UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001 - 36146
CommScope Holding Company, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
27-4332098 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1100 CommScope Place, SE
Hickory, North Carolina
(Address of principal executive offices)
28602
(Zip Code)
(828) 324-2200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☐ (Do not check if a small reporting company) |
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Small reporting company |
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☐ |
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Emerging growth company |
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☐ |
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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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 17, 2017 there were 193,041,305 shares of Common Stock outstanding.
CommScope Holding Company, Inc.
Form 10-Q
June 30, 2017
Table of Contents
1
Part 1 -- Financial Information (Unaudited)
ITEM 1. Condensed Consolidated Financial Statements
CommScope Holding Company, Inc. |
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and Comprehensive Income |
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(Unaudited -- In thousands, except per share amounts) |
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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Net sales |
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$ |
1,174,090 |
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$ |
1,306,788 |
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$ |
2,311,375 |
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$ |
2,450,767 |
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Operating costs and expenses: |
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Cost of sales |
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701,306 |
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753,029 |
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1,383,765 |
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1,449,917 |
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Selling, general and administrative |
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207,369 |
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234,333 |
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418,923 |
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443,530 |
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Research and development |
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46,887 |
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51,934 |
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95,782 |
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104,124 |
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Amortization of purchased intangible assets |
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66,981 |
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76,015 |
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134,619 |
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149,631 |
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Restructuring costs, net |
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13,773 |
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7,605 |
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19,161 |
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13,677 |
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Asset impairments |
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— |
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— |
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— |
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15,293 |
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Total operating costs and expenses |
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1,036,316 |
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1,122,916 |
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2,052,250 |
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2,176,172 |
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Operating income |
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137,774 |
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183,872 |
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259,125 |
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274,595 |
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Other income (expense), net |
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1,515 |
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(14,653 |
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(15,221 |
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(14,352 |
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Interest expense |
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(61,417 |
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(74,113 |
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(130,971 |
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(146,675 |
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Interest income |
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1,730 |
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1,148 |
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2,604 |
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3,727 |
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Income before income taxes |
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79,602 |
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96,254 |
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115,537 |
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117,295 |
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Income tax expense |
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(24,138 |
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(34,293 |
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(26,511 |
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(42,754 |
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Net income |
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$ |
55,464 |
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$ |
61,961 |
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$ |
89,026 |
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$ |
74,541 |
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Earnings per share: |
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Basic |
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$ |
0.29 |
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$ |
0.32 |
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$ |
0.46 |
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$ |
0.39 |
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Diluted |
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$ |
0.28 |
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$ |
0.32 |
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$ |
0.45 |
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$ |
0.38 |
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Weighted average shares outstanding: |
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Basic |
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193,092 |
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192,241 |
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193,555 |
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191,996 |
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Diluted |
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197,218 |
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196,073 |
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198,173 |
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195,815 |
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Comprehensive income: |
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Net income |
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$ |
55,464 |
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$ |
61,961 |
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$ |
89,026 |
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$ |
74,541 |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation gain (loss) |
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86,749 |
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(46,591 |
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127,100 |
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(307 |
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Pension and other postretirement benefit activity |
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(360 |
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(2,404 |
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(729 |
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(3,135 |
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Loss on net investment hedge |
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(2,996 |
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— |
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(3,351 |
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— |
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Available-for-sale securities |
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(2,132 |
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(1,411 |
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(823 |
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(2,134 |
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Total other comprehensive income (loss), net of tax |
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81,261 |
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(50,406 |
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122,197 |
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(5,576 |
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Total comprehensive income |
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$ |
136,725 |
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$ |
11,555 |
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$ |
211,223 |
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$ |
68,965 |
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See notes to unaudited condensed consolidated financial statements. |
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2
CommScope Holding Company, Inc.
