Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42 )
66
Consolidated Statements of Operations
69
Consolidated Statements of Comprehensive Loss
70
Consolidated Balance Sheets
71
Consolidated Statements of Cash Flows
72
Consolidated Statements of Stockholders’ Equity (Deficit)
73
Notes to Consolidated Financial Statements
74
65
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of CommScope Holding Company, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CommScope Holding Company, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss , stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation of Goodwill for the ANS Reporting Unit
Description of the Matter
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 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.
66
How We Addressed the Matter in Our Audit
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 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 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 support the realization of the Company’s existing deferred tax assets before expiration.
How We Addressed the Matter in Our Audit
We evaluated the Company’s assessment of the realizability of deferred tax assets, with the assistance of our income tax professionals. We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risks of material misstatement relating to the realizability of deferred tax assets, including controls over management’s development and review of the estimated future taxable income discussed above.
To test the realizability of deferred tax assets, we performed audit procedures 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 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
We have served as the Company’s auditor since 2008.
Charlotte, North Carolina
February 22, 2023
67
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of CommScope Holding Company, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited CommScope Holding Company, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, CommScope Holding Company, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 22, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Charlotte, North Carolina
February 22, 2023
68
CommScope Holding Company, Inc.
Consolidated Statements of Operations
(In millions, except per share amounts)
Year Ended December 31,
2022
2021
2020
Net sales
$
9,228.1
$
8,586.7
$
8,435.9
Cost of sales
6,424.0
5,902.4
5,688.1
Gross profit
2,804.1
2,684.3
2,747.8
Operating expenses:
Selling, general and administrative
1,135.0
1,233.9
1,170.7
Research and development
657.4
683.2
703.3
Amortization of purchased intangible assets
543.0
613.0
630.5
Restructuring costs, net
62.9
91.9
88.4
Asset impairments
1,119.6
13.7
206.7
Total operating expenses
3,517.9
2,635.7
2,799.6
Operating income (loss)
( 713.8
)
48.6
( 51.8
)
Other expense, net
( 0.1
)
( 23.8
)
( 29.3
)
Interest expense
( 588.9
)
( 561.2
)
( 577.8
)
Interest income
2.8
1.9
4.4
Loss before income taxes
( 1,300.0
)
( 534.5
)
( 654.5
)
Income tax benefit
13.1
71.9
81.1
Net loss
( 1,286.9
)
( 462.6
)
( 573.4
)
Series A convertible preferred stock dividends
( 59.0
)
( 57.3
)
( 56.1
)
Net loss attributable to common stockholders
$
( 1,345.9
)
$
( 519.9
)
$
( 629.5
)
Loss per share:
Basic
$
( 6.49
)
$
( 2.55
)
$
( 3.20
)
Diluted
$
( 6.49
)
$
( 2.55
)
$
( 3.20
)
Weighted average shares outstanding:
Basic
207.4
203.6
196.8
Diluted
207.4
203.6
196.8
See notes to consolidated financial statements.
69
CommScope Holding Company, Inc.
Consolidated Stat ements of Comprehensive Loss
(In millions)
Year Ended December 31,
2022
2021
2020
Comprehensive loss:
Net loss
$
( 1,286.9
)
$
( 462.6
)
$
( 573.4
)
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss)
( 104.5
)
( 85.3
)
82.2
Defined benefit plans:
Change in unrecognized actuarial gain (loss)
( 1.5
)
22.8
( 10.8
)
Change in unrecognized net prior service credit
0.1
0.2
( 0.2
)
Gain (loss) on hedging instruments
16.0
11.8
( 30.1
)
Total other comprehensive income (loss), net of tax
( 89.9
)
( 50.5
)
41.1
Total comprehensive loss
$
( 1,376.8
)
$
( 513.1
)
$
( 532.3
)
See notes to consolidated financial statements.
70
CommScope Holding Company, Inc.
Consolidated Balance Sheets
(In millions, except share amounts)
December 31,
2022
2021
Assets
Cash and cash equivalents
$
398.1
$
360.3
Accounts receivable, net of allowance for doubtful accounts
of $ 82.8 and $ 63.7 , respectively
1,523.6
1,532.6
Inventories, net
1,588.1
1,435.8
Prepaid expenses and other current assets
216.4
251.0
Total current assets
3,726.2
3,579.7
Property, plant and equipment, net of accumulated depreciation
of $ 873.5 and $ 787.4 , respectively
609.6
656.3
Goodwill
4,072.4
5,231.7
Other intangible assets, net
2,473.5
3,027.3
Other noncurrent assets
803.7
764.5
Total assets
$
11,685.4
$
13,259.5
Liabilities and Stockholders' Deficit
Accounts payable
$
1,025.5
$
1,160.7
Accrued and other liabilities
1,050.0
989.8
Current portion of long-term debt
32.0
32.0
Total current liabilities
2,107.5
2,182.5
Long-term debt
9,469.6
9,478.5
Deferred income taxes
173.4
208.2
Other noncurrent liabilities
380.6
490.8
Total liabilities
12,131.1
12,360.0
Commitments and contingencies
Series A convertible preferred stock, $ 0.01 par value
1,100.3
1,056.1
Stockholders' deficit:
Preferred stock, $ 0.01 par value: Authorized shares: 200,000,000 ;
Issued and outstanding shares: 1,100,310 and 1,056,144 , respectively,
Series A convertible preferred stock
—
—
Common stock, $ 0.01 par value: Authorized shares: 1,300,000,000 ;
Issued and outstanding shares: 208,371,426 and 204,567,294 ,
respectively
2.2
2.2
Additional paid-in capital
2,542.9
2,540.7
Accumulated deficit
( 3,502.2
)
( 2,215.3
)
Accumulated other comprehensive loss
( 296.3
)
( 206.4
)
Treasury stock, at cost: 12,726,695 shares and
10,970,585 shares, respectively
( 292.6
)
( 277.8
)
Total stockholders' deficit
( 1,546.0
)
( 156.6
)
Total liabilities and stockholders' deficit
$
11,685.4
$
13,259.5
See notes to consolidated financial statements.
71
CommScope Holding Company, Inc.
Consolidated Statements of Cash Flows
(In millions)
Year Ended December 31,
2022
2021
2020
Operating Activities:
Net loss
$
( 1,286.9
)
$
( 462.6
)
$
( 573.4
)
Adjustments to reconcile net loss to net cash generated by operating activities:
Depreciation and amortization
696.1
786.3
823.3
Equity-based compensation
61.1
79.6
115.0
Deferred income taxes
( 118.4
)
( 147.5
)
( 154.7
)
Asset impairments
1,119.6
13.7
206.7
Changes in assets and liabilities:
Accounts receivable
( 16.0
)
( 59.6
)
228.4
Inventories
( 178.8
)
( 359.8
)
( 100.5
)
Prepaid expenses and other current assets
30.9
3.2
( 17.2
)
Accounts payable and other accrued liabilities
( 43.2
)
256.0
( 175.2
)
Other noncurrent assets
8.2
( 45.5
)
28.8
Other noncurrent liabilities
( 88.8
)
8.4
( 4.0
)
Other
6.2
50.1
59.0
Net cash generated by operating activities
190.0
122.3
436.2
Investing Activities:
Additions to property, plant and equipment
( 101.3
)
( 131.4
)
( 121.2
)
Proceeds from sale of property, plant and equipment
0.1
13.1
5.0
Cash paid for Cable Exchange acquisition
—
—
( 3.5
)
Payments upon settlement of net investment hedge
—
( 18.0
)
—
Other
19.1
( 0.5
)
( 0.5
)
Net cash used in investing activities
( 82.1
)
( 136.8
)
( 120.2
)
Financing Activities:
Long-term debt repaid
( 365.0
)
( 1,282.0
)
( 1,282.0
)
Long-term debt proceeds
333.0
1,250.0
950.0
Debt issuance costs
( 7.2
)
( 12.0
)
( 11.7
)
Debt extinguishment costs
—
( 34.4
)
( 17.9
)
Dividends paid on Series A convertible preferred stock
( 14.9
)
( 43.0
)
( 14.3
)
Proceeds from the issuance of common shares under equity-based
compensation plans
0.1
5.6
9.0
Tax withholding payments for vested equity-based compensation awards
( 14.8
)
( 26.4
)
( 16.9
)
Other
3.8
2.7
—
Net cash used in financing activities
( 65.0
)
( 139.5
)
( 383.8
)
Effect of exchange rate changes on cash and cash equivalents
( 5.1
)
( 7.6
)
( 8.5
)
Change in cash and cash equivalents
37.8
( 161.6
)
( 76.3
)
Cash and cash equivalents at beginning of period
360.3
521.9
598.2
Cash and cash equivalents at end of period
$
398.1
$
360.3
$
521.9
See notes to consolidated financial statements.
72
CommScope Holding Company, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(In millions, except share amounts)
Year Ended December 31,
2022
2021
2020
Number of common shares outstanding:
Balance at beginning of period
204,567,294
200,095,232
194,563,530
Issuance of shares under equity-based compensation plans
5,560,242
6,219,566
7,343,401
Shares surrendered under equity-based compensation plans
( 1,756,110
)
( 1,747,504
)
( 1,811,699
)
Balance at end of period
208,371,426
204,567,294
200,095,232
Common stock:
Balance at beginning of period
$
2.2
$
2.1
$
2.0
Issuance of shares under equity-based compensation plans
—
0.1
0.1
Balance at end of period
$
2.2
$
2.2
$
2.1
Additional paid-in capital:
Balance at beginning of period
$
2,540.7
$
2,512.9
$
2,445.1
Issuance of shares under equity-based compensation plans
0.1
5.5
8.9
Equity-based compensation
61.1
79.6
115.0
Dividends on Series A convertible preferred stock
( 59.0
)
( 57.3
)
( 56.1
)
Balance at end of period
$
2,542.9
$
2,540.7
$
2,512.9
Accumulated deficit:
Balance at beginning of period
$
( 2,215.3
)
$
( 1,752.7
)
$
( 1,179.3
)
Net loss
( 1,286.9
)
( 462.6
)
( 573.4
)
Balance at end of period
$
( 3,502.2
)
$
( 2,215.3
)
$
( 1,752.7
)
Accumulated other comprehensive loss:
Balance at beginning of period
$
( 206.4
)
$
( 155.9
)
$
( 197.0
)
Other comprehensive income (loss), net of tax
( 89.9
)
( 50.5
)
41.1
Balance at end of period
$
( 296.3
)
$
( 206.4
)
$
( 155.9
)
Treasury stock, at cost:
Balance at beginning of period
$
( 277.8
)
$
( 251.4
)
$
( 234.5
)
Net shares surrendered under equity-based compensation plans
( 14.8
)
( 26.4
)
( 16.9
)
Balance at end of period
$
( 292.6
)
$
( 277.8
)
$
( 251.4
)
Total stockholders' equity (deficit)
$
( 1,546.0
)
$
( 156.6
)
$
355.0
See notes to consolidated financial statements.
73
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements
(In millions, unless otherwise noted)
1. BACKGROUND AND DESCRIPTION OF THE BUSINESS
CommScope Holding Company, Inc., along with its direct and indirect subsidiaries (CommScope or the Company), is a global provider of infrastructure solutions for communication, data center 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 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.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include CommScope Holding Company, Inc., along with its direct and indirect subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates in the Preparation of the Financial Statements
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S.) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and their underlying assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other objective sources. The Company bases its estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Significant accounting estimates reflected in the Company’s financial statements include the allowance for doubtful accounts; reserves for sales returns, discounts, allowances, rebates and distributor price protection programs; inventory excess and obsolescence reserves; product warranty reserves and other contingent liabilities; tax valuation allowances; liabilities for unrecognized tax benefits; impairment reviews for investments, property, plant and equipment, goodwill and other intangible assets; and pension and other postretirement benefit costs and liabilities. Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is at least reasonably possible that they may ultimately differ materially from actual results.
Cash and Cash Equivalents
Cash and cash equivalents represent deposits in banks and cash invested temporarily in various instruments that are highly liquid and have a maturity of three months or less at the time of purchase.
74
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable and contract assets for unbilled receivables are stated at the amount owed by the customer, net of allowances for estimated doubtful accounts, discounts, returns and rebates. The Company measures the allowance for doubtful accounts using an expected credit loss model, which uses a lifetime expected loss allowance for all trade accounts receivable and contract assets. To measure the expected credit losses, trade accounts receivable and contract assets are grouped based on shared credit risk characteristics and the days past due 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. Therefore, the Company has concluded that the expected loss rates for trade accounts receivables are a reasonable approximation of the loss rates for the contract assets.
In calculating an allowance for doubtful accounts, the Company uses its historical experience, external indicators and forward-looking information to calculate expected credit losses using an aging method. The Company assesses impairment of trade accounts receivable on a collective basis as they possess shared credit risk characteristics which have been grouped based on the days past due.
The expected loss rates are based on the payment profiles of sales over the preceding thirty-six months and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle their trade accounts receivable. Accounts are written off against the allowance account when they are determined to be no longer collectible.
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
Inventories are stated at the lower of cost or net realizable value. Inventory cost is determined on a first-in, first-out (FIFO) basis. Costs such as idle facility expense, excessive scrap and re-handling costs are expensed as incurred. The Company maintains reserves to reduce the value of inventory to the lower of cost or net realizable value, including reserves for excess and obsolete inventory.
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.
75
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Leases
The Company determines if a contract is a lease or contains a lease at inception. Right of use assets related to operating type leases are reported in other noncurrent assets and the present value of remaining lease obligations is reported in accrued and other liabilities and other noncurrent liabilities on the Consolidated Balance Sheets. For the periods presented, CommScope does not have any financing type leases.
