COMMSCOPE HOLDING COMPANY, INC. The following discussion and analysis of our financial condition and results of operations is for the year endedDecember 31, 2019 compared with the year endedDecember 31, 2018 . This comparison should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" included in Part I, Item 1A or in other parts of this Annual Report on Form 10-K. For a discussion and analysis of our financial condition and results of operations for the year endedDecember 31, 2018 compared toDecember 31, 2017 , see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 2018 Annual Report on Form 10-K, filed with theSecurities and Exchange Commission onFebruary 21, 2019 .
OVERVIEW
We are a global provider of infrastructure solutions for communication and entertainment networks. Our solutions for wired and wireless networks enable service providers including cable, telephone and digital broadcast satellite operators and media programmers to deliver media, voice, Internet Protocol (IP) data services and Wi-Fi to their subscribers and allow enterprises to experience constant wireless and wired connectivity across complex and varied networking environments. Our solutions are complemented by a broad array of services including technical support, systems design and integration. We are a leader in digital video and IP television distribution systems, broadband access infrastructure platforms and equipment that delivers data and voice networks to homes. Our global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale. OnApril 4, 2019 , we completed the acquisition ofARRIS International plc (ARRIS) (the Acquisition) in an all-cash transaction with a total purchase price of approximately$7.7 billion , including debt assumed. The combined company is expected to drive profitable growth in new markets, shape the future of wired and wireless communications, and be in a position to benefit from key industry trends, including network convergence, fiber and mobility everywhere, 5G, Internet of Things (IoT) and rapidly changing network and technology architectures. The operations of ARRIS are included in our consolidated operating results for the year endedDecember 31, 2019 from the date of the Acquisition,April 4, 2019 . Prior to the Acquisition, we operated and reported based on two operating segments: Connectivity Solutions (Connectivity) and Mobility Solutions (Mobility). Following the Acquisition, we have operated and managedCommScope in the following reportable segments: Connectivity, Mobility, Customer Premises Equipment (CPE), Network & Cloud (N&C) and Ruckus Networks (Ruckus). We recently announced a realignment of our operating structure that became effective inJanuary 2020 . Based on this new operating structure, our new segments are Venue and Campus Networks, Broadband Networks, Outdoor Wireless Networks and Home Networks. We will begin reporting based on these segments in the first quarter of 2020. To fund the Acquisition, inFebruary 2019 , we issued$1.25 billion of 5.50% senior secured notes due 2024 (the 2024 Secured Notes),$1.5 billion of 6.00% senior secured notes due 2026 (the 2026 Secured Notes) and$1.0 billion of 8.25% senior unsecured notes due 2027 (the New Unsecured Notes and, together with the 2024 Secured Notes and the 2026 Secured Notes, the New Notes), the proceeds from which were released from escrow on the date of the Acquisition. On the date of the Acquisition, we borrowed$3.2 billion under a new senior secured term loan due 2026 (the 2026 Term Loan) with an interest rate of LIBOR plus 3.25% and entered into a new asset-based revolving credit facility in an amount up to$1.0 billion with availability of$796.8 million as ofDecember 31, 2019 , reflecting a borrowing base of$820.9 million reduced by$24.1 million of letters of credit under the facility. Also as ofApril 4, 2019 , we issued$1.0 billion in Series A Convertible Preferred Stock (the Convertible Preferred Stock) toCarlyle Partners VII S1 Holdings, L.P. (Carlyle). During the year endedDecember 31, 2019 , we recognized$195.3 million of transaction and integration costs primarily related to the Acquisition. We will continue to incur transaction and integration costs as well as restructuring costs to integrate the ARRIS business and those costs may be material. 44 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) inthe United States (U.S. ). The preparation of these financial statements 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. Management 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 changes in events or circumstances indicate that revisions may be necessary. The following critical accounting policies and estimates reflected in our financial statements are based on management's knowledge of and experience with past and current events and on management's assumptions about future events. While we have generally not experienced significant deviations from our critical estimates in the past, it is reasonably possible that these estimates may ultimately differ materially from actual results. See Note 2 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a description of all of our significant accounting policies.
Business Combinations
We use the acquisition method of accounting for business combinations which requires the tangible and intangible assets acquired and liabilities assumed to be recorded at their respective fair market value as of the acquisition date.Goodwill represents the excess of the consideration transferred over the fair value of the net assets acquired. The fair values of the assets acquired and liabilities assumed are determined based upon management's valuation and involves making significant estimates and assumptions based on facts and circumstances that existed as of the acquisition date. We use a measurement period following the acquisition date to gather information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities assumed. The measurement period ends once all information is obtained, but no later than one year from the acquisition date.
Asset Impairment Reviews
Impairment Reviews of
We test goodwill at the reporting unit level for impairment annually as ofOctober 1 and on an interim basis when events occur or circumstances exist that indicate the carrying value may no longer be recoverable. As ofJanuary 1, 2019 , we early adopted Accounting Standards Update (ASU) 2017-04, Intangibles -Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, which eliminated Step 2 of the goodwill impairment test. Step 2 required an entity to determine the fair value at the impairment testing date of its assets and liabilities. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. In accordance with the new standard, we compare the fair value of our reporting units with the carrying amount, including goodwill. We recognize an impairment charge for the amount by which the reporting unit's carrying amount exceeds its fair value. We estimate the fair value of a reporting unit using a discounted cash flow (DCF) method or, as appropriate, a combination of the DCF method and a market approach known as the guideline public company method. Under the DCF method, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. The significant assumptions in the DCF model primarily include, but are not limited to, forecasts of annual revenue growth rates, annual operating income margin, the terminal growth rate and the discount rate used to determine the present value of the cash flow projections. When determining these assumptions and preparing these estimates, we consider historical performance trends, industry data, insight derived from customers, relevant changes in the reporting unit's underlying business and other market trends that may affect the reporting unit. The discount rate is based on the estimated weighted average cost of capital as of the test date of market participants in the industry in which the reporting unit operates. Under the guideline public company method, we estimate the fair value based upon market multiples of revenue and earnings derived from publicly traded companies with similar operating and investment characteristics as the reporting unit. The weighting of the fair value derived from the market approach may vary depending on the level of comparability of these publicly-traded companies to the reporting unit. When comparable public companies are not meaningful or not available, we may estimate the fair value of a reporting unit using only the DCF method. 45
-------------------------------------------------------------------------------- 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 our strategy, changes in technology or other factors could negatively affect the fair value in one or more of our reporting units and result in a material impairment charge in the future. To assess the reasonableness of the calculated fair values of our reporting units, we also compare the sum of the reporting units' fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization). If the implied control premium is not reasonable, we will reevaluate the fair value estimates of the reporting unit by adjusting the discount rates and/or other assumptions.
