
|
Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) |
|
February 16, 2022 |
Brooke B. Clark |
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/s/ CLAUDIUS E. WATTS IV |
|
Director and Chairman of the Board |
|
February 16, 2022 |
Claudius E. Watts IV |
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||
|
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/s/ MARY S. CHAN |
|
Director |
|
February 16, 2022 |
Mary S. Chan |
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||
|
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|
/s/ FRANK M. DRENDEL |
|
Director and Chairman Emeritus |
|
February 16, 2022 |
Frank M. Drendel |
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||
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/s/ STEPHEN C. GRAY |
|
Director |
|
February 16, 2022 |
Stephen C. Gray |
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||
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/s/ L. WILLIAM KRAUSE |
|
Director |
|
February 16, 2022 |
L. William Krause |
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||
|
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|
/s/ JOANNE M. MAGUIRE |
|
Director |
|
February 16, 2022 |
Joanne M. Maguire |
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|
||
|
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|
|
/s/ THOMAS J. MANNING |
|
Director |
|
February 16, 2022 |
Thomas J. Manning |
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||
|
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|
|
/s/ PATRICK R. MCCARTER |
|
Director |
|
February 16, 2022 |
Patrick R. McCarter |
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|
||
|
|
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|
/s/ DERRICK A. ROMAN |
|
Director |
|
February 16, 2022 |
Derrick A. Roman |
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|
||
|
|
|
|
|
/s/ TIMOTHY T. YATES |
|
Director |
|
February 16, 2022 |
Timothy T. Yates |
|
|
120