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
Property, plant and equipment are stated at cost. Upon application of acquisition accounting, property, plant and equipment are measured at estimated fair value as of the acquisition date to establish a new historical cost basis. Provisions for depreciation are based on estimated useful lives of the assets using the straight-line method. Useful lives generally range from 10 to 35 years for buildings and improvements and 3 to 10 years for machinery and equipment. Expenditures for repairs and maintenance are expensed as incurred. Assets that management intends to dispose of and that meet held for sale criteria are carried at the lower of the carrying value or fair value less costs to sell.
Goodwill and Other Intangible Assets
Goodwill is assigned to reporting units based on the difference between the purchase price as allocated to the reporting units and the estimated fair value of the identified net assets acquired as allocated to the reporting units. Purchased intangible assets with finite lives are carried at their estimated fair values at the time of acquisition less accumulated amortization and any impairment charges. Amortization is recognized on a straight-line basis over the estimated useful lives of the respective assets, which approximates the pattern that the economic benefits are realized by the Company.
Asset Impairments
Goodwill is tested for impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of the reporting unit may exceed its fair value. Property, plant and equipment, intangible assets with finite lives and right of use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable, based on the undiscounted cash flows expected to be derived from the use and ultimate disposition of the assets. Assets identified as impaired are adjusted to estimated fair value. Equity investments without readily determinable fair values are evaluated each reporting period for impairment based on a qualitative assessment and are then measured at fair value if an impairment is determined to exist. See Notes 3 and 9 for discussion of asset impairment charges.
76
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
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
The Company recognizes revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. The Company’s revenue is generated primarily from product or equipment sales. The Company also generates revenue from custom design and installation services as well as bundled sales arrangements that include product, software and services. 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; (3) determine the transaction price; (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. Therefore, sales of these products and the related software are considered one performance obligation.
License contracts include revenue recognized for the licensing of intellectual property, including software, sold separately without products. Functional intellectual property licenses do not meet the criteria for revenue to be recognized over time and revenue is most commonly recognized upon delivery of the license/software to the customer.
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; “Day 2” professional services to help customers maximize their utilization of deployed systems; and installation services related to the routine installation of equipment ordered by the customer at the customer’s site.
Revenue is measured based on the consideration the Company expects to be entitled based on customer contracts. 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 services arrangements.
Unbilled receivables are recorded when revenues are recognized in advance of invoice issuance. 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.
77
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Shipping and Handling Costs
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.
Tax Collected from Customers
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, which are collected by the Company from customers, are excluded from net sales.
Advertising Costs
Advertising costs are expensed in the period in which they are incurred and are reflected in selling, general and administrative expense on the Consolidated Statements of Operations. Advertising expense was $ 39.4 million, $ 35.8 million and $ 45.9 million for the years ended December 31, 2022, 2021 and 2020 , respectively.
Product Warranties
The Company recognizes a liability for the estimated claims that may be paid under its customer assurance-type warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products. These product warranties extend over various periods, depending on the product subject to the warranty and the terms of the individual agreements. The Company records a provision for estimated future warranty claims as cost of sales based upon the historical relationship of warranty claims to sales and specifically identified warranty issues. The Company bases its estimates on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Such revisions may be material.
Research and Development
Research and development (R&D) costs are expensed in the period in which they are incurred. R&D costs include materials and equipment that have no alternative future use, depreciation on equipment and facilities currently used for R&D purposes, personnel costs, contract services and reasonable allocations of indirect costs, if clearly related to an R&D activity. Expenditures in the pre-production phase of an R&D project are recorded as R&D expense. However, costs incurred in the pre-production phase that are associated with output actually used in production are recorded in cost of sales. A project is considered finished with pre-production efforts when management determines that it has achieved acceptable levels of scrap and yield, which vary by project. Expenditures related to ongoing production are recorded in cost of sales.
78
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Restructuring
The Company records restructuring charges associated with management-approved restructuring plans, which could include the elimination of job functions, closure or relocation of facilities, reorganization of operations, changes in management structure, workforce reductions or other actions. Restructuring charges may include ongoing and enhanced termination benefits related to employee separations, contract termination costs, impairment of certain assets and other related costs associated with exit or disposal activities. Severance benefits are provided to employees primarily under the Company’s ongoing benefit arrangements. These severance costs are accrued once management commits to a plan of termination and it becomes probable that employees will be separated and entitled to benefits at amounts that can be reasonably estimated. In some instances, the Company enhances its ongoing termination benefits with one-time termination benefits, which are recognized when employees are notified of their enhanced termination benefits.
Foreign Currency Translation
For the years ended December 31, 2022, 2021 and 2020 , approximately 38 %, 42 % and 39 %, respectively, of the Company’s net sales were to customers located outside the U.S. A portion of these sales was denominated in currencies other than the U.S. dollar, particularly sales from the Company’s foreign subsidiaries. The financial position and results of operations of certain of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Revenues and expenses of these subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities of these subsidiaries have been translated at the exchange rates as of the balance sheet date. Translation gains and losses are recorded in accumulated other comprehensive loss. Upon sale or liquidation of an investment in a foreign subsidiary, the amount of net translation gains or losses that have been accumulated in other comprehensive loss attributable to that investment are reported as a gain or loss in earnings in the period in which the sale or liquidation occurs.
Aggregate foreign currency gains and losses, such as those resulting from the settlement of receivables or payables, foreign currency contracts and short-term intercompany advances in a currency other than the subsidiary’s functional currency, are recorded currently in earnings (included in other expense, net) and resulted in losses of $ 4.1 million, $ 4.4 million and $ 19.2 million during the years ended December 31, 2022, 2021 and 2020, respectively. Foreign currency remeasurement gains and losses related to certain long-term intercompany loans that are not expected to be settled in the foreseeable future are recorded in accumulated other comprehensive loss.
Equity-Based Compensation
The estimated fair value of stock awards is recognized as expense over the requisite service periods. Forfeitures of stock awards are recognized as they occur. The Company records deferred tax assets related to compensation expense for awards that are expected to result in future tax deductions for the Company, based on the amount of compensation cost recognized and the Company’s statutory tax rate in the jurisdiction in which it expects to receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and actual tax deductions reported on the Company’s income tax return are recorded in the Consolidated Statements of Operations within income tax expense benefit.
Income Taxes
Deferred income taxes reflect the future tax consequences of differences between the financial reporting and tax basis of assets and liabilities. The Company records a valuation allowance, when appropriate, to reduce deferred tax assets to an amount that is more likely than not to be realized.
Tax benefits that result from uncertain tax positions may be recognized only if they are considered more likely than not to be sustainable, based on their technical merits. The amount of benefit to be recognized is the largest amount of tax benefit that is at least 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.
79
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
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.
Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS) is computed by dividing net income (loss), less any dividends related to the Series A convertible preferred stock (Convertible Preferred Stock), by the weighted average number of common shares outstanding during the period. The numerator in diluted EPS is based on the basic EPS numerator adjusted to add back any dividends related to the Convertible Preferred Stock, subject to antidilution requirements. The denominator used in diluted EPS is based on the basic EPS computation plus the effect of potentially dilutive common shares related to the Convertible Preferred Stock and equity-based compensation plans, subject to antidilution requirements.
For the years ended December 31, 2022, 2021 and 2020 , 11.3 million, 12.2 million and 17.4 million shares, respectively, of outstanding equity-based compensation awards were not included in the computation of diluted EPS because either the effect was antidilutive or the performance conditions were not met. Of those amounts, for the years ended December 31, 2022, 2021 and 2020, 2.9 million, 4.9 million and 4.4 million shares, respectively, would have been considered dilutive if the Company had not been in a net loss position.
For the years ended December 31, 2022, 2021 and 2020, 39.1 million, 37.9 million and 37.1 million, respectively, of as-if converted shares related to the Convertible Preferred Stock were excluded from the diluted share count because they were anti-dilutive; however, they may have been considered dilutive if the Company had not been in a net loss position .
Year ended December 31,
2022
2021
2020
Numerator:
Net loss
$
( 1,286.9
)
$
( 462.6
)
$
( 573.4
)
Dividends on Series A convertible preferred stock
( 59.0
)
( 57.3
)
( 56.1
)
Net loss attributable to common stockholders
$
( 1,345.9
)
$
( 519.9
)
$
( 629.5
)
Denominator:
Weighted average common shares outstanding – basic
207.4
203.6
196.8
Dilutive effect of as-if converted Series A convertible preferred stock
—
—
—
Dilutive effect of equity-based awards
—
—
—
Weighted average common shares outstanding – diluted
207.4
203.6
196.8
Loss per share:
Basic
$
( 6.49
)
$
( 2.55
)
$
( 3.20
)
Diluted
$
( 6.49
)
$
( 2.55
)
$
( 3.20
)
Concentrations of Risk
Non-derivative financial instruments used by the Company in the normal course of business include letters of credit and commitments to extend credit, primarily accounts receivable. The Company generally does not require collateral on its accounts receivable. These financial instruments involve risk, including the credit risk of nonperformance by the counterparties to those instruments, and the actual loss may exceed the reserves provided in the Company’s Consolidated Balance Sheets. See Note 16 for further discussion of customer-related concentrations of risk.
The Company manages its exposures to credit risk associated with accounts receivable using such tools as credit approvals, credit limits and monitoring procedures. CommScope estimates the allowance for doubtful accounts based on the actual payment history and individual circumstances of significant customers as well as the age of receivables. In management’s opinion, as of December 31, 2022, the Company did not have significant unreserved risk of credit loss due to the non-performance of customers or other counterparties related to amounts receivable. However, an adverse change in financial condition of a significant customer or group of customers or in the telecommunications industry could materially affect the Company’s estimates related to doubtful accounts.
80
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The principal raw materials and components purchased by CommScope (aluminum, copper, steel, bimetals, optical fiber, plastics and other polymers, capacitors, memory devices and silicon chips) are subject to changes in market price as these materials are linked to various commodity markets. The Company attempts to mitigate these risks through effective requirements planning and by working closely with its key suppliers to obtain the best possible pricing and delivery terms.
The Company relies on sole suppliers or a limited group of suppliers for certain key components (memory devices, capacitors and silicon chips), subassemblies and modules and a limited group of contract manufacturers to manufacture a significant portion of its products. Any disruption or termination of these arrangements could have a material adverse impact on the Company’s results of operations.
Recent Accounting Pronouncements
Adopted in 2022
On January 1, 2022, the Company adopted Accounting Standards Update (ASU) No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity . The new guidance simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions and requires the application of the if-converted method for calculating diluted earnings per share, along with expanded disclosures. The impact of adopting this new guidance was not material to the consolidated financial statements.
On January 1, 2022, the Company early adopted ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers . The new guidance improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability, as well as payment terms which affect subsequent revenue recognized by the acquirer. According to the guidance, at the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if the acquirer had originated the contracts. The adoption of this new guidance had no impact to the consolidated financial statements but will be applied prospectively to future business combinations.
Issued but Not Adopted
In September 2022, the Financial Accounting Standards Board (FASB) issued ASU No. 2022-04, Liabilities–Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The new guidance is expected to improve the transparency of supplier finance programs by requiring that a buyer in a supplier finance program disclose sufficient qualitative and quantitative information about the program to allow a user of its financial statements to understand the program's nature, activity during the period, changes from period to period and potential magnitude. ASU No. 2022-04 is effective for the Company as of January 1, 2023 on a retrospective basis including interim periods within those fiscal years, except for the requirement to disclose rollforward information which is effective for the Company as of January 1, 2024. Early adoption is permitted. The Company had no material supplier finance programs in 2022. The Company does not expect this guidance to have a material impact on the consolidated financial statements.
In March 2020, January 2021 and December 2022, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope and ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, respectively. Together, the ASUs provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and sale or transfer of debt securities classified as held-to-maturity. The most recent amendment defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024.
81
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents details of the Company’s intangible assets other than goodwill as of December 31, 2022 and 2021:
2022
2021
Gross Carrying
Amount
Accumulated Amortization
Net Carrying Amount
Gross Carrying
Amount
Accumulated Amortization
Net Carrying Amount
Customer base
$
3,486.5
$
1,941.5
$
1,545.0
$
3,508.4
$
1,779.3
$
1,729.1
Trade names and trademarks
1,020.6
502.9
517.7
1,022.3
439.8
582.5
Patents and technologies
2,014.4
1,603.6
410.8
2,025.7
1,310.0
715.7
Other
58.3
58.3
—
58.3
58.3
—
Total intangible assets
$
6,579.8
$
4,106.3
$
2,473.5
$
6,614.7
$
3,587.4
$
3,027.3
There were no impairments of finite-lived intangible assets identified during the years ended December 31, 2022, 2021 or 2020.
Amortization expense for intangible assets was $ 543.0 million, $ 613.0 million and $ 630.5 million for the years ended December 31, 2022, 2021 and 2020 , respectively. Future amortization expense as of December 31, 2022 is as follows:
Estimated
Amortization
Expense
2023
$
429.8
2024
342.7
2025
277.8
2026
229.1
2027
199.1
Thereafter
995.0
The following table presents the activity in goodwill by reportable segment.
