Vistance Networks, Inc. 10-K

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. 3 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: Year Ended December 31, 2021 2020 2019 Broadband 36.7 % 33.8 % 27.8 % OWN 16.4 14.7 17.7 VCN 25.4 23.0 23.6 Core segments 78.5 71.5 69.1 Home 21.5 28.5 30.9 Total 100.0 % 100.0 % 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. 4 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: 1) Network Convergence : Operators are moving toward converged or multi-use network architectures. Rather than building upon independent wireline and wireless networks, operators are now shifting toward networks that combine voice, video and data communications into a single converged data network for wired and wireless services. 2) Continued Disruption by Over-the-Top TV: Although content consumption continues to increase, subscriptions to pay TV are declining. As a result, cable operators are compelled to invest in and upgrade their networks and expand their video, voice, data and mobile services to deliver higher data rates in both the uplink and downlink on their network. While past data trends have been defined by rapid growth in the downlink, IoT will drive the need for major network change in the uplink. 3) Densification : As wireless operators work to meet consumer demand, cell splitting, in the form of densification is expected to be a key driver for fulfilling the promise of 5G networks. Increased sectorization at macro cell sites and establishing better inbuilding coverage will also play significant roles in the 5G network. We expect that densification will require significant fiber cable and connectivity between wireless cell sites. 4) Virtualization, Centralization and Disaggregation: Operators are virtualizing and centralizing their networks to make them more flexible and efficient. Wireless operators are deploying centralized radio access networks (CRAN) as a first step in the evolution to a virtualized radio access network. Eventually this will enable servers and switches to replace some of the hardware specific equipment that exists today and allow much of the processing to be performed on general purpose processors wherever and whenever it is needed throughout the network. Cable operators are also seeking to virtualize their networks by moving from a traditional converged cable access platform (CCAP) architecture to a distributed access architecture (DAA). This moves some of the processing from the head end to the node and virtualizes the rest on traditional switches and servers. 5 5) Low Latency Services: To support the increased demands of a growing game-playing subscriber base, all operators are seeking new ways to reduce the latency and jitter of the gaming packet streams. As an example, Data Over Cable Service Interface Specification (DOCSIS) deployments will likely be adding the new low latency DOCSIS technologies to their cable modem termination systems (CMTS) and customer premises equipment (CPE) gear in the coming year. Node-splits will also be used to reduce congestion and decrease latency. Over time, we expect these low latency services to allow support of Web3.0 and the metaverse, as access networks are increasing and used in a more interactive way. The densification of 5G networks will also reduce congestion and decrease latency as well. 6) Capacity Expansion : Wired and wireless network providers are both cognizant of the need to stay ahead of the traffic growth that occurs every year. This traffic growth results from increases in average subscriber consumption levels and in maximum service level agreement (SLA) levels. For cable providers, the next years will see many increases in spectrum, including moves to DOCSIS 3.1 upstream mid-splits (85 MHz) and DOCSIS 3.1 upstream high-splits (204 MHz) and downstream DOCSIS 3.1 transitions to 1.2 GHz. Capacity will also be increased via the increased use of the spectrally-efficient DOCSIS 3.1 orthogonal frequency-division multiplexing (OFDM) and orthogonal frequency-division multiple access (OFDMA) channels within the cable spectrum. New DOCSIS equipment will be needed for this expansion. For wireless providers, the next years will see moves to 5G that will include additions to their wireless spectrum in the CBRS band, the C-band and the mmWave band. New antenna equipment will be needed for this expansion. 7) Government-sponsored Broadband Improvements : 2022 is likely to see several government-sponsored programs aimed at improving the Broadband infrastructure connecting to rural and other under-served areas. Several funds and initiatives to build more equitable access—in particular, in the U.S., the Rural Digital Opportunity Fund (RDOF) and the Bipartisan Infrastructure Law (BIL) package—may be driving technology and device sales across the board. While we do not expect much money flowing under the BIL in 2022, we expect the preparation activity to pick up dramatically in the second half of the year. 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: • Enhanced mobile broadband—to support significant improvement in data rates and user experience in both the uplink and downlink, • IoT communications to support the expected billions of connections between machines as well as short bursts of information to other systems, and • Low latency, high-reliability—to support applications that are critical or are needed in real time, like factory machines, virtual reality and augmentation. 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. 6 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. 7 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: • Become more market and customer centric – work to truly understand the needs of our customers and applications for data and video networking solutions. • Expand to service providers outside of North America – expand market share with service providers in the rest of the world. • Expand Enterprise sales coverage – enhance sales coverage in historically underpenetrated top metropolitan statistical areas and verticals within the North American region, as well as targeted country/vertical combinations around the world. • Introduce new products and scale software solutions – build and scale our differentiated products, software and technology. • Investment in capacity – expand capacity for products with high backlog, fast-growth and long-term demand visibility. 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. • Connectivity and Cable Solutions (CCS) - combines most of our copper and fiber cabling and connectivity products. • Access Network Solutions (ANS) - includes our active broadband cable and video technologies. 8 • Networking, Intelligent Cellular and Security Solutions (NICS) - dedicated to providing wireless communications solutions for indoor and venue applications. • Outdoor Wireless Networks (OWN) - largely unchanged from our current OWN segment. Home Networks – largely unchanged from our current Home segment. 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: • Deliver organic growth • Create a well-positioned comprehensive portfolio of products and services • Stimulate market leading innovation, delivering powerful software and services • Maintain world class operational efficiency and cost structures • Architect a simplified organization, with more accountability, responsibility and visibility 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. 9 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. 10 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: • Flex our capacity to meet market demand and expand our market position; • Deliver high-quality customer solutions; • Provide high customer service levels due to proximity to the customer; and • Effectively integrate acquisitions and capitalize on related synergies. 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. 11 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. 12 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. 13 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. 14 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. 15 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. 16