COMMSCOPE HOLDING COMPANY, INC. The following discussion and analysis of our financial condition and results of operations is for the year endedDecember 31, 2021 compared with the year endedDecember 31, 2020 . 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, 2020 compared toDecember 31, 2019 , see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 2020 Annual Report on Form 10-K, filed with theSecurities and Exchange Commission onFebruary 17, 2021 .
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. In the first quarter of 2021, we announced a transformation initiative referred to as CommScope NEXT designed to drive shareholder value through three pillars: profitable growth, operational efficiency and portfolio optimization. We believe these efforts are critical to making us more competitive and allowing us to invest in growth and maximize stockholder and stakeholder value. We have incurred$91.9 million of restructuring costs and$90.3 million of transaction, transformation and integration costs during the year endedDecember 31, 2021 , both primarily related to CommScope NEXT. We expect to continue to incur restructuring costs and transaction, transformation and integration costs related to CommScope NEXT and such costs could be material. As a step in the CommScope NEXT transformation plan, inApril 2021 , we announced a plan to spin-off the Home Networks business in 2022. After thorough consideration of the current supply chain environment and its impact on the Home Networks business, we have decided to delay the execution of the spin-off. We remain committed to the spin-off of the Home Networks business fromCommScope , but we currently do not have a firm timeline for restarting the plan. Accordingly, management now analyzes the financial results of our "Core" business separately from Home Networks. These supplementary Core financial measures reflect the results of our Broadband Networks (Broadband), Outdoor Wireless Networks (OWN) and Venue and Campus Networks (VCN) segments, in the aggregate. Our Core financial measures exclude the results and performance of our Home Networks (Home) segment. See the Segment Results section below for illustration of the aggregation of our Core financial measures. These metrics represent the business segments as we have reported them. However, the ultimate definition of the Home Networks business that we expect to separate may vary, and future results may differ materially. In the second quarter of 2021, we shifted certain product lines from our Broadband segment to our Home segment to better align with how those businesses are being managed. All prior period amounts have been recast to reflect these operating segment changes. COVID-19 Update The COVID-19 outbreak had an adverse impact on our financial performance in 2020 primarily related to decreased demand, supply constraints due to the temporary shutdown of certain of our facilities and increased business continuity costs. We took a variety of actions in 2020 to help mitigate the financial impacts such as headcount reductions, lower capital spending and lower discretionary spending. The negative impact of COVID-19 on our financial performance has eased during 2021, with network strain driving increased demand for our Broadband segment products in particular. The recovery in demand has also indirectly had unfavorable business impacts, including commodity inflation (primarily copper and resins), logistics cost increases, extended lead times and certain component part shortages. We expect certain of these unfavorable impacts to continue into 2022. 43 -------------------------------------------------------------------------------- The extent of the negative impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, including new variants, the effectiveness and adoption of vaccines and related actions taken by domestic and international jurisdictions to maintain and prevent disease spread, and the extent of any financial recession resulting from the pandemic, all of which are uncertain and cannot be predicted.
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 our significant accounting policies.
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. 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 and is commensurate with the risk and uncertainty inherent in each reporting unit and in internally developed forecasts. 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. 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 units by adjusting the discount rates and/or other assumptions. 44 --------------------------------------------------------------------------------
2021 Interim and Annual Goodwill Analysis
During the second quarter of 2021, we realigned certain of our product lines that changed the composition of our reporting units and resulted in the reallocation of$13.7 million of goodwill from the Network and Cloud (N&C) reporting unit to the Home Networks reporting unit.Goodwill was assessed for impairment due to a change in the composition of reporting units. We performed impairment testing immediately before and after the change and determined that no goodwill impairment existed. The annual test of goodwill impairment was performed for each of the reporting units with goodwill balances as ofOctober 1, 2021 . For the 2021 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. The range of discount rates used in our annual tests were 9.0% to 12.0% for 2021. During the annual impairment test performed in the fourth quarter of 2021 and in conjunction with the development of our 2022 and long range plans, we identified further weakness in our Home Networks reporting unit forecast resulting from a continuing decline in demand for video products from bothU.S. and international service providers as well as the negative impact of supply shortages and delays on our ability to meet customer demand for video products. As a result, we determined the goodwill balance in the Home Networks reporting unit was impaired and recorded a$13.7 million impairment charge. See Note 3 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further discussion. The following table provides summary information regarding our reporting units with goodwill balances as ofDecember 31, 2021 that have the lowest level of headroom. The table presents key assumptions used in our annual goodwill analysis, along with sensitivity analysis showing the effect of a change in certain key assumptions, assuming all other assumptions remain constant, to the resulting fair value using an income approach. Accordingly, if performance is worse than anticipated for these reporting units, future impairment tests could result in impairment charges that could be material to our results of operations. The Enterprise reporting unit is in our VCN segment and the N&C reporting unit is in our Broadband segment. Key Assumptions Goodwill Excess of Fair Value to Carrying Value Result of Annual Increase of Terminal Balance at % of Goodwill Test Decrease of 0.5% 0.5%
Reporting Discount Growth
Unit Rate Rate 2021 Assets 1, 2021 in Cash Flows Growth Rate Rate Enterprise 10.5 % 1.5 %$ 979.6 7.4 %$ 519.0 $ 377.2 $ 475.6$ 440.9 N&C 9.5 % 2.0 % 2,007.1 15.1 % 436.1 156.8 312.7 239.9
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. Other than certain assets impaired as a result of restructuring actions, we did not identify any impairments of definite-lived intangible assets or other long-lived assets in 2021, including the finite lived assets in our Home Network reporting unit for which a goodwill impairment was recognized in the fourth quarter of 2021. 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.