December 31, 2021
Activity
December 31, 2022
Goodwill
Accumulated Impairment Losses
Total
Additions (Deductions)
Impairment
Foreign Exchange and Other
Goodwill
Accumulated Impairment Losses
Total
CCS
$
2,307.3
$
( 51.5
)
$
2,255.8
$
—
$
—
$
( 26.4
)
$
2,280.9
$
( 51.5
)
$
2,229.4
OWN
666.6
( 159.5
)
507.1
—
—
( 6.3
)
660.3
( 159.5
)
500.8
NICS
653.0
( 41.2
)
611.8
—
—
( 3.6
)
649.4
( 41.2
)
608.2
ANS
1,999.1
( 142.1
)
1,857.0
—
( 1,119.6
)
( 3.4
)
1,995.7
( 1,261.7
)
734.0
Home
413.2
( 413.2
)
—
—
—
—
413.2
( 413.2
)
—
Total
$
6,039.2
$
( 807.5
)
$
5,231.7
$
—
$
( 1,119.6
)
$
( 39.7
)
$
5,999.5
$
( 1,927.1
)
$
4,072.4
December 31, 2020
Activity
December 31, 2021
Goodwill
Accumulated Impairment Losses
Total
Additions (Deductions)
Impairment
Foreign Exchange and Other
Goodwill
Accumulated Impairment Losses
Total
CCS
$
2,323.8
$
( 51.5
)
$
2,272.3
$
—
$
—
$
( 16.5
)
$
2,307.3
$
( 51.5
)
$
2,255.8
OWN
670.6
( 159.5
)
511.1
—
—
( 4.0
)
666.6
( 159.5
)
507.1
NICS
657.8
( 41.2
)
616.6
—
—
( 4.8
)
653.0
( 41.2
)
611.8
ANS
2,028.6
( 142.1
)
1,886.5
( 13.7
)
—
( 15.8
)
1,999.1
( 142.1
)
1,857.0
Home
399.5
( 399.5
)
—
13.7
( 13.7
)
—
413.2
( 413.2
)
—
Total
$
6,080.3
$
( 793.8
)
$
5,286.5
$
—
$
( 13.7
)
$
( 41.1
)
$
6,039.2
$
( 807.5
)
$
5,231.7
82
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
During the annual impairment test performed in the fourth quarter of 2022 and in conjunction with the development of its 2023 and long-range plans, the Company identified changes in the ANS reporting unit's expected future cash flows due to various market trends expected to affect the business, including technology shifts affecting hardware sales, trends affecting bandwidth growth and other operational challenges, as well as an increase in the cost of capital. As a result, the Company determined the goodwill balance in the ANS reporting unit was impaired and recorded a $ 1,119.6 million impairment charge. The ANS reporting unit is the same as the ANS segment.
In the second quarter of 2021, management shifted certain product lines from the Company’s ANS segment to its Home segment to better align the Home segment with how the business is being managed. The realignment of product lines changed the composition of the Company’s reporting units which resulted in the reallocation of $ 13.7 million of goodwill from the ANS reporting unit, within the ANS segment, to the Home Networks reporting unit, within the Home segment, which is reflected as additions (deductions) in the table above. During the annual impairment test performed in the fourth quarter of 2021 and in conjunction with the development of the Company's 2022 and long-range plans, the Company identified further weakness in the projected results of its Home Networks reporting unit that stemmed from the continued decline in customer demand for video products. As a result, the Company determined the goodwill balance in the Home Networks reporting unit was impaired and recorded a $ 13.7 million impairment charge.
The goodwill balance for the year ended December 31, 2020 reflects the final measurement period adjustments from the ARRIS acquisition. During the second quarter of 2020, the Company recorded a $ 206.7 million goodwill impairment charge relating to the Home Networks reporting unit which resulted in a full impairment of the remaining goodwill in the Home segment, and as such, the Home segment had no remaining goodwill balance as of December 31, 2020.
Estimating the fair value of a reporting unit involves uncertainties because it requires management to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry economic factors and future business strategy. Changes in projected revenue growth rates, projected operating income margins or estimated discount rates due to uncertain market conditions, loss of one or more key customers, changes in the Company’s strategy, changes in technology or other factors could negatively affect the fair value in one or more of the Company’s reporting units and result in a material impairment charge in the future.
83
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
4. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregated Net Sales
See Note 16 for the presentation of net sales by segment and geographic region.
Allowance for Doubtful Accounts
Year Ended December 31,
2022
2021
2020
Allowance for doubtful accounts, beginning of period
$
63.7
$
40.3
$
35.4
Provision
22.6
25.8
5.0
Write-offs
( 2.1
)
( 0.9
)
( 3.2
)
Foreign exchange and other
( 1.4
)
( 1.5
)
3.1
Allowance for doubtful accounts, end of period
$
82.8
$
63.7
$
40.3
During the year ended December 31, 2022, the Company recorded an allowance for $ 20.9 million to reserve the balance due from a distributor in the OWN segment based on deterioration in the customer’s risk profile. During the year ended December 31, 2021, the Company recorded an allowance for $ 30.3 million to reserve the balance due from a value-added reseller in the Home segment due to deterioration in the customer’s risk profile. These charges are included in the provision line in the table above and in selling, general and administrative expense on the Consolidated Statements of Operations.
Customer Contract Balances
The following table provides the balance sheet location and amounts of contract assets, or unbilled accounts receivable, and contract liabilities, or deferred revenue, from contracts with customers as of December 31, 2022 and December 31, 2021.
December 31,
Contract Balance Type
Balance Sheet Location
2022
2021
Unbilled accounts receivable
Accounts receivable, net of allowance for doubtful accounts
$
35.3
$
35.0
Deferred revenue - current
Accrued and other liabilities
$
97.9
$
94.6
Deferred revenue - noncurrent
Other noncurrent liabilities
63.4
61.1
Total contract liabilities
$
161.3
$
155.7
There were no material changes to contract asset balances for the year ended December 31, 2022 as a result of changes in estimates or impairments. The change in the contract liability balance from December 31, 2021 to December 31, 2022 was primarily due to upfront support billings to be recognized over the support term. During the year ended December 31, 2022, the Company recognized $ 88.3 million of revenue related to contract liabilities recorded as of December 31, 2021.
5. LEASES
The Company has operating type leases for real estate, equipment and vehicles both in the U.S. and internationally. As of December 31, 2022 and 2021, the Company had no finance type leases. Operating lease expense was $ 97.6 million, $ 102.1 million and $ 105.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. Operating lease expense included period cost for short-term, cancellable and variable leases that were not included in lease liabilities, of $ 36.2 million, $ 33.2 million and $ 31.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The Company occasionally subleases all or a portion of certain unutilized real estate facilities. As of December 31, 2022, the Company’s sublease arrangements were classified as operating type leases and the income amounts were not material for the years ended December 31, 2022, 2021 and 2020, respectively.
Supplemental cash flow information related to operating leases:
Year Ended December 31,
2022
2021
2020
Operating cash paid to settle lease liabilities
$
59.4
$
71.5
$
74.6
Right of use asset additions in exchange for lease liabilities
43.5
25.3
21.9
84
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Supplemental balance sheet information related to operating leases:
December 31,
Balance Sheet Location
2022
2021
Right of use assets
Other noncurrent assets
$
149.0
$
162.5
Lease liabilities - current
Accrued and other liabilities
$
47.7
$
46.7
Lease liabilities - noncurrent
Other noncurrent liabilities
123.5
140.8
Total lease liabilities
$
171.2
$
187.5
Weighted average remaining lease term (in years)
5.3
Weighted average discount rate
8.8
%
Future minimum lease payments under non-cancellable leases as of December 31, 2022 are as follows:
Operating Leases
2023
57.2
2024
45.0
2025
31.8
2026
24.4
2027
15.0
Thereafter
47.9
Total minimum lease payments
$
221.3
Less: imputed interest
( 50.1
)
Total
$
171.2
6. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION
Accounts Receivable
December 31,
2022
2021
Accounts receivable - trade
$
1,545.3
$
1,499.9
Accounts receivable - other
61.1
96.4
Allowance for doubtful accounts
( 82.8
)
( 63.7
)
Total accounts receivable, net
$
1,523.6
$
1,532.6
Inventories
December 31,
2022
2021
Raw materials
$
535.8
$
436.0
Work in process
212.7
178.3
Finished goods
839.6
821.5
Total inventories, net
$
1,588.1
$
1,435.8
85
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Property, Plant and Equipment
December 31,
2022
2021
Land and land improvements
$
52.2
$
54.1
Buildings and improvements
340.9
334.4
Machinery and equipment
1,038.1
968.0
Construction in progress
51.9
87.2
1,483.1
1,443.7
Accumulated depreciation
( 873.5
)
( 787.4
)
Total property, plant and equipment, net
$
609.6
$
656.3
D epreciation expense was $ 127.2 million, $ 136.7 million and $ 158.3 million during the years ended December 31, 2022, 2021 and 2020 , respectively. No interest was capitalized during the years ended December 31, 2022, 2021 or 2020.
Accrued and Other Liabilities
December 31,
2022
2021
Compensation and employee benefit liabilities
$
301.3
$
304.7
Accrued interest
118.1
118.3
Deferred revenue
97.9
94.6
Contract manufacturer inventory repurchase obligation
79.1
14.5
Restructuring liabilities
58.9
41.0
Operating lease liabilities
47.7
46.7
Product warranty accrual
44.8
54.0
Other
302.2
316.0
Total accrued and other liabilities
$
1,050.0
$
989.8
Accumulated Other Comprehensive Loss
The following table presents changes in accumulated other comprehensive loss (AOCL), net of tax:
Year Ended December 31,
2022
2021
Foreign currency translation
Balance at beginning of period
$
( 165.8
)
$
( 80.5
)
Other comprehensive loss
( 104.3
)
( 86.4
)
Amounts reclassified from AOCL
( 0.2
)
1.1
Balance at end of period
$
( 270.3
)
$
( 165.8
)
Defined benefit plan activity
Balance at beginning of period
$
( 13.4
)
$
( 36.4
)
Other comprehensive income (loss)
( 1.4
)
24.1
Amounts reclassified from AOCL
—
( 1.1
)
Balance at end of period
$
( 14.8
)
$
( 13.4
)
Hedging instruments
Balance at beginning of period
$
( 27.2
)
$
( 39.0
)
Other comprehensive income
16.0
11.8
Balance at end of period
$
( 11.2
)
$
( 27.2
)
Net AOCL at end of period
$
( 296.3
)
$
( 206.4
)
86
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Amounts reclassified from net AOCL related to foreign currency translation and defined benefit plans are recorded in other expense, net in the Consolidated Statements of Operations.
Cash Flow Information
Year Ended December 31,
2022
2021
2020
Cash paid during the period for:
Income taxes, net of refunds
$
130.7
$
79.4
$
94.4
Interest
563.2
525.9
520.9
7. FINANCING
December 31,
2022
2021
7.125 % senior notes due July 2028
$
700.0
$
700.0
5.00 % senior notes due March 2027
750.0
750.0
8.25 % senior notes due March 2027
1,000.0
1,000.0
6.00 % senior notes due June 2025
1,300.0
1,300.0
4.75 % senior secured notes due September 2029
1,250.0
1,250.0
6.00 % senior secured notes due March 2026
1,500.0
1,500.0
Senior secured term loan due April 2026
3,096.0
3,128.0
Senior secured revolving credit facility
—
—
Total principal amount of debt
$
9,596.0
$
9,628.0
Less: Original issue discount, net of amortization
( 15.9
)
( 20.3
)
Less: Debt issuance costs, net of amortization
( 78.5
)
( 97.2
)
Less: Current portion
( 32.0
)
( 32.0
)
Total long-term debt
$
9,469.6
$
9,478.5
Senior Notes
As of December 31, 2022, the Company had outstanding two series of senior secured notes: (1) $ 1,250.0 million of 4.75 % senior secured notes due September 1, 2029 (the 2029 Secured Notes) issued by CommScope, Inc. in August 2021; and (2) $ 1.5 billion of 6.00 % senior secured notes due March 1, 2026 issued by CommScope, Inc. in February 2019 (the 2026 Secured Notes and, together with the 2029 Secured Notes, the Secured Notes). As of December 31, 2022, the Company had outstanding four series of senior unsecured notes: (1) $ 700.0 million initial aggregate principal amount of 7.125 % senior notes due July 1, 2028 (the 2028 Notes) issued by CommScope, Inc. in July 2020; (2) $ 750.0 million initial aggregate principal amount of 5.00 % senior notes due March 15, 2027 issued by CommScope Technologies LLC (CommScope Technologies), a wholly owned subsidiary of the Company, in March 2017 (the 5.00 % 2027 Notes); (3) $ 1.3 billion aggregate principal amount of 6.00 % senior notes due June 15, 2025 issued by CommScope Technologies in June 2015 (the 2025 Notes, and together with the 5.00 % 2027 Notes, the CommScope Technologies Notes); (4) $ 1.0 billion initial aggregate principal amount of 8.25 % senior notes due March 1, 2027 issued by CommScope, Inc. in February 2019 (the 8.25 % 2027 Notes and, together with the 2028 Notes, the CommScope, Inc. Notes; the Secured Notes, the CommScope Technologies Notes and the CommScope, Inc. Notes, collectively, the Senior Notes).
The indentures governing the Senior Notes contain covenants that restrict the ability of CommScope, Inc. and its restricted subsidiaries to, among other things, incur additional debt, make certain payments, including payment of dividends (except, in the case of the CommScope, Inc. Notes and the Secured Notes, with respect to the Convertible Preferred Stock) or repurchases of equity interests of CommScope, Inc. or the applicable issuer, make loans or acquisitions or capital contributions and certain investments, incur certain liens, sell assets, merge or consolidate or liquidate other entities and enter into certain transactions with affiliates.
There are no financial maintenance covenants in the indentures governing the Senior Notes. Events of default under the indentures governing the Senior Notes include, among others, non-payment of principal or interest when due, covenant defaults, bankruptcy and insolvency events and cross acceleration to material debt.
87
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
4.75 % Senior Secured Notes due 2029 and 6.00 % Senior Secured Notes due 2026 (the Secured Notes)
The 2029 Secured Notes mature on September 1, 2029 and the 2026 Secured Notes mature on March 1, 2026 . Interest is payable on the Secured Notes semi-annually in arrears on March 1 and September 1 of each year. The Secured Notes are guaranteed on a senior secured basis by the Company and each of CommScope, Inc.’s existing and future wholly owned domestic restricted subsidiaries that is an obligor under the senior secured credit facilities or certain other debt, subject to certain exceptions. The Secured Notes and the related guarantees are secured on a first-priority basis by security interests in all of the assets that secure indebtedness under the 2026 Term Loan on a first-priority basis, and on a second-priority basis in all assets that secure the Revolving Credit Facility (as defined below) on a first-priority basis and the 2026 Term Loan on a second-priority basis. The Secured Notes and the related guarantees rank senior in right of payment to all of CommScope, Inc.’s and the guarantors’ subordinated indebtedness and equally in right of payment with all of CommScope, Inc.’s and the guarantors’ senior indebtedness (without giving effect to collateral arrangements), including the senior secured credit facilities and the other Senior Notes. The Secured Notes and the related guarantees are effectively senior to all of CommScope, Inc.’s and the guarantors’ unsecured indebtedness and debt secured by a lien junior to the liens securing the Secured Notes, in each case to the extent of the value of the collateral, and effectively equal to all of CommScope, Inc.’s and the guarantors’ senior indebtedness secured on the same priority basis as the Secured Notes, including the 2026 Term Loan. The Secured Notes and the related guarantees are effectively subordinated to any of CommScope, Inc.’s or the guarantors’ indebtedness that is secured by assets that do not constitute collateral for the Secured Notes and effectively subordinated to any of CommScope, Inc.’s or the guarantors’ indebtedness that is secured by a senior-priority lien, including under the Revolving Credit Facility, in each case to the extent of the value of the assets securing such indebtedness. In addition, the Secured Notes and related guarantees are structurally subordinated to all existing and future liabilities (including trade payables) of CommScope, Inc.’s subsidiaries that do not guarantee the Secured Notes.
The Secured Notes may be redeemed prior to maturity under certain circumstances. Upon certain change of control events, the Secured Notes may be redeemed at the option of the holders at 101 % of their face amount, plus accrued and unpaid interest. The 2029 Secured Notes may be redeemed on or after September 1, 2024 by CommScope, Inc. at the redemption prices specified in the indenture governing the 2029 Secured Notes. Prior to September 1, 2024 , the 2024 Secured Notes may be redeemed by CommScope, Inc. at a redemption price equal to 100 % of their principal amount, plus a make-whole premium (as specified in the indenture governing the 2029 Secured Notes), plus accrued and unpaid interest. Prior to September 1, 2024 , under certain circumstances, CommScope, Inc. may also redeem up to 40 % of the aggregate principal amount of the 2029 Secured Notes at a redemption price of 104.750 %, plus accrued and unpaid interest, using the proceeds of certain equity offerings. At any time prior to September 1, 2024 , CommScope, Inc. may redeem during each calendar year up to 10.0 % of the aggregate principal amount of the 2029 Secured Notes at a redemption price equal to 103.0 % of the aggregate principal amount of the 2029 Secured Notes to be redeemed, plus accrued and unpaid interest, if any, to, but not including, the date of redemption. The 2026 Secured Notes may be redeemed by CommScope, Inc. at the redemption prices specified in the indenture governing the 2026 Secured Notes.
7.125% Senior Notes due 2028 and 8.25% Senior Notes due 2027 (the CommScope, Inc. Notes)
The 2028 Notes mature on July 1, 2028 and the 8.25 % 2027 Notes mature on March 1, 2027 . Interest is payable semi-annually in arrears on the 2028 Notes on July 1 and January 1 of each year and on the 8.25% 2027 Notes on March 1 and September 1 of each year. The CommScope, Inc. Notes are guaranteed on a senior unsecured basis by each of CommScope, Inc.’s existing and future wholly owned domestic restricted subsidiaries that is an obligor under the senior secured credit facilities or certain other capital markets debt, subject to certain exceptions. The CommScope, Inc. Notes and the related guarantees rank senior in right of payment to all of CommScope, Inc.’s and the guarantors’ subordinated indebtedness and equally in right of payment with all of CommScope, Inc.’s and the guarantors’ senior indebtedness (without giving effect to collateral arrangements), including the senior secured credit facilities and the other Senior Notes. The CommScope, Inc. Notes and the related guarantees are effectively junior to all of CommScope, Inc.’s and the guarantors’ existing and future secured indebtedness, including the Secured Notes and the senior secured credit facilities, to the extent of the value of the assets securing such secured indebtedness. In addition, the CommScope, Inc. Notes and related guarantees are structurally subordinated to all existing and future liabilities (including trade payables) of CommScope, Inc.’s subsidiaries that do not guarantee the CommScope, Inc. Notes.
88
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The CommScope, Inc. Notes may be redeemed prior to maturity under certain circumstances. Upon certain change of control events, the CommScope, Inc. Notes may be redeemed at the option of the holders at 101 % of their principal amount, plus accrued and unpaid interest. The 2028 Notes may be redeemed by CommScope, Inc. on or after July 1, 2023 at the redemption prices specified in the indenture governing the 2028 Notes. Prior to July 1, 2023, the 2028 Notes may be redeemed by CommScope, Inc. at a redemption price equal to 100 % of their principal amount, plus a make-whole premium (as specified in the indenture governing the 2028 Notes), plus accrued and unpaid interest. Prior to July 1, 2023 , under certain circumstances, CommScope, Inc. may also redeem up to 40 % of the aggregate principal amount of the 2028 Notes at a redemption price of 107.125 %, plus accrued and unpaid interest, using the proceeds of certain equity offerings. The 8.25% 2027 Notes may be redeemed by CommScope, Inc. at the redemption prices specified in the indenture governing the 8.25% 2027 Notes.
5.00% Senior Notes due 2027 and 6.00% Senior Notes due 2025 (the CommScope Technologies Notes)
The 5.00 % 2027 Notes mature on March 15, 2027 and the 2025 Notes mature on June 15, 2025 . Interest is payable on the 5.00% 2027 Notes semi-annually in arrears on March 15 and September 15 of each year and on the 2025 Notes on June 15 and December 15 of each year.
The CommScope Technologies Notes are guaranteed on a senior unsecured basis by CommScope, Inc. and each of CommScope, Inc.’s existing and future wholly owned domestic restricted subsidiaries (other than CommScope Technologies) that is an obligor under the senior secured credit facilities or certain other capital markets debt, subject to certain exceptions. The CommScope Technologies Notes and the related guarantees rank senior in right of payment to all of CommScope Technologies’ and the guarantors’ subordinated indebtedness and equally in right of payment with all of CommScope Technologies’ and the guarantors’ senior indebtedness (without giving effect to collateral arrangements), including the senior secured credit facilities and the other Senior Notes. The CommScope Technologies Notes and the related guarantees are effectively junior to all of CommScope Technologies’ and the guarantors’ existing and future secured indebtedness, including the Secured Notes and the senior secured credit facilities, to the extent of the value of the assets securing such secured indebtedness. In addition, the CommScope Technologies Notes and related guarantees are structurally subordinated to all existing and future liabilities (including trade payables) of CommScope, Inc.’s subsidiaries that do not guarantee the CommScope Technologies Notes.
The CommScope Technologies Notes may be redeemed prior to maturity under certain circumstances. Upon certain change of control events, the CommScope Technologies Notes may be redeemed at the option of the holders at 101 % of their principal amount, plus accrued and unpaid interest. The 5.00% 2027 Notes may be redeemed by CommScope Technologies at the redemption prices specified in the indenture governing the 5.00% 2027 Notes. The 2025 Notes may be redeemed by CommScope Technologies at the redemption prices specified in the indenture governing the 2025 Notes.
Senior Secured Credit Facilities
Senior Secured Term Loan due 2026
The 2026 Term Loan has scheduled amortization payments of $ 32.0 million per year due in equal quarterly installments, which began with the quarter ended December 31, 2019, with the balance due at maturity ( April 2026 ). For the year ended December 31, 2022, the interest rate was, at the Company’s option, either (1) the base rate (which is the highest of (w) the greater of the then-current federal funds rate set by the Federal Reserve Bank of New York and the overnight federal funds rate, in each case, plus 0.5 %, (x) the prime rate on such day, (y) the one-month Eurodollar rate published on such date plus 1.00 % and (z) 1.00 % per annum) plus an applicable margin of 2.25 % or (2) one-, two-, three- or six-month LIBOR or, if available from all lenders, 12-month LIBOR or any shorter period (selected at the option of CommScope, Inc.) plus an applicable margin of 3.25 %. For the year ended December 31, 2022, the 2026 Term Loan was subject to a LIBOR floor of 0.00 %.
Subject to certain conditions, the 2026 Term Loan may be increased or a new incremental term loan facility may be added to increase the capacity by up to the sum of the greater of $ 950.0 million and 50 % of Consolidated EBITDA, as defined in the credit agreement governing the 2026 Term Loan (the Credit Agreement), plus an unlimited amount as long as on a pro forma basis the Company meets certain net leverage ratios or fixed charge ratios as defined in the Credit Agreement.
89
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
CommScope, Inc. may voluntarily prepay loans under the 2026 Term Loan, subject to minimum amounts, with prior notice but without premium or penalty. CommScope, Inc. must prepay the 2026 Term Loan with the net cash proceeds of certain asset sales, the incurrence or issuance of specified refinancing indebtedness and, commencing with the fiscal year ending in December 2020, 50 % of excess cash flow (such percentage subject to reduction based on the achievement of specified Consolidated First Lien Net Leverage Ratios), in each case, subject to certain reinvestment rights and other exceptions.
CommScope, Inc.’s obligations under the 2026 Term Loan are guaranteed by the Company and each of CommScope, Inc.’s direct and indirect wholly owned U.S. subsidiaries (subject to certain permitted exceptions based on immateriality thresholds of aggregate assets and revenues of excluded U.S. subsidiaries). The 2026 Term Loan is secured by a lien on substantially all of CommScope, Inc.’s and the guarantors’ current and fixed assets (subject to certain exceptions), and the 2026 Term Loan will have a first-priority lien on all fixed assets and a second-priority lien on all current assets (second in priority to the liens securing the Revolving Credit Facility), in each case, subject to other permitted liens.
The 2026 Term Loan contains customary negative covenants consistent with those applicable to the 2026 Secured Notes, including, but not limited to, restrictions on the ability of CommScope, Inc. and its subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, pay dividends (except with respect to the Convertible Preferred Stock) or make other restricted payments, sell or otherwise transfer assets or enter into certain transactions with affiliates.
The 2026 Term Loan provides that, upon the occurrence of certain events of default, the obligations thereunder may be accelerated. Such events of default will include payment defaults, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy proceedings, material money judgments, material pension-plan events, change of control and other customary events of default.
During the year ended December 31, 2022, the Company made scheduled amortization payments totaling $ 32.0 million due in equal quarterly installments on the 2026 Term Loan. The current portion of long-term debt reflects $ 32.0 million of repayments due under the 2026 Term Loan.
No portion of the 2026 Term Loan was reflected as a current portion of long-term debt as of December 31, 2022 related to the potentially required excess cash flow payment because no such payment is expected to be required. There was no excess cash flow payment required in 2022 related to 2021.
90
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Senior Secured Revolving Credit Facility
On October 19, 2022, the Company completed the refinancing (the Refinancing) of the Company’s asset-based revolving credit facility (Revolving Credit Facility) which continues to provide borrowing capacity of up to $ 1.0 billion, subject to certain limitations, available to CommScope, Inc. and its U.S. subsidiaries designated as co-borrowers (the U.S. Revolving Borrowers). The Refinancing, among other things, (i) refinanced in full all existing loans outstanding under the Revolving Credit Facility immediately prior to the Refinancing, (ii) extended the maturity of the Revolving Credit Facility from April 2024 to the earliest of (x) September 30, 2027, (y) the date the commitments of the lenders under the Revolving Credit Agreement are reduced to zero and (z) 91 days prior to the maturity date of any other indebtedness of a "Credit Party" (as defined in the credit agreement governing the Revolving Credit Facility) that has a scheduled maturity or weighted average life to maturity that is prior to September 30, 2027 (subject to certain exceptions) and (iii) replaced the existing revolving loan commitments outstanding under the Revolving Credit Facility immediately prior to the Refinancing with a new tranche of commitments (the Tranche A Revolving Commitments) for borrowings denominated in U.S. dollars, euros and pounds sterling made to the U.S. Revolving Borrowers and a separate tranche of commitments (the Tranche B Revolving Commitments) for borrowings denominated in euros, pounds sterling and Swiss francs made to the U.S. Revolving Borrowers and certain of the Company's wholly owned Irish, English and Swiss subsidiaries that are joined as borrowers under the Revolving Credit Facility (such subsidiaries, the European Revolving Borrowers and, together with the U.S. Revolving Borrowers, the Revolving Borrowers). Prior to the joinder of any European Revolving Borrower, Tranche A Loans are available to the U.S. Revolving Borrowers in an aggregate amount equal to (i) the lesser of (x) $ 1.0 billion and (y) the borrowing base of the U.S. Revolving Borrowers minus (ii) the aggregate amount of all "Tranche A Revolving Credit Outstandings" (as defined in the credit agreement governing the Revolving Credit Facility). From and after the joinder of any European Revolving Borrower, the Revolving Borrowers may reallocate an amount of the Tranche A Revolving Commitments to Tranche B Revolving Commitments, and Tranche B Loans will then be available to the Revolving Borrowers in an amount equal to (i) the lesser of (x) the Tranche B Revolving Commitments and (y) the sum of the borrowing base of the European Revolving Borrowers minus (ii) the aggregate amount of all "Tranche B Revolving Credit Outstandings" (as defined in the credit agreement governing the Revolving Credit Facility). At no time will the aggregate commitments of the lenders under the Revolving Credit Facility exceed $ 1.0 billion. Borrowing base calculations are based on the sum of specific percentages of eligible accounts receivable and eligible inventory, minus the amount of any applicable reserves. The ability to draw under the Revolving Credit Facility or issue letters of credit is conditioned upon, among other things, delivery of prior written notice of a borrowing or issuance, as applicable, the ability of the Revolving Borrowers to reaffirm the representations and warranties contained in the credit agreement governing the Revolving Credit Facility and the absence of any default or event of default. As of December 31, 2022, the Company had no outstanding borrowings under the Revolving Credit Facility and had availability of $ 908.8 million, after giving effect to borrowing base limitations and outstanding letters of credit.