Condensed Consolidated Balance Sheets
(Unaudited - In thousands, except share amounts)
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June 30, 2017 |
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December 31, 2016 |
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Assets |
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Cash and cash equivalents |
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$ |
484,491 |
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$ |
428,228 |
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Accounts receivable, less allowance for doubtful accounts of $18,838 and $17,211, respectively |
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931,654 |
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952,367 |
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Inventories, net |
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529,604 |
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473,267 |
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Prepaid expenses and other current assets |
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146,375 |
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139,902 |
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Total current assets |
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2,092,124 |
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1,993,764 |
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Property, plant and equipment, net of accumulated depreciation of $351,021 and $303,734, respectively |
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475,297 |
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474,990 |
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Goodwill |
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2,810,738 |
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2,768,304 |
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Other intangible assets, net |
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1,694,282 |
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1,799,065 |
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Other noncurrent assets |
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103,535 |
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105,863 |
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Total assets |
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$ |
7,175,976 |
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$ |
7,141,986 |
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Liabilities and Stockholders' Equity |
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Accounts payable |
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$ |
448,464 |
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$ |
415,921 |
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Other accrued liabilities |
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308,345 |
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429,397 |
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Current portion of long-term debt |
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— |
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12,500 |
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Total current liabilities |
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756,809 |
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857,818 |
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Long-term debt |
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4,569,967 |
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4,549,510 |
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Deferred income taxes |
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189,914 |
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199,121 |
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Pension and other postretirement benefit liabilities |
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31,295 |
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31,671 |
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Other noncurrent liabilities |
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108,368 |
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109,782 |
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Total liabilities |
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5,656,353 |
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5,747,902 |
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Commitments and contingencies |
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Stockholders' equity: |
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Preferred stock, $.01 par value: Authorized shares: 200,000,000; |
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Issued and outstanding shares: None |
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— |
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— |
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Common stock, $0.01 par value: Authorized shares: 1,300,000,000; |
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Issued and outstanding shares: 193,029,472 and 193,837,437, |
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respectively |
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1,970 |
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1,950 |
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Additional paid-in capital |
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2,311,374 |
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2,282,014 |
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Retained earnings (accumulated deficit) |
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(500,736 |
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(589,556 |
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Accumulated other comprehensive loss |
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(162,916 |
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(285,113 |
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Treasury stock, at cost: 4,010,752 shares and 1,129,222 shares, |
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respectively |
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(130,069 |
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(15,211 |
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Total stockholders' equity |
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1,519,623 |
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1,394,084 |
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Total liabilities and stockholders' equity |
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$ |
7,175,976 |
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$ |
7,141,986 |
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See notes to unaudited condensed consolidated financial statements.
3
CommScope Holding Company, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In thousands)
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Six Months Ended |
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June 30, |
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2017 |
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2016 |
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Operating Activities: |
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Net income |
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$ |
89,026 |
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$ |
74,541 |
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Adjustments to reconcile net income to net cash generated by operating activities: |
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Depreciation and amortization |
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190,453 |
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200,497 |
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Equity-based compensation |
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20,598 |
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18,246 |
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Deferred income taxes |
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(14,073 |
) |
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(48,319 |
) |
Asset impairments |
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— |
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15,293 |
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Changes in assets and liabilities: |
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Accounts receivable |
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43,975 |
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(137,532 |
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Inventories |
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(42,243 |
) |
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(18,386 |
) |
Prepaid expenses and other assets |
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(1,773 |
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10,139 |
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Accounts payable and other liabilities |
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(120,777 |
) |
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164,855 |
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Other |
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24,847 |
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5,929 |
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Net cash generated by operating activities |
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190,033 |
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285,263 |
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Investing Activities: |
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Additions to property, plant and equipment |
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(30,577 |
) |
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(32,184 |
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Proceeds from sale of property, plant and equipment |
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4,978 |
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3,740 |
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Cash paid for acquisitions including purchase price adjustments, net of cash acquired |
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— |
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6,263 |
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Other |
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6,778 |
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1,656 |
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Net cash used in investing activities |
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(18,821 |
) |
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(20,525 |
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Financing Activities: |
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Long-term debt repaid |
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(780,379 |
) |
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(306,270 |
) |
Long-term debt proceeds |
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780,379 |
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— |
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Debt issuance and modification costs |
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(8,363 |
) |
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— |
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Debt extinguishment costs |
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(14,800 |
) |
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(9,939 |
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Cash paid for repurchase of common stock |
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(100,000 |
) |
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— |
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Proceeds from the issuance of common shares under equity-based compensation plans |
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8,506 |
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6,991 |
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Tax withholding payments for vested equity-based compensation awards |
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(14,858 |
) |
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(2,796 |
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Net cash used in financing activities |
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(129,515 |
) |
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(312,014 |
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Effect of exchange rate changes on cash and cash equivalents |
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14,566 |
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|
435 |
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Change in cash and cash equivalents |
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56,263 |
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(46,841 |
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Cash and cash equivalent at beginning of period |
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428,228 |
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|
562,884 |
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Cash and cash equivalents at end of period |
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$ |
484,491 |
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$ |
516,043 |
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See notes to unaudited condensed consolidated financial statements.
