COMMSCOPE HOLDING COMPANY, INC. The following narrative is an analysis of the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The discussion is provided to increase the understanding of, and should be read in conjunction with, the unaudited condensed consolidated financial statements and accompanying notes included in this report as well as the audited consolidated financial statements, related notes thereto and management's discussion and analysis of financial condition and results of operations, including management's discussion and analysis regarding the application of critical accounting policies and the risk factors in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (2021 Annual Report). We discuss certain financial measures in management's discussion and analysis of financial condition and results of operations, including adjusted EBITDA, that differ from measures calculated in accordance with generally accepted accounting principles (GAAP) inthe United States (U.S. ). See "Reconciliation of Non-GAAP Measures" included elsewhere in this quarterly report for more information about these non-GAAP financial measures, including our reasons for including the measures and material limitations with respect to the usefulness of the measures.
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 2021, we announced a transformation initiative called 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 incurred$12.1 million and$44.4 million of restructuring costs and$15.6 million and$15.7 million of transaction, transformation and integration costs during the three months endedMarch 31, 2022 and 2021, respectively, 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 to optimize our portfolio through CommScope NEXT, as ofJanuary 1, 2022 , we reorganized our internal management and reporting structure to align our portfolio of products and solutions more closely with the markets we serve and bring better performance clarity with our competitive peer set. The reorganization changed the information regularly reviewed by our chief operating decision maker for purposes of allocating resources and assessing performance. As a result, we are now reporting financial performance based on the following operating segments: Connectivity and Cable Solutions (CCS),Outdoor Wireless Networks (OWN), Networking, Intelligent Cellular and Security Solutions (NICS), Access Network Solutions (ANS) and Home Networks (Home). Prior to this change, we operated and reported four operating segments: Broadband Networks (Broadband), Outdoor Wireless Networks (OWN), Venue and Campus Networks (VCN) and Home Networks (Home). The Home segment was unchanged in this realignment. All prior period amounts have been recast to reflect these operating segment changes. Also as a step in our CommScope NEXT transformation plan, in 2021, we announced a plan to separate the Home Networks business via a spin-off transaction. Due to the impact of the uncertain supply chain environment on the Home Networks business, we have delayed our separation plan, but we continue to analyze the financial results of our "Core" business separately from Home. As such, below we refer to certain supplementary Core financial measures, which reflect the results of our CCS, OWN, NICS and ANS segments in the aggregate. See the Segment Results section below for the aggregation of our Core financial measures. 23 --------------------------------------------------------------------------------
Impacts of COVID-19 and Supply Chain Constraints
The impact of the COVID-19 pandemic and measures taken to contain its spread remain dynamic. We continue to monitor the situation, particularly the new lock-downs and restrictions in parts ofChina that have recently been imposed, and actively assess further implications for our business, supply chain and customer demand. In the second quarter of 2022, we reopened most of our offices across the globe, but we continue to take meaningful precautions in accordance with relevant guidelines to protect the health and safety of our employees. Variants continue to emerge, efforts to mitigate or contain the impacts of the pandemic continue to evolve and the duration and severity of the impact of the pandemic on our business and results of operations in future periods remain uncertain. As in many industries, we have seen the negative impacts of COVID-19 recede and a recovery in demand for our products over the past year, but this has created negative indirect consequences such as inflation, shortages in materials and components and increased logistics costs. Prices for certain commodities that we use such as aluminum, copper, steel, silicon, fluoropolymers and certain other polymers have experienced significant volatility as a result of changes in the levels of global demand, supply disruptions, including port, transportation and distribution delays or interruptions, and other factors. As a result, we have seen a significant increase in costs that has negatively impacted our results of operations. We are also experiencing limited supply of memory devices, capacitors and silicon chips, which has increased our costs and has impacted our ability to deliver on a timely basis due to extended lead times. We are trying to mitigate our increasing component and logistics costs by implementing higher prices on our products and services. We are also mitigating certain shortages by purchasing components in advance and maintaining higher levels of inventory or finding alternate vendors for some components. We believe the global supply chain challenges and their adverse impact on our business and financial results will persist, at least through the remainder of 2022, and may extend into periods thereafter. We expect these constrained supply conditions to increase our costs and impact our ability to deliver products to our customers in a timely manner.
