What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-23 compared with 2022-02-17 · 367 added, 463 removed, 1054 unchanged (44% of the section changed)

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The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Goodwill

Valuation of Goodwill for the ANS Reporting Unit

Description of the Matter

As more fully described i n Note 3 to the consolidated financial statements, at December 31, 2021, the Company’s goodwill was $5,231.7 m illion.

As more fully described in Note 3 to the consolidated financial statements, at December 31, 2022, the Company’s goodwill was $4,072.4 million, of which $734.0 million relates to the Access Network Solutions (ANS) reporting unit.

The Company’s goodwill is initially assigned to its reporting units as of the acquisition date.

Goodwill is tested for impairment at the reporting unit level annually, or more frequently if indicators of potential goodwill impairment exist.

The Company performed its annual goodwill impairment test for all reporting units in the fourth quarter of 2021 using both a discounted cash flow model and a guideline public company approach.

As a result of the annual goodwill impairment test, the Company recorded a $13.7 million impairment charge in the Home Networks reporting unit, which reflects a full impairment of the goodwill of that reporting unit, as its estimated fair value was less than the carrying value.

Auditing management’s goodwill impairment test was complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting units.

In particular, the fair value estimates were sensitive to changes in significant assumptions, such as the estimated discount rates, projected revenue growth rates and projected operating income margins, which are affected by expectations about future market or economic conditions.

Goodwill is tested for impairment at least annually at the reporting unit level.

The Company performed its annual goodwill impairment test in the fourth quarter of 2022 using both a discounted cash flow model and a guideline public company approach.

As a result of the annual goodwill impairment test, the Company recorded a $1,119.6 million impairment charge in the ANS reporting unit, which reflects a partial impairment of the goodwill of that reporting unit, as its estimated fair value was less than the carrying value.

Auditing management’s goodwill impairment test was complex and highly judgmental due to the significant estimation required in determining the fair value of the ANS reporting unit.

In particular, the fair value estimate was sensitive to changes in significant assumptions, such as the estimated discount rates, projected revenue growth rates and projected operating income margins, which are affected by expectations about future market or economic conditions.

How We Addressed the Matter in Our Audit

We evaluated the Company’s assessment of the impairment of goodwill.

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the goodwill impairment test, including controls over management’s development and review of the significant assumptions discussed above.

To test the estimated fair value of the reporting units, we performed audit procedures with the assistance of our valuation specialists that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis.

We evaluated the Company’s assessment of the impairment of goodwill for the ANS reporting unit.

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the annual goodwill impairment test for this reporting unit, including controls over management’s development and review of the significant assumptions discussed above.

To test the estimated fair value of the ANS reporting unit, we performed audit procedures with the assistance of our valuation specialists that included, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis.

We evaluated the Company’s estimated discount rate methodology and developed independent ranges of reasonable discount rates.

We compared the significant assumptions of projected revenue growth rates and projected operating income margins used by management to current industry and economic trends, changes to the Company’s business model, customer base or product mix and other relevant factors.

We also evaluated the reasonableness of the guideline public companies used to develop the fair value estimates of the reporting units.

We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions.

In addition, we tested management’s reconciliation of the fair value of the reporting units to the market capitalization of the Company.

We also recalculated the goodwill impairment charge and evaluated the related goodwill disclosures included in Note 3 to the consolidated financial statements.

We also evaluated the reasonableness of the guideline public companies used to develop the fair value estimate of the ANS reporting unit.

We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of this reporting unit that would result from changes in the assumptions.

We also evaluated the related goodwill disclosures included in Note 3 to the consolidated financial statements.

Incomes Taxes - Valuation Allowance

Description of the Matter

As more fully described in Notes 2 and 12 to the consolidated financial statements, at December 31, 2021, the Company recognized deferred tax assets related to deductible temporary differences and carryforwards of $898.9 million, net of valuation allowances of $706.7 million.

As more fully described in Note 12 to the consolidated financial statements, at December 31, 2022, the Company recognized deferred tax assets related to deductible temporary differences and carryforwards of $924.9 million, net of valuation allowances of $643.1 million.

Deferred tax assets are reduced by a valuation allowance if, based on the weight of all available evidence, in management’s judgment, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.

Auditing management’s assessment of the realizability of deferred tax assets involved especially challenging and subjective auditor judgment in determining whether the reversal of existing taxable temporary differences and the generation of sufficient future taxable income supports the realization of the Company’s existing deferred tax assets before expiration.