4
CommScope Holding Company, Inc.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited - In thousands, except share amounts)
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Six Months Ended |
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June 30, |
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2017 |
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2016 |
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Number of common shares outstanding: |
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Balance at beginning of period |
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193,837,437 |
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191,368,727 |
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Issuance of shares under equity-based compensation plans |
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2,073,565 |
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1,360,090 |
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Shares surrendered under equity-based compensation plans |
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(396,010 |
) |
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(110,704 |
) |
Repurchase of common stock |
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(2,485,520 |
) |
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— |
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Balance at end of period |
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193,029,472 |
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|
192,618,113 |
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Common stock: |
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Balance at beginning of period |
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$ |
1,950 |
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$ |
1,923 |
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Issuance of shares under equity-based compensation plans |
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20 |
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|
14 |
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Balance at end of period |
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$ |
1,970 |
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$ |
1,937 |
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Additional paid-in capital: |
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|
|
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Balance at beginning of period |
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$ |
2,282,014 |
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$ |
2,216,202 |
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Issuance of shares under equity-based compensation plans |
|
|
8,486 |
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|
6,977 |
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Equity-based compensation |
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|
20,579 |
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|
18,135 |
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Cumulative effect of change in accounting principle |
|
|
295 |
|
|
|
— |
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Tax benefit from shares issued under equity-based compensation plans |
|
|
— |
|
|
|
6,190 |
|
Balance at end of period |
|
$ |
2,311,374 |
|
|
$ |
2,247,504 |
|
Retained earnings (accumulated deficit): |
|
|
|
|
|
|
|
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Balance at beginning of period |
|
$ |
(589,556 |
) |
|
$ |
(812,394 |
) |
Net income |
|
|
89,026 |
|
|
|
74,541 |
|
Cumulative effect of change in accounting principle |
|
|
(206 |
) |
|
|
— |
|
Balance at end of period |
|
$ |
(500,736 |
) |
|
$ |
(737,853 |
) |
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
(285,113 |
) |
|
$ |
(171,678 |
) |
Other comprehensive income (loss), net of tax |
|
|
122,197 |
|
|
|
(5,576 |
) |
Balance at end of period |
|
$ |
(162,916 |
) |
|
$ |
(177,254 |
) |
Treasury stock, at cost: |
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
(15,211 |
) |
|
$ |
(11,333 |
) |
Net shares surrendered under equity-based compensation plans |
|
|
(14,858 |
) |
|
|
(2,796 |
) |
Repurchase of common stock |
|
|
(100,000 |
) |
|
|
— |
|
Balance at end of period |
|
$ |
(130,069 |
) |
|
$ |
(14,129 |
) |
Total stockholders' equity |
|
$ |
1,519,623 |
|
|
$ |
1,320,205 |
|
See notes to unaudited condensed consolidated financial statements.
5
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, unless otherwise noted)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
CommScope Holding Company, Inc., along with its direct and indirect subsidiaries (CommScope or the Company), is a global provider of infrastructure solutions for the core, access and edge layers of communication networks. The Company’s solutions and services for wired and wireless networks enable high-bandwidth data, video and voice applications. CommScope’s global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale.
Basis of Presentation
The Condensed Consolidated Balance Sheet as of June 30, 2017, the Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2017 and 2016, and the Condensed Consolidated Statements of Cash Flows and Stockholders’ Equity for the six months ended June 30, 2017 and 2016 are unaudited and reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The results of operations for these interim periods are not necessarily indicative of the results of operations to be expected for any future period or the full fiscal year.