For more discussion of the risks related to COVID-19 and the supply chain environment, see Part I, Item 1A, "Risk Factors" in our 2021 Annual Report.
24
--------------------------------------------------------------------------------CRITICAL ACCOUNTING POLICIES
There have been no changes in our critical accounting policies as disclosed in our 2021 Annual Report.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
Three Months Ended
March 31,
2022 2021
% of Net % of Net %
Amount Sales Amount Sales Change Change
(dollars in millions, except per share amounts)
Net sales $ 2,228.6 100.0 % $ 2,072.0 100.0 % $ 156.6 7.6 %
Core net sales (1) 1,732.9 77.8 1,571.0 75.8 161.9 10.3
Gross profit 636.3 28.6 672.2 32.4 (35.9 ) (5.3 )
Operating income 26.8 1.2 8.9 0.4 17.9 201.1
Core operating income (1) 40.6 2.3 40.4 2.6 0.2 0.5
Non-GAAP adjusted EBITDA (2) 253.3 11.4 289.7 14.0 (36.4 ) (12.6 )
Core adjusted EBITDA (1) 230.0 13.3 270.3 17.2 (40.3 ) (14.9 )
Net loss (139.9 ) (6.3 ) (97.6 ) (4.7 ) (42.3 ) 43.3
Diluted loss per share $ (0.75 ) $ (0.55 ) $ (0.20 ) 35.5
(1)
Core financial measures reflect the results of our CCS, OWN, NICS and ANS
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."
Net sales
Three Months Ended
March 31, %
2022 2021 Change Change
(dollars in millions)
Net sales $ 2,228.6 $ 2,072.0 $ 156.6 7.6 %
Domestic 1,347.1 1,191.9 155.2 13.0
International 881.5 880.1 1.4 0.2
Net sales for the three months ended March 31, 2022 increased $156.6 million , or
7.6%, compared to the prior year period primarily driven by higher pricing and
increased volume. Core net sales increased $161.9 million , or 10.3%, compared to
the prior year period with increases in the CCS segment of $161.1 million and
the OWN segment of $65.9 million , partially offset by decreases in the ANS
segment of $61.9 million and the NICS segment of $3.2 million . For the three
months ended March 31, 2022 , net sales in the Home segment decreased $5.3
million compared to the prior year period. We continued to experience supply
shortages and extended lead times for certain materials that negatively affected
our ability to meet customer demand for certain of our products during the three
months ended March 31, 2022 . We expect these shortages and delays to persist for
the remainder of 2022 and into 2023. For further details by segment, see the
discussion of Segment Results below.
From a regional perspective, for the three months ended March 31, 2022 compared
to the prior year period, net sales increased in the U.S. by $155.2 million ,
Canada by $32.5 million and the Europe , Middle East and Africa (EMEA) region by
$20.7 million . These increases in net sales were partially offset by decreases
in the Caribbean and Latin American (CALA) region of $29.8 million and the Asia
Pacific (APAC) region of $22.0 million . Net sales to customers located outside
of the U.S. comprised 39.6% of total net sales for the three months ended March
31, 2022 compared to 42.5% for the three months ended March 31, 2021 . Foreign
exchange rate changes impacted net sales unfavorably by approximately 1% for the
three months ended March 31, 2022 compared to the prior year period. For
additional information on regional sales by segment, see the discussion of
Segment Results below and Note 7 in the Notes to Unaudited Condensed
Consolidated Financial Statements included herein.
25
--------------------------------------------------------------------------------Gross profit, SG&A expense and R&D expense
Three Months Ended
March 31, %
2022 2021 Change Change
(dollars in millions)
Gross profit $ 636.3 $ 672.2 $ (35.9 ) (5.3 )%
As a percent of sales 28.6 % 32.4 %
SG&A expense 286.0 292.7 (6.7 ) (2.3 )
As a percent of sales 12.8 % 14.1 %
R&D expense 170.7 171.5 (0.8 ) (0.5 )
As a percent of sales 7.7 % 8.3 %
Gross profit (net sales less cost of sales)
Despite higher consolidated net sales, gross profit decreased for the three
months ended
Selling, general and administrative expense
For the three months endedMarch 31, 2022 , SG&A expense decreased by$6.7 million compared to the prior year period. The decrease was primarily due to cost savings initiatives, partially offset by higher bad debt expense of$9.4 million ,$5.4 million of which was driven by a reassessment of the collectability of our outstanding accounts receivable from Russian customers in light of the ongoingRussia /Ukraine conflict.
