CommScope(COMM) - 2024 Q2 - Quarterly Report

Part I—Financial Information (Unaudited) Item 1. Condensed Consolidated Financial Statements This section presents CommScope Holding Company, Inc's unaudited condensed consolidated financial statements for the quarter and six months ended June 30, 2024, including statements of operations, comprehensive income (loss), balance sheets, cash flows, and stockholders' deficit, along with detailed notes explaining the company's background, significant transactions, accounting policies, and financial performance Condensed Consolidated Statements of Operations Three Months Ended June 30, 2024 vs 2023 (in millions, except per share amounts): | Metric | 2024 | 2023 | Change | % Change | | :----- | :--- | :--- | :----- | :------- | | Net Sales | $1,386.9 | $1,588.8 | $(201.9) | (12.7)% | | Gross Profit | $547.6 | $568.9 | $(21.3) | (3.7)% | | Operating Income | $192.8 | $98.2 | $94.6 | 96.3% | | Net Income (Loss) | $44.4 | $(100.4) | $144.8 | NM | | Net Income (Loss) Attributable to Common Stockholders | $28.2 | $(115.7) | $143.9 | NM | | Diluted EPS | $0.13 | $(0.55) | $0.68 | NM | Six Months Ended June 30, 2024 vs 2023 (in millions, except per share amounts): | Metric | 2024 | 2023 | Change | % Change | | :----- | :--- | :--- | :----- | :------- | | Net Sales | $2,555.3 | $3,253.2 | $(697.9) | (21.5)% | | Gross Profit | $949.8 | $1,199.1 | $(249.3) | (20.8)% | | Operating Income | $195.7 | $281.3 | $(85.6) | (30.4)% | | Net Income (Loss) | $(314.8) | $(97.0) | $(217.8) | 224.5% | | Net Income (Loss) Attributable to Common Stockholders | $(347.0) | $(127.4) | $(219.6) | 172.4% | | Diluted EPS | $(1.63) | $(0.61) | $(1.02) | 167.2% | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive Income (Loss) (in millions): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income (Loss) | $44.4 | $(100.4) | $(314.8) | $(97.0) | | Foreign currency translation gain (loss) | $(16.1) | $0.3 | $(21.3) | $20.7 | | Total comprehensive income (loss) | $29.0 | $(99.1) | $(328.8) | $(76.9) | Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in millions): | Metric | June 30, 2024 | December 31, 2023 | | :----- | :------------ | :---------------- | | Cash and cash equivalents | $345.9 | $543.8 | | Total current assets | $2,566.8 | $2,862.7 | | Total assets | $8,821.0 | $9,371.9 | | Current portion of long-term debt | $1,306.6 | $32.0 | | Total current liabilities | $2,473.1 | $1,409.4 | | Long-term debt | $7,968.2 | $9,246.6 | | Total liabilities | $10,945.5 | $11,178.6 | | Total stockholders' deficit | $(3,318.8) | $(2,968.8) | Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2024 vs 2023 (in millions): | Metric | 2024 | 2023 | Change | | :----- | :--- | :--- | :----- | | Net cash generated by (used in) operating activities | $(126.9) | $90.7 | $(217.6) | | Net cash generated by (used in) investing activities | $(47.6) | $26.9 | $(74.5) | | Net cash used in financing activities | $(17.8) | $(97.8) | $80.0 | | Change in cash and cash equivalents | $(197.9) | $20.0 | $(217.9) | | Cash and cash equivalents at end of period | $345.9 | $418.1 | $(72.2) | Condensed Consolidated Statements of Stockholders' Deficit Stockholders' Deficit (in millions, except share amounts): | Metric | June 30, 2024 | December 31, 2023 | | :----- | :------------ | :---------------- | | Common stock, end of period | $2.3 | $2.3 | | Additional paid-in capital, end of period | $2,531.0 | $2,550.4 | | Accumulated deficit, end of period | $(5,267.9) | $(4,953.1) | | Total stockholders' deficit, end of period | $(3,318.8) | $(2,968.8) | - Weighted average common shares outstanding (basic) increased to 213.5 million for the three months ended June 30, 2024, from 210.5 million in the prior year period, and to 212.9 million for the six months ended June 30, 2024, from 209.7 million in the prior year period[4] Notes to Unaudited Condensed Consolidated Financial Statements 1. Background and Basis of Presentation - CommScope is a global provider of infrastructure solutions for communication, data center, and entertainment networks, offering solutions for wired and wireless networks, complemented by technical support, systems design, and integration services[12] - On June 7, 2024, CommScope acquired certain assets and assumed specified liabilities of Casa Systems, Inc for $45.1 million, integrating them into its Access Network Solutions (ANS) segment to enhance virtual CMTS and PON product offerings[13] - On January 9, 2024, the company completed the sale of its Home Networks (Home) segment to Vantiva SA, resulting in a 24.73% equity stake in Vantiva and an earn-out of up to $100 million; the Home business is now classified as discontinued operations[14] - The company faces substantial doubt about its ability to operate as a going concern due to $1.27 billion in 6.00% senior unsecured notes maturing on June 15, 2025, for which it currently lacks sufficient cash or liquidity to repay[18] - Management believes the pending sale of the OWN segment and DAS business unit for approximately $2.1 billion, which may be used to retire the 2025 Notes, is probable and will alleviate substantial doubt about the company's going concern ability[19][20] - Accounts receivable from Charter Communications, Inc represented approximately 10% of total accounts receivable as of June 30, 2024, indicating a concentration of risk[21] Product Warranty Accrual Activity (in millions): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Beginning Balance | $27.6 | $34.3 | $27.4 | $33.7 | | Provision for claims | $4.7 | $6.7 | $11.5 | $11.6 | | Claims paid | $(5.3) | $(6.0) | $(11.9) | $(10.4) | | Ending Balance | $27.0 | $35.1 | $27.0 | $35.1 | - The company has non-cancellable purchase obligations for raw materials, with advance payments totaling $120.0 million through 2026, and committed purchases growing to approximately $137 million per year by 2026 through 2032[25] - Goodwill impairment tests as of January 1, 2024, showed low headroom (8% for Enterprise and 7% for ANS reporting units), indicating a risk for future impairment if economic, market, or business conditions decline or forecasted cash flows decrease materially[28][30] Income Tax (Expense) Benefit (in millions): | Period | Pretax Income (Loss) | Income Tax (Expense) Benefit | | :----- | :------------------- | :--------------------------- | | Three Months Ended June 30, 2024 | $31.1 | $43.7 | | Six Months Ended June 30, 2024 | $(131.2) | $(56.1) | | Three Months Ended June 30, 2023 | $(66.7) | $3.6 | | Six Months Ended June 30, 2023 | $(40.9) | $7.6 | - The company adopted ASU No 2022-04 on January 1, 2024, for supplier finance program disclosures, with no material impact; it is evaluating ASU No 2023-09 (Income Tax Disclosures) and ASU No 2023-07 (Segment Reporting) for future adoption[40][41][42] 2. Acquisitions - On June 7, 2024, CommScope acquired certain assets of Casa Systems, Inc for $45.1 million in cash, integrating them into its ANS segment to enhance virtual CMTS and PON product offerings and expand its customer base[43][44][45] Preliminary Fair Value of Assets Acquired and Liabilities Assumed in Casa Transaction (June 7, 2024, in millions): | Category | Amount | | :------- | :----- | | Total cash consideration paid | $45.1 | | Accounts receivable, net | $4.4 | | Inventories, net | $13.6 | | Property, plant and equipment | $2.6 | | Goodwill | $2.2 | | Identifiable intangible assets | $24.1 | | Other noncurrent assets | $1.2 | | Less: Liabilities assumed | $(3.0) | | Fair value allocated to net assets acquired | $45.1 | - The goodwill from the Casa Transaction is attributed to the company's reputation and assembled workforce, and is expected to be fully deductible for income tax purposes[48] Preliminary Valuations of Intangible Assets Acquired (in millions): | Intangible Asset | Estimated Fair Value | Weighted Average Estimated Useful Life (In Years) | | :--------------- | :------------------- | :------------------------------------------------ | | Customer relationships | $5.8 | 12 | | Existing technology | $18.3 | 7 | | Total amortizable intangible assets | $24.1 | | - CommScope recognized $1.0 million in transaction and integration costs related to the Casa Transaction for both the three and six months ended June 30, 2024, recorded in selling, general and administrative expense[50] 3. Discontinued Operations - On January 9, 2024, CommScope completed the sale of its Home business to Vantiva SA, receiving 134,704,669 shares of Vantiva common stock (24.73% equity stake), $0.25 million in cash, and an earn-out of up to $100 million[51] - The Home business was classified as a discontinued operation in Q4 2023, resulting in a $177.0 million loss on classification; an additional loss of $69.8 million was recognized upon closing the transaction in Q1 2024[52] - CommScope entered into a transition service agreement (TSA) with Vantiva, providing post-closing support, and a Supply Agreement for selling retained inventory; the company recognized a $17.0 million loss on its equity investment in Vantiva in Q2 2024[53] Summarized Components of Loss from Discontinued Operations (in millions): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $22.0 | $329.6 | $32.7 | $666.7 | | Gross profit (loss) | $(0.8) | $48.3 | $(13.8) | $109.9 | | Operating loss | $(19.0) | $(25.9) | $(50.2) | $(56.5) | | Loss from discontinued operations, net of income taxes | $(30.4) | $(37.3) | $(127.5) | $(63.7) | Loss on Disposal of Home Business (January 9, 2024, in millions): | Item | Amount | | :--- | :----- | | Fair value of shares issued to seller | $17.0 | | Carrying value of net assets sold | $(37.9) | | Loss on disposal before income taxes and reclassification of foreign currency translation | $(20.9) | | Reclassification of foreign currency translation | $(27.4) | | Loss on disposal before income taxes | $(48.3) | | Income tax expense | $(21.5) | | Loss on disposal, net of income taxes | $(69.8) | 4. Goodwill Goodwill by Reportable Segment (in millions): | Segment | Goodwill (Dec 31, 2023) | Accumulated Impairment Losses (Dec 31, 2023) | Total (Dec 31, 2023) | Goodwill (June 30, 2024) | Accumulated Impairment Losses (June 30, 2024) | Total (June 30, 2024) | | :------ | :---------------------- | :------------------------------------------- | :------------------- | :----------------------- | :-------------------------------------------- | :-------------------- | | CCS | $2,291.0 | $(150.6) | $2,140.4 | $2,279.4 | $(150.6) | $2,128.8 | | OWN | $662.7 | $(159.5) | $503.2 | $659.8 | $(159.5) | $500.3 | | NICS | $650.6 | $(41.2) | $609.4 | $649.0 | $(41.2) | $607.8 | | ANS | $1,995.4 | $(1,734.0) | $261.4 | $1,997.4 | $(1,734.0) | $263.4 | | Total | $5,599.7 | $(2,085.3) | $3,514.4 | $5,585.6 | $(2,085.3) | $3,500.3 | - Goodwill balances were reassessed as of January 1, 2024, due to segment reorganization, with no new impairment identified; however, the ANS and Enterprise reporting units have low headroom (7% and 8% respectively), posing a risk for future impairment[61] 5. Revenue from Contracts with Customers Allowance for Doubtful Accounts (in millions): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Beginning Balance | $30.0 | $49.6 | $32.2 | $50.1 | | Provision (benefit) | $(6.4) | $3.0 | $(6.1) | $2.4 | | Write-offs | — | $(21.5) | $(2.1) | $(21.7) | | Ending Balance | $23.4 | $31.2 | $23.4 | $31.2 | Customer Contract Balances (in millions): | Contract Balance Type | June 30, 2024 | December 31, 2023 | | :-------------------- | :------------ | :---------------- | | Unbilled accounts receivable | $16.8 | $16.8 | | Deferred revenue - current | $107.0 | $85.4 | | Deferred revenue - noncurrent | $77.9 | $70.6 | | Total contract liabilities | $184.9 | $156.0 | - The increase in total contract liabilities from December 31, 2023, to June 30, 2024, was primarily due to upfront support billings to be recognized over the support term; the company recognized $21.1 million and $51.3 million of revenue from contract liabilities in the three and six months ended June 30, 2024, respectively[65] 6. Supplemental Financial Statement Information Accounts Receivable (in millions): | Category | June 30, 2024 | December 31, 2023 | | :------- | :------------ | :---------------- | | Accounts receivable - trade | $999.0 | $826.9 | | Accounts receivable - other | $24.2 | $20.5 | | Allowance for doubtful accounts | $(23.4) | $(32.2) | | Total accounts receivable, net | $999.8 | $815.2 | Inventories, net (in millions): | Category | June 30, 2024 | December 31, 2023 | | :------- | :------------ | :---------------- | | Raw materials | $507.2 | $551.4 | | Work in process | $177.5 | $165.6 | | Finished goods | $357.1 | $362.7 | | Total inventories, net | $1,041.8 | $1,079.7 | Accrued and Other Liabilities (in millions): | Category | June 30, 2024 | December 31, 2023 | | :------- | :------------ | :---------------- | | Compensation and employee benefit liabilities | $148.0 | $178.6 | | Accrued interest | $113.2 | $113.2 | | Deferred revenue | $107.0 | $85.4 | | Operating lease liabilities | $35.6 | $36.5 | | VAT liability | $32.3 | $14.7 | | Product warranty accrual | $25.3 | $26.0 | | Restructuring liabilities | $9.9 | $11.7 | | Other | $200.4 | $168.2 | | Total accrued and other liabilities | $671.7 | $634.3 | Operating Lease Information (in millions): | Category | June 30, 2024 | December 31, 2023 | | :------- | :------------ | :---------------- | | Right of use assets | $145.6 | $157.2 | | Lease liabilities - current | $35.6 | $36.5 | | Lease liabilities - noncurrent | $128.3 | $139.9 | | Total lease liabilities | $163.9 | $176.4 | Accumulated Other Comprehensive Loss (AOCL) (in millions): | Category | June 30, 2024 | December 31, 2023 | | :------- | :------------ | :---------------- | | Foreign currency translation | $(253.7) | $(232.4) | | Defined benefit plan activity | $(15.0) | $(14.9) | | Hedging instruments | $(12.0) | $(19.4) | | Net AOCL at end of period | $(280.7) | $(266.7) | Cash Flow Information (Six Months Ended June 30, in millions): | Item | 2024 | 2023 | | :--- | :--- | :--- | | Cash paid for income taxes, net of refunds | $54.0 | $59.7 | | Cash paid for interest | $322.9 | $322.7 | | Non-cash investing activities: Equity method investment from divestiture | $17.0 | — | 7. Financing Debt Obligations (in millions): | Debt Type | June 30, 2024 | December 31, 2023 | | :-------- | :------------ | :---------------- | | 7.125% senior notes due July 2028 | $641.6 | $641.6 | | 5.00% senior notes due March 2027 | $750.0 | $750.0 | | 8.25% senior notes due March 2027 | $866.9 | $866.9 | | 6.00% senior notes due June 2025 | $1,274.6 | $1,274.6 | | 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 | $3,048.0 | $3,064.0 | | Total principal amount of debt | $9,331.1 | $9,347.1 | | Total long-term debt (net of discount/costs, current