The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and are presented in accordance with the applicable requirements of Regulation S-X. Accordingly, these financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. The significant accounting policies followed by the Company are set forth in Note 2 within the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the 2016 Annual Report). There were no changes in the Company’s significant accounting policies during the three or six months ended June 30, 2017. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements.
Prior to January 1, 2017, the Company consolidated the operating results of the acquired BNS business based on the BNS fiscal reporting calendar that resulted in a reporting lag of one day for the year ended December 31, 2016. Effective January 1, 2017, the reporting lag was eliminated as a result of system conversions that were part of the BNS integration. The elimination of the reporting lag represents a change in accounting principle which the Company believes to be preferable because it provides more current information to the users of its financial statements. The Company determined that it was impracticable to apply the effects of the lag elimination to financial reporting periods prior to January 1, 2017. The cumulative effect of not retroactively applying this change in accounting, however, was immaterial as of January 1, 2017. Therefore, the Company reported the cumulative effect of the change in accounting principle in net income for the six months ended June 30, 2017 and did not retrospectively apply the effects of this change to prior periods.
Concentrations of Risk and Related Party Transactions
Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 12% and 11% of the Company’s total net sales during the three and six months ended June 30, 2017, respectively. Net sales to Anixter accounted for 11% of the Company’s total net sales during the three and six months ended June 30, 2016. Sales to Anixter primarily originate within the CommScope Connectivity Solutions (CCS) segment. Other than Anixter, no other direct customer accounted for 10% or more of the Company’s total net sales for the three or six months ended June 30, 2017 or 2016.
Accounts receivable from Anixter represented approximately 12% of accounts receivable as of June 30, 2017. Other than Anixter, no direct customer accounted for 10% or more of the Company’s accounts receivable as of June 30, 2017.
6
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, unless otherwise noted)
The Company recognizes a liability for the estimated claims that may be paid under its customer warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products. These product warranties extend over periods ranging from one to twenty-five years from the date of sale, depending upon the product subject to the warranty. The Company records a provision for estimated future warranty claims as cost of sales based upon the historical relationship of warranty claims to sales and specifically identified warranty issues. The Company bases its estimates on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Such revisions may be material.
The following table summarizes the activity in the product warranty accrual, included in other accrued liabilities:
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Product warranty accrual, beginning of period |
|
$ |
20,180 |
|
|
$ |
17,689 |
|
|
$ |
21,631 |
|
|
$ |
17,964 |
|
Provision for warranty claims |
|
|
2,028 |
|
|
|
2,468 |
|
|
|
4,231 |
|
|
|
4,519 |
|
Warranty claims paid |
|
|
(2,029 |
) |
|
|
(1,864 |
) |
|
|
(5,718 |
) |
|
|
(4,412 |
) |
Foreign exchange |
|
|
104 |
|
|
|
63 |
|
|
|
139 |
|
|
|
285 |
|
Product warranty accrual, end of period |
|
$ |
20,283 |
|
|
$ |
18,356 |
|
|
$ |
20,283 |
|
|
$ |
18,356 |
|
Commitments and Contingencies
The Company is either a plaintiff or a defendant in certain pending legal matters in the normal course of business. Management believes none of these legal matters will have a material adverse effect on the Company’s business or financial condition upon final disposition.
In addition, the Company is subject to various federal, state, local and foreign laws and regulations governing the use, discharge, disposal and remediation of hazardous materials. Compliance with current laws and regulations has not had, and is not expected to have, a materially adverse effect on the Company’s financial condition or results of operations.
Asset Impairments
Goodwill is tested for impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of the reporting unit may exceed its fair value. During the six months ended June 30, 2016, the Company recorded a $15.3 million goodwill impairment charge as a result of the change in its reportable segments. The impairment was recorded in the CCS segment.
Property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable, based on the undiscounted cash flows expected to be derived from the use and ultimate disposition of the assets. Assets identified as impaired are carried at estimated fair value. Other than the goodwill impairment described above, there were no asset impairments identified during the three or six months ended June 30, 2017 or 2016.