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Identify the performance obligations in the contract. Performance obligations 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.
•
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.
Other customer contract types include a variety of post-contract support service
offerings, which are generally recognized over time as the services are
provided, including the following: maintenance and support services provided
under annual service-level agreements; "Day 2" professional services to help
customers maximize their utilization of deployed systems; and installation
services related to the routine installation of equipment ordered by the
customer at the customer's site.
For performance obligations recognized over time, judgment is required to
evaluate assumptions, including the total estimated costs to determine progress
towards completion of the performance obligation and to calculate the
corresponding amount of revenue to recognize. If estimated total costs on any
contract are greater than the net contract revenues, the entire estimated loss
is recognized in the period the loss becomes known. The cumulative effects on
revenue from revisions to total estimated costs are recorded in the period in
which the revisions to estimates are identified and the amounts can be
reasonably estimated.
Revenue is measured based on the consideration 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 performance obligations related to
project contracts. 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.
Contingencies and Litigation
We are a party to lawsuits, claims and proceedings incident to the operation of our business, including intellectual property infringement matters, those pertaining to labor and employment contracts and other matters, some of which allege substantial monetary damages. We assess these matters in order to determine if a contingent liability should be recorded. In making this determination, management may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. We expense legal fees associated with consultations and defense of lawsuits as incurred. We accrue for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. Litigation outcomes are difficult to predict and are often resolved over long periods of time, making our estimates highly judgmental. Estimating probable losses requires the analysis of multiple possible outcomes that often depend on judgments about potential actions by third parties, such as future changes in facts and circumstances, differing interpretations of the law, assessments of the amount of damages and other factors beyond our control. There is the potential for a material adverse effect on our results of operation and cash flows if one or more matters are resolved in a particular period in an amount materially in excess of what we anticipated. Alternatively, if the judgments and estimates made by management are incorrect and a particular contingent loss does not occur, the contingent loss recorded would be reversed, thereby favorably impacting our results of operations.
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 our results of operations.
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, and may be
material to our results of operations.
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--------------------------------------------------------------------------------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 our net income (loss).
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RESULTS OF OPERATIONS
Comparison of results of operations for the year ended
Year Ended December 31,
2021 2020
% of Net % of Net $ %
Amount Sales Amount Sales Change Change
(dollars in millions, except per share amounts)
Net sales $ 8,586.7 100.0 % $ 8,435.9 100.0 % $ 150.8 1.8 %
Core net sales (1) 6,737.4 78.5 6,028.4 71.5 709.0 11.8
Gross profit 2,684.3 31.3 2,747.8 32.6 (63.5 ) (2.3 )
Operating income (loss) 48.6 0.6 (51.8 ) (0.6 ) 100.4 NM
Core operating income (1) 263.5 3.9 223.6 2.7 39.9 17.8
Non-GAAP adjusted EBITDA (2) 1,117.0 13.0 1,215.2 14.4 (98.2 ) (8.1 )
Core adjusted EBITDA (1) 1,091.5 16.2 1,083.9 12.8 7.6 0.7
Net loss (462.6 ) (5.4 ) (573.4 ) (6.8 ) 110.8 (19.3 )
Diluted loss per share $ (2.55 ) $ (3.20 ) $ 0.65 (20.3 )
NM - Not meaningful
(1)Core financial measures reflect the results of our Broadband, OWN and VCN segments, in the aggregate. Core financial measures exclude the results of our Home segment. See the Segment Results section below for illustration of the aggregation of our Core financial measures.
(2)
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, $ %
2021 2020 Change Change
(dollars in millions)
Net sales $ 8,586.7 $ 8,435.9 $ 150.8 1.8 %
Domestic 4,960.5 5,185.3 (224.8 ) (4.3 )
International 3,626.2 3,250.6 375.6 11.6
Net sales in 2021 increased $150.8 million , or 1.8%, compared to the prior year.
Core net sales in 2021 increased $709.0 million , or 11.8%, compared to the prior
year with increases in the Broadband segment of $300.6 million , the VCN segment
of $241.9 million and the OWN segment of $166.5 million . Net sales in 2021 in
the Home segment decreased $558.2 million compared to the prior year. In 2021,
all of our segments experienced supply shortages and extended lead times for
certain materials that negatively affected our ability to meet customer demand
for our products. We expect these shortages and delays to persist into 2022. In
addition, our Broadband segment faced capacity constraints that negatively
affected net sales in 2021. For further details by segment, see the discussion
of Segment Results below.
From a regional perspective, net sales increased in 2021 in the Asia Pacific
(APAC) region by $141.4 million , the Europe , Middle East and Africa (EMEA)
region by $90.4 million , the Caribbean and Latin America (CALA) region by $88.7
million and Canada by $55.1 million . The increases in international net sales in
2021 were partially offset by a decrease of $224.8 million in the U.S. Net sales
to customers located outside of the U.S. comprised 42.2% for 2021 compared to
38.5% for 2020. Foreign exchange rate changes impacted net sales favorably by
approximately 1% for 2021 compared to the prior year. For additional information
on regional sales by segment, see discussion of Segment Results below and Note
16 in the Notes to Consolidated Financial Statements included elsewhere in this
Annual Report on Form 10-K.
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--------------------------------------------------------------------------------Gross profit, SG&A expense and R&D expense
Year Ended December 31, $ %
2021 2020 Change Change
(dollars in millions)
Gross profit $ 2,684.3 $ 2,747.8 $ (63.5 ) (2.3 )%
As a percent of sales 31.3 % 32.6 %
SG&A expense 1,233.9 1,170.7 63.2 5.4
As a percent of sales 14.4 % 13.9 %
R&D expense 683.2 703.3 (20.1 ) (2.9 )
As a percent of sales 8.0 % 8.3 %
Gross profit (net sales less cost of sales)
Despite higher consolidated net sales, gross profit decreased in 2021 compared to the prior year primarily due to significantly higher material and freight costs. We also experienced substantial sales volume declines in our Home segment and pricing pressures related to certain of our OWN segment products. Increased pricing on certain of our VCN segment products more than offset the OWN segment pricing pressures. In addition, we recorded charges of$48.6 million that reduced gross profit in 2021 related to the settlement of intellectual property assertions, but these charges were partially offset by the recovery of$17.1 million related to a warranty indemnification litigation matter ofARRIS International plc (ARRIS), which was acquired byCommScope in 2019.
Selling, general and administrative expense
In the first quarter of 2021, we announced a transformation initiative called CommScope NEXT, and as a step in our transformation, we announced our commitment to spin-off our Home Networks business fromCommScope . As a result of these transformation and separation efforts, we incurred$90.3 million of transaction, transformation and integration costs during 2021 that were recorded in selling, general and administrative (SG&A) expense. During 2020, we incurred$24.9 million of transaction, transformation and integration costs that were mainly focused on the integration of the ARRIS business. We continue to focus on integrating the ARRIS business, including our work to combine our enterprise resource planning systems. We expect to continue to incur transaction, transformation and integration costs related to CommScope NEXT, the spin-off of the Home Networks business fromCommScope , and the integration of the ARRIS business, and such costs could be material. For 2021, excluding transaction, transformation and integration costs, SG&A expense decreased by$2.4 million compared to 2020. The decrease was primarily due to cost savings initiatives, but the favorable impact of cost savings initiatives was partially offset by higher variable incentive compensation expense of$13.5 million and higher bad debt expense, which was driven by a$30.3 million charge related to a certain value-added reseller customer in the Home segment. We reserved the entire balance due from this customer due to changes in their risk profile, and we are pursuing legal action. Excluding transaction, transformation and integration costs, SG&A as a percentage of net sales was 13.3% and 13.6% for 2021 and 2020, respectively.
Research and development expense
Research and development (R&D) expense for 2021 decreased due to lower spending
on Home segment products that was partially offset by increased spending on Core
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, $ %
2021 2020 Change Change
(dollars in millions)
Amortization of purchased intangible
assets $ 613.0 $ 630.5 $ (17.5 ) (2.8 %)
Restructuring costs, net 91.9 88.4 3.5 4.0
Asset impairments 13.7 206.7 (193.0 ) (93.4 )
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Amortization of purchased intangible assets
The amortization of purchased intangible assets was lower in 2021 compared to the prior year because certain of our intangible assets became fully amortized.
Restructuring costs, net
The restructuring costs recorded in 2021 reflected actions initiated during 2021 and included$90.7 million related to CommScope NEXT and$1.2 million related to integrating the ARRIS business. The restructuring costs recorded during 2020 were primarily related to integrating the ARRIS business. From a cash perspective, we paid$31.6 million to settle restructuring liabilities during 2021 and expect to pay an additional$69.0 million between 2022 and 2023 related to restructuring actions that have been initiated. Additional restructuring actions related to CommScope NEXT are expected to be identified and the resulting charges and cash requirements could be material. The Company does not expect to identify significant additional restructuring actions related to the ARRIS integration. Asset impairments We recorded goodwill impairment charges of$13.7 million and$206.7 million during 2021 and 2020, respectively, related to our Home Networks reporting unit within our Home segment. See the discussion above under "Critical Accounting Policies" for more information regarding the annual goodwill impairment test performed during 2021. Other expense, net Year Ended December 31, $ % 2021 2020 Change Change (dollars in millions) Foreign currency loss$ (4.4 ) $ (19.2 ) $ 14.8 (77.1 )% Other expense, net (19.4 ) (10.1 ) (9.3 ) 92.1 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 foreign currency loss in 2020 was primarily driven by certain unhedged currencies.
Other expense, net
For 2021, other expense, net was driven by the redemption fee of$34.4 million related to the refinancing of our 5.50% senior secured notes dueMarch 2024 (the 2024 Secured Notes) as further described in Note 7 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. The redemption fee was partially offset by income of$8.1 million on equity method investments and other miscellaneous investments. We also recognized a gain of$2.9 million during the year endedDecember 31, 2021 related to the sale of an investment accounted for under the cost method. In addition, we recognized a curtailment gain in other expense, net of$2.5 million reflecting the impacts of a restructuring action on an international defined benefit plan. For 2020, other expense, net was driven by redemption fees of$17.9 million related to the refinancing of our 5.00% senior notes due 2021 (the 2021 Notes) and 5.50% senior notes dueJune 2024 (the 2024 Notes) and the redemption of$100.0 million of our 6.00% senior notes due 2025 (the 2025 Notes), offset partially by income on equity method investments and other miscellaneous investments.
Interest expense, Interest income and Income taxes
Year Ended December 31, $ %
2021 2020 Change Change
(dollars in millions)
Interest expense $ (561.2 ) $ (577.8 ) $ 16.6 (2.9 %)
Interest income 1.9 4.4 (2.5 ) (56.8 )
Income tax benefit 71.9 81.1 (9.2 ) (11.3 )
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Interest expense and interest income
In 2021, we wrote off$9.9 million of debt issuance costs related to the refinancing of the 2024 Secured Notes as further described in Note 7 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. For 2020, we wrote off$7.6 million related to the refinancing of the 2021 Notes and 2024 Notes and the partial redemption of the 2025 Notes. Excluding the write-off of debt issuance costs, interest expense decreased in 2021 due to lower variable interest rates on our senior secured term loan due 2026 (the 2026 Term Loan). Our weighted average effective interest rate on outstanding borrowings, including the impact of interest rate swaps and the amortization of debt issuance costs and original issue discount, was 5.74% atDecember 31, 2021 and 5.86% atDecember 31, 2020 .
Income tax benefit
For 2021, our effective tax rate was 13.5% and we recognized a tax benefit of$71.9 million on a pretax loss of$534.5 million . Our tax benefit was lower than the statutory rate of 21.0% in 2021 primarily due to the impact of$37.4 million of tax expense related to a foreign tax rate change. See Note 12 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for more discussion of our income tax benefit. For 2020, our effective tax rate was 12.4% and we recognized a tax benefit of$81.1 million on a pretax loss of$654.5 million . Our tax benefit was less than the statutory rate primarily due to a goodwill impairment charge of$206.7 million , for which minimal tax benefits were recorded. Our tax rate was also impacted unfavorably by excess tax costs of$14.0 million related to equity compensation awards as well asU.S. anti-deferral provisions and foreign withholding taxes. These unfavorable impacts were offset partially by favorable impacts related to federal tax credits and foreign tax rate changes. 52 -------------------------------------------------------------------------------- Segment Results Year Ended December 31, 2021 2020 % of Net % of Net $ % Amount Sales Amount Sales Change Change Net sales by segment: Broadband$ 3,148.8 36.7 %$ 2,848.2 33.8 %$ 300.6 10.6 % OWN 1,410.2 16.4 1,243.7 14.7 166.5 13.4 VCN 2,178.4 25.4 1,936.5 23.0 241.9 12.5 Core net sales (1) 6,737.4 78.5 6,028.4 71.5 709.0 11.8 Home 1,849.3 21.5 2,407.5
28.5 (558.2 ) (23.2 )
Consolidated net sales
1.8 %
Operating income
(loss) by
segment:
Broadband $ 120.1 3.8 % $ 157.2 5.5 % $ (37.1 ) (23.6 ) %
OWN 199.0 14.1 181.1 14.6 17.9 9.9
VCN (55.6 ) (2.6 ) (114.7 ) (5.9 ) 59.1 (51.5 )
Core operating
income (1) 263.5 3.9 223.6 3.7 39.9 17.8
Home (214.9 ) (11.6 ) (275.4 ) (11.4 ) 60.5 (22.0 ) %
Consolidated operating
income (loss) $ 48.6 0.6 % $ (51.8 ) (0.6 ) % $ 100.4 NM
Adjusted EBITDA by
segment:
Broadband $ 629.9 20.0 % $ 625.4 22.0 % $ 4.5 0.7 %
OWN 267.9 19.0 278.5 22.4 (10.6 ) (3.8 )
VCN 193.7 8.9 180.0 9.3 13.7 7.6
Core adjusted EBITDA
(1) 1,091.5 16.2 1,083.9 18.0 7.6 0.7
Home 25.5 1.4 131.3 5.5 (105.8 ) (80.6 )
Non-GAAP consolidated
adjusted EBITDA (2) $ 1,117.0 13.0 % $ 1,215.2 14.4 % $ (98.2 ) (8.1 ) %
NM - Not meaningful
(1)Core financial measures reflect the results of our Broadband, OWN and VCN segments, in the aggregate. Core financial measures exclude the results of our Home segment.
(2)
See "Reconciliation of Non-GAAP Measures" within this Management's Discussion and Analysis of Financial Condition and Results of Operations.
Broadband Networks Segment
Net sales increased in 2021 compared to the prior year due to increased demand for our products and services as service providers enhanced their networks to keep pace with broadband demand. We are experiencing capacity constraints and supply shortages with certain of our network cable products, which hindered our ability to meet customer demand for our Broadband segment products in 2021. We are investing to alleviate our capacity constraints and began to see benefits from the expanded capacity in the fourth quarter of 2021. We expect the supply shortages to extend into 2022. From a regional perspective, in 2021, net sales increased in theU.S. by$137.8 million , the CALA region by$111.2 million , the EMEA region by$62.6 million andCanada by$6.3 million but decreased in the APAC region by$17.3 million . Foreign exchange rate changes impacted Broadband segment net sales favorably by approximately 1% during 2021 compared to the prior year. 53 -------------------------------------------------------------------------------- For 2021, Broadband segment operating income and adjusted EBITDA both benefitted from increased sales volumes and favorable geographic and product mix. However, these benefits were largely offset by higher material and freight costs and increased expenses to expand capacity to meet demand. Compared to 2020, Broadband segment operating income in 2021 was unfavorably impacted by a$52.0 million increase in restructuring expense related to the planned closure of an international manufacturing facility and an intellectual property litigation settlement charge of$20.0 million . The intellectual property litigation settlement was partially offset by the recovery of$17.1 million related to a warranty indemnification litigation matter. Restructuring expense and litigation settlements are not reflected in adjusted EBITDA. See "Reconciliation of Segment Adjusted EBITDA" within this Management's Discussion and Analysis of Financial Condition and Results of Operations, below.
Outdoor Wireless Networks Segment
For 2021, OWN segment net sales increased compared to the prior year primarily due to an increase in customer spending on both macro and metro cell solutions. Although OWN segment net sales increased year over year for 2021, net sales were negatively affected by supply shortages of certain materials that hindered our ability to meet customer demand. From a regional perspective, in 2021, OWN segment net sales increased in theU.S. by$71.3 million , the APAC region by$58.3 million , the EMEA region by$25.1 million andCanada by$21.4 million but decreased in the CALA region by$9.6 million . Foreign exchange rate changes impacted OWN segment net sales favorably by approximately 1% during 2021 compared to the prior year. For 2021, OWN segment operating income increased by$17.9 million but adjusted EBITDA decreased by$10.6 million compared to the prior year. Both operating income and adjusted EBITDA for the OWN segment benefitted from increased sales volumes, but this favorable impact was more than offset by pricing pressures on certain products and higher freight and material costs. In addition, OWN segment operating income for 2021 increased as a result of a$12.3 million reduction in amortization expense and a$12.2 million reduction in restructuring expense compared to the prior year. Amortization expense and restructuring expense are not reflected in adjusted EBITDA. See "Reconciliation of Segment Adjusted EBITDA" within this Management's Discussion and Analysis of Financial Condition and Results of Operations, below.
Venue and Campus Networks Segment
For 2021, VCN segment net sales increased compared to the prior year as higher net sales of our Building and Data Center Connectivity and Ruckus products were partially offset by lower net sales of our Indoor Cellular Networks products. Net sales of Ruckus products were unfavorably impacted in 2021 due to shortages of certain materials that negatively affected our ability to meet customer demand. We expect this supply shortage to continue into 2022. From a regional perspective, in 2021, net sales for the VCN segment were higher across all regions with increases in theU.S. of$90.7 million , the APAC region of$60.6 million , the EMEA region of$51.8 million , the CALA region of$27.3 million andCanada of$11.5 million . Foreign exchange rate changes impacted VCN segment net sales favorably by approximately 1% during 2021 compared to the prior year. For 2021, VCN segment operating loss decreased and adjusted EBITDA increased compared to the prior year primarily due to favorable pricing impacts on certain products and higher sales volumes. These benefits were partially offset by higher material and freight costs and higher selling expenses. In addition, VCN segment operating loss for 2021 benefitted from a$14.9 million reduction in restructuring expense and a$13.4 million reduction in intellectual property litigation charges compared to the prior year. Restructuring expense and intellectual property litigation charges are not reflected in adjusted EBITDA. See "Reconciliation of Segment Adjusted EBITDA" within this Management's Discussion and Analysis of Financial Condition and Results of Operations, below.
Home Networks Segment
Net sales for the Home segment decreased in 2021 primarily due to the continuing decline in demand for video products from bothU.S. and international service providers as well as the negative impact of supply shortages and delays on our ability to meet customer demand. From a regional perspective, in 2021, net sales decreased in theU.S. by$524.6 million , the EMEA region by$49.1 million and the CALA region by$40.2 million and increased in the APAC region by$39.8 million andCanada by$15.9 million . Foreign exchange rate changes impacted Home segment net sales favorably by approximately 1% during 2021 compared to the prior year. 54 -------------------------------------------------------------------------------- Excluding goodwill impairment charges in 2021 and 2020 of$13.7 million and$206.7 million , respectively, Home segment operating loss increased and adjusted EBITDA decreased in 2021 compared to the prior year primarily due to lower sales volumes. The Home segment also experienced higher material costs and higher bad debt expense, driven by a$30.3 million reserve related to a certain value-added reseller customer. These higher costs were partially offset by favorable pricing impacts on certain products and benefits from cost savings initiatives in R&D. Home segment operating loss was also unfavorably impacted in 2021 by increases of$41.6 million in transaction, transformation and integration costs and$28.8 million in intellectual property litigation charges, but these were partially offset by a decrease of$21.4 in restructuring expense compared to the prior year. During 2020, the Home segment benefitted from the release of a$23.6 million accrual related to an intellectual property royalty matter that was settled for less than anticipated. Of the$23.6 million accrual release in the prior year,$15.1 million related to pre-acquisition sales and was excluded from the calculation of adjusted EBITDA; the remaining$8.5 million release provided a benefit to Home segment adjusted EBITDA in 2020. Home segment transaction, transformation and integration costs were primarily related to the announced commitment to separate the Home Networks business fromCommScope . Transaction, transformation and integration costs, restructuring expense and intellectual property settlements are not reflected in adjusted EBITDA. See "Reconciliation of Segment Adjusted EBITDA" within this Management's Discussion and Analysis of Financial Condition and Results of Operations, below.