2019 Interim Goodwill Analysis
During the second quarter of 2019, management determined that indicators of possible goodwill impairment existed for the reporting units from the recently acquired ARRIS business. Since the closing of the Acquisition at the beginning of the second quarter of 2019, the ARRIS reporting units (CPE, N&C and Ruckus) had continued to experience challenges that impacted our performance. The challenges included declines in spending by our cable operator customers that resulted in declines in revenue and operating income for these reporting units and the loss of key leaders of these reporting units following the Acquisition. Certain of these challenges were expected to persist throughout the remainder of 2019 and impact management's ability to grow these businesses at the rate that was originally estimated when we completed the acquisition of ARRIS. Based on these indicators, a goodwill impairment test was performed for these reporting units using a DCF valuation model. Given the proximity to the acquisition date, we did not use a market approach for the interim goodwill test. The discount rates used in the second quarter 2019 interim goodwill impairment test were 9.5%, 10.5% and 11.0% for the CPE, N&C and Ruckus reporting units. As a result, management developed a revised forecast for 2019 and updated the annual financial forecasts for the years beyond 2019 that consider these challenges. The projections assumed a recovery of spending by these customers would begin in 2020. The extent and timing of this recovery were key assumptions in the determination of the fair value of the reporting units. The second quarter 2019 impairment test showed no impairment.
2019 Annual Goodwill Analysis
The annual test of goodwill was performed for each of the reporting units with goodwill balances as ofOctober 1, 2019 . As a result of the annual test, we recorded goodwill impairment charges totaling$376.1 million , of which$192.8 million related to our CPE reporting unit,$142.1 million related to our N&C reporting unit and$41.2 million related to our Ruckus reporting unit. These reporting units were acquired in our ARRIS acquisition onApril 4, 2019 . Since the closing of the Acquisition, the ARRIS reporting units have experienced challenges that impacted our performance. These challenges included declines in spending by cable operator customers that resulted in declines in net sales and operating income for these reporting units and the loss of key leaders of these reporting units following the Acquisition. Initially, we anticipated a recovery in spending by certain customers starting in 2020. During our annual strategic planning process in the fourth quarter of 2019, a number of specific factors arose, including an assessment of historical and future operating results, key customer inputs, new assessments of market trends and anticipated expenditures required to support the changing market dynamics affecting each of the reporting units. As a result of these factors, we expect a more prolonged recovery and have concluded that the fair value of each of the ARRIS reporting units was less than its carrying value, which resulted in a partial write-off of goodwill for each of the reporting units as ofOctober 1, 2019 . The expense was recorded in the asset impairments line on the Consolidated Statement of Operations. For the 2019 annual goodwill test, we determined the fair value of each reporting unit using a 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 market approach. 46
-------------------------------------------------------------------------------- As discussed, our CPE, N&C and Ruckus reporting units failed the annual goodwill impairment test and an impairment was recorded as ofOctober 1, 2019 . Our distributed coverage and capacity systems (DCCS) reporting unit was also at risk of failing the goodwill impairment test as the amount by which its fair value exceeded its carrying value was less than 10%. The DCCS reporting unit is in our Mobility segment. Considering the relatively low headroom going forward for the CPE, N&C, Ruckus and DCCS reporting units, there is a risk for future impairment in the event of decline in general economic, market or business conditions or any significant unfavorable change in the forecasted cash flows, weighted average cost of capital and growth rates. If current and long-term projections for our CPE, N&C, Ruckus and DCCS reporting units are not realized or decrease materially, we may be required to recognize additional goodwill impairment charges. The following table sets forth summary information regarding our CPE, N&C, Ruckus and DCCS reporting units as ofDecember 31, 2019 , including key assumptions used in our annual goodwill analysis, along with sensitivity analysis showing the effect of a change in certain key assumptions, assuming all other assumptions remain constant, to the resulting fair value using an income approach, as ofOctober 1, 2019 : Key Assumptions Goodwill Excess (Deficit) of Fair Value to Carrying Value Result of Annual Goodwill Test Decrease of Increase of Balance at as of October Decrease of 0.5% in 0.5% in Reporting Terminal Growth December 31, Percent of 1, 10% in Cash Long-term Discount Unit Discount Rate Rate 2019 Total Assets 2019 Flows Growth Rate
Rate
(dollars in millions)
CPE 9.0 % 0.0 % $ 209.3 1.5 % $ (192.8 ) $ (354.9 ) $ (236.8 ) $ (283.1 )
N&C 10.0 % 2.0 % 2,029.1 14.1 % (142.1 ) (433.5 ) (194.9 ) (289.1 )
Ruckus 11.0 % 3.0 % 375.8 2.6 % (41.2 ) (117.4 ) (78.1 ) (107.1 )
DCCS 9.5 % 2.0 % 235.3 1.6 % 44.2 (24.8 ) (2.7 ) (17.2 )
Definite-Lived Intangible Assets and Other Long-Lived Assets
Management reviews definite-lived intangible assets and other long-lived assets for impairment when events or changes in circumstances indicate that their carrying values may not be fully recoverable. This analysis differs from our goodwill impairment analysis in that an intangible or other long-lived asset impairment is only deemed to have occurred if the sum of the forecasted undiscounted future net cash flows related to the assets being evaluated is less than the carrying value of the assets. If the forecasted net cash flows are less than the carrying value, then the asset is written down to its estimated fair value. We did not identify any impairments of definite-lived intangible assets or other long-lived assets in 2019. Changes in the estimates of forecasted net cash flows may result in future asset impairments that could be material to our results of operations. Revenue Recognition We recognize revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. Our revenue is generated primarily from product or equipment sales. We also generate revenue from custom design and installation services as well as bundled sales arrangements that include product, software and services. Revenue is recognized when performance obligations in a contract are satisfied through the transfer of control of the good or service at the amount of consideration expected to be received. The following are required before revenue is recognized:
• Identify the contract with the customer. A variety of arrangements are
considered contracts; however, contracts typically take the form of a
master purchase agreement or customer purchase orders.
• Identify the performance obligations in the contract. Performanceobligations are identified as promised goods or services that are distinct
within an arrangement.
• Determine the transaction price. The transaction price is the amount of
consideration we expect to receive in exchange for transferring the
promised goods or services. The consideration may include fixed or
variable amounts or both.
• Allocate the transaction price to the performance obligations. The
transaction price is allocated to the performance obligations on a
relative standalone selling price basis.
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• Recognize revenue as the performance obligations are satisfied. Revenue is
recognized when transfer of control of the promised goods or services has
occurred. This is either at a point in time or over time.
Product sales represent over 90% of our revenue. For these sales, revenue is recognized when control of the product has transferred to the customer, which is generally at the point in time when products have been shipped, right to payment has been obtained and risk of loss has been transferred. Certain of our 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. Certain customer transactions may be project based and include multiple performance obligations based on the bundling of equipment, software and services. When a multiple performance obligation arrangement exists, the transaction price is allocated to the performance obligations based on the relative standalone selling price, and revenue is recognized upon transfer of control of each deliverable. To determine the standalone selling price, we first look to establish the standalone selling price through an observable price when the good or service is sold separately in similar circumstances. If the standalone selling price cannot be established through an observable price, we will make an estimate based on market conditions, customer specific factors and customer class. We may use a combination of approaches to estimate the standalone selling price. For performance obligations recognized over time, judgment is required to evaluate assumptions, including the total estimated costs to determine progress towards completion of the performance obligation and to calculate the corresponding amount of revenue to recognize. If estimated total costs on any contract are greater than the net contract revenues, the entire estimated costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.
Other customer contract types include a variety of post-contract support services offerings, including:
• Maintenance and support services provided under annual service-level
agreements with our customers. These services represent stand-ready
obligations that are recognized over time (on a straight-line basis over
the contract period) because the customer simultaneously receives andconsumes the benefits of the services as the services are performed.