7
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, unless otherwise noted)
The effective income tax rate of 30.3% and 22.9% for the three and six months ended June 30, 2017, respectively, was lower than the statutory rate of 35.0% primarily due to the favorable impact of $4.4 million and $13.1 million of excess tax benefits related to equity-based compensation awards for the three and six months ended June 30, 2017, respectively. Such benefits, which were previously reflected in additional paid-in capital, are now recognized in income tax expense as a result of the adoption of Accounting Standards Update (ASU) No. 2016-09. See the discussion under Recent Accounting Pronouncements for further information regarding the adoption of this new accounting guidance. The effective income tax rate was also favorably affected by the impact of earnings in foreign jurisdictions that the Company does not plan to repatriate. These earnings are generally taxed at rates lower than the United States (U.S.) statutory rate. Offsetting these decreases for the three and six months ended June 30, 2017 was the effect of the provision for state income taxes.
The effective income tax rate of 35.6% and 36.4% for the three and six months ended June 30, 2016, respectively, was higher than the statutory rate of 35.0% primarily due to the provision for state income taxes as well as losses in certain jurisdictions where the Company did not recognize tax benefits due to the likelihood of them not being realizable. In addition, the effective income tax rate for the six months ended June 30, 2016 was affected by the impact of the goodwill impairment charge for which only partial tax benefits were recorded. These increases to the effective income tax rate were partially offset by the favorable impact of earnings in foreign jurisdictions that the Company does not plan to repatriate.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on net income divided by the weighted average number of common shares outstanding plus the effect of potentially dilutive common shares using the treasury stock method. Potentially dilutive common shares include outstanding equity-based awards (stock options, restricted stock units and performance share units). Certain outstanding equity-based awards were not included in the computation of diluted earnings per share because the effect was either antidilutive or the performance conditions were not met (0.7 million shares and 0.5 million shares for the three and six months ended June 30, 2017, respectively, and 1.7 million shares and 1.6 million shares for the three and six months ended June 30, 2016, respectively). During the three and six months ended June 30, 2017, the Company repurchased 0.9 million shares and 2.5 million shares, respectively, of its common stock to reduce dilution from grants under its equity-based award programs. See Note 11 for more information on the share repurchase program.
The following table presents the basis for the earnings per share computations (in thousands, except per share data):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for basic and diluted earnings per share |
|
$ |
55,464 |
|
|
$ |
61,961 |
|
|
$ |
89,026 |
|
|
$ |
74,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic |
|
|
193,092 |
|
|
|
192,241 |
|
|
|
193,555 |
|
|
|
191,996 |
|
Dilutive effect of equity-based awards |
|
|
4,126 |
|
|
|
3,832 |
|
|
|
4,618 |
|
|
|
3,819 |
|
Weighted average common shares outstanding - diluted |
|
|
197,218 |
|
|
|
196,073 |
|
|
|
198,173 |
|
|
|
195,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.29 |
|
|
$ |
0.32 |
|
|
$ |
0.46 |
|
|
$ |
0.39 |
|
Diluted |
|
$ |
0.28 |
|
|
$ |
0.32 |
|
|
$ |
0.45 |
|
|
$ |
0.38 |
|
8
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, unless otherwise noted)
Recent Accounting Pronouncements
Adopted During the Six Months Ended June 30, 2017
The Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting on January 1, 2017. The new standard simplifies several aspects of the accounting for employee equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Beginning January 1, 2017, the Company recognized all excess tax benefits in income tax expense. An income tax benefit of $4.4 million and $13.1 million was recognized for the three and six months ended June 30, 2017, respectively, under ASU No. 2016-09. The Company recognized a $0.2 million, net of tax, cumulative effect adjustment to retained earnings as a result of its election to change its accounting policy to account for forfeitures as they occur. The impact of the adoption of ASU No. 2016-09 to the Condensed Consolidated Statements of Cash Flows was to present excess tax benefits or deficiencies as an operating activity rather than as a financing activity. The Company elected to present the impact on the Condensed Consolidated Statements of Cash Flows retrospectively; therefore, the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2016 reflects an increase to both net cash generated by operating activities and net cash used in financing activities of $6.7 million.