Liquidity and Capital Resources
The following table summarizes certain key measures of our liquidity and capital
resources:
December 31,
2021 2020 $ Change % Change
(dollars in millions)
Cash and cash equivalents $ 360.3 $ 521.9 $ (161.6 ) (31.0 ) %
Working capital (1), excluding cash and
cash
equivalents and current portion of
long-term debt 1,068.9 911.2 157.7 17.3
Availability under revolving credit
facility 684.1 735.1 (51.0 ) (6.9 )
Long-term debt, including current
portion 9,510.5 9,520.6 (10.1 ) (0.1 )
Total capitalization (2) 10,410.0 10,917.4 (507.4 ) (4.6 )
Long-term debt as a percentage of total
capitalization 91.4 % 87.2 %
(1)
Working capital consists of current assets of $3,579.7 million less current
liabilities of $2,182.5 million as of December 31, 2021 and current assets of
$3,354.5 million less current liabilities of $1,953.4 million as of December 31,
2020 .
(2)
Total capitalization includes long-term debt, including the current portion, Series A convertible preferred stock (the Convertible Preferred Stock) and stockholders' equity (deficit).
Our principal sources of liquidity on a short-term basis are cash and cash equivalents, cash flows provided by operations and availability under our credit facilities. On a long-term basis, our potential sources of liquidity also include raising capital through the issuance of additional equity and/or debt.
The primary uses of liquidity include debt service requirements, voluntary debt repayments or redemptions, working capital requirements, capital expenditures, business separation transaction costs, transformation costs, acquisition integration costs, dividends related to the Convertible Preferred Stock if we elect to pay such dividends in cash, litigation settlements, income tax payments and other contractual obligations. Our interest payments on long-term debt are expected to total$2,564.2 million over the duration of the debt, with$505.1 million due in 2022. For additional information regarding our long-term debt obligations, see Note 7 in the Notes to Consolidated Financial Statements and our discussion of our interest rate risk in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this Annual Report on Form 10-K. For additional information regarding our obligations under our operating lease and restructuring agreements, see Notes 5 and 10, respectively, in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. During the normal course of business, to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with our contract manufacturers and suppliers that allow them to produce and procure inventory based upon our forecasted requirements. We estimate our obligations under these agreements to be$415.7 million due in 2022. 55 -------------------------------------------------------------------------------- We have$140.5 million in unrecognized tax benefits; however, the timing of the related tax payments is highly uncertain. We anticipate a reduction of up to$6.0 million of unrecognized tax benefits during the next twelve months. See Note 12 in the Notes to Consolidated Financial Statements included elsewhere in the Annual Report on Form 10-K for further discussion. We are contingently liable under open standby letters of credit issued by our banks in favor of third parties that totaled$50.0 million as ofDecember 31, 2021 . These letters of credit primarily support performance obligations of a third-party contractor. These amounts represent our estimate of the maximum amounts we would expect to incur upon the contractual non-performance of the contractor, but we also have cross-indemnities in place that may enable us to recover some or all of our losses in the event of the contractor's non-performance. We believe the likelihood of having to perform under these guarantees is remote. There were no material amounts recorded in our consolidated financial statements related to third-party guarantee agreements as ofDecember 31, 2021 or 2020. We believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our senior secured revolving credit facilities (the Revolving Credit Facility), 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 additional amounts under the Revolving Credit Facility or issue debt or equity 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, 2021 , our non-GAAP pro forma adjusted EBITDA, as measured pursuant to the indentures governing our notes, was$1,182.6 million , which included annualized synergies expected to be realized within the next year ($2.6 million ) and annualized savings expected from cost reduction initiatives ($63.0 million ) so that the impact of the synergies and 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, 2021 . Cash and cash equivalents decreased during 2021 primarily driven by cash paid for capital expenditures of$131.4 million , costs related to the debt refinancing of$46.4 million , cash dividends paid for the Convertible Preferred Stock of$43.0 million , tax withholding payments for vested equity-based compensation awards of$26.4 million and a payment to settle a net investment hedge of$18.0 million , partially offset by cash generated from operating activities of$122.3 million . As ofDecember 31, 2021 , approximately 72% 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 2021 primarily due to higher inventory balances as a result of rising material costs and increases in stock as we build inventory waiting for certain materials or components to complete our products for sale. Partially offsetting the increase in inventory was an increase in accounts payable mainly driven by higher inventory balances. During 2021, we sold approximately$45 million of accounts receivable under customer-sponsored supplier financing agreements; however, only$14.0 million of that amount impacted working capital, excluding cash and cash equivalents and the current portion of long-term debt, as ofDecember 31, 2021 . Under these agreements, we are able to sell accounts receivable to a bank, and we retain no interest in and have no servicing responsibilities for the accounts receivable sold.
The net reduction in total capitalization during 2021 reflected the net loss for the year and foreign currency translation losses.
Cash Flow Overview
Year Ended December 31, $ %
2021 2020 Change Change
(dollars in millions)
Net cash generated by
operating activities $ 122.3 $ 436.2 $ (313.9 ) (72.0 )%
Net cash used in investing
activities (136.8 ) (120.2 ) (16.6 ) 13.8
Net cash used in financing
activities (139.5 ) (383.8 ) 244.3 (63.7 )
56--------------------------------------------------------------------------------
Operating Activities
Year Ended December 31,
2021 2020
(in millions)
Net loss $ (462.6 ) $ (573.4 )
Adjustments to reconcile net loss to net cash generated by
operating activities:
Depreciation and amortization 786.3 823.3
Equity-based compensation 79.6 115.0
Deferred income taxes (147.5 ) (154.7 )
Asset impairments 13.7 206.7
Changes in assets and liabilities:
Accounts receivable (59.6 ) 228.4
Inventories (359.8 ) (100.5 )
Prepaid expenses and other current assets 3.2 (17.2 )
Accounts payable and other accrued liabilities 256.0 (175.2 )
Other noncurrent liabilities 8.4 (4.0 )
Other noncurrent assets (45.5 ) 28.8
Other 50.1 59.0
Net cash generated by operating activities $ 122.3
During 2021, operating cash flows decreased compared to the prior year primarily
as a result of lower operating performance and increases in working capital in
the current year due to improved net sales, higher inventory costs and the
building of inventory as we wait for certain materials or components to complete
our products for sale.
Investing Activities
Year Ended December 31,
2021 2020
(in millions)
Additions to property, plant and equipment $ (131.4 ) $ (121.2 )
Proceeds from sale of property, plant and equipment 13.1 5.0
Cash paid for Cable Exchange acquisition - (3.5 ) Payments upon settlement of net investment hedge (18.0 )
-
Other (0.5 ) (0.5 ) Net cash used in investing activities$ (136.8 ) $
(120.2 )
During 2021, the increase in cash used in investing activities was driven by a payment made to settle a net investment hedge of$18.0 million and an increase of$10.2 million in our investment in property, plant and equipment that primarily related to supporting improvements in manufacturing operations, including expanding production capacity and investing in information technology, including software developed for internal use. These were partially offset by an increase in proceeds from the sale of property, plant and equipment mainly driven by proceeds of$10.5 million related to the sale of a manufacturing location. Financing Activities Year Ended December 31, 2021 2020 (in millions) Long-term debt repaid$ (1,282.0 ) $ (1,282.0 ) Long-term debt proceeds 1,250.0 950.0 Debt issuance costs (12.0 ) (11.7 ) Debt extinguishment costs (34.4 ) (17.9 ) Dividends paid on Series A convertible preferred stock (43.0 ) (14.3 ) Proceeds from the issuance of common shares under equity-based compensation plans 5.6 9.0 Tax withholding payments for vested equity-based compensation awards (26.4 ) (16.9 ) Other 2.7 - Net cash used in financing activities$ (139.5 ) $ (383.8 ) 57
-------------------------------------------------------------------------------- In 2021, we issued$1,250.0 million of 4.75% senior secured notes due 2029 (the 2029 Secured Notes) and used the net proceeds from the offering, together with cash on hand, to redeem and retire$1,250.0 million outstanding under the 2024 Secured Notes. In connection with the issuance of the 2029 Secured Notes, we paid$12.0 million of debt issuance costs. We paid a redemption premium of$34.4 million to retire the 2024 Secured Notes. We also paid four quarterly scheduled amortization payments totaling$32.0 million on the senior secured term loan due in 2026 (the 2026 Term Loan). We may continue to look for favorable opportunities to refinance portions of our existing debt to lower borrowing costs, extend the term or adjust the total amount of fixed-rate or floating-rate debt. In 2020, we issued$700.0 million of 7.125% senior notes due 2028 (the 2028 Notes) and used the net proceeds from the offering to redeem and retire the$700.0 million outstanding under the 2021 Notes and the 2024 Notes. We incurred$11.7 million of debt issuance costs in connection with the issuance of the 2028 Notes. In addition, we redeemed$100.0 million aggregate principal amount of the 2021 Notes, redeemed$100.0 million aggregate principal amount of the 2025 Notes and paid four quarterly scheduled amortization payments totaling$32.0 million on the 2026 Term Loan. We paid redemption premiums of$11.9 million to retire the 2024 Notes and$6.0 million to partially redeem the 2025 Notes. Also during 2020, we borrowed and repaid$250.0 million under our senior secured asset-based revolving credit facility (the Revolving Credit Facility). As ofDecember 31, 2021 , we had no outstanding borrowings under the Revolving Credit Facility and the remaining availability was$684.1 million , reflecting a borrowing base of$777.6 million reduced by$93.5 million of letters of credit issued under the Revolving Credit Facility. Also impacting cash used in financing activities for the year endedDecember 31, 2021 was the increase of$28.7 million in cash dividends paid for the Convertible Preferred Stock. In 2021, the dividends for the Convertible Preferred Stock were paid in cash for three of the four quarters, while in the prior year, the dividends were paid in additional shares of the Convertible Preferred Stock for three of the four quarters. During 2021, we received proceeds of$5.6 million related to the exercise of stock options compared to$9.0 million in the prior year. During 2021, employees surrendered 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$26.4 million compared to$16.9 million in the prior year.