• Professional services and other similar services consist primarily of "Day
2" services to help customers maximize their utilization of deployed
systems. The services are recognized over time because the customer
simultaneously receives and consumes the benefits of the service as the
services are performed.
• Installation services relate to the routine installation of equipment
ordered by the customer at the customer's site and are distinct
performance obligations from delivery of the related hardware. The
associated revenues are recognized over time as the services are provided.
Revenue is measured based on the consideration to which we expect to be entitled
based on customer contracts. For sales to distributors, system integrators and
value-added resellers, revenue is adjusted for variable consideration amounts,
including but not limited to estimated discounts, returns, rebates and
distributor price protection programs. 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.
A contract liability for deferred revenue is recorded when consideration is
received or is unconditionally due from a customer prior to transferring control
of goods or services to the customer under the terms of a contract. Deferred
revenue balances typically result from advance payments received from customers
for product contracts or from billings in excess of revenue recognized on
project or services arrangements.
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Unbilled receivables are recorded when revenues are recognized in advance of
invoice issuance. A contract asset is any portion of unbilled receivables for
which the right to consideration is conditional on a factor other than the
passage of time, which is common for certain project contract performance
obligations. These assets are presented on a combined basis with accounts
receivable and are converted to accounts receivable once our right to the
consideration becomes unconditional, which varies by contract but is generally
based on achieving certain acceptance milestones. We recognize 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.
We include shipping and handling costs billed to customers in net sales and
include 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.
Leases
We determine 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. We do not currently 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 our leases do not provide an implicit rate; therefore, we use 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.
We remeasure and reallocate 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 we will exercise a lease option. We assess
right of use assets for impairment in accordance with our long-lived asset
impairment policy.
We account 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.
Inventory Reserves
We maintain reserves to reduce the value of inventory based on the lower of cost
or net realizable value, including allowances for excess and obsolete inventory.
These reserves are based on management's assumptions about and analysis of
relevant factors including current levels of orders and backlog, forecasted
demand, market conditions and new products or innovations that diminish the
value of existing inventories. If actual market conditions deteriorate from
those anticipated by management, additional allowances for excess and obsolete
inventory could be required and may be material to earnings.
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--------------------------------------------------------------------------------Product Warranty Reserves
We recognize a liability for the estimated claims that may be paid under our customer assurance-type warranty agreements to remedy potential deficiencies of quality or performance of our products. The product warranties extend over various periods, depending upon the product subject to the warranty and the terms of the individual agreements. We record a provision for estimated future warranty claims based upon the historical relationship of warranty claims to sales and specifically identified warranty issues. We base our estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revise our estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. 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 reasonably possible that they may ultimately differ materially from actual results, including in the case of a significant product failure.
Tax Valuation Allowances and Liabilities for Unrecognized Tax Benefits
We establish an income tax valuation allowance when available evidence indicates that it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider the amounts, character, source and timing of expected future deductions or carryforwards as well as sources of taxable income and tax planning strategies that may enable utilization. We maintain an existing valuation allowance until sufficient positive evidence exists to support its reversal. Changes in the amount or timing of expected future deductions or taxable income may have a material impact on the level of income tax valuation allowances. If we determine that we will not be able to realize all or part of a deferred tax asset in the future, an increase to an income tax valuation allowance would be charged to earnings in the period such determination was made. We recognize income tax benefits related to particular tax positions only when it is considered more likely than not that the tax position will be sustained if examined on its technical merits by tax authorities. The amount of benefit recognized is the largest amount of tax benefit that is evaluated to be greater than 50% likely to be realized. Considerable judgment is required to evaluate the technical merits of various positions and to evaluate the likely amount of benefit to be realized. Lapses in statutes of limitations, developments in tax laws, regulations and interpretations, and changes in assessments of the likely outcome of uncertain tax positions could have a material impact on the overall tax provision. We establish deferred tax liabilities for the estimated tax cost associated with foreign earnings that we do not consider permanently reinvested (primarily foreign withholding and state income taxes). These liabilities are subject to adjustment if there is a change in the assertion of whether the foreign earnings are considered to be permanently reinvested.
We also establish allowances related to value-added and similar recoverable taxes when it is considered probable that those assets are not recoverable. Changes in the probability of recovery or in the estimates of the amount recoverable are recognized in the period such determination is made and may be material to earnings.
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RESULTS OF OPERATIONS
Comparison of results of operations for the year ended
Year Ended December 31,
2019 2018
% of Net % of Net $ %
Amount Sales Amount Sales Change Change
(dollars in millions, except per share amounts)
Net sales $ 8,345.1 100.0 % $ 4,568.5 100.0 % $ 3,776.6 82.7 %
Gross profit 2,404.1 28.8 1,633.3 35.8 770.8 47.2
Operating income (loss) (508.5 ) (6.1 ) 450.0 9.9 (958.5 ) (213.0 )
Non-GAAP adjusted operating
income (1) 1,153.8 13.8 838.0 18.3 315.8 37.7
Non-GAAP adjusted EBITDA (1) 1,297.5 15.5 913.6 20.0 383.9 42.0
Net income (loss) (929.5 ) (11.1 ) 140.2 3.1 (1,069.7 ) (763.0 )
Net income (loss)
attributable to common
stockholders (973.2 ) (11.7 ) 140.2 3.1 (1,113.4 ) (794.2 )
Diluted earnings (loss) per
share $ (5.02 ) $ 0.72 $ (5.74 ) (797.2 )
(1) See "Reconciliation of Non-GAAP Measures" in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, below.
Net sales
Year Ended December 31, $ %
2019 2018 Change Change
(dollars in millions)
Net sales $ 8,345.1 $ 4,568.5 $ 3,776.6 82.7 %
Domestic net sales 4,922.2 2,539.2 2,383.0 93.8
International net sales 3,422.9 2,029.3 1,393.6 68.7
Net sales for the year ended December 31, 2019 included ARRIS net sales of $4.0
billion . Excluding the ARRIS business, CommScope's net sales were lower for 2019
compared to the prior year. Approximately 50% of the decline related to lower
volumes, approximately 35% related to pricing pressures and the remainder
related to impacts of foreign exchange rate changes among other factors. From a
regional perspective, we saw lower net sales across all regions for 2019. For
2019, the decrease in net sales excluding the ARRIS business was primarily
driven by declines of $166.6 million in the Asia Pacific (APAC) region and $41.0
million in the Europe , Middle East and Africa (EMEA) region.
Net sales to customers located outside of the U.S. comprised 41.0% of total net
sales for 2019 compared to 44.4% for 2018. For further details by segment, see
the section titled "Segment Results" below.