The Company also adopted ASU No. 2016-15, Cash Flow Classification of Certain Cash Receipts and Cash Payments, as of January 1, 2017. This guidance amends or clarifies guidance on classification of certain transactions in the statement of cash flows, including classification of debt extinguishment costs and contingent consideration payments after a business combination. During the six months ended June 30, 2017, the impact of adoption on the Company’s Condensed Consolidated Statements of Cash Flows was to present $14.8 million of debt redemption premium paid as a financing activity rather than as an operating activity. The provisions of this new standard are required to be applied retrospectively; therefore, the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2016 reflects an increase to both net cash generated by operating activities and net cash used in financing activities of $9.9 million.
Issued but Not Adopted
In March 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an employer to report the service cost component in the same line item as other compensation costs arising from services rendered by the employee and requires the other components of net benefit cost to be reported outside the subtotal of operating income. ASU No. 2017-07 is effective for the Company as of January 1, 2018 and must be applied retrospectively. While the Company is evaluating the impact of the new guidance on the consolidated financial statements, it expects the application of this new guidance to decrease operating income. For details on the components of the Company’s annual net periodic benefit cost, see Note 10 to the Company’s audited consolidated financial statements included in the Company’s 2016 Annual Report.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test of Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under the new guidance, an entity will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize a goodwill impairment charge for the excess of the reporting unit’s carrying amount over its fair value, up to the amount of goodwill allocated to that reporting unit. ASU No. 2017-04 is effective for the Company as of January 1, 2020 and early adoption is permitted. The Company is evaluating the impact of the new guidance on the consolidated financial statements and when it may be adopted.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The new guidance replaces the current incurred loss method used for determining credit losses on financial assets, including trade receivables, with an expected credit loss method. ASU No. 2016-13 is effective for the Company as of January 1, 2020 and early adoption is permitted. The Company is evaluating the impact of the new guidance on the consolidated financial statements and when it may be adopted.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which supersedes the current leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize assets and lease liabilities for the rights and obligations created by leased assets previously classified as operating leases. ASU No. 2016-02 is effective for the Company as of January 1, 2019 and early adoption is permitted. The Company expects to adopt this new guidance as of January 1, 2019 and is evaluating the impact of the new guidance on the consolidated financial statements.
9
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, unless otherwise noted)
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which modifies how entities measure equity investments (except those accounted for under the equity method of accounting) and present changes in the fair value of financial liabilities; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; changes presentation and disclosure requirements; and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The guidance is effective for the Company as of January 1, 2018 and, with the exception of certain provisions, early adoption is not permitted. The Company does not expect the new guidance to have a material impact on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The new accounting standard defines a single comprehensive model of accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the ASU is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The Company will be required to adopt the new standard, including subsequently issued clarifying guidance, as of January 1, 2018 using either: (i) full retrospective application to each prior reporting period presented; or (ii) modified retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional required disclosures. The Company plans to adopt the new accounting model as of January 1, 2018 using the modified retrospective method.
The Company has completed an impact assessment and determined that adoption of the standard will likely result in an acceleration in the timing of when revenues are recognized for contracts containing multiple performance obligations. These contract revenues are currently accounted for using the multi-element guidance and are primarily for certain metro cell, distributed antenna system (DAS) and small cell solutions within the CommScope Mobility Solutions (CMS) segment. These multi-element revenue contracts represented less than 2% of total net sales for the three and six months ended June 30, 2017. Due to the short-term nature of most of the contracts, the ultimate impact to the Company’s consolidated financial statements at adoption will be based on customer-specific contract terms in effect at that time and could be significant.
The Company is in the process of implementing the necessary changes to its accounting policies, processes, internal controls and information systems that will be required to meet the new standard’s reporting and disclosure requirements.