Letters of credit under the Revolving Credit Facility are limited to the lesser of (x) $ 250.0 million and (y) the aggregate unused amount of commitments under the Revolving Credit Facility then in effect. Subject to certain conditions, the Revolving Credit Facility may be expanded by up to $ 400.0 million in additional commitments. Loans under the Revolving Credit Facility may be denominated, at the option of the Revolving Borrowers, (i) with respect to Tranche A Loans, in U.S. dollars, euros or pounds sterling, and (ii) with respect to Tranche B Loans, U.S. dollars, euros, pounds sterling or Swiss francs.
Borrowings under the Revolving Credit Facility will bear interest at a floating rate, which can be either (1) an adjusted Term SOFR rate (for borrowings denominated in U.S. dollars), (2) the EURIBOR rate (for borrowings denominated in euros), (3) the Sterling Overnight Index Average (SONIA) (for borrowings denominated in pounds sterling) or (4) the Swiss Average Rate Overnight (SARON) (for borrowings denominated in Swiss francs), in each case, subject to certain adjustments plus an applicable margin of 1.25 % to 1.50 % or, at the option of the Revolving Borrowers, a base rate plus an applicable margin of 0.25 % to 0.50 %.
The obligations of the U.S. Revolving Borrowers under the Revolving Credit Facility are guaranteed by the Company, CommScope, Inc. and each of CommScope, Inc.’s direct and indirect wholly owned U.S. subsidiaries (subject to certain permitted exceptions based on immateriality thresholds of aggregate assets and revenues of excluded U.S. subsidiaries). The Revolving Credit Facility is secured by a lien on substantially all of the U.S. Revolving Borrowers’ and the guarantors’ current and fixed assets (subject to certain exceptions). The Revolving Credit Facility has a first-priority lien on all current assets and a second-priority lien on all fixed assets (second in priority to the liens securing the 2029 Secured Notes, the 2026 Secured Notes and the 2026 Term Loan), in each case, subject to other permitted liens.
91
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The following fees are applicable under the Revolving Credit Facility: (i) an unused line fee of (x) 0.25 % per annum of the unused portion of the Revolving Credit Facility when the average unused portion of the facility is less than 50% of the aggregate commitments under the Revolving Credit Facility or (y) 0.375 % per annum of the unused portion of the Revolving Credit Facility when the average unused portion of the facility is equal to or greater than 50% of the aggregate commitments under the Revolving Credit Facility; (ii) a letter of credit participation fee on the aggregate stated amount of each letter of credit equal to the applicable margin for adjusted Term SOFR, EURIBOR, SONIA and SARON loans, as applicable; (iii) a letter of credit fronting fee of 0.125 % per annum, multiplied by the average aggregate daily maximum amount available to be drawn under all applicable letters of credit issued by such letter of credit issuer; and (iv) certain other customary fees and expenses of the lenders and agents thereunder .
The Revolving Borrowers will be required to make prepayments under the Revolving Credit Facility at any time when, and to the extent that, the aggregate amount of the outstanding loans and letters of credit under the Revolving Credit Facility exceeds the lesser of the aggregate amount of commitments in respect of the Revolving Credit Facility and the borrowing base.
The Revolving Credit Facility contains customary covenants, including, but not limited to, restrictions on the ability of CommScope, Inc. and its subsidiaries to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances or investments, pay dividends (except with respect to the Convertible Preferred Stock), sell or otherwise transfer assets, optionally prepay or modify terms of any junior indebtedness, enter into certain transactions with affiliates or change lines of business. The Revolving Credit Facility contains a Covenant Fixed Charge Coverage Ratio (as defined in the credit agreement governing the Revolving Credit Facility) of 1.00 to 1.00. The credit agreement governing the Revolving Credit Facility provides that the Covenant Fixed Charge Coverage Ratio must be tested and must exceed the level set forth above only in the event that excess availability under the Revolving Credit Facility is less than the greater of $ 80 million and 10 % of the maximum credit as of the end of the most recent fiscal quarter. As of December 31, 2022, the Company’s excess availability and Covenant Fixed Charge Coverage Ratio were in excess of the Revolving Credit Facility’s requirements.
The Revolving Credit Facility provides that, upon the occurrence of certain events of default, the obligations thereunder may be accelerated and the lending commitments terminated. Such events of default include payment defaults, material inaccuracies of representations and warranties, covenant defaults, cross-defaults to other material indebtedness, voluntary and involuntary bankruptcy proceedings, material money judgments, material pension-plan events, certain change of control events and other customary events of default.
Other Matters
The following table summarizes scheduled maturities of long-term debt as of December 31, 2022:
2023
2024
2025
2026
2027
Thereafter
Scheduled maturities of long-term debt
$
32.0
$
32.0
$
1,332.0
$
4,500.0
$
1,750.0
$
1,950.0
The Company’s non-guarantor subsidiaries held $ 3,664 million, or 31 %, of total assets and $ 1,029 million, or 8 %, of total liabilities as of December 31, 2022 and accounted for $ 2,708 million, or 29 %, of net sales for the year ended December 31, 2022. All amounts presented exclude intercompany balances.
The Company is dependent upon the earnings and cash flow of its subsidiaries to make certain payments, including debt and interest payments. Certain subsidiaries may have limitations or restrictions on transferring funds to other subsidiaries that may be necessary to meet those requirements.
The weighted average effective interest rate on outstanding borrowings, including the impact of the interest rate swap, and the amortization of debt issuance costs and original issue discount, was 6.91 % at December 31, 2022 and 5.74 % at December 31, 2021 .
92
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
8. DERIVATIVES AND HEDGING ACTIVITIES
Derivatives Not Designated As Hedging Instruments
The Company uses forward contracts to hedge a portion of its balance sheet foreign exchange re-measurement risk and to hedge certain planned foreign currency expenditures. As of December 31, 2022, the Company had foreign exchange contracts outstanding with maturities of up to eight months and aggregate notional values of $ 522.2 million (based on exchange rates as of December 31, 2022). 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.
The following table presents the balance sheet location and fair value of the Company’s derivatives not designated as hedging instruments:
December 31,
Contract Type
Location of Asset (Liability)
2022
2021
Foreign currency contracts
Prepaid expenses and other current assets
$
9.9
$
5.7
Foreign currency contracts
Accrued and other liabilities
( 6.5
)
( 0.8
)
Total derivatives not designated as
hedging instruments
$
3.4
$
4.9
The pretax impact of the foreign currency forward contracts, both matured and outstanding, on the Consolidated Statements of Operations is as follows:
Year Ended December 31,
Location of Gain (Loss)
2022
2021
2020
Other expense, net
$
( 19.0
)
$
( 2.6
)
$
24.9
Derivative Instruments Designated As Cash Flow Hedges of Interest Rate Risk
The Company has a hedging strategy to mitigate a portion of the exposure to changes in cash flows resulting from variable interest rates on the 2026 Term Loan. The total notional amount of the interest rate swap derivatives as of December 31, 2022 was $ 300 million with outstanding maturities up to fifteen months . There was no ineffectiveness on the instruments designated as cash flow hedges for the years ended December 31, 2022, 2021 or 2020.
The following table presents the balance sheet location and fair value of the derivative instruments designated as cash flow hedges of interest rate risk:
December 31,
Contract Type
Location of Asset (Liability)
2022
2021
Interest rate swap contracts
Other noncurrent assets
$
8.6
$
—
Interest rate swap contracts
Accrued and other liabilities
—
( 1.5
)
Interest rate swap contracts
Other noncurrent liabilities
—
( 10.3
)
Total derivatives designated as cash
flow hedging instruments
$
8.6
$
( 11.8
)
The impact of the effective portion of the interest rate swap contracts designated as cash flow hedging instruments on the Consolidated Statements of Comprehensive Loss is as follows:
Year Ended December 31,
Location of Gain (Loss)
2022
2021
2020
Other comprehensive income (loss), net of tax
$
16.0
$
14.4
$
( 10.2
)
93
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
9. FAIR VALUE MEASUREMENTS
The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, debt instruments, interest rate swap contracts and foreign currency contracts. For cash and cash equivalents, trade receivables and trade payables, the carrying amounts of these financial instruments as of December 31, 2022 and December 31, 2021 were considered representative of their fair values due to their short terms to maturity. The fair values of the Company’s debt instruments, interest rate swap contracts and foreign currency contracts were based on indicative quotes.
Fair value measurements using quoted prices in active markets for identical assets and liabilities fall within Level 1 of the fair value hierarchy, measurements using significant other observable inputs fall within Level 2, and measurements using significant unobservable inputs fall within Level 3.
The carrying amounts, estimated fair values and valuation input levels of the Company’s debt instruments, interest rate derivatives and foreign currency contracts as of December 31, 2022 and 2021, are as follows:
December 31, 2022
December 31, 2021
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Valuation
Inputs
Assets:
Foreign currency contracts
$
9.9
$
9.9
$
5.7
$
5.7
Level 2
Interest rate swap contracts
8.6
8.6
—
—
Level 2
Liabilities:
7.125% senior notes due 2028
$
700.0
$
502.6
$
700.0
$
690.4
Level 2
5.00% senior notes due 2027
750.0
513.4
750.0
705.0
Level 2
8.25% senior notes due 2027
1,000.0
780.8
1,000.0
1,023.8
Level 2
6.00% senior notes due 2025
1,300.0
1,183.4
1,300.0
1,300.0
Level 2
4.75% senior secured notes due 2029
1,250.0
1,000.0
1,250.0
1,240.3
Level 2
6.00% senior secured notes due 2026
1,500.0
1,383.3
1,500.0
1,554.4
Level 2
Senior secured term loan due 2026
3,096.0
2,925.7
3,128.0
3,092.8
Level 2
Foreign currency contracts
6.5
6.5
0.8
0.8
Level 2
Interest rate swap contracts
—
—
11.8
11.8
Level 2
Non-Recurring Fair Value Measurements
During the annual impairment test in the fourth quarter of 2022, a goodwill impairment charge of $ 1,119.6 million was recorded related to the ANS reporting unit in the ANS segment. The fair value of each reporting unit was determined using a discounted cash flow (DCF) model and a guideline public company approach, with 75 % of the value determined using the DCF model and 25 % of the value determined using the guideline public company approach. Under the DCF method, the fair value of a reporting unit is based on the present value of estimated future cash flows. Under the guideline public company method, the fair value is based upon market multiples of revenue and earnings derived from publicly-traded companies with similar operating and investment characteristics as the reporting unit. The inputs to both the DCF model and the guideline public company analysis are Level 3 valuation inputs. Changes in any of these inputs, among other factors, could negatively affect the fair value of one or more of the Company’s reporting units and result in a material impairment charge in the future.
During the annual impairment test in the fourth quarter of 2021, the Company recorded a pretax goodwill impairment charge of $ 13.7 million in the Home segment related to the goodwill reallocated from the ANS reporting unit to the Home Networks reporting unit in the second quarter of 2021 as a result of a segment realignment. The fair value of each reporting unit was determined consistent with the approach used in the annual test in 2022 and used Level 3 valuation inputs.
During the second quarter of 2020, the Company recorded a pretax goodwill impairment charge of $ 206.7 million related to the Home Networks reporting unit in the Home segment. The fair value of the reporting unit was determined as of May 31, 2020 based on the present value of estimated future cash flows using a DCF model. The inputs to the DCF model were Level 3 valuation inputs.
94
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
These fair value estimates are based on pertinent information available to management as of the valuation date. Although management is not aware of any factors that would significantly affect these fair value estimates, such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and current estimates of fair value may differ significantly from the amounts presented.
10. RESTRUCTURING COSTS
The Company incurs costs associated with restructuring initiatives intended to improve overall operating performance and profitability. The costs related to restructuring actions are generally cash-based and primarily consist of employee-related costs, which include severance and other one-time termination benefits.
In addition to the employee-related costs, the Company records other costs associated with restructuring actions such as the gain or loss on the sale of facilities and impairment costs arising from unutilized real estate or equipment. The Company attempts to sell or lease this unutilized space but additional impairment charges may be incurred related to these or other excess assets.
The Company’s net pretax restructuring activity included in restructuring costs, net on the Consolidated Statements of Operations, by segment, was as follows:
Year Ended December 31,
2022
2021
2020
CCS
$
17.1
$
62.0
$
25.9
OWN
22.4
3.6
15.7
NICS
9.9
8.5
8.0
ANS
12.2
9.2
8.8
Home
1.3
8.6
30.0
Total
$
62.9
$
91.9
$
88.4
Restructuring liabilities were included in the Company’s Consolidated Balance Sheets as follows:
December 31,
2022
2021
Accrued and other liabilities
$
58.9
$
41.0
Other noncurrent liabilities
0.5
28.2
Total restructuring liabilities
$
59.4
$
69.2
CommScope NEXT Restructuring Actions
In the first quarter of 2021, the Company announced and began implementing a business transformation initiative called CommScope NEXT. This initiative is designed to drive shareholder value through three pillars: profitable growth, operational efficiency and portfolio optimization. The activity within the liability established for CommScope NEXT restructuring actions was as follows:
Employee-
Related
Costs
Other
Total
Balance at December 31, 2020
$
—
$
—
$
—
Additional expense, net
86.7
4.0
90.7
Cash paid
( 26.6
)
—
( 26.6
)
Foreign exchange and other non-cash items
0.5
( 4.0
)
( 3.5
)
Balance at December 31, 2021
60.6
—
60.6
Additional expense, net
50.7
8.6
59.3
Cash paid
( 48.9
)
( 0.5
)
( 49.4
)
Foreign exchange and other non-cash items
( 3.7
)
( 8.1
)
( 11.8
)
Balance at December 31, 2022
$
58.7
$
—
$
58.7
95
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
CommScope NEXT actions to date have included employee costs related to the closure of an international manufacturing facility as well as headcount reductions in manufacturing, engineering, marketing, sales and administrative functions. Asset impairment charges related to real estate and property, plant and equipment that are affected by restructuring activities are included in the other category in the table above and in restructuring costs, net on the Consolidated Statements of Operations for the years ended December 31, 2022 and 2021.
The Company has recognized restructuring charges of $ 150.0 million to date related to CommScope NEXT actions. The Company expects to make cash payments of $ 58.2 million in 2023 and $ 0.5 million in 2024 to settle CommScope NEXT restructuring actions. Additional restructuring actions related to CommScope NEXT are expected to be identified and the resulting charges and cash requirements could be material.
11. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company and certain of its subsidiaries have defined contribution retirement savings plans, the most significant of which is a 401(k) plan in the U.S. These plans allow employees meeting certain requirements to contribute a portion of their compensation on a pretax and/or after-tax basis in accordance with guidelines established by the plans and the Internal Revenue Service or other tax authorities. The Company matches a percentage of the employee contributions up to certain limits. During the years ended December 31, 2022, 2021 and 2020, the Company made contributions to defined contribution retirement savings plans of $ 51.2 million, $ 50.4 million and $ 56.6 million, respectively.
The Company also maintains noncontributory and contributory deferred compensation plans. During the years ended December 31, 2022, 2021 and 2020, the Company recognized pretax costs of $ 2.7 million, $ 1.3 million and $ 2.6 million, respectively, related to these plans. The liability related to these plans was $ 22.5 million and $ 31.3 million as of December 31, 2022 and 2021, respectively.
Pension Plans
The Company sponsors defined benefit pension plans covering certain active and former domestic and foreign employees. Included in the defined benefit pension plans are both funded and unfunded plans. The following table summarizes information for the defined benefit pension plans:
December 31,
U.S. Plans
Non-U.S. Plans
2022
2021
2022
2021
Change in benefit obligation:
Benefit obligation, beginning
$
12.5
$
13.5
$
275.5
$
310.5
Service cost
—
—
5.7
6.8
Interest cost
0.3
0.3
3.7
3.1
Actuarial gain
( 2.6
)
( 0.5
)
( 68.7
)
( 20.6
)
Benefits paid
( 0.8
)
( 0.8
)
( 4.5
)
( 5.5
)
Settlements
—
—
( 6.2
)
( 3.9
)
Curtailment
—
—
—
( 4.0
)
Foreign exchange and other
—
—
( 22.2
)
( 10.9
)
Benefit obligation, ending
$
9.4
$
12.5
$
183.3
$
275.5
Change in plan assets:
Fair value of plan assets, beginning
$
—
$
—
$
279.4
$
279.1
Employer and plan participant contributions
0.8
0.8
6.4
7.5
Return on plan assets
—
—
( 69.9
)
11.8
Benefits paid
( 0.8
)
( 0.8
)
( 4.5
)
( 5.5
)
Settlements
—
—
( 6.2
)
( 3.9
)
Foreign exchange and other
—
—
( 24.0
)
( 9.6
)
Fair value of plan assets, ending
$
—
$
—
$
181.2
$
279.4
Funded status, net liability (asset)
$
9.4
$
12.5
$
2.1
$
( 3.9
)
96
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The following table presents the balance sheet location of the Company's pension liabilities and assets:
December 31,
U.S. Plans
Non-U.S. Plans
2022
2021
2022
2021
Accrued and other liabilities
$
( 0.9
)
$
( 0.7
)
$
( 0.7
)
$
( 0.4
)
Other noncurrent liabilities
( 8.5
)
( 11.8
)
( 15.3
)
( 22.0
)
Other noncurrent assets
—
—
13.9
26.3
The accumulated benefit obligation for the Company’s U.S. defined benefit pension plans was $ 9.4 million and $ 12.5 million as of December 31, 2022 and 2021 , respectively, and the accumulated benefit obligation for the Company’s non-U.S. defined benefit pension plans was $ 159.9 million and $ 233.2 million as of December 31, 2022 and 2021, respectively.
The following table summarizes information for the Company’s pension plans with an accumulated benefit obligation in excess of plan assets:
December 31,
U.S. Plans
Non-U.S. Plans
2022
2021
2022
2021
Projected benefit obligation
$
9.4
$
12.5
$
44.1
$
48.8
Accumulated benefit obligation
9.4
12.5
41.3
45.9
Fair value of plan assets
—
—
28.4
27.4
The following table summarizes pretax amounts included in accumulated other comprehensive loss:
December 31,
U.S. Plans
Non-U.S. Plans
2022
2021
2022
2021
Unrecognized net actuarial gain (loss)
$
1.0
$
( 1.7
)
$
( 16.5
)
$
( 13.6
)
Unrecognized prior service cost
—
—
—
( 0.1
)
Total
$
1.0
$
( 1.7
)
$
( 16.5
)
$
( 13.7
)
Actuarial gains and losses are amortized using a corridor approach. The corridor is equal to 10 % of the greater of the benefit obligation and the fair value of the assets. Gains and losses in excess of the corridor are generally amortized over the average remaining life of the plan participants. Pretax amounts for net periodic benefit cost and other amounts included in other comprehensive income (loss) for the defined benefit pension plans consisted of the following components:
Year Ended December 31,
U.S. Plans
Non-U.S. Plans
2022
2021
2020
2022
2021
2020
Service cost
$
—
$
—
$
—
$
5.7
$
6.8
$
4.3
Interest cost
0.3
0.3
0.3
3.7
3.1
4.0
Recognized actuarial loss
0.1
0.1
0.1
0.1
1.6
1.3
Expected return on plan assets
—
—
—
( 4.9
)
( 6.4
)
( 7.0
)
Settlement loss
—
—
—
1.6
0.3
1.5
Curtailment gain
—
—
—
—
( 2.5
)
—
Net periodic benefit cost
0.4
0.4
0.4
6.2
2.9
4.1
Changes in plan assets and benefit obligations
included in other comprehensive income (loss):
Change in unrecognized net actuarial loss (gain)
( 2.7
)
( 0.6
)
1.0
2.9
( 28.0
)
13.4
Change in unrecognized prior service cost
—
—
—
( 0.1
)
( 0.4
)
( 0.2
)
Curtailment and settlements
—
—
—
—
( 1.8
)
( 1.5
)
Total included in other comprehensive income (loss)
( 2.7
)
( 0.6
)
1.0
2.8
( 30.2
)
11.7
Total recognized in net periodic benefit cost and
included in other comprehensive income (loss)
$
( 2.3
)
$
( 0.2
)
$
1.4
$
9.0
$
( 27.3
)
$
15.8
97
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The Company reports the service cost component of net periodic benefit cost in the same line item as other compensation costs arising from the services rendered by the employee and records the other components of net periodic benefit cost in other expense, net.
Assumptions
Significant weighted average assumptions used in determining benefit obligations and net periodic benefit cost are as follows:
U.S. Plans
Non-U.S. Plans
2022
2021
2020
2022
2021
2020
Benefit obligations:
Discount rate
4.99
%
2.55
%
2.07
%
4.37
%
1.47
%
1.02
%
Rate of compensation increase
—
%
—
%
—
%
3.36
%
3.79
%
3.59
%
Net periodic benefit cost:
Discount rate
2.55
%
2.07
%
2.95
%
1.47
%
1.02
%
1.65
%
Rate of return on plan assets
—
%
—
%
—
%
4.03
%
1.96
%
2.33
%
Rate of compensation increase
—
%
—
%
—
%
3.79
%
3.59
%
3.74
%
The Company considered the available yields on high-quality fixed-income investments with maturities corresponding to the Company’s expected benefit obligations to determine the discount rates at each measurement date.
Plan Assets
In developing the expected rate of return on plan assets, the Company considered the expected long-term rate of return on individual asset classes. Expected return on plan assets is based on the market value of the assets. The majority of the non-U.S. pension assets are managed by independent investment advisors. In general, the investment strategy is designed to accumulate a diversified portfolio among markets, asset classes or individual securities in order to reduce market risk and assure that the pension assets are available to pay benefits as they come due.
Mutual funds classified as Level 1 are valued at net asset value, which is based on the fair value of the funds’ underlying securities. Certain mutual funds are classified as Level 2 because a portion of the funds’ underlying assets are valued using significant other observable inputs. Other assets are primarily composed of fixed income investments (including insurance and real estate products) and are valued based on the investment’s stated rate of return, which approximates market interest rates.
98
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The Company had no U.S. defined benefit pension plan assets as of December 31, 2022 or 2021. The estimated fair values and the valuation input levels of the Company’s non-U.S. defined benefit pension plan assets are as follows:
December 31, 2022
Non-U.S. Plans
Level 1
Fair Value
Level 2
Fair Value
Mutual funds:
International equity
$
19.7
$
7.7
International debt
36.8
76.0
Absolute return
—
3.8
Other
7.7
29.5
Total
$
64.2
$
117.0
December 31, 2021
Non-U.S. Plans
Level 1
Fair Value
Level 2
Fair Value
Mutual funds:
International equity
$
25.6
$
32.2
International debt
47.4
126.5
Absolute return
—
9.5
Other
9.6
28.6
Total
$
82.6
$
196.8
Expected Cash Flows
The Company expects to contribute $ 0.9 million to U.S. defined benefit pension plans and $ 4.2 million to non-U.S. defined benefit pension plans during 2023.
The following table summarizes projected benefit payments from pension plans through 2032, including benefits attributable to estimated future service (in millions):
U.S. Plans
Non-U.S. Plans
2023
$
0.9
$
14.8
2024
0.9
10.0
2025
0.9
10.3
2026
0.9
13.8
2027
0.8
11.6
2028-2032
3.7
57.5
12. INCOME TAXES
L oss before income taxes includes the results from domestic and international operations as follows:
Year Ended December 31,
2022
2021
2020
U.S. companies
$
( 1,359.2
)
$
( 541.0
)
$
( 689.7
)
Non-U.S. companies
59.2
6.5
35.2
Loss before income taxes
$
( 1,300.0
)
$
( 534.5
)
$
( 654.5
)
99
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The components of income tax benefit were as follows:
Year Ended December 31,
2022
2021
2020
Current:
Federal
$
42.0
$
( 19.1
)
$
( 0.1
)
Foreign
45.5
86.7
67.3
State
17.8
8.0
6.4
Current income tax expense
$
105.3
$
75.6
$
73.6
Deferred:
Federal
$
( 90.7
)
$
( 123.9
)
$
( 131.0
)
Foreign
( 17.1
)
( 14.0
)
( 7.1
)
State
( 10.6
)
( 9.6
)
( 16.6
)
Deferred income tax benefit
( 118.4
)
( 147.5
)
( 154.7
)
Total income tax benefit
$
( 13.1
)
$
( 71.9
)
$
( 81.1
)
The reconciliation of income taxes calculated at the statutory U.S. federal income tax rate to the Company’s benefit for income taxes was as follows:
Year Ended December 31,
2022
2021
2020
Benefit for income taxes at federal statutory rate
$
( 273.0
)
$
( 112.2
)
$
( 137.4
)
State income taxes, net of federal tax effect
( 8.4
)
( 20.9
)
( 21.6
)
Other permanent items
12.5
7.0
11.0
Equity-based compensation
( 5.6
)
7.0
16.1
Other changes in tax laws and tax rulings
4.7
37.9
( 38.2
)
Goodwill related items
232.0
2.8
42.8
Base erosion and anti-abuse tax
—
10.2
—
Foreign-derived intangible income deduction
( 7.4
)
( 7.5
)
( 3.8
)
Federal tax credits
( 26.4
)
( 23.2
)
( 23.4
)
Change in unrecognized tax benefits
( 7.1
)
( 13.2
)
( 2.6
)
Withholding taxes and Subpart F income, net of foreign tax credits
48.8
19.7
23.6
Foreign earnings taxed at other than federal rate
6.6
5.6
20.9
Tax provision adjustments and revisions to prior years' returns
( 3.2
)
( 5.8
)
7.1
Change in valuation allowances
13.4
20.7
24.4
Total benefit for income taxes
$
( 13.1
)
$
( 71.9
)
$
( 81.1
)
100
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The components of deferred income tax assets and liabilities and the classification of deferred tax balances on the balance sheet were as follows:
December 31,
2022
2021
Deferred tax assets:
Accounts receivable, inventory and warranty reserves
$
138.3
$
109.4
Employee benefits
60.4
50.9
Foreign net operating loss and tax credit carryforwards
573.3
649.0
Federal net operating loss and tax credit carryforwards
22.0
115.2
State net operating loss and tax credit carryforwards
103.6
108.9
Unrecognized tax benefits
30.8
43.0
Interest limitation
75.4
51.7
Capitalized research and development costs
471.6
391.6
Other
92.6
85.9
Total deferred tax assets
1,568.0
1,605.6
Valuation allowance
( 643.1
)
( 706.7
)
Total deferred tax assets, net of valuation allowance
924.9
898.9
Deferred tax liabilities:
Intangible assets
$
( 542.7
)
$
( 629.7
)
Property, plant and equipment
( 15.3
)
( 19.1
)
Undistributed foreign earnings
( 20.6
)
( 17.6
)
Other
( 13.0
)
( 13.6
)
Total deferred tax liabilities
( 591.6
)
( 680.0
)
Net deferred tax asset
$
333.3
$
218.9
Deferred taxes recognized on the balance sheet:
Noncurrent deferred tax asset (included with other noncurrent assets)
$
506.7
$
427.1
Noncurrent deferred tax liability
( 173.4
)
( 208.2
)
Net deferred tax asset
$
333.3
$
218.9
The deferred tax asset for foreign net operating loss and tax credit carryforwards as of December 31, 2022 includes foreign net operating loss carryforwards (net of federal tax effects) of $ 560.3 million, which begin to expire in 2023 , and foreign tax credit carryforwards (net of federal tax effects) of $ 13.0 million, which begin to expire in 2023 . Certain of these foreign net operating loss carryforwards are subject to local restrictions limiting their utilization. Valuation allowances of $ 542.8 million have been established related to these foreign deferred tax assets.
The deferred tax asset for federal net operating loss and tax credit carryforwards as of December 31, 2022 relates to $ 4.9 million of net operating loss carryforwards, which begin to expire in 2030 and $ 17.1 million of U.S. foreign tax credit carryforwards, which begin to expire in 2028 . A valuation allowance of $ 17.1 million has been established against these deferred tax assets.
The deferred tax asset for state net operating loss and tax credit carryforwards as of December 31, 2022 includes state net operating loss carryforwards (net of federal tax impact) of $ 37.3 million, which begin to expire in 2023 , and state tax credit carryforwards (net of federal tax impact) of $ 66.3 million, which begin to expire in 2023 . A valuation allowance of $ 79.8 million has been established against these and other state income tax related deferred tax assets.
In addition to the valuation allowances detailed above, the Company has also established a valuation allowance of $ 3.4 million against other deferred tax assets.
101
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Under current U.S. tax regulations, in general, repatriation of foreign earnings to the U.S. can be completed with no incremental U.S. tax. However, repatriation of foreign earnings could subject the Company to U.S. state and non-U.S. jurisdictional taxes (including withholding taxes) on distributions. As of December 31, 2022 , the Company has a deferred tax liability of $ 20.6 million for the estimated foreign and state tax costs associated with the expected repatriation of the Company’s undistributed foreign earnings. The unrecorded deferred tax liability for foreign and state tax costs associated with earnings considered permanently reinvested is not material as of December 31, 2022.
The following table reflects a reconciliation of the beginning and end of period amounts of gross unrecognized tax benefits, excluding interest and penalties:
Year Ended December 31,
2022
2021
2020
Balance at beginning of period
$
176.6
$
190.5
$
191.9
Increase related to prior periods
1.1
0.7
2.5
Decrease related to prior periods
( 23.3
)
( 0.3
)
( 4.5
)
Increase related to current periods
5.1
5.9
5.0
Decrease related to settlements with taxing authorities
( 13.4
)
( 7.5
)
( 0.9
)
Decrease related to lapse in statutes of limitations
( 0.6
)
( 12.7
)
( 2.6
)
Decrease related to the ARRIS acquisition
—
—
( 0.9
)
Balance at end of period
$
145.5
$
176.6
$
190.5
The Company’s liability for unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods was $ 115.6 million as of December 31, 2022. The Company operates in numerous jurisdictions worldwide and is subject to routine tax audits on a regular basis. The determination of the Company’s unrecognized tax benefits involves significant management judgment regarding interpretation of relevant facts and tax laws in each of these jurisdictions.
Unrecognized tax benefits are reviewed and evaluated on an ongoing basis and may be adjusted for changing facts and circumstances including the lapse of applicable statutes of limitation and closure of tax examinations. Although the timing and outcome of such events are difficult to predict, the Company estimates that the balance of unrecognized tax benefits, excluding the impact of accrued interest and penalties, may be reduced by up to $ 7.0 million within the next twelve months.
The Company provides for interest and penalties related to unrecognized tax benefits as income tax expense. The Company accrued $ 9.4 million for interest and penalties as of both December 31, 2022 and 2021. During the years ended December 31, 2022, 2021 and 2020 the net expense (benefit) for interest and penalties recognized through income tax benefit was $ 0.1 million, $( 0.1 ) million and $( 1.3 ) million, respectively.
The Company files federal, state and local tax returns with statutes of limitation generally ranging from 3 to 4 years. The Company is currently undergoing a U.S. federal income tax audit for the 2019 tax year and is generally no longer subject to state and local tax examinations for years prior to 2019. Tax returns filed by the Company’s significant foreign subsidiaries are generally subject to statutes of limitation of 3 to 7 years and are generally no longer subject to examination for years prior to 2017. In many jurisdictions, tax authorities retain the ability to review prior years’ tax returns and to adjust any net operating loss or tax credit carryforwards from these years that are available to be utilized in subsequent periods. During 2022, the Company recognized $ 9.7 million (net of payments) related to the lapse of applicable statutes of limitations and the conclusion of various domestic and foreign examinations.
The following table presents income tax expense (benefit) related to amounts presented in other comprehensive income (loss):
Year Ended December 31,
2022
2021
2020
Foreign currency translation
$
1.2
$
1.2
$
( 5.0
)
Defined benefit plans
0.8
6.6
( 3.5
)
Total
$
2.0
$
7.8
$
( 8.5
)
102
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
13. SERIES A CONVERTIBLE PREFERRED STOCK
On April 4, 2019, the Company issued and sold 1,000,000 shares of the Convertible Preferred Stock for $ 1.0 billion, or $ 1,000 per share, pursuant to an Investment Agreement between the Company and The Carlyle Group (Carlyle), dated November 8, 2018 (the Investment Agreement). As of December 31, 2022 , the Company had authorized 1,200,000 shares of Series A Convertible Preferred Stock.
Dividend Rights
The Convertible Preferred Stock ranks senior to the shares of the Company’s common stock, with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Convertible Preferred Stock has a liquidation preference of $ 1,000 per share. Holders of the Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 5.5 % per year, payable quarterly in arrears. If CommScope does not declare and pay a dividend, the dividend rate will increase by 2.5 % to 8.0 % per year (and that rate will increase by an additional 0.50 % every three months until such unpaid dividend is declared and paid, subject to a cap of 11.0 % per year) until all accrued but unpaid dividends have been paid in full. Dividends can be paid in cash, in-kind through the issuance of additional shares of Convertible Preferred Stock or any combination of the two, at the Company’s option.
During the years ended December 31, 2022, 2021 and 2020 , the Company paid cash dividends of $ 14.9 million, $ 43.0 million and $ 14.3 million, respectively, and dividends in-kind of $ 44.1 million, $ 14.3 million and $ 41.8 million, respectively, which were recorded as additional Convertible Preferred Stock on the Consolidated Balance Sheets.
Conversion Features
The Convertible Preferred Stock is convertible at the option of the holders at any time into shares of CommScope common stock at an initial conversion rate of 36.3636 shares of common stock per share of the Convertible Preferred Stock (equivalent to $ 27.50 per common share). The conversion rate is subject to customary anti-dilution and other adjustments. At any time after the third anniversary of the issuance of the Convertible Preferred Stock, if the volume weighted average price of CommScope’s common stock exceeds the conversion price of $ 49.50 , as may be adjusted pursuant to the Certificate of Designations, for at least thirty trading days in any period of forty-five consecutive trading days (including the final five trading days of any such forty-five-trading day period) all of the Convertible Preferred Stock may be converted at the election of CommScope into the relevant number of shares of CommScope common stock.
Redemption Rights
On any date during the three months following the eight year and six-month anniversary of the Investment Agreement closing date and the three months following each anniversary thereafter, holders of the Convertible Preferred Stock will have the right to require CommScope to redeem all or any portion of the Convertible Preferred Stock at 100 % of the liquidation preference thereof plus all accrued and unpaid dividends. The redemption price is payable, at the Company’s option, in cash or a combination of cash and common stock, subject to certain restrictions.
Upon certain change of control events involving CommScope, CommScope has the right, subject to the holder’s right to convert prior to such redemption, to redeem all of the Convertible Preferred Stock for the greater of (i) an amount in cash equal to the sum of the liquidation preference of the Convertible Preferred Stock, all accrued but unpaid dividends and, if the applicable redemption date is prior to the fifth anniversary of the first dividend payment date, the present value, discounted at a rate of 10 %, of any remaining scheduled dividends through the five year anniversary of the first dividend payment date, assuming CommScope chose to pay such dividends in cash and (ii) the consideration the holders would have received if they had converted their shares of the Convertible Preferred Stock into CommScope common stock immediately prior to the change of control event.
To the extent that CommScope does not exercise the redemption right described above, following the effective date of any such change of control event, the holders of the Convertible Preferred Stock can require CommScope to repurchase the Convertible Preferred Stock at the greater of (i) an amount in cash equal to 100 % of the liquidation preference thereof plus all accrued but unpaid dividends and (ii) the consideration the holders would have received if they had converted their shares of the Convertible Preferred Stock into CommScope common stock immediately prior to the change of control event.
103
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Voting Rights
Holders of the Convertible Preferred Stock are entitled to vote with the holders of the Company’s common stock on an as-converted basis. Holders of the Convertible Preferred Stock are entitled to a separate class vote with respect to, among other things, amendments to CommScope’s organizational documents that have an adverse effect on the Convertible Preferred Stock, issuances by CommScope of securities that are senior to, or equal in priority with, the Convertible Preferred Stock and issuances of shares of the Convertible Preferred Stock after the closing date of the Acquisition, other than shares issued as dividends with respect to shares of the Convertible Preferred Stock.
14. STOCKHOLDERS’ EQUITY
Equity-Based Compensation Plans
In 2019, the Company’s stockholders approved the 2019 Long-Term Incentive Plan authorizing 8.0 million shares for issuance, plus additional shares underlying awards outstanding under the predecessor plans. Subsequently, in each of the years 2020, 2021 and 2022, the Company’s stockholders approved the Amended and Restated 2019 Long-Term Incentive Plan (the 2019 Plan) and authorized an additional aggregate 15.8 million shares for issuance. All future equity awards will be made from the 2019 Plan. Awards under the 2019 Plan may include stock options, stock appreciation rights, restricted stock, stock units (including restricted stock units (RSUs) and deferred stock units), performance awards (represents any of the awards already listed with a performance-vesting component), other stock-based awards and cash-based awards. As of December 31, 2022, there were 3.9 million shares available for future grants under the 2019 Plan.
As of December 31, 2022 , $ 89.0 million of total unrecognized compensation expense related to unvested stock options, RSUs and performance share units (PSUs) is expected to be recognized over a remaining weighted average period of 1.9 years. There were no significant capitalized equity-based compensation costs at December 31, 2022.
The following table shows a summary of the equity-based compensation expense included in the Consolidated Statements of Operations:
Year Ended December 31,
2022
2021
2020
Selling, general and administrative
$
34.6
$
40.7
$
63.0
Research and development
18.3
25.8
33.5
Cost of sales
8.2
13.1
18.5
Total equity-based compensation expense
$
61.1
$
79.6
$
115.0
The Company believes the valuation techniques and the approaches utilized to develop the underlying assumptions are appropriate in estimating the fair values of its equity-based compensation. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards. Subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company.
Stock Options
Stock options are awards that allow the recipient to purchase shares of the Company’s common stock at a fixed price. Stock options are granted at an exercise price equal to the Company’s stock price at the date of grant. The Company uses the Black-Scholes model to estimate the fair value of stock options at the date of grant. These awards generally vest over five years following the grant date and have a contractual term of ten years . There were 2.3 million options outstanding as of December 31, 2022 with no intrinsic value and the majority were vested. There were no stock options granted during the years ended December 31, 2022, 2021 or 2020. The intrinsic value of options exercised during the years ended December 31, 2022, 2021 and 2020 was $ 0.1 million, $ 5.4 million and $ 7.1 million, respectively.
Restricted Stock Units
RSUs entitle the holder to shares of common stock after a vesting period of generally three years . The fair value of the awards is determined on the grant date based on the Company’s stock price.
104
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The following table summarizes the RSU activity (in millions, except per share data):
Restricted
Stock
Units
Weighted
Average Grant
Date Fair Value
Per Share
Non-vested share units at December 31, 2021
10.4
$
15.04
Granted
7.3
$
8.05
Vested and shares issued
( 5.1
)
$
14.99
Forfeited
( 1.4
)
$
14.02
Non-vested share units at December 31, 2022
11.2
$
10.66
The weighted average grant date fair value per unit of these awards granted during the years ended December 31, 2022, 2021 and 2020 was $ 8.05 , $ 20.19 and $ 10.49 , respectively. The total fair value of RSUs that vested during the years ended December 31, 2022, 2021 and 2020 was $ 76.5 million, $ 82.4 million and $ 76.0 million, respectively.
Performance Share Units
PSUs are stock awards in which the number of shares ultimately received by the employee depends on achievement towards a performance measure. Certain of CommScope’s PSUs have an internal performance measure and the awards vest at the end of three years. The number of shares issued under these awards can vary between 0 % and 300 % of the number of PSUs granted. The fair value of these awards is determined on the date of grant based on the Company's stock price.
CommScope also has PSUs with a market condition performance measure based on stock price milestones over a three-year period. The number of shares issued under these awards can vary between 0 % to 100 % of the number of PSUs granted. In addition, the Company has PSUs with a market condition based on the Company's total stockholder return (TSR) ranking relative to the S&P 500 TSR for a three-year period. The number of shares issued under these awards can vary between 0 % to 200 % of the number of PSUs granted. The Company uses a Monte Carlo simulation model to estimate the fair value of PSUs with a market condition performance measure at the date of grant. Key assumptions used in the model include the risk-free interest rate, which reflects the yield on zero-coupon U.S. treasury securities, and stock price volatility, which is derived based on the historical volatility of the Company's stock.
The following table presents the weighted average assumptions used to estimate the fair value of these awards granted:
Year Ended December 31,
2022
2021
2020
Risk-free interest rate
1.7
%
0.4
%
0.2
%
Expected volatility
61.2
%
56.0
%
51.7
%
Weighted average fair value at grant date
$
11.21
$
11.21
$
4.03
The following table summarizes the PSU activity (in millions, except per share data):
Performance
Share Units
Weighted
Average Grant
Date Fair Value
Per Share
Non-vested share units at December 31, 2021
2.1
$
7.69
Granted
1.4
$
9.51
Vested and shares issued
( 0.4
)
$
8.13
Forfeited
( 0.2
)
$
15.91
Non-vested share units at December 31, 2022
2.9
$
8.14
The weighted average grant date fair value per unit of these awards granted during the years ended December 31, 2022, 2021 and 2020 was $ 9.51 , $ 14.47 and $ 4.63 , respectively. The total fair value of PSUs that vested during the years ended December 31, 2022, 2021 and 2020 was $ 3.5 million, $ 1.0 million, and $ 18.4 million, respectively.
105
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
15. COMMITMENTS AND CONTINGENCIES
The following table summarizes the activity in the product warranty accrual, included in accrued and other liabilities and other noncurrent liabilities:
Year Ended December 31,
2022
2021
2020
Product warranty accrual, beginning of period
$
66.8
$
59.5
$
61.0
Provision for warranty claims
24.7
38.5
30.9
Warranty claims paid
( 36.1
)
( 30.8
)
( 32.4
)
Foreign exchange
( 0.4
)
( 0.4
)
—
Product warranty accrual, end of period
$
55.0
$
66.8
$
59.5
Third-Party Guarantees
The Company was contingently liable under open standby letters of credit issued by its banks to support performance obligations of a third-party contractor that totaled $ 44.0 million as of December 31, 2022. These amounts represent an estimate of the maximum amounts the Company would expect to incur upon the contractual non-performance of the third-party contractor, but the Company also has cross-indemnities in place that may enable it to recover amounts in the event of non-performance by the third-party contractor. The Company believes the likelihood of having to perform under these guarantees is remote. There were no material amounts recorded in the consolidated financial statements related to third-party guarantee agreements as of and for the years ended December 31, 2022 or 2021. As of December 31, 2022, these instruments reduced the available borrowings under the Revolving Credit Facility.
Legal Proceedings
The Company is a party to certain intellectual property claims and also periodically receives notices asserting that its products infringe on another party’s patents and other intellectual property rights. These claims and assertions, whether against the Company directly or against its customers, could require the Company to pay damages, royalties, stop offering the relevant products and/or cease other activities. The Company may also be called upon to indemnify certain customers for costs related to products sold to such customers. The outcome of these claims and notices is uncertain and a reasonable estimate of the loss from unfavorable outcomes in certain of these matters either cannot be determined or is estimated at the minimum amount of a range of estimates. The actual loss, through settlement or trial, could be material and may vary significantly from the Company's estimates. From time to time, the Company may also be involved as a plaintiff involving intellectual property claims. Gain contingencies, if any, are recognized when they are realized.
As of December 31, 2022 and 2021, the Company had liabilities of $ 37.1 million and $ 24.6 million, respectively, recorded in accrued and other liabilities and noncurrent liabilities on the Consolidated Balance Sheets related to certain intellectual property assertions that have been settled or are in the process of settlement. For the years ended December 31, 2022, 2021 and 2020, the Company recorded charges to cost of sales in the Consolidated Statements of Operations of $ 31.0 million, $ 48.6 million and $ 7.8 million, respectively, related to these intellectual property assertions. The current year charges are reflected in the results of the Home, NICS and CCS segments. The Company paid $ 21.0 million, $ 56.1 million and $ 109.0 million during the years ended December 31, 2022, 2021 and 2020, respectively, to settle intellectual property assertions.
During the year ended December 31, 2021, the Company received $ 17.1 million in the settlement of a warranty indemnification matter that was assumed in the acquisition of ARRIS in 2019. The recovery was recorded as a reduction of cost of sales in the Consolidated Statements of Operations and is reflected in the results of the ANS segment.
The Company is either a plaintiff or a defendant in certain other pending legal matters in the normal course of business. Management believes none of these other pending legal matters will have a material adverse effect on the Company’s business or financial condition upon final disposition.
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.
106
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
16. INDUSTRY SEGMENTS, MAJOR CUSTOMERS, RELATED PARTY TRANSACTIONS AND GEOGRAPHIC INFORMATION
Segment Information
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: CCS, OWN, NICS, ANS and Home. All prior period amounts below have been recast to reflect these operating segment changes.
The Connectivity and Cable Solutions (CCS) segment provides fiber optic and copper connectivity and cable solutions for use in telecommunications, cable television, residential broadband networks, data centers and business enterprises. The CCS portfolio includes network solutions for indoor and outdoor network applications. Indoor network solutions include optical fiber and twisted pair structured cable solutions, intelligent infrastructure management hardware and software and network rack and cabinet enclosures. Outdoor network solutions are used in both local-area and wide-area networks and “last mile” fiber-to-the-home installations, including deployments of fiber-to-the-node, fiber-to-the-premises and fiber-to-the-distribution point to homes, businesses and cell sites.
The Outdoor Wireless Networks (OWN) segment focuses on the macro and metro cell markets. The segment includes base station antennas, radio frequency (RF) filters, tower connectivity, microwave antennas, metro cell products, cabinets, steel, accessories and the wireless spectrum management business, Comsearch.
The Networking, Intelligent Cellular and Security Solutions (NICS) segment provides wireless networks for enterprises and service providers. Product offerings include indoor and outdoor Wi-Fi and long-term evolution (LTE) access points, access and aggregation switches; an Internet of Things suite, on-premises and cloud-based control and management systems; and software and software-as-a-service applications addressing security, location, reporting and analytics.
The Access Network Solutions (ANS) segment’s product solutions include cable modem termination systems, video infrastructure, distribution and transmission equipment and cloud solutions that enable facility-based service providers to construct a state-of-the-art residential and metro distribution network.
The Home Networks (Home) segment includes subscriber-based solutions that support broadband and video applications. The broadband offerings in the Home segment include devices that provide residential connectivity to a service provider’s network, 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 that support cable, satellite and IP television content delivery and include products such as digital video recorders, high definition set top boxes and hybrid set top devices.
The following table provides summary financial information by reportable segment:
December 31,
2022
2021
Identifiable segment-related assets:
CCS
$
4,263.8
$
4,377.2
OWN
1,166.8
1,386.5
NICS
1,338.1
1,397.0
ANS
2,632.6
3,831.9
Home
1,379.3
1,479.5
Total identifiable segment-related assets
10,780.6
12,472.1
Reconciliation to total assets:
Cash and cash equivalents
398.1
360.3
Deferred income tax assets
506.7
427.1
Total assets
$
11,685.4
$
13,259.5
107
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
The Company’s measurement of segment performance is adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization). The Company defines adjusted EBITDA as operating income (loss), adjusted to exclude depreciation, amortization of intangible assets, restructuring costs, asset impairments, equity-based compensation, transaction, transformation and integration costs and other items that the Company believes are useful to exclude in the evaluation of operating performance from period to period because these items are not representative of the Company’s core business.
The following table provides net sales, adjusted EBITDA, depreciation expense and additions to property, plant and equipment by reportable segment:
Year Ended December 31,
2022
2021
2020
Net sales:
CCS
$
3,789.6
$
3,053.8
$
2,551.8
OWN
1,467.9
1,417.1
1,250.4
NICS
939.7
861.9
847.1
ANS
1,327.5
1,404.6
1,379.1
Home
1,703.4
1,849.3
2,407.5
Consolidated net sales
$
9,228.1
$
8,586.7
$
8,435.9
Segment adjusted EBITDA:
CCS
$
643.6
$
448.9
$
447.5
OWN
269.7
266.8
277.3
NICS
51.9
( 15.3
)
12.8
ANS
285.2
391.1
346.3
Home
26.3
25.5
131.3
Total segment adjusted EBITDA
1,276.7
1,117.0
1,215.2
Amortization of intangible assets
( 543.0
)
( 613.0
)
( 630.5
)
Restructuring costs, net
( 62.9
)
( 91.9
)
( 88.4
)
Equity-based compensation
( 61.1
)
( 79.6
)
( 115.0
)
Asset impairments
( 1,119.6
)
( 13.7
)
( 206.7
)
Transaction, transformation and integration costs
( 38.2
)
( 90.3
)
( 24.9
)
Acquisition accounting adjustments
( 7.3
)
( 11.5
)
( 20.6
)
Patent claims and litigation settlements
( 28.5
)
( 31.7
)
( 16.3
)
Executive severance
—
—
( 6.3
)
Reserve of Russian accounts receivable
( 2.7
)
—
—
Depreciation
( 127.2
)
( 136.7
)
( 158.3
)
Consolidated operating income (loss)
$
( 713.8
)
$
48.6
$
( 51.8
)
Depreciation expense:
CCS
$
58.8
$
53.6
$
53.9
OWN
14.3
15.4
17.2
NICS
15.0
19.2
21.0
ANS
22.5
25.8
31.1
Home
16.6
22.7
35.1
Consolidated depreciation expense
$
127.2
$
136.7
$
158.3
Additions to property, plant and equipment:
CCS
$
64.6
$
81.5
$
61.8
OWN
9.9
11.0
12.8
NICS
7.0
13.4
10.1
ANS
11.1
14.6
10.3
Home
8.7
10.9
26.2
Consolidated additions to property, plant and equipment
$
101.3
$
131.4
$
121.2
108
CommScope Holding Company, Inc.
Notes to Consolidated Financial Statements-(Continued)
(In millions, unless otherwise noted)
Customer and Supplier Information
No direct customer accounted for 10 % or more of the Company's total net sales during the years ended December 31, 2022 or 2021. Net sales to Comcast Corporation and affiliates (Comcast) accounted for 11 % of the Company’s net sales during the year ended December 31, 2020. Net sales to Comcast are mostly derived from the Home, ANS and CCS segments. Other than Comcast, no direct customer accounted for 10 % or more of the Company’s total net sales during the year ended December 31, 2020. Accounts receivable from Charter Communications, Inc. (Charter) represented approximately 12 % of accounts receivable as of December 31, 2022. Other than Charter, no direct customer accounted for 10 % or more of the Company's accounts receivable as of December 31, 2022. No direct customers accounted for 10 % or more of the Company’s accounts receivable as of December 31, 2021.
The Company relies on sole suppliers or a limited group of suppliers for certain key components, subassemblies and modules and a limited group of contract manufacturers to manufacture a significant portion of its products. Any disruption or termination of these arrangements could have a material adverse impact on the Company’s results of operations.
Related Party Transactions
See Note 13 for a discussion of the Convertible Preferred Stock issued to Carlyle to finance the ARRIS acquisition. Other than transactions related to the Convertible Preferred Stock, there were no material related party transactions for the years ended December 31, 2022, 2021 or 2020.
Geographic Information
Sales to customers located outside of the U.S. comprised 38 % , 42 % and 39 % of total net sales during the years ended December 31, 2022, 2021 and 2020 , respectively. Sales by geographic region, based on the destination of product shipments or service provided, were as follows:
Year Ended December 31, 2022
CCS
OWN
NICS
ANS
Home
Total
Geographic Region:
United States (U.S.)
$
2,513.6
$
1,062.6
$
539.5
$
902.4
$
732.4
$
5,750.5
Europe, Middle East and Africa (EMEA)
571.9
218.0
250.7
124.2
430.2
1,595.0
Asia Pacific (APAC)
431.4
120.8
114.1
79.2
79.0
824.5
Caribbean and Latin America (CALA)
179.3
32.8
20.3
164.3
199.0
595.7
Canada
93.4
33.7
15.1
57.4
262.8
462.4
Consolidated net sales
$
3,789.6
$
1,467.9
$
939.7
$
1,327.5
$
1,703.4
$
9,228.1
Year Ended December 31, 2021
CCS
OWN
NICS
ANS
Home
Total
Geographic Region:
United States
$
1,823.6
$
894.3
$
490.4
$
824.5
$
927.7
$
4,960.5
Europe, Middle East and Africa
548.0
272.4
238.2
146.7
415.3
1,620.6
Asia Pacific
439.8
150.7
102.5
131.4
114.2
938.6
Caribbean and Latin America
169.1
44.6
18.3
246.8
220.2
699.0
Canada
73.3
55.1
12.5
55.2
171.9
368.0
Consolidated net sales
$
3,053.8
$
1,417.1
$
861.9
$
1,404.6
$
1,849.3
$
8,586.7
Long-lived assets, excluding intangible assets, consist substantially of property, plant and equipment and right of use assets. The Company’s long-lived assets, excluding intangible assets, located in the U.S., EMEA, APAC and CALA regions represented the following percentages of such long-lived assets: 60 %, 14 %, 18 % and 8 %, respectively, as of December 31, 2022 and 63 %, 13 %, 18 % and 6 %, respectively, as of December 31, 2021 .
109
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUN TANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.