Gross profit, SG&A expense and R&D expense
Year Ended December 31, $ %
2019 2018 Change Change
(dollars in millions)
Gross profit $ 2,404.1 $ 1,633.3 $ 770.8 47.2 %
As a percent of sales 28.8 % 35.8 %
SG&A expense 1,277.1 674.0 603.1 89.5
As a percent of sales 15.3 % 14.8 %
R&D expense 578.5 185.7 392.8 211.5
As a percent of sales 6.9 % 4.1 %
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Gross profit (net sales less cost of sales)
Gross profit for 2019 was negatively affected by ARRIS acquisition accounting adjustments of$264.2 million primarily related to the markup of inventory to its estimated fair value less the estimated costs associated with its sale. Excluding the acquisition accounting adjustments recorded in 2019, gross profit forCommScope was$2.7 billion and gross profit as a percentage of sales was 32.0%. Excluding the ARRIS business in total, for 2019,CommScope's gross profit was$1.5 billion and gross profit as a percentage of sales was 34.8%. For 2019, gross profit and gross profit as a percentage of sales for the legacyCommScope business decreased due to lower net sales and the$55.0 million settlement of patent infringement litigation as described in Note 16 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. The Connectivity segment experienced lower gross profit in 2019 compared to the prior year primarily as a result of the$255.3 million decrease in net sales. The Mobility segment's gross profit was essentially unchanged compared to the prior year despite the$55.0 million patent infringement litigation settlement. As discussed in Note 2 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, we changed our accounting principle to reclassify certain internal handling costs from selling, general and administrative (SG&A) expense to cost of sales. The impact of this change increased cost of sales and decreased gross profit by$55.0 million for 2018. All comparisons presented in this management's discussion and analysis have been adjusted to reflect the impact of this change in accounting principle.
Selling, general and administrative expense
For 2019, SG&A expense increased primarily due to the inclusion of ARRIS SG&A expense (excluding transaction and integration costs) of$445.8 million and transaction and integration costs of$195.3 million . Excluding the ARRIS business as well as transaction and integration costs, SG&A expense decreased$18.5 million for 2019, compared to the prior year primarily due to benefits from cost savings initiatives. Excluding transaction and integration costs and the ARRIS business, SG&A expense as a percentage of sales was 14.8% for 2019.
Research and development expense
Research and development (R&D) expense increased for 2019 compared to the prior year due to the inclusion of ARRIS R&D expenses of$385.7 million . Excluding ARRIS, R&D expense forCommScope increased by$7.1 million primarily due to our continuing investment in Mobility segment products. R&D activities generally relate to ensuring that our products are capable of meeting the evolving technological needs of our customers, bringing new products to market and modifying existing products to better serve our customers. Amortization of purchased intangible assets, Restructuring costs, net and Asset impairments Year Ended December 31, $ 2019 2018 Change (dollars in millions) Amortization of purchased intangible assets$ 593.2 $ 264.6 $ 328.6 Restructuring costs, net 87.7 44.0 43.7 Asset impairments 376.1 15.0 361.1
Amortization of purchased intangible assets
The amortization of purchased intangible assets was higher in 2019 compared to the prior year primarily due to the additional amortization resulting from the Acquisition. Excluding ARRIS, amortization related toCommScope was lower by$32.0 million for 2019 compared to the prior year because certain of our intangible assets became fully amortized. 52 --------------------------------------------------------------------------------
Restructuring costs, net
The restructuring costs recorded in 2019 were primarily related to integrating the ARRIS business while the restructuring costs recognized in the prior year were primarily related to the integration of the BNS business. From a cash perspective, we paid$89.9 million to settle restructuring liabilities during 2019 and expect to pay an additional$23.9 million by the end of 2020 related to restructuring actions that have been initiated. In addition, we expect to pay$4.4 million between 2021 and 2022 related to restructuring actions that have been initiated. No significant restructuring charges are expected to be incurred to complete the previously announced BNS integration initiatives. Additional restructuring actions related to the acquisition of ARRIS are expected to be identified and the resulting charges and cash requirements are expected to be material. Asset impairments During 2019 we recorded goodwill impairment charges of$192.8 million ,$142.1 million and$41.2 million related to our CPE, N&C and Ruckus segments, respectively, as a result of our annual impairment test. During 2018, we recorded an impairment charge of$15.0 million allocated equally between the Connectivity and Mobility segments to fully impair an equity investment in a privately-held company. Other expense, net Year Ended December 31, $ 2019 2018 Change (dollars in millions) Foreign currency loss$ (11.9 ) $ (29.9 ) $ 18.0 Other income (expense), net 5.5 (14.4 ) 19.9 Foreign currency loss Foreign currency loss includes the net foreign currency gains and losses resulting from the settlement of receivables and payables, foreign currency contracts and short-term intercompany advances in a currency other than the subsidiary's functional currency. The decrease in 2019 was driven by a$14.0 million foreign currency loss in 2018 that was related to foreign currency translation adjustments previously reported in accumulated other comprehensive loss that were recognized in other expense, net due to the liquidation of a foreign subsidiary.
Other income (expense), net
The decrease in other expense, net for 2019 compared to the prior year was primarily due the impact in 2018 of the termination of aU.S. defined benefit pension plan and the termination of benefits under certain of ourU.S. postretirement medical plans. As a result of the pension plan terminations, we recognized a pretax charge of$34.5 million in 2018 related to unrecognized net actuarial losses previously recorded in accumulated other comprehensive loss. We also recognized a pretax gain of$9.7 million related to unrecognized prior service credits and unrecognized net actuarial gains previously recorded in accumulated other comprehensive loss for the postretirement medical plans. Other income, net for 2019 includes gains of$6.1 million related to the sale of certain investments.
Interest expense, Interest income and Income taxes
Year Ended December 31, $
2019 2018 Change
(dollars in millions)
Interest expense $ (577.2 ) $ (242.0 ) $ (335.2 )
Interest income 18.1 7.0 11.1
Income tax (expense) benefit 144.5 (30.5 ) 175.0
53
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Interest expense and interest income
Interest expense for 2019 increased compared to the prior year due to the financing of the Acquisition. InFebruary 2019 , we issued the New Notes, which were held in escrow until the Acquisition date,April 4, 2019 . InFebruary 2019 , we also secured the borrowing of$3.2 billion , less$32.0 million of original issue discount, under the 2026 Term Loan which was funded onApril 4, 2019 as well. We began accruing interest on the New Notes inFebruary 2019 and accrued ticking fees related to the 2026 Term Loan fromFebruary 2019 toApril 2019 . We incurred$379.2 million of incremental interest expense during 2019 as a result of this acquisition-related debt. We used the proceeds from the New Notes and a portion of the 2026 Term Loan, together with cash on hand and proceeds from the issuance of the Convertible Preferred Stock to finance the Acquisition. The remaining proceeds from the 2026 Term Loan were used to pay off the existing senior secured term loan due 2022 (the 2022 Term Loan). We also made voluntary payments on the 2022 Term Loan during 2019. In connection with the repayments of the 2022 Term Loan,$7.7 million of original issue discount and debt issuance costs were written off and included in interest expense in 2019. During 2019, we also redeemed$500.0 million aggregate principal amount of our 5.00% senior notes due 2021 (the 2021 Notes) and accelerated the recognition of$2.1 million of debt issuance costs in interest expense.
Our weighted average effective interest rate on outstanding borrowings,
including the amortization of debt issuance costs and original issue discount,
was 6.13% at
Interest income increased during 2019 due to
InMarch 2019 , we entered into pay-fixed, receive-variable interest rate swap derivatives and designated them as cash flow hedges of interest rate risk. These swaps effectively fixed the interest rate on a portion the 2026 Term Loan. The total notional amount of the interest rate swap derivatives as ofDecember 31, 2019 was$600 million with outstanding maturities of up to fifty-one months.
Income tax (expense) benefit
For 2019, our effective tax rate was 13.5% and we recognized a tax benefit of$144.5 million on a pretax loss of$1,074.0 million . The unfavorable impact to our tax benefit was driven primarily by$77.9 million related to goodwill impairment charges for which minimal tax benefits were recorded. The rate was also unfavorably impacted byU.S. anti-deferral provisions and foreign withholding taxes but these were partially offset by the favorable impact of federal tax credits and the expiration of statutes of limitations on various uncertain tax positions. The impact of excess tax costs related to equity-based compensation awards was not material in 2019. See Note 13 Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for more discussion of our income tax benefit. The effective income tax rate of 17.9% for 2018 was lower than the statutory rate of 21.0% primarily due to a reduction in tax expense of$23.3 million related to the expiration of statutes of limitations on various uncertain tax positions, a$7.8 million benefit recorded for changes to provisional amounts related to the tax reform legislation enacted in 2017 and the favorable impact of$4.6 million of excess tax benefits related to equity-based compensation awards for 2018. These decreases to the effective tax rate were partially offset by an increase in tax expense due to the effect of the provision for state income taxes, the impact of earnings in foreign jurisdictions that are taxed at rates higher than theU.S. , the impact of the newU.S. anti-deferral provisions and the impact of repatriation taxes. 54 --------------------------------------------------------------------------------
Segment Results
Year Ended December 31,
2019 2018
% of Net % of Net $ %
Amount Sales Amount Sales Change Change
(dollars in millions)
Net sales by segment:
Connectivity $ 2,557.4 30.6 % $ 2,812.7 61.6 % $ (255.3 ) (9.1 ) %
Mobility 1,754.2 21.0 1,755.8 38.4 (1.6 ) (0.1 )
CPE 2,539.0 30.4 - - 2,539.0 NM
N&C 1,073.6 12.9 - - 1,073.6 NM
Ruckus 420.9 5.0 - - 420.9 NM
Consolidated net sales $ 8,345.1 100.0 % $ 4,568.5 100.0 % $ 3,776.6 82.7 %
Operating income (loss) by
segment:
Connectivity $ 174.4 6.8 % $ 271.9 9.7 % $ (97.5 ) (35.9 ) %
Mobility 180.7 10.3 178.1 10.1 2.6 1.5
CPE (196.0 ) (7.7 ) - - (196.0 ) NM
N&C (441.5 ) (41.1 ) - - (441.5 ) NM
Ruckus (226.1 ) (53.7 ) - - (226.1 ) NM
Consolidated operating income
(loss) $ (508.5 ) (6.1 ) % $ 450.0 9.9 % $ (94.9 ) (21.1 ) %
Non-GAAP adjusted operating
income
by segment:
Connectivity $ 412.2 16.1 % $ 521.8 18.6 % $ (109.6 ) (21.0 ) %
Mobility 357.9 20.4 316.2 18.0 41.7 13.2
CPE 163.5 6.4 - - 163.5 NM
N&C 206.4 19.2 - - 206.4 NM
Ruckus 13.8 3.3 - - 13.8 NM
Non-GAAP consolidated
adjusted
operating income (1) $ 1,153.8 13.8 % $ 838.0 18.3 % $ 315.8 37.7 %
Non-GAAP adjusted EBITDA by
segment:
Connectivity $ 462.1 18.1 % $ 575.2 20.5 % $ (113.1 ) (19.7 ) %
Mobility 380.1 21.7 338.4 19.3 41.7 12.3
CPE 193.7 7.6 - - 193.7 NM
N&C 237.0 22.1 - - 237.0 NM
Ruckus 24.6 5.8 - - 24.6 NM
Non-GAAP consolidated
adjusted
EBITDA (1) $ 1,297.5 15.5 % $ 913.6 20.0 % $ 383.9 42.0 %
(1) See "Reconciliation of Non-GAAP Measures" within this Management's
Discussion and Analysis of Financial Condition and Results of Operations,
below.
55
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Connectivity Solutions Segment
Connectivity segment net sales were lower in 2019 compared to the prior year. Approximately 70% of the decline in net sales was due to lower sales volumes, approximately 20% was due to pricing pressure and the remaining decline related to the impacts of foreign exchange rate changes among other factors. From a regional perspective, the Connectivity segment saw declines of$88.6 million in theU.S. ,$77.4 million in the EMEA region and$70.2 million in the APAC region. Net sales in theU.S. were down due to declines in spending by our cable operator customers. Sales in the EMEA and APAC regions were lower due to decreases in sales of enterprise solutions and to a lesser extent, the impact of unfavorable foreign exchange rate changes. Connectivity segment operating income and non-GAAP adjusted EBITDA decreased during 2019 compared to the prior year primarily due to lower net sales. For 2019, Connectivity segment operating income was favorably impacted by lower intangible amortization and restructuring costs, partially offset by higher transaction and integration costs, all of which are excluded from non-GAAP adjusted EBITDA. See "Reconciliation of Non-GAAP Measures" within this Management's Discussion and Analysis of Financial Condition and Results of Operations, below.
Mobility Solutions Segment
Mobility segment net sales remained relatively unchanged during 2019 compared to the prior year as pricing pressures were almost fully offset by higher volumes. Foreign exchange rate changes negatively impacted Mobility segment net sales by approximately 1% for 2019 compared to the prior year. From a regional perspective, Mobility segment net sales increased by$71.8 million in theU.S. and$36.4 million in the EMEA region, but these increases were largely offset by a decline of$96.4 million in the APAC region. Sales of metro cell solutions drove the increase in theU.S. while higher sales of distributed antenna systems and macro cell products drove the increase in the EMEA region. Lower sales of macro cell solutions, primarily inIndia , drove the decrease in sales to the APAC region. Mobility segment operating income increased slightly for 2019 despite a$55.0 million settlement of a patent infringement claim (see Note 16 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K) and a$15.7 million increase in transaction and integration costs. Mobility segment operating income for 2019 benefitted from lower intangible amortization expense, restructuring costs and asset impairments when compared to 2018. All of these costs are excluded from the calculation of non-GAAP adjusted EBITDA, which also increased for 2019 compared to the prior year. The increase in adjusted EBITDA for 2019 was primarily due to favorable geographic mix and lower input costs. See "Reconciliation of Segment adjusted EBITDA" within this Management's Discussion and Analysis of Financial Condition and Results of Operations, below.
Customer Premises Equipment Segment
Net sales to customers outside the
Operating income for our CPE segment for 2019 was negatively impacted by a goodwill impairment charge of$192.8 million ,$27.8 million of acquisition accounting adjustments related to deferred revenue and the mark-up of inventory to its fair value and$23.2 million of restructuring costs for 2019. Asset impairments, acquisition accounting adjustments and restructuring charges are not reflected in non-GAAP adjusted EBITDA.