2. ACQUISITIONS
On August 28, 2015, the Company acquired TE Connectivity’s BNS business for approximately $3.0 billion in an all-cash transaction. During the six months ended June 30, 2016, the Company received $6.3 million in net settlements for certain adjustments related to the BNS acquisition. Also during the three and six months ended June 30, 2016, the Company recorded measurement period adjustments primarily related to the finalization of the valuation of inventory, intangible assets, plant and equipment, pension liabilities and deferred taxes. The impact of these measurement period adjustments was not material to the Company’s results.
3. GOODWILL
The following table presents goodwill by reportable segment (in millions):
|
|
CCS |
|
|
CMS |
|
|
Total |
|
|||
Goodwill, gross at December 31, 2016 |
|
$ |
2,077.5 |
|
|
$ |
901.8 |
|
|
$ |
2,979.3 |
|
Foreign exchange |
|
|
40.6 |
|
|
|
1.8 |
|
|
|
42.4 |
|
Goodwill, gross at June 30, 2017 |
|
|
2,118.1 |
|
|
|
903.6 |
|
|
|
3,021.7 |
|
Accumulated impairment charges at December 31, 2016 and June 30, 2017 |
|
|
(51.5 |
) |
|
|
(159.5 |
) |
|
|
(211.0 |
) |
Goodwill, net at June 30, 2017 |
|
$ |
2,066.6 |
|
|
$ |
744.1 |
|
|
$ |
2,810.7 |
|
10
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, unless otherwise noted)
4. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Inventories
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||
Raw materials |
|
$ |
141,954 |
|
|
$ |
126,027 |
|
Work in process |
|
|
118,000 |
|
|
|
135,848 |
|
Finished goods |
|
|
269,650 |
|
|
|
211,392 |
|
|
|
$ |
529,604 |
|
|
$ |
473,267 |
|
Other Accrued Liabilities
|
|
June 30, 2017 |
|
|
December 31, 2016 |
|
||
Compensation and employee benefit liabilities |
|
$ |
99,687 |
|
|
$ |
169,923 |
|
Deferred revenue |
|
|
20,244 |
|
|
|
25,859 |
|
Product warranty accrual |
|
|
20,283 |
|
|
|
21,631 |
|
Accrued interest |
|
|
18,712 |
|
|
|
8,586 |
|
Restructuring reserve |
|
|
29,756 |
|
|
|
30,438 |
|
Income taxes payable |
|
|
18,544 |
|
|
|
49,984 |
|
Value-added taxes payable |
|
|
12,960 |
|
|
|
14,885 |
|
Accrued professional fees |
|
|
9,230 |
|
|
|
10,621 |
|
Other |
|
|
78,929 |
|
|
|
97,470 |
|
|
|
$ |
308,345 |
|
|
$ |
429,397 |
|
11
CommScope Holding Company, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, unless otherwise noted)
Accumulated Other Comprehensive Loss
The following table presents changes in accumulated other comprehensive income (AOCI), net of tax, and accumulated other comprehensive loss (AOCL), net of tax:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
(213,797 |
) |
|
$ |
(114,336 |
) |
|
$ |
(254,148 |
) |
|
$ |
(160,620 |
) |
Other comprehensive income (loss) |
|
|
86,749 |
|
|
|
(46,897 |
) |
|
|
126,833 |
|
|
|
(613 |
) |
Amounts reclassified from AOCL |
|
|
— |
|
|
|
306 |
|
|
|
267 |
|
|
|
306 |
|
Balance at end of period |
|
$ |
(127,048 |
) |
|
$ |
(160,927 |
) |
|
$ |
(127,048 |
) |
|
$ |
(160,927 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plan activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |
(33,842 |
) |
|
$ |
(18,298 |
) |
|
$ |
(33,473 |
) |
|
$ |
(17,567 |
) |
Other comprehensive loss |
|
|
— |
|
|
|
(1,730 |
) |
|
|
— |
|
|
|
(1,730 |
) |
Amounts reclassified from AOCL |
|
|
(360 |
) |
|
|
(674 |
) |
|
|
(729 |
) |
|
|
(1,405 |
) |
Balance at end of period |
|
$ |
(34,202 |
) |
|
$ |
(20,702 |
) |
|
$ |
(34,202 |
) |
|
$ |
(20,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
$ |