portion) | $7,968.2 | $9,246.6 | - The $1.27 billion 6.00% senior unsecured notes due June 15, 2025, have been reclassified to current portion of long-term debt, as the company does not currently have sufficient cash or liquidity to repay them[73] - The weighted average effective interest rate on outstanding borrowings was 7.22% as of both June 30, 2024, and December 31, 2023[76] - As of June 30, 2024, the company had $535.4 million in availability under its Revolving Credit Facility, with no outstanding borrowings[75] 8. Fair Value Measurements Fair Value of Financial Instruments (in millions): | Instrument | Carrying Amount (June 30, 2024) | Fair Value (June 30, 2024) | Carrying Amount (Dec 31, 2023) | Fair Value (Dec 31, 2023) | Valuation Inputs | | :--------- | :------------------------------ | :------------------------- | :----------------------------- | :------------------------ | :--------------- | | Foreign currency contracts (assets) | $1.4 | $1.4 | $8.7 | $8.7 | Level 2 | | Interest rate swap contracts (assets) | $3.0 | $3.0 | — | — | Level 2 | | 7.125% senior notes due 2028 | $641.6 | $269.5 | $641.6 | $301.6 | Level 2 | | 6.00% senior notes due 2025 | $1,274.6 | $1,034.3 | $1,274.6 | $1,038.8 | Level 2 | | Senior secured term loan due 2026 | $3,048.0 | $2,735.6 | $3,064.0 | $2,742.3 | Level 2 | | Foreign currency contracts (liabilities) | $12.0 | $12.0 | $3.6 | $3.6 | Level 2 | | Interest rate swap contracts (liabilities) | — | — | $8.0 | $8.0 | Level 2 | - Fair value measurements for debt instruments, interest rate swap contracts, and foreign currency contracts are primarily based on Level 2 inputs (indicative quotes)[77][78] - Non-recurring fair value measurements in Q2 2024 included assets acquired and liabilities assumed from the Casa Transaction (Level 3 inputs) and impairment of unutilized real estate within restructuring costs (Level 3 inputs)[79] 9. Segments and Geographic Information - Following the divestiture of the Home business, CommScope operates with four segments: Connectivity and Cable Solutions (CCS), Outdoor Wireless Networks (OWN), Networking, Intelligent Cellular and Security Solutions (NICS), and Access Network Solutions (ANS)[81] - As of January 1, 2024, certain product lines were shifted from the CCS segment to the ANS segment for better business alignment, and prior period amounts have been recast[81] Identifiable Segment-Related Assets (in millions): | Segment | June 30, 2024 | December 31, 2023 | | :------ | :------------ | :---------------- | | CCS | $3,749.2 | $3,597.8 | | OWN | $1,041.4 | $993.8 | | NICS | $1,248.5 | $1,271.5 | | ANS | $1,836.6 | $1,957.0 | | Total identifiable segment-related assets | $7,875.7 | $7,820.1 | Net Sales by Segment (Three Months Ended June 30, in millions): | Segment | 2024 | 2023 | Change | % Change | | :------ | :--- | :--- | :----- | :------- | | CCS | $728.4 | $697.0 | $31.4 | 4.5% | | OWN | $256.3 | $228.8 | $27.5 | 12.0% | | NICS | $209.4 | $327.6 | $(118.2) | (36.1)% | | ANS | $192.8 | $335.4 | $(142.6) | (42.5)% | | Consolidated net sales | $1,386.9 | $1,588.8 | $(201.9) | (12.7)% | Net Sales by Segment (Six Months Ended June 30, in millions): | Segment | 2024 | 2023 | Change | % Change | | :------ | :--- | :--- | :----- | :------- | | CCS | $1,333.1 | $1,518.1 | $(185.0) | (12.2)% | | OWN | $452.3 | $487.2 | $(34.9) | (7.2)% | | NICS | $389.7 | $612.1 | $(222.4) | (36.3)% | | ANS | $380.2 | $635.8 | $(255.6) | (40.2)% | | Consolidated net sales | $2,555.3 | $3,253.2 | $(697.9) | (21.5)% | Segment Adjusted EBITDA (Three Months Ended June 30, in millions): | Segment | 2024 | 2023 | Change | % Change | | :------ | :--- | :--- | :----- | :------- | | CCS | $171.4 | $82.9 | $88.5 | 106.8% | | OWN | $75.4 | $41.7 | $33.7 | 80.8% | | NICS | $22.1 | $74.9 | $(52.8) | (70.5)% | | ANS | $33.2 | $63.0 | $(29.8) | (47.3)% | | Total segment adjusted EBITDA | $302.1 | $252.7 | $49.4 | 19.5% | Segment Adjusted EBITDA (Six Months Ended June 30, in millions): | Segment | 2024 | 2023 | Change | % Change | | :------ | :--- | :--- | :----- | :------- | | CCS | $266.4 | $233.9 | $32.5 | 13.9% | | OWN | $119.7 | $101.3 | $18.4 | 18.2% | | NICS | $21.1 | $132.9 | $(111.8) | (84.1)% | | ANS | $47.9 | $109.7 | $(61.8) | (56.3)% | | Total segment adjusted EBITDA | $455.1 | $566.4 | $(111.3) | (19.7)% | Consolidated Net Sales by Geographic Region (Six Months Ended June 30, 2024, in millions): | Region | CCS | OWN | NICS | ANS | Total | | :----- | :-- | :-- | :--- | :-- | :---- | | United States | $860.9 | $283.3 | $234.0 | $267.9 | $1,646.1 | | Europe, Middle East and Africa | $201.7 | $108.0 | $91.5 | $25.7 | $426.9 | | Asia Pacific | $195.4 | $46.9 | $46.9 | $14.6 | $303.8 | | Caribbean and Latin America | $48.9 | $9.7 | $9.4 | $38.5 | $106.5 | | Canada | $26.2 | $4.4 | $7.9 | $33.5 | $72.0 | | Consolidated net sales | $1,333.1 | $452.3 | $389.7 | $380.2 | $2,555.3 | 10. Restructuring Costs, Net Net Pretax Restructuring Activity by Segment (in millions): | Segment | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | CCS | $0.4 | $13.2 | $0.8 | $(1.9) | | OWN | $0.2 | $3.8 | $0.2 | $3.9 | | NICS | $1.4 | $9.0 | $2.6 | $11.0 | | ANS | $(1.1) | $9.3 | $27.9 | $10.7 | | Total | $0.9 | $36.6 | $31.5 | $25.5 | Restructuring Liabilities (in millions): | Category | June 30, 2024 | December 31, 2023 | | :------- | :------------ | :---------------- | | Accrued and other liabilities | $9.9 | $11.7 | | Other noncurrent liabilities | — | $0.1 | | Total restructuring liabilities | $9.9 | $11.8 | - CommScope NEXT restructuring actions, initiated in Q1 2021, aim for profitable growth, operational efficiency, and portfolio optimization; to date, $205.9 million in charges have been recognized, with $9.9 million in cash payments expected for the remainder of 2024[93][95] 11. Series A Convertible Preferred Stock - On April 4, 2019, CommScope issued 1,000,000 shares of Series A Convertible Preferred Stock to Carlyle for $1.0 billion, convertible into common stock at an initial rate of 36.3636 shares per preferred share[96] - Holders are entitled to a cumulative dividend of 5.5% per year, payable quarterly; for the three and six months ended June 30, 2024, dividends of $16.2 million and $32.2 million, respectively, were paid in-kind[97] 12. Subsequent Events - CommScope entered into a definitive agreement to sell its OWN segment and the Distributed Antenna Systems (DAS) business unit of its NICS segment to Amphenol Corporation for approximately $2.1 billion in cash; the sale is expected to close in the first half of 2025[98] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on CommScope's financial condition and results of operations for the three and six months ended June 30, 2024, compared to the prior year periods, covering key financial metrics, strategic initiatives like CommScope NEXT, impacts of economic conditions, segment performance, liquidity, and capital resources, including the pending sale of the OWN and DAS businesses Overview - CommScope is a global provider of infrastructure solutions for communication, data center, and entertainment networks, known for innovative technology, broad offerings, and global scale[102] - The acquisition of Casa Systems, Inc assets for $45.1 million on June 7, 2024, is expected to strengthen the ANS segment by enhancing virtual CMTS and PON product offerings[103] CommScope NEXT - CommScope NEXT is a business transformation initiative launched in 2021, focusing on profitable growth, operational efficiency, and portfolio optimization to enhance competitiveness, de-leverage debt, and maximize shareholder value[105] - In the first half of 2024, the company incurred $0.9 million and $31.5 million in net restructuring costs and $23.7 million and $32.3 million in transaction, transformation, and integration costs, respectively, related to CommScope NEXT initiatives[105] - The sale of the Home Networks segment to Vantiva SA was completed on January 9, 2024, with all prior period amounts recast to reflect its discontinuation[106] - CommScope now reports financial performance based on four remaining segments: CCS, OWN, NICS, and ANS, with certain product lines shifted from CCS to ANS as of January 1, 2024[108] - In July 2024, CommScope agreed to sell its OWN segment and the DAS business unit of its NICS segment to Amphenol Corporation, leading to the introduction of 'Core financial measures' (CCS, NICS excluding DAS, and ANS)[109] Impacts of Current Economic Conditions - Macroeconomic factors like higher interest rates, inflation, and global economic slowdown continued to negatively impact net sales across all segments in the first half of 2024, as customers reduced purchases and paused capital spending[110] - The company is implementing additional cost savings initiatives in 2024 and expects a recovery in demand in the second half of the year, but warns that failure to achieve this recovery could materially impact its outlook[110] Critical Accounting Policies - No material changes to critical accounting policies were reported, except for an update to goodwill impairment reviews[112] - The annual goodwill impairment test as of October 1, 2023, resulted in partial impairment charges of $99.1 million for Enterprise and $46.3 million for ANS; as of January 1, 2024, both reporting units had low headroom (8% and 7% respectively), indicating a risk for future impairment[113][114] Results of Operations Consolidated Financial Highlights (Three Months Ended June 30, in millions, except per share amounts): | Metric | 2024 | 2023 | Change | % Change | | :----- | :--- | :--- | :----- | :------- | | Net sales | $1,386.9 | $1,588.8 | $(201.9) | (12.7)% | | Gross profit | $547.6 | $568.9 | $(21.3) | (3.7)% | | Operating income | $192.8 | $98.2 | $94.6 | 96.3% | | Non-GAAP adjusted EBITDA | $302.1 | $252.7 | $49.4 | 19.5% | | Income (loss) from continuing operations | $74.8 | $(63.1) | $137.9 | NM | | Diluted EPS from continuing operations | $0.27 | $(0.37) | $0.64 | NM | Consolidated Financial Highlights (Six Months Ended June 30, in millions, except per share amounts): | Metric | 2024 | 2023 | Change | % Change | | :----- | :--- | :--- | :----- | :------- | | Net sales | $2,555.3 | $3,253.2 | $(697.9) | (21.5)% | | Gross profit | $949.8 | $1,199.1 | $(249.3) | (20.8)% | | Operating income | $195.7 | $281.3 | $(85.6) | (30.4)% | | Non-GAAP adjusted EBITDA | $455.1 | $566.4 | $(111.3) | (19.7)% | | Loss from continuing operations | $(187.3) | $(33.3) | $(154.0) | 462.5% | | Diluted loss from continuing operations per share | $(1.03) | $(0.30) | $(0.73) | 243.3% | - Net sales decreased by 12.7% for the three months and 21.5% for the six months ended June 30, 2024, primarily due to reduced purchasing by customers and paused capital spending[120] - Gross profit decreased by $21.3 million (3.7%) and $249.3 million (20.8%) for the three and six months ended June 30, 2024, respectively, mainly due to lower sales volumes, partially offset by favorable product mix and lower input costs[123] - Transition service agreement (TSA) income of $8.4 million and $18.0 million was recognized for the three and six months ended June 30, 2024, respectively, related to post-closing support for the divested Home business[122][124] - SG&A expense decreased by $19.7 million (8.6%) and $52.0 million (11.3%) for the three and six months ended June 30, 2024, driven by cost savings, lower bad debt, and reduced variable incentive compensation, partially offset by higher transaction costs for CommScope NEXT[126] - R&D expense decreased by $36.7 million (28.6%) and $57.9 million (22.8%) for the three and six months ended June 30, 2024, primarily due to lower spending in CCS, NICS, and ANS segments[127] - Amortization of purchased intangible assets decreased by $15.4 million (20.3%) and $41.8 million (23.7%) for the three and six months ended June 30, 2024, as certain intangible assets became fully amortized[128][129] - Net restructuring costs were $0.9 million and $31.5 million for the three and six months ended June 30, 2024, respectively, primarily related to CommScope NEXT initiatives[128][130] - Other income, net, for the three and six months ended June 30, 2024, was primarily impacted by a gain on early extinguishment of debt in the prior year periods, with no debt repurchases in the current periods[133] - Interest expense remained stable, favorably impacted by lower long-term debt from 2023 repurchases, but unfavorably by increased variable interest rates on the 2026 Term Loan[135] - Income tax benefit of $43.7 million on pretax income of $31.1 million for Q2 2024, and income tax expense of $56.1 million on a pretax loss of $131.2 million for H1 2024, were unfavorably impacted by valuation allowances and US anti-deferral provisions[137] Segment Results Net Sales by Segment (Three Months Ended June 30, in millions): | Segment | 2024 | 2023 | Change | % Change | | :------ | :--- | :--- | :----- | :------- | | CCS | $728.4 | $697.0 | $31.4 | 4.5% | | NICS (excluding DAS) | $132.4 | $236.8 | $(104.4) | (44.1)% | | ANS | $192.8 | $335.4 | $(142.6) | (42.5)% | | Core net sales | $1,053.6 | $1,269.2 | $(215.6) | (17.0)% | | OWN | $256.3 | $228.8 | $27.5 | 12.0% | | DAS | $77.0 | $90.8 | $(13.8) | (15.2)% | | Consolidated net sales | $1,386.9 | $1,588.8 | $(201.9) | (12.7)% | Operating Income (Loss) by Segment (Three Months Ended June 30, in millions): | Segment | 2024 | 2023 | Change | % Change | | :------ | :--- | :--- | :----- | :------- | | CCS | $130.6 | $32.7 | $97.9 | 299.4% | | NICS (excluding DAS) | $(24.8) | $33.7 | $(58.5) | (173.6)% | | ANS | $2.1 | $5.3 | $(3.2) | (60.4)% | | Core operating income | $107.9 | $71.7 | $36.2 | 50.5% | | OWN | $62.4 | $27.4 | $35.0 | 127.7% | | DAS | $22.5 | $11.0 | $11.5 | 104.5% | | Consolidated operating income | $192.8 | $98.2 | $94.6 | 96.3% | Adjusted EBITDA by Segment (Three Months Ended June 30, in millions): | Segment | 2024 | 2023 | Change | % Change | | :------ | :--- | :--- | :----- | :------- | | CCS | $171.4 | $82.9 | $88.5 | 106.8% | | NICS (excluding DAS) | $(3.5) | $55.8 | $(59.3) | (106.3)% | | ANS | $33.2 | $63.0 | $(29.8) | (47.3)% | | Core adjusted EBITDA | $201.1 | $201.7 | $(0.6) | (0.3)% | | OWN | $75.4 | $41.7 | $33.7 | 80.8% | | DAS | $25.6 | $19.1 | $6.5 | 34.0% | | Non-GAAP consolidated adjusted EBITDA | $302.1 | $252.7 | $49.4 | 19.5% | Net Sales by Segment (Six Months Ended June 30, in millions): | Segment | 2024 | 2023 | Change | % Change | | :------ | :--- | :--- | :----- | :------- | | CCS | $1,333.1 | $1,518.1 | $(185.0) | (12.2)% | | NICS (excluding DAS) | $241.3 | $434.8 | $(193.5) | (44.5)% | | ANS | $380.2 | $635.8 | $(255.6) | (40.2)% | | Core net sales | $1,954.6 | $2,588.7 | $(634.1) | (24.5)% | | OWN | $452.3 | $487.2 | $(34.9) | (7.2)% | | DAS | $148.4 | $177.3 | $(28.9) | (16.3)% | | Consolidated net sales | $2,555.3 | $3,253.2 | $(697.9) | (21.5)% | Operating Income (Loss) by Segment (Six Months Ended June 30, in millions): | Segment | 2024 | 2023 | Change | % Change | | :------ | :--- | :--- | :----- | :------- | | CCS | $188.8 | $160.5 | $28.3 | 17.6% | | NICS (excluding DAS) | $(61.8) | $51.9 | $(113.7) | (219.1)% | | ANS | $(63.6) | $(20.4) | $(43.2) | 211.8% | | Core operating income | $63.4 | $192.0 | $(128.6) | (67.0)% | | OWN | $95.9 | $76.6 | $19.3 | 25.2% | | DAS | $36.4 | $27.7 | $8.7 | 31.4% | | Consolidated operating income | $195.7 | $281.3 | $(85.6) | (30.4)% | Adjusted EBITDA by Segment (Six Months Ended June 30, in millions): | Segment | 2024 | 2023 | Change | % Change | | :------ | :--- | :--- | :----- | :------- | | CCS | $266.4 | $233.9 | $32.5 | 13.9% | | NICS (excluding DAS) | $(20.9) | $93.9 | $(114.8) | (122.3)% | | ANS | $47.9 | $109.7 | $(61.8) | (56.3)% | | Core adjusted EBITDA | $293.4 | $437.5 | $(144.1) | (32.9)% | | OWN | $119.7 | $101.3 | $18.4 | 18.2% | | DAS | $42.0 | $39.0 | $3.0 | 7.7% | | Non-GAAP consolidated adjusted EBITDA | $455.1 | $566.4 | $(111.3) | (19.7)% | - CCS segment net sales increased for the three months ended June 30, 2024, due to higher Enterprise business sales volumes, but decreased for the six months due to customer spending pauses in Q1; operating income and adjusted EBITDA increased for both periods due to favorable product mix and cost reductions[144][145] - OWN segment net sales increased for the three months ended June 30, 2024, due to higher sales volumes, but decreased for the six months due to reduced spending by North American operators in Q1; operating income and adjusted EBITDA increased for both periods due to higher sales volumes, favorable product mix, and lower input/SG&A costs[146][147] - NICS segment net sales decreased for both the three and six months ended June 30, 2024, primarily due to lower Ruckus product sales volumes, reduced demand, and channel inventory digestion; operating loss increased and adjusted EBITDA decreased due to lower sales, pricing, and higher inventory reserves, partially offset by lower SG&A and R&D costs[148][149] - ANS segment net sales decreased for both the three and six months ended June 30, 2024, due to lower sales volumes as customers paused spending and right-sized inventories; operating income (loss) and adjusted EBITDA were unfavorably impacted by lower sales but benefited from reduced SG&A, R&D, freight, and input costs[150][151] Liquidity and Capital Resources Liquidity and Capital Resources (in millions, except percentage data): | Metric | June 30, 2024 | December 31, 2023 | Change | % Change | | :----- | :------------ | :---------------- | :----- | :------- | | Cash and cash equivalents | $345.9 | $543.8 | $(197.9) | (36.4)% | | Working capital (excluding cash and current debt) | $1,052.4 | $970.1 | $82.3 | 8.5% | | Availability under Revolving Credit Facility | $535.4 | $688.0 | $(152.6) | (22.2)% | | Long-term debt, including current portion | $9,274.8 | $9,278.6 | $(3.8) | — | | Total capitalization | $7,150.3 | $7,471.9 | $(321.6) | (4.3)% | | Long-term debt as a percentage of total capitalization | 129.7% | 124.2% | 5.5% | | - The company has $1.27 billion in 6.00% senior unsecured notes maturing on June 15, 2025, and currently lacks sufficient cash to repay them, raising substantial doubt about its going concern ability[154] - Management believes the pending sale of the OWN segment and DAS business unit for approximately $2.1 billion, which can be used to retire the 2025 Notes, is probable and will alleviate going concern doubt[155][156] - Cash and cash equivalents decreased by $197.9 million during the six months ended June 30, 2024, primarily due to $126.9 million used in operating activities and $45.1 million for the Casa Transaction[161] - Working capital increased due to higher accounts receivable from increased Q2 2024 net sales and lower accrued liabilities, partially offset by increased accounts payable and other liabilities[162] Cash Flow Overview (Six Months Ended June 30, in millions): | Activity | 2024 | 2023 | Change | % Change | | :------- | :--- | :--- | :----- | :------- | | Net cash generated by (used in) operating activities | $(126.9) | $90.7 | $(217.6) | (239.9)% | | Net cash generated by (used in) investing activities | $(47.6) | $26.9 | $(74.5) | (277.0)% | | Net cash used in financing activities | $(17.8) | $(97.8) | $80.0 | (81.8)% | - Net cash used in operating activities increased by $217.6 million compared to the prior year period, primarily due to better operating performance in H1 2023[164] - Net cash used in investing activities increased by $74.5 million, driven by the Casa Transaction ($45.1 million) and decreased capital expenditures, partially offset by prior year proceeds from asset sales[165] - Net cash used in financing activities decreased by $80.0 million, mainly due to $75.0 million in long-term debt repurchases in the prior year period that did not recur in the current period[166][167] Reconciliation of Non-GAAP Measures - CommScope uses non-GAAP financial measures like adjusted EBITDA to provide a clearer understanding of its core business performance, excluding items not representative of core operations[169] Non-GAAP Adjusted EBITDA Reconciliation (in millions): | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | Twelve Months Ended June 30, 2024 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | :-------------------------------- | | Operating income (loss) | $192.8 | $98.2 | $195.7 | $281.3 | $(198.5) | | Amortization of purchased intangible assets | $60.4 | $75.8 | $134.6 | $176.4 | $285.3 | | Restructuring costs, net | $0.9 | $36.6 | $31.5 | $25.5 | $35.7 | | Equity-based compensation | $1.6 | $9.9 | $12.8 | $22.2 | $34.2 | | Transaction, transformation and integration costs | $23.7 | $2.8 | $32.3 | $3.1 | $56.3 | | Depreciation | $22.7 | $27.6 | $48.2 | $55.5 | $104.5 | | Non-GAAP adjusted EBITDA | $302.1 | $252.7 | $455.1 | $566.4 | $887.7 | - Non-GAAP pro forma adjusted EBITDA for the twelve months ended June 30, 2024, was $926.1 million, including annualized savings from cost reduction initiatives, used for debt covenant calculations[160] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes to the company's interest rate risk, commodity price risk, or foreign currency exchange rate risk information previously reported in its 2023 Annual Report - No material changes in interest rate risk, commodity price risk, or foreign currency exchange rate risk were reported compared to the 2023 Annual Report[181] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of June 30, 2024, concluding they are effective; no material changes in internal control over financial reporting occurred during the quarter - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective as of June 30, 2024[182] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2024[183] Part II—Other Information Item 1. Legal Proceedings This section details CommScope's involvement in various legal matters, including intellectual property claims and other pending lawsuits; while outcomes are uncertain and potential losses could be material, management believes other routine legal matters will not have a material adverse effect on the company's financial condition - CommScope is involved in intellectual property claims and other legal matters, with potential damages or royalties, but management believes most will not materially adversely affect the company's financial condition[185][186] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in Part I, Item 1A of the company's 2023 Annual Report - No material changes to risk factors were reported compared to the 2023 Annual Report[187] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities This section reports no recent unregistered sales of equity securities and details issuer purchases of equity securities, which were shares withheld to satisfy tax withholding obligations related to vested equity-based compensation awards - No unregistered sales of equity securities were reported[188] Issuer Purchases of Equity Securities (Three Months Ended June 30, 2024): | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :----- | :------------------------------- | :--------------------------- | | April 1, 2024 - April 30, 2024 | 2,251 | $1.16 | | May 1, 2024 - May 31, 2024 | 5,167 | $0.99 | | June 1, 2024 - June 30, 2024 | 1,125,960 | $1.44 | | Total | 1,133,378 | $1.44 | - Shares purchased were withheld to satisfy tax withholding obligations for vested RSUs and PSUs[189] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reported period - No defaults upon senior securities were reported[190] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[190] Item 5. Other Information This section confirms that the company's officers and directors did not enter into, modify, or terminate any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2024 - Officers and directors did not enter into, modify, or terminate any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2024[191] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including the Purchase Agreement for the sale of the OWN and DAS businesses, a Long-Term Cash Incentive Award Agreement, a Success Bonus Agreement, and various certifications - Key exhibits include the Purchase Agreement for the sale of OWN and DAS businesses (Exhibit 2.1), a Long-Term Cash Incentive Award Agreement (Exhibit 10.1), a Success Bonus Agreement (Exhibit 10.2), and certifications from principal executive and financial officers (Exhibits 31.1, 31.2, 32.1)[193] Signatures This section contains the signatures of the authorized officers, confirming the filing of the Quarterly Report on Form 10-Q as of August 7, 2024 - The report was signed by Kyle D Lorentzen, Executive Vice President and Chief Financial Officer, on August 7, 2024[194]