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 term non-GAAP adjusted EBITDA may vary from that of others in our industry. This financial measure should not be considered as an alternative 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. 58 --------------------------------------------------------------------------------
Consolidated
Year Ended December 31,
2021 2020 2019
(in millions)
Net loss $ (462.6 ) $ (573.4 ) $ (929.5 )
Income tax benefit (71.9 ) (81.1 ) (144.5 )
Interest income (1.9 ) (4.4 ) (18.1 )
Interest expense 561.2 577.8 577.2
Other expense, net 23.8 29.3 6.4
Operating income (loss) $ 48.6 $ (51.8 ) $ (508.5 )
Adjustments:
Amortization of purchased intangible assets 613.0 630.5 593.2
Restructuring costs, net 91.9 88.4 87.7
Equity-based compensation 79.6 115.0 90.8
Asset impairments 13.7 206.7 376.1
Transaction, transformation and integration
costs (1) 90.3 24.9 195.3
Acquisition accounting adjustments (2) 11.5 20.6
264.2
Patent claims and litigation settlements 31.7 16.3 55.0 Executive severance - 6.3 - Depreciation 136.7 158.3 143.7 Non-GAAP adjusted EBITDA$ 1,117.0 $ 1,215.2 $ 1,297.5 (1) In 2021, primarily reflects transaction separation costs related to the planned spin-off of the Home Networks business fromCommScope , transformation costs related to CommScope NEXT and integration costs related to the ARRIS acquisition. In 2020, primarily reflects integration costs related to the ARRIS acquisition and in 2019, primarily reflects transaction and integration costs related to the ARRIS acquisition.
(2)
In 2021 and 2020, reflects acquisition accounting adjustments related to reducing deferred revenue to its estimated fair value. In 2019, reflects acquisition accounting adjustments of$218.8 million related to the mark up of inventory to its estimated fair value and acquisition accounting adjustments of$45.4 million related to reducing deferred revenue to its estimated fair value. 59 --------------------------------------------------------------------------------
Reconciliation of Segment Adjusted EBITDA
Segment adjusted EBITDA is provided as a performance measure in Note 16 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. Below we reconcile segment adjusted EBITDA for each segment individually to operating income (loss) for that segment to supplement the reconciliation of the total segment adjusted EBITDA to consolidated operating (loss) in that footnote. Broadband Networks Segment Year Ended December 31, 2021 2020 2019 (in millions) Operating income (loss)$ 120.1 $ 157.2 $ (341.7 ) Adjustments: Amortization of purchased intangible assets 322.1 323.1 273.2 Restructuring costs, net 69.8 17.8 36.9 Equity-based compensation 32.6 44.4 34.8 Asset impairments - - 142.1
Transaction, transformation and integration costs 20.4 7.9
120.2
Acquisition accounting adjustments 4.8 11.4
135.8
Patent claims and litigation settlements 2.9 3.0 - Executive severance - 2.2 - Depreciation 57.2 58.4 55.1 Adjusted EBITDA$ 629.9 $ 625.4 $ 456.5
Outdoor Wireless Networks Segment
Year Ended December 31,
2021 2020 2019
(in millions)
Operating income $ 199.0 $ 181.1 $ 200.3
Adjustments:
Amortization of purchased intangible assets 33.5 45.8 49.5
Restructuring costs, net 3.5 15.7 6.9
Equity-based compensation 8.3 13.6 12.9Transaction, transformation and integration costs 8.4 4.2
19.1
Patent claims and litigation settlements - - 55.0 Executive severance - 1.2 - Depreciation 15.2 17.0 17.5 Adjusted EBITDA$ 267.9 $ 278.5 $ 361.2
Venue and Campus Networks Segment
Year Ended December 31,
2021 2020 2019
(in millions)
Operating loss $ (55.6 ) $ (114.7 ) $ (186.7 )
Adjustments:
Amortization of purchased intangible assets 153.6 157.7 166.6
Restructuring costs, net 10.0 24.9 20.7
Equity-based compensation 25.4 34.9 28.3
Asset impairments - - 41.2Transaction, transformation and integration costs 13.8 6.7
58.3
Acquisition accounting adjustments 4.6 7.3
100.6
Patent claims and litigation settlements 0.3 13.7 - Executive severance - 1.7 - Depreciation 41.6 47.8 40.4 Adjusted EBITDA$ 193.7 $ 180.0 $ 269.3 60
--------------------------------------------------------------------------------
Home Networks Segment
Year Ended December 31,
2021 2020 2019
(in millions)
Operating loss $ (214.9 ) $ (275.4 ) $ (180.4 )
Adjustments:
Amortization of purchased intangible assets 103.9 103.9 103.9
Restructuring costs, net 8.6 30.0 23.2
Equity-based compensation 13.4 22.1 14.8
Asset impairments 13.7 206.7 192.8Transaction, transformation and integration costs 47.8 6.2
(2.3 )
Acquisition accounting adjustments 1.9 1.9 27.8
Patent claims and litigation settlements 28.5 (0.3 ) - Executive severance - 1.2 - Depreciation 22.7 35.1 30.7 Adjusted EBITDA$ 25.5 $ 131.3 $ 210.5
Note: Components may not sum to total due to rounding
Recent Accounting Pronouncements
See Note 2 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.
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 (aluminum, copper, steel, bimetals, optical fiber, plastics and other polymers, capacitors, memory devices and silicon chips) 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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