Research and development expense
Research and development (R&D) expense was relatively unchanged for the three months endedMarch 31, 2022 compared to the prior year period. 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
Three Months Ended
March 31, %
2022 2021 Change Change
(dollars in millions)
Amortization of purchased intangible
assets $ 140.7 $ 154.7 $ (14.0 ) (9.0 )%
Restructuring costs, net 12.1 44.4 (32.3 ) (72.7 )
Amortization of purchased intangible assets
For the three months ended
Restructuring costs, net
The net restructuring costs recorded during the three months endedMarch 31, 2022 and 2021 included$8.4 million and$33.3 million , respectively, related to CommScope NEXT and$3.7 million and$11.1 million , respectively, related to integrating the ARRIS business. From a cash perspective, we paid$7.8 million to settle restructuring liabilities during the three months endedMarch 31, 2022 and expect to pay an additional$37.3 million by the end of 2022 and$27.2 million during 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. We do not expect to identify significant additional restructuring actions related to the ARRIS integration. 26
--------------------------------------------------------------------------------
Other income, net
Three Months Ended
March 31, %
2022 2021 Change Change
(dollars in millions)
Foreign currency gain (loss) $ (0.2 ) $ 0.3 $ (0.5 ) (166.7 )%
Other income 0.2 0.7 (0.5 ) (71.4 )
Foreign currency gain (loss)
Foreign currency gain 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 change in foreign currency loss for the
three months ended March 31, 2022 was not significant compared to the prior year
period.
Other income, net
The change in other income, net for the three months ended
Interest expense, Interest income and Income taxes
Three Months Ended
March 31, %
2022 2021 Change Change
(dollars in millions)
Interest expense $ (136.5 ) $ (137.5 ) $ 1.0 (0.7 )%
Interest income 0.7 0.5 0.2 40.0Income tax (expense) benefit (30.9 ) 29.5 (60.4 ) (204.7 )
Interest expense and interest income
Interest expense was relatively unchanged for the three months endedMarch 31, 2022 compared to the prior year period. Our weighted average effective interest rate on outstanding borrowings, including the impact of the interest rate swap and the amortization of debt issuance costs and original issue discount, was 5.77% atMarch 31, 2022 , 5.74% atDecember 31, 2021 and 5.85% atMarch 31, 2021 .
Income tax (expense) benefit
For the three months endedMarch 31, 2022 , we recognized$30.9 million of income tax expense on a pretax loss of$109.0 million . Our tax expense was driven by the unfavorable impacts ofU.S. anti-deferral provisions and non-creditable withholding taxes. Our effective income tax rate was 23.2% for the three months endedMarch 31, 2021 . We recognized a tax benefit of$29.5 million on a pretax loss of$127.1 million . Our tax benefit was higher than the statutory rate and was impacted favorably by decreases in prior year uncertain tax positions and adjustments related to the finalization of prior year's tax returns, offset partially by the unfavorable impacts of earnings in foreign jurisdictions that are taxed at rates higher than theU.S. statutory rate, foreign withholding taxes andU.S. anti-deferral provisions. 27
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Segment Results
Three Months Ended
March 31,
2022 2021
% of Net % of Net %
Amount Sales Amount Sales Change Change
(dollars in millions)
Net sales by segment:
CCS $ 838.0 37.6 % $ 676.9 32.7 % $ 161.1 23.8 %
OWN 390.1 17.5 324.2 15.6 65.9 20.3
NICS 188.0 8.4 191.2 9.2 (3.2 ) (1.7 )
ANS 316.8 14.2 378.7 18.3 (61.9 ) (16.3 )
Core net sales (1) 1,732.9 77.8 1,571.0 75.8 161.9 10.3
Home 495.7 22.2 501.0 24.2 (5.3 ) (1.1 )
Consolidated net sales $ 2,228.6 100.0 % $ 2,072.0 100.0 % $ 156.6 7.6 %
Operating income (loss)
by segment:
CCS $ 37.3 4.5 % $ 26.1 3.9 % $ 11.2 42.9 %
OWN 52.9 13.6 50.8 15.7 2.1 4.1
NICS (43.0 ) (22.9 ) (60.4 ) (31.6 ) 17.4 (28.8 )
ANS (6.6 ) (2.1 ) 23.9 6.3 (30.5 ) (127.6 )