Network & Cloud Segment
Net sales to customers outside theU.S. comprised 39.5% of total N&C segment net sales for 2019. These sales to international customers were spread across all major geographic regions. N&C segment net sales were unfavorably impacted by acquisition accounting adjustments related to deferred revenue of$29.5 million for 2019. 56
-------------------------------------------------------------------------------- Operating income for our N&C segment was negatively impacted by a goodwill impairment charge of$142.1 million ,$135.8 million of acquisition accounting adjustments related to the mark-up of inventory to its estimated fair value and deferred revenue,$32.1 million of restructuring costs and$100.0 million of transaction and integration costs for 2019. All of these charges are excluded from our calculation of non-GAAP adjusted EBITDA.
Ruckus Networks Segment
Net sales to customers outside theU.S. comprised 44.0% of total Ruckus segment net sales for 2019. Sales to international customers were primarily to customers in the EMEA and APAC regions. Ruckus segment net sales were unfavorably impacted by acquisition accounting adjustments related to deferred revenue of$10.7 million for 2019.
Operating income for our Ruckus segment for 2019 was negatively impacted by
Liquidity and Capital Resources
The following table summarizes certain key measures of our liquidity and capital
resources:
December 31, $ %
2019 2018 Change Change
(dollars in millions)
Cash and cash equivalents $ 598.2 $ 458.2 $ 140.0 30.6 %
Working capital (1), excluding cash
and cash
equivalents and current portion of
long-term debt 903.6 729.0 174.6 24.0
Availability under revolving credit
facility 796.8 463.1 333.7 72.1
Long-term debt, including current
portion 9,832.4 3,985.9 5,846.5 146.7
Total capitalization (2) 11,668.7 5,742.7 5,926.0 103.2
Long-term debt, including current
portion, as a
percentage of total capitalization 84.3 % 69.4 %
(1) Working capital consists of current assets of
liabilities of
of $1,877.8 million less current liabilities of $690.6 million as of
December 31, 2018 .
(2) Total capitalization includes long-term debt, including the current portion,
Series A convertible preferred stock and stockholders' equity.
Our principal sources of liquidity on a short-term basis are cash and cash equivalents, cash flows provided by operations and availability under credit facilities. To fund the Acquisition, onFebruary 19, 2019 we issued the New Notes, the proceeds from which were held in escrow until they were released onApril 4, 2019 , the Acquisition date. InFebruary 2019 , we also secured the borrowing of$3.2 billion under the 2026 Term Loan with an interest rate of LIBOR plus 3.25% that was funded on the Acquisition date. In addition, at the closing of the Acquisition, we entered into a new asset-based revolving credit facility. Availability under the new asset-based revolving credit facility was$796.8 million as ofDecember 31, 2019 , reflecting a borrowing base of$820.9 million reduced by$24.1 million of letters of credit under the facility. We did not borrow under the new asset-based revolving credit facility to fund the Acquisition, but we did borrow and repay$15.0 million under the facility in the second quarter of 2019. In addition to incremental new debt, we funded the Acquisition by issuing the Convertible Preferred Stock to Carlyle for an aggregate investment of$1.0 billion . The Convertible Preferred Stock pays dividends at an annual rate of 5.50%, with dividends payable quarterly and is convertible at the option of the holders at any time into shares ofCommScope common stock at a price of$27.50 per share, subject to certain limits on the number of shares that may be issued unless we obtain shareholder approval. On a long-term basis, our potential sources of liquidity also include raising capital through the issuance of additional equity and/or debt. 57 -------------------------------------------------------------------------------- The primary uses of liquidity include debt service requirements (including voluntary debt repayments or redemptions), funding working capital requirements, paying acquisition integration costs, capital expenditures, paying restructuring costs, paying dividends related to the Convertible Preferred Stock and income tax payments. We believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our new asset-based revolving credit facility and access to capital markets, will be sufficient to meet our presently anticipated future cash needs. We may experience volatility in cash flows between periods due to, among other reasons, variability in the timing of vendor payments and customer receipts. We may, from time to time, borrow under our revolving credit facility or issue securities, if market conditions are favorable, to meet future cash needs or to reduce our borrowing costs. Although there are no financial maintenance covenants under the terms of our senior notes, there is a limitation, among other limitations, on certain future borrowings based on an adjusted leverage ratio or a fixed charge coverage ratio. These ratios are based on financial measures similar to non-GAAP adjusted EBITDA as presented in the "Reconciliation of Non-GAAP Measures" section below, but also give pro forma effect to certain events, including acquisitions, synergies and savings from cost reduction initiatives such as facility closures and headcount reductions. For the year endedDecember 31, 2019 , our non-GAAP pro forma adjusted EBITDA, as measured pursuant to the indentures governing our notes, was$1,481.6 million , which included increases to our non-GAAP adjusted EBITDA related to the ARRIS business fromJanuary 1, 2019 to the Acquisition date, calculated in accordance withCommScope's definition ($70.8 million ); annualized synergies expected to be realized in the three years following the close of the Acquisition ($105.0 million ); and annualized savings expected from announced cost reduction initiatives ($8.3 million ) so that the impact of the cost reduction initiatives is fully reflected in the twelve-month period used in the calculation of the ratios. In addition to limitations under these indentures, our senior secured credit facilities contain customary negative covenants based on similar financial measures. We believe we are in compliance with the covenants under our indentures and senior secured credit facilities atDecember 31, 2019 . Cash and cash equivalents increased during 2019 primarily due to the addition of the ARRIS business, partially offset by funding the Acquisition, settling assumed ARRIS debt, payments on the 2022 Term Loan, redemptions of the 2021 Notes, acquisition-related payments and restructuring payments. As ofDecember 31, 2019 , approximately 57% of our cash and cash equivalents were held outside theU.S. Working capital, excluding cash and cash equivalents and the current portion of long-term debt, increased during 2019 due to the Acquisition. Excluding the ARRIS business, working capital, excluding cash and cash equivalents, decreased mainly due to higher accrued interest related to the debt incurred to finance the Acquisition coupled with lower accounts receivable balances. The increase in total capitalization during 2019 reflected the proceeds from the New Notes funded in the first quarter, the 2026 Term Loan, which was funded on the Acquisition date, and the Convertible Preferred Stock, all of which were utilized to fund a substantial portion of the Acquisition onApril 4, 2019 . 58 --------------------------------------------------------------------------------
Cash Flow Overview
Comparison for the year endedDecember 31, 2019 with the year endedDecember 31, 2018 Year Ended December 31, $ % 2019 2018 Change Change (dollars in millions) Net cash generated by operating activities$ 596.4 $ 494.1 $ 102.3 20.7 %
Net cash used in investing activities (5,154.9 ) (64.3 )
(5,090.6 ) NM
Net cash generated by (used in)
financing activities 4,698.6 (409.6 ) 5,108.2 NM
NM - Not meaningful
Operating Activities
Year Ended
December 31,
2019 2018
Operating Activities:
Net income (loss) $ (929.5 ) $ 140.2
Adjustments to reconcile net income (loss) to net
cash generated by
operating activities:
Depreciation and amortization 770.9 357.5
Equity-based compensation 90.8 44.9
Deferred income taxes (260.8 ) (49.2 )
Asset impairments 376.1 15.0
Changes in assets and liabilities:
Accounts receivable 258.8 65.1
Inventories 489.1 (48.5 ) Prepaid expenses and other assets 19.5
1.0
Accounts payable and other accrued liabilities (274.0 ) (0.8 ) Other noncurrent liabilities 7.2 (54.6 ) Other noncurrent assets 46.0 (8.0 ) Other 2.3 31.5 Net cash generated by operating activities$ 596.4 $
494.1
During 2019, cash generated from operating activities increased compared to the prior year period due to addition of the ARRIS business partially offset by the payment of$233.9 million more in interest as a result of the Acquisition-related debt and payments of$210.7 million of transaction and integration costs related to the Acquisition during 2019. We also paid$49.7 million more in restructuring costs for 2019 compared to the prior year. The change in inventory during 2019 reflects$218.8 million of acquisition accounting adjustments related to the mark-up of inventory to its estimated fair value. 59
--------------------------------------------------------------------------------
Investing Activities
Year Ended
December 31,
2019 2018
Investing Activities:
Additions to property, plant and equipment $ (104.1 ) $ (82.3 )
Proceeds from sale of property, plant and equipment 1.6 12.9
Cash paid for current year acquisitions, net of cash acquired
(5,053.4 ) -
Cash paid for prior year acquisition (11.0 )
-
Proceeds from sale of long-term investments 9.3
-
Proceeds upon settlement of net investment hedge 2.7
5.1
Net cash used in investing activities$ (5,154.9 ) $
(64.3 )
During 2019, we paid$5.1 billion , net of cash acquired, to fund the Acquisition using a combination of cash on hand, proceeds from the issuance of long-term debt and proceeds from the issuance of the Convertible Preferred Stock. Our investment in property, plant and equipment during 2019 was$21.8 million higher than 2018, primarily as a result of the addition of ARRIS' investment in property, plant and equipment since the Acquisition date. Our investments in property, plant and equipment were primarily related to supporting improvements in manufacturing operations, including expanding production capacity and investing in information technology, including software developed for internal use. During 2019, we also paid$11.0 million of the$14.5 million liability for remaining payments due related to theAugust 2017 acquisition of Cable Exchange. In addition, during 2019, we received proceeds of$9.3 million on the sale of certain investments. During 2019 and 2018, we sold property and equipment no longer being utilized for$1.6 million and$12.9 million , respectively. During 2019 and 2018, we received$2.7 million and$5.1 million , respectively, to settle net investment hedges that we entered into for the purpose of mitigating a portion of the foreign currency risk on the euro net investment in a foreign subsidiary. Financing Activities Year Ended December 31, 2019 2018 Financing Activities: Long-term debt repaid$ (3,061.3 ) $ (550.0 ) Long-term debt proceeds 6,933.0 150.0 Debt issuance costs (120.8 ) - Series A convertible preferred stock proceeds 1,000.0
-
Dividends paid on Series A convertible preferred stock (40.7 )
-
Deemed dividend paid on Series A convertible preferred stock (3.0 )
-
Proceeds from the issuance of common shares under equity-based compensation plans 4.6
6.1
Tax withholding payments for vested equity-based compensation awards (13.2 ) (15.7 ) Net cash generated by (used in) financing activities$ 4,698.6 $
(409.6 )
During 2019, we received net proceeds from the issuance of the New Notes and the 2026 Term Loan of$6.9 billion to fund the Acquisition. On the date of the Acquisition, we also entered into a new asset-based revolving credit facility in an amount up to$1.0 billion , which had availability of$796.8 million as ofDecember 31, 2019 , reflecting a borrowing base of$820.9 billion reduced by$24.1 million of letters of credit issued under the facility. We borrowed and repaid$15.0 million under the new asset-based revolving credit facility during the second quarter of 2019. We had no outstanding borrowings under the new asset-based revolving credit facility as ofDecember 31, 2019 . In connection with these financing transactions, we paid$120.8 million of debt issuance costs during 2019. 60
-------------------------------------------------------------------------------- We repaid$225.0 million of the 2022 Term Loan in the first quarter of 2019 and we repaid the remaining balance of$261.3 million onApril 4, 2019 using proceeds from the 2026 Term Loan. As part of funding the Acquisition, we repaid ARRIS' outstanding debt of$2.1 billion under its senior secured credit facilities. We redeemed$500.0 million aggregate principal amount of our 2021 Notes during 2019. We also paid an$8.0 million scheduled payment duringDecember 2019 related to the 2026 Term Loan. We may repurchase more of our senior notes if market conditions are favorable and the applicable indenture and the credit agreements governing the senior secured credit facilities permit such repayment or repurchase. In addition, we may refinance portions of our existing debt to lower borrowing costs, extend the term or adjust the total amount of fixed or floating-rate debt. In addition to the new debt, we funded the Acquisition by issuing the Convertible Preferred Stock to Carlyle for an aggregate investment of$1.0 billion . We paid$3.0 million in transaction fees on Carlyle's behalf related to the Convertible Preferred Stock and we treated that as a deemed dividend during 2019. During 2019, we paid$40.7 million in authorized dividends for the Convertible Preferred Stock. During 2019, we received proceeds of$4.6 million related to the exercise of stock options. Also during 2019, employees surrendered 0.7 million shares of our common stock to satisfy their tax withholding requirements on vested restricted stock units and performance share units, which reduced cash flows by$13.2 million . During 2018, we received proceeds of$6.1 million related to the exercise of stock options and employees surrendered 0.4 million shares of our common stock to satisfy their tax withholding requirements on vested restricted stock units, which reduced cash flows by$15.7 million . 61 --------------------------------------------------------------------------------
Reconciliation of Non-GAAP Measures
We believe that presenting certain non-GAAP financial measures enhances an investor's understanding of our financial performance. We further believe that these financial measures are useful in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business. We also use certain of these financial measures for business planning purposes and in measuring our performance relative to that of our competitors. We believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the terms non-GAAP adjusted operating income and non-GAAP adjusted EBITDA may vary from that of others in our industry. These financial measures should not be considered as alternatives to operating income (loss), net income (loss) or any other performance measures derived in accordance withU.S. GAAP as measures of operating performance, operating cash flows or liquidity. Although there are no financial maintenance covenants under the terms of our senior notes, there is a limitation, among other limitations, on certain future borrowings based on an adjusted leverage ratio or a fixed charge coverage ratio. These ratios are based on financial measures similar to non-GAAP adjusted EBITDA as presented in this section, but also give pro forma effect to certain events, including acquisitions and savings from cost reduction initiatives such as facility closures and headcount reductions. Consolidated Year Ended December 31, 2019 2018 2017 (in millions) Net income (loss)$ (929.5 ) $ 140.2 $ 193.8 Income tax expense (benefit) (144.5 ) 30.5 16.0 Interest income (18.1 ) (7.0 ) (4.2 ) Interest expense 577.2 242.0 257.0 Other expense, net 6.4 44.3 9.4 Operating income (loss)$ (508.5 ) $ 450.0 $ 472.0 Adjustments: Amortization of purchased intangible assets 593.2 264.6 271.0 Restructuring costs, net 87.7 44.0 43.8 Equity-based compensation 90.8 44.9 41.8 Asset impairments 376.1 15.0 - Transaction and integration costs (1) 195.3 19.5
48.0
Purchase accounting adjustments (2) 264.2 -
-
Patent litigation settlement 55.0 -
-
Non-GAAP adjusted operating income$ 1,153.8 $ 838.0 $ 876.7 Depreciation 143.7 75.6 81.7 Non-GAAP adjusted EBITDA$ 1,297.5 $ 913.6 $ 958.4
(1) In 2019, primarily reflects transaction and integration costs related to the
Acquisition. In 2018 and 2017, primarily reflects integration costs related
to the acquisition of the BNS business, transaction costs related to
potential and consummated acquisitions and costs related to secondary stock
offerings.
(2) For the year ended December 31, 2019 , reflects purchase accounting
adjustments of $218.8 million related to the mark up of inventory to its
estimated fair value and purchase accounting adjustments of
related to reducing deferred revenue to its estimated fair value.
62
--------------------------------------------------------------------------------
Reconciliation of Segment Adjusted EBITDA
Segment adjusted EBITDA is provided as a performance measure in Note 17 in the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. Below we reconcile segment adjusted EBITDA for each segment individually to operating income for that segment to supplement the reconciliation of the total segment adjusted EBITDA to consolidated operating income in that footnote. Connectivity Segment Year Ended December 31, 2019 2018 2017 (in millions) Operating income$ 174.4 $ 271.9 $ 239.0 Adjustments: Amortization of purchased intangible assets 161.4 178.6 175.5 Restructuring costs, net 12.4 24.2 36.6 Equity-based compensation 24.6 27.3 24.4 Asset impairments - 7.5 - Transaction and integration costs 39.4 12.3 47.9 Depreciation 49.9 53.4 58.5 Adjusted EBITDA$ 462.1 $ 575.2 $ 581.8 Mobility Segment Year Ended December 31, 2019 2018 2017 (in millions) Operating income$ 180.7 $ 178.1 $ 233.0 Adjustments: Amortization of purchased intangible assets 71.1 86.0 95.5 Restructuring costs, net 11.2 19.8 7.2 Equity-based compensation 16.9 17.6 17.5 Asset impairments - 7.5 - Transaction and integration costs 23.0 7.3 0.2 Patent litigation settlement 55.0 - - Depreciation 22.2 22.2 23.2 Adjusted EBITDA$ 380.1 $ 338.4 $ 376.6 CPE Segment Year Ended December 31, 2019 2018 2017 (in millions) Operating loss$ (196.0 ) $ - $ - Adjustments: Amortization of purchased intangible assets 103.9 - - Restructuring costs, net 23.2 - - Equity-based compensation 14.1 - - Asset impairments 192.8 - - Transaction and integration costs (2.3 ) -
-
Purchase accounting adjustments 27.8 - - Depreciation 30.2 Adjusted EBITDA$ 193.7 $ - $ - 63
--------------------------------------------------------------------------------
N&C Segment
Year Ended December 31,
2019 2018 2017
(in millions)
Operating loss $ (441.5 ) $ - $ -
Adjustments:
Amortization of purchased intangible assets 212.7 - -
Restructuring costs, net 32.1 - -
Equity-based compensation 25.2
Asset impairments 142.1 - -
Transaction and integration costs 100.0 - -
Purchase accounting adjustments 135.8 - - Depreciation 30.6 Adjusted EBITDA$ 237.0 $ - $ - Ruckus Segment Year Ended December 31, 2019 2018 2017 (in millions) Operating loss$ (226.1 ) $ - $ - Adjustments: Amortization of purchased intangible assets 44.1 - - Restructuring costs, net 8.8 - - Equity-based compensation 10.0 - - Asset impairments 41.2 - - Transaction and integration costs 35.2 -
-
Purchase accounting adjustments 100.6 - - Depreciation 10.8 Adjusted EBITDA$ 24.6 $ - $ -
Note: Components may not sum to total due to rounding
64
--------------------------------------------------------------------------------Contractual Obligations
InFebruary 2019 , we issued the New Notes and repaid$225.0 million of the 2022 Term Loan. InApril 2019 , we completed the Acquisition, borrowed$3.2 billion under the 2026 Term Loan and repaid the remaining$261.3 million of the 2022 Term Loan. During the third and fourth quarters of 2019, we redeemed$500.0 million of the 2021 Notes. The following table summarizes our contractual obligations as ofDecember 31, 2019 . This table does not include the obligations related to our Series A convertible preferred stock discussed in Note 14 in our Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. Amount of Payments Due per Period Total Contractual Obligations Payments Due 2020 2021-2022 2023-2024 Thereafter (in millions)
Long-term debt, including current
maturities (a)$ 9,992.0 $ 32.0 $ 214.0 $ 1,964.0 $ 7,782.0 Interest on long-term debt (a)(b) 3,434.0 576.0 1,135.8 1,071.0 651.2 Operating leases 259.6 74.7 107.0 55.2 22.7 Purchase obligations and other supplier agreements (c) 347.2 347.2 - - -
Pension and other postretirement
benefit liabilities (d) 9.0 6.3 0.8 0.7 1.2 Restructuring costs, net (e) 26.3 21.9 4.4 - - Patent litigation settlement (f) 55.0 55.0 - - - Unrecognized tax benefits (g) - - - - - Total contractual obligations$ 14,123.1 $ 1,113.1 $ 1,462.0 $ 3,090.9 $ 8,457.1
(a) No prepayment or redemption of any of our long-term debt balances has been
assumed. Refer to Note 8 in the Notes to Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K for information
regarding the terms of our long-term debt agreements.
(b) Interest on long-term debt excludes the amortization of debt issuance costs
and original issue discount. Interest on variable rate debt is estimated
based upon rates in effect as of
(c) Purchase obligations and other supplier agreements include
related to obligations, primarily to our contract manufacturers, with
non-cancelable terms to purchase goods or services; payments of
million due in 2020 for minimum amounts owed under take-or-pay or
requirements contracts; and
related to the acquisition of Cable Exchange. Generally, amounts covered by
open purchase orders, other than the portion that is noncancelable as
disclosed above, are excluded as there is no contractual obligation until
goods or services are received.
(d) Amounts reflect expected contributions related to payments under thepostretirement benefit plans through 2029 and expected pension contributions
of
Statements included elsewhere in this Annual Report on Form 10-K).
(e) Future restructuring payments exclude payments due under lease arrangements
which are included in operating leases above.
(f) Amount reflects the settlement of patent litigation. The payment is due in
two installments, with
(g) Due to the uncertainty in predicting the timing of tax payments related to
our unrecognized tax benefits,
presentation. We anticipate a reduction of up to
unrecognized tax benefits during the next twelve months (see Note 13 in the
Notes to Consolidated Financial Statements included elsewhere in this Annual
Report on Form 10-K).
65
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Recent Accounting Pronouncements
See Note 1 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.
Off-Balance Sheet Arrangements
We were not a party to any significant off-balance sheet arrangements during the
year ended
Effects of Inflation and Changing Prices
We continually attempt to minimize the effect of inflation on earnings by controlling our operating costs and adjusting our selling prices. The principal raw materials and components purchased by us (memory and chip capacitors, copper, aluminum, steel, optical fiber, plastics and other polymers) are subject to changes in market price as they are influenced by commodity markets and other factors. Prices for these items have, at times, been volatile. As a result, we have adjusted our prices for certain products and may have to adjust prices again in the future. To the extent that we are unable to pass on cost increases to customers without a significant decrease in sales volume or must implement price reductions in response to a rapid decline in raw material costs, these cost changes could have a material adverse impact on the results of our operations.
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