Auditing management’s assessment of the realizability of deferred tax assets involved especially challenging and subjective auditor judgment in determining whether the reversal of existing taxable temporary differences and the generation of sufficient future taxable income support the realization of the Company’s existing deferred tax assets before expiration.

How We Addressed the Matter in Our Audit

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We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the realizability of deferred tax assets, including controls over management’s development and review of the estimated future taxable income discussed above.

To test the realizability of deferred tax assets, we performed audit procedures with the assistance of our income tax professionals that included, among others, evaluating whether the sources of management’s estimated taxable income were of the appropriate character and would be sufficient to utilize the deferred tax assets under the relevant tax laws.

We tested the forecasted timing of the reversal of existing taxable temporary differences by evaluating the projected sources of taxable income and considering the nature of the temporary differences.

To test the realizability of deferred tax assets, we performed audit procedures that included, among others, evaluating whether the sources of management’s estimated future taxable income were of the appropriate character and would be sufficient to utilize the deferred tax assets under the relevant tax laws.

We tested the forecasted timing of the reversal of existing taxable temporary differences by evaluating the projected sources of future taxable income and considering the nature of the temporary differences.

We also evaluated the significant assumptions used by the Company to develop estimates of future taxable income and tested the completeness and accuracy of the underlying data.

For example, we compared management’s estimates of future taxable income with current industry and economic trends, the actual results of prior periods, and other forecasted financial information prepared by the Company.

We also evaluated the related income tax disclosures included in Notes 2 and 12 to the consolidated financial statements.

For example, we compared management’s estimates of future income with current industry and economic trends, the actual results of prior periods and other forecasted financial information prepared by the Company.

We also evaluated the related income tax disclosures included in Note 12 to the consolidated financial statements.

/s/ Ernst & Young LLP

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Income tax benefit

Series A convertible preferred stock dividend

Deemed dividend on Series A convertible preferred stock

Series A convertible preferred stock dividends

Net loss attributable to common stockholders

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Cash and cash equivalents

Accounts receivable, less allowance for doubtful accounts

Accounts receivable, net of allowance for doubtful accounts

of $ 82.8 and $ 63.7 , respectively

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Other noncurrent assets

Liabilities and Stockholders' Equity (Deficit)

Liabilities and Stockholders' Deficit

Accounts payable

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Series A convertible preferred stock, $ 0.01 par value

Stockholders' equity (deficit):

Stockholders' deficit:

Preferred stock, $ 0.01 par value:

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10,970,585 shares, respectively

Total stockholders' equity (deficit)

Total liabilities and stockholders' equity (deficit)

Total stockholders' deficit

Total liabilities and stockholders' deficit

See notes to consolidated financial statements.

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Accounts payable and other accrued liabilities

Other noncurrent liabilities

Other noncurrent assets

Other noncurrent liabilities

Net cash generated by operating activities

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Proceeds from sale of property, plant and equipment

Proceeds from sale of long-term investments

Cash paid for ARRIS acquisition, net of cash acquired

Cash paid for Cable Exchange acquisition

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Debt extinguishment costs

Series A convertible preferred stock proceeds

Dividends paid on Series A convertible preferred stock

Deemed dividend paid on Series A convertible preferred stock

Proceeds from the issuance of common shares under equity-based compensation plans

Proceeds from the issuance of common shares under equity-based

compensation plans

Tax withholding payments for vested equity-based compensation awards

Net cash generated by (used in) financing activities

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Change in cash and cash equivalents

Cash and cash equivalent at beginning of period

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

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Equity-based compensation

Equity-based compensation assumed

Dividend on Series A convertible preferred stock

Deemed dividend on Series A convertible preferred stock

Dividends on Series A convertible preferred stock

Balance at end of period

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BACKGROUND AND DESCRIPTION OF THE BUSINESS

CommScope Holding Company, Inc., along with its direct and indirect subsidiaries (CommScope or the Company), is a global provider of infrastructure solutions for communication and entertainment networks.

The Company’s solutions for wired and wireless networks enable service providers including cable, telephone and digital broadcast satellite operators and media programmers to deliver media, voice, Internet Protocol (IP) data services and Wi-Fi to their subscribers and allow enterprises to experience constant wireless and wired connectivity across complex and varied networking environments.

The Company’s solutions are complemented by a broad array of services including technical support, systems design and integration.

The Company’s solutions are complemented by services including technical support, systems design and integration.

CommScope is a leader in digital video and IP television (IPTV) distribution systems, broadband access infrastructure platforms and equipment that delivers data and voice networks to homes.

CommScope’s global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale.

In the second quarter of 2021, management shifted certain product lines from the Company’s Broadband Networks (Broadband) segment to its Home Networks (Home) segment to better align with how the business is being managed.

As of January 1, 2022, the Company reorganized its internal management and reporting structure to align its portfolio of products and solutions more closely with the markets it serves and provides better performance comparability with its competitive peer set.

The reorganization changed the information regularly reviewed by the Company's chief operating decision maker for purposes of allocating resources and assessing performance.

As a result, the Company is now reporting financial performance based on the following operating segments:

Connectivity and Cable Solutions (CCS), Outdoor Wireless Networks (OWN), Networking, Intelligent Cellular and Security Solutions (NICS), Access Network Solutions (ANS) and Home Networks (Home).

These five segments represent non-aggregated reportable operating segments.

Prior to this change, the Company operated and reported four operating segments:

Broadband Networks, Outdoor Wireless Networks, Venue and Campus Networks and Home Networks.

All prior period amounts in these consolidated financial statements have been recast to reflect these operating segment changes.

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liabilities for unrecognized tax benefits;

purchase price allocations;

impairment reviews for investments, property, plant and equipment, goodwill and other intangible assets;

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Cash and Cash Equivalents

Cash and cash equivalents represent deposits in banks and cash invested temporarily in various instruments with a maturity of three months or less at the time of purchase.

Cash and cash equivalents represent deposits in banks and cash invested temporarily in various instruments that are highly liquid and have a maturity of three months or less at the time of purchase.

CommScope Holding Company, Inc.

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The Company measures the allowance for doubtful accounts using an expected credit loss model, which uses a lifetime expected loss allowance for all trade accounts receivable and contract assets.

To measure the expected credit losses, trade accounts receivable and contract assets are grouped based on shared credit risk characteristics and the days past due.

To measure the expected credit losses, trade accounts receivable and contract assets are grouped based on shared credit risk characteristics and the days past due based on the contractual terms of the receivable.

Contract assets relate to unbilled work in progress and have substantially the same risk characteristics as trade accounts receivable for the same types of contracts.

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Accounts are written off against the allowance account when they are determined to be no longer collectible.

The Company sells certain of its accounts receivable under a customer-sponsored supplier financing agreement.

Under this agreement, the Company is able to sell certain accounts receivable to a bank at a discount.

The Company sold approximately $ 339 million and $ 45 million of trade accounts receivable under this program during the years ended December 31, 2022 and 2021, respectively, and the cost of factoring such receivables was not material.

The Company derecognizes the accounts receivable on the Consolidated Balance Sheet once sold to the bank, as it retains no interest in and has no servicing responsibilities for them once they have been sold.

The cash received from the bank is classified within the operating activities section in the Consolidated Statements of Cash Flows.

Inventories are stated at the lower of cost or net realizable value.

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The Company maintains reserves to reduce the value of inventory to the lower of cost or net realizable value, including reserves for excess and obsolete inventory.

Long-Lived Assets

Derivative Instruments and Hedging Activities

CommScope is exposed to risks resulting from adverse fluctuations in commodity prices, interest rates and foreign currency exchange rates.

CommScope’s risk management strategy includes the use of derivative financial instruments whenever management determines their use to be reasonable and practical.

This strategy does not permit the use of derivative financial instruments for trading or speculation.

The Company periodically uses forward contracts to hedge a portion of its balance sheet foreign exchange re-measurement risk and to hedge certain planned foreign currency expenditures.

Unrealized gains and losses resulting from these contracts are recognized in other expense, net and partially offset corresponding foreign exchange gains and losses on the balances and expenditures being hedged.

These instruments are not designated as hedges for hedge accounting purposes and are marked to market each period through earnings.

The Company also has a hedging strategy to mitigate a portion of the exposure to changes in cash flows resulting from variable interest rates on the senior secured term loan due 2026 (2026 Term Loan), which are based on the one-month LIBOR benchmark rate.

Hedge effectiveness is assessed each quarter, and for hedges that meet the effectiveness requirements, changes in fair value are recorded as a component of other comprehensive income (loss), net of tax, and are reclassified to interest expense as interest payments are made on the Company’s variable rate debt.

The Company has elected and documented the use of the normal purchases and sales exception for normal purchase and sales contracts that meet the definition of a derivative financial instrument.

See Note 8 for further disclosure related to the derivative instruments and hedging activities.

CommScope Holding Company, Inc.

Notes to Consolidated Financial Statements-(Continued)

(In millions, unless otherwise noted)

The Company determines if a contract is a lease or contains a lease at inception.

Right of use assets related to operating type leases are reported in other noncurrent assets and the present value of remaining lease obligations is reported in accrued and other liabilities and other noncurrent liabilities on the Consolidated Balance Sheets.

For the periods presented, CommScope does not have any financing type leases.

Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date.

The majority of the Company’s leases do not provide an implicit rate;

therefore, the Company uses the incremental borrowing rates applicable to the economic environment and the duration of the lease, based on the information available at commencement date, in determining the present value of future payments.

The right of use asset for operating leases is measured using the lease liability adjusted for the impact of lease payments made prior to commencement, lease incentives received, initial direct costs incurred and any asset impairments.

Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company remeasures and reallocates the consideration in a lease when there is a modification of the lease that is not accounted for as a separate contract.

The lease liability is remeasured when there is a change in the lease term or a change in the assessment of whether the Company will exercise a lease option.

The Company assesses right of use assets for impairment in accordance with its long-lived asset impairment policy.

The Company accounts for lease agreements with contractually required lease and non-lease components on a combined basis.

Lease payments made for cancellable leases, variable amounts that are not based on an observable index and lease agreements with an original duration of less than twelve months are recorded directly to lease expense.

Property, Plant and Equipment

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(In millions, unless otherwise noted)

Deferred income taxes reflect the future tax consequences of differences between the financial reporting and tax basis of assets and liabilities.

The Company records a valuation allowance, when appropriate, to reduce deferred tax assets to an amount that is more likely than not to be realized.

Tax benefits that result from uncertain tax positions may be recognized only if they are considered more likely than not to be sustainable, based on their technical merits.

The amount of benefit to be recognized is the largest amount of tax benefit that is at least 50 % likely to be realized.

In addition, the Company does not provide for U.S.

taxes related to the foreign currency remeasurement gains and losses on its long-term intercompany loans with foreign subsidiaries.

These loans are not expected to be repaid in the foreseeable future, and the foreign currency gains and losses are therefore recorded to accumulated other comprehensive loss.

The Company records the income tax effects related to the activity of its defined benefit plans and hedging instruments in accumulated other comprehensive loss at the currently enacted tax rate and reclassifies it to net income (loss) in the same period that the related pre-tax accumulated comprehensive income (loss) reclassifications are recognized.

Inventory Repurchase Obligations

The Company periodically enters into sell / buy transactions with its contract manufacturers, where it sells certain component inventory to its contract manufacturers for use in its finished goods.

The Company is obligated to subsequently repurchase this inventory either as a finished food or the original component inventory if it is not consumed after a specific period of time.

The Company records an accounts receivable and a corresponding contract manufacturer inventory repurchase obligation in accrued and other liabilities related to these transactions.

The Company does not record a sale upon shipment of the inventory to the contract manufacturer and the original value of the inventory remains in its inventory balance.

Revenue Recognition

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The Company also generates revenue from custom design and installation services as well as bundled sales arrangements that include product, software and services.

Revenue is recognized when performance obligations in a contract are satisfied through the transfer of control of the good or service at the amount of consideration expected to be received.

The following are required before revenue is recognized:

Identify the contract with the customer.

A variety of arrangements are considered contracts;

however, contracts typically take the form of a master purchase agreement or customer purchase orders.

The Company applies a five-step approach as defined in ASC 606, Revenue from Contracts with Customers, in determining the amount and timing of revenue to be recognized:

(1) identify the contract with a customer;

(2) identify the performance obligations in the contract;

Performance obligations are identified as promised goods or services that are distinct within an arrangement.

(3) determine the transaction price;

The transaction price is the amount of consideration the Company expects to receive in exchange for transferring the promised goods or services.

The consideration may include fixed or variable amounts or both.

Allocate the transaction price to the performance obligations.

The transaction price is allocated to the performance obligations on a relative standalone selling price basis.

Recognize revenue as the performance obligations are satisfied.

Revenue is recognized when transfer of control of the promised goods or services has occurred.

This is either at a point in time or over time.

Product sales represent over 90 % of the Company’s revenue.

For these sales, revenue is recognized when control of the product has transferred to the customer, which is generally at the point in time when products have been shipped, right to payment has been obtained and risk of loss has been transferred.

(4) allocate the transaction price to the performance obligations in the contract;

and (5) recognize revenue when a corresponding performance obligation is satisfied.

Most contracts with customers are to provide distinct products or services within a single contract.

However, if a contract is separated into more than one performance obligation, the total transaction price is allocated to each performance obligation in an amount based on the estimated relative standalone selling price.

Product sales to end-customers or distributors represent over 90 % of the Company’s revenue and are recognized at a point-in-time, which is generally at the point in time when products have been shipped, right to payment has been obtained and risk of loss has been transferred.

Certain of the Company’s product performance obligations include proprietary operating system software, which typically is not considered separately identifiable.

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Functional intellectual property licenses do not meet the criteria for revenue to be recognized over time and revenue is most commonly recognized upon delivery of the license/software to the customer.

CommScope Holding Company, Inc.

Notes to Consolidated Financial Statements-(Continued)

(In millions, unless otherwise noted)

Certain customer transactions may be project based and include multiple performance obligations based on the bundling of equipment, software and services.

When a multiple performance obligation arrangement exists, the transaction price is allocated to the performance obligations based on their relative standalone selling price, and revenue is recognized upon transfer of control of each deliverable.

To determine the standalone selling price, the Company first looks to establish the standalone selling price through an observable price when the good or service is sold separately in similar circumstances.

If the standalone selling price cannot be established through an observable price, the Company will make an estimate based on market conditions, customer specific factors and customer class.

The Company may use a combination of approaches to estimate the standalone selling price.

Other customer contract types include a variety of post-contract support service offerings, which are generally recognized over time as the services are provided, including the following:

The Company has service arrangements where net sales are recognized over time.

These arrangements include a variety of post-contract support service offerings, which are generally recognized over time as the services are provided, including the following:

maintenance and support services provided under annual service-level agreements;

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and installation services related to the routine installation of equipment ordered by the customer at the customer’s site.

For performance obligations recognized over time, judgment is required to evaluate assumptions, including the total estimated costs to determine progress towards completion of the performance obligation and to calculate the corresponding amount of revenue to recognize.

If estimated total costs on any contract are greater than the net contract revenues, the entire estimated loss is recognized in the period the loss becomes known.

The cumulative effects on revenue from revisions to total estimated costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.

Revenue is measured based on the consideration the Company expects to be entitled based on customer contracts.

For sales to distributors, system integrators and value-added resellers, revenue is adjusted for variable consideration amounts, including but not limited to estimated discounts, returns, rebates and distributor price protection programs.

Sales are adjusted for variable consideration amounts, including but not limited to estimated discounts, rebates, distributor price protection programs and returns.

These estimates are determined based upon historical experience, contract terms, inventory levels in the distributor channel and other related factors.

Adjustments to variable consideration estimates are recorded when circumstances indicate revisions may be necessary.

Variable consideration is primarily related to the Company's sales to distributors, system integrators and value-added resellers.

A contract liability for deferred revenue is recorded when consideration is received or is unconditionally due from a customer prior to transferring control of goods or services to the customer under the terms of a contract.

Deferred revenue balances typically result from advance payments received from customers for product contracts or from billings in excess of revenue recognized on project or services arrangements.

Deferred revenue balances typically result from advance payments received from customers for product contracts or from billings in excess of revenue recognized on services arrangements.

Unbilled receivables are recorded when revenues are recognized in advance of invoice issuance.

A contract asset is any portion of unbilled receivables for which the right to consideration is conditional on a factor other than the passage of time, which is common for certain performance obligations related to project contracts.

These assets are presented on a combined basis with accounts receivable and are converted to accounts receivable once the Company’s right to the consideration becomes unconditional, which varies by contract but is generally based on achieving certain acceptance milestones.

The Company recognizes the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset would be one year or less.

The Company includes shipping and handling costs billed to customers in net sales and includes the costs incurred to transport product to customers as well as certain internal handling costs, which relate to activities to prepare goods for shipment, as cost of sales.

Shipping and handling costs incurred after control is transferred to the customer are accounted for as fulfillment costs and are not accounted for as separate revenue obligations.