Core operating income
(1) 40.6 2.3 40.4 2.6 0.2 0.5
Home (13.8 ) (2.8 ) (31.5 ) (6.3 ) 17.7 (56.2 )
Consolidated operating
income $ 26.8 1.2 % $ 8.9 0.4 % $ 17.9 201.1 %
Adjusted EBITDA by
segment:
CCS $ 98.6 11.8 % $ 106.0 15.7 % $ (7.4 ) (7.0 ) %
OWN 71.0 18.2 73.7 22.7 (2.7 ) (3.7 )
NICS (13.8 ) (7.3 ) (17.4 ) (9.1 ) 3.6 (20.7 )
ANS 74.2 23.4 108.0 28.5 (33.8 ) (31.3 )
Core adjusted EBITDA
(1) 230.0 13.3 270.3 17.2 (40.3 ) (14.9 )
Home 23.3 4.7 19.4 3.9 3.9 20.1
Non-GAAP consolidated
adjusted
EBITDA (2) $ 253.3 11.4 % $ 289.7 14.0 % $ (36.4 ) (12.6 ) %
Note: Components may not sum to total due to rounding.
(1)
Core financial measures reflect the results of our CCS, OWN, NICS and ANS segments, in the aggregate. Core financial measures exclude the results of our Home segment. (2) See "Reconciliation of Non-GAAP Measures."
Connectivity and Cable Solutions Segment
Net sales for the CCS segment increased for the three months endedMarch 31, 2022 compared to the prior year period due to increased demand for our products and services as service providers continued to enhance their networks to keep pace with increasing broadband demand. CCS segment net sales also benefitted from pricing increases as well as additional production enabled by our capacity expansion. We continue to experience supply shortages with certain of our network cable products, which hindered our ability to meet customer demand for our CCS segment products during the three months endedMarch 31, 2022 , and these shortages could extend into the remainder of 2022. From a regional perspective, for the three months endedMarch 31, 2022 , net sales increased in theU.S. by$139.8 million , the EMEA region by$9.9 million , the CALA region by$7.8 million andCanada by$7.5 million but decreased in the APAC region by$3.9 million . Foreign exchange rate changes impacted CCS segment net sales unfavorably by approximately 1% during the three months endedMarch 31, 2022 compared to the prior year period. 28
-------------------------------------------------------------------------------- For the three months endedMarch 31, 2022 , CCS segment operating income and adjusted EBITDA both benefitted from pricing increases and higher sales volumes. However, these benefits were more than offset by higher material and freight costs and increases in SG&A and R&D costs. Compared to the prior year period, CCS segment operating income for the three months endedMarch 31, 2022 was favorably impacted by a$13.8 million reduction in restructuring expense and a$10.8 million reduction in amortization expense but was unfavorably impacted by a$4.9 million charge to establish an allowance against certain accounts receivable determined to be uncollectible as a result of theRussia /Ukraine conflict. Restructuring expense, amortization expense and the charge related to certain uncollectible accounts receivable resulting from theRussia /Ukraine conflict are not reflected in adjusted EBITDA. See "Reconciliation of Segment Adjusted EBITDA" below.
Outdoor Wireless Networks Segment
For the three months endedMarch 31, 2022 , OWN segment net sales increased compared to the prior year period primarily due to an increase in customer demand for both metro and macro cell solutions and favorable pricing impacts. From a regional perspective, for the three months endedMarch 31, 2022 , OWN segment net sales increased in theU.S. by$80.5 million and the EMEA region by$8.0 million but decreased in the APAC region by$13.9 million ,Canada by$6.3 million and the CALA region by$2.4 million compared to the prior year period. Foreign exchange rate changes impacted OWN segment net sales unfavorably by approximately 1% during the three months endedMarch 31, 2022 compared to the same prior year period. For the three months endedMarch 31, 2022 , OWN segment operating income and adjusted EBITDA both benefitted from increased sales volumes and favorable pricing impacts, but these benefits were more than offset by higher material and freight costs. Compared to the prior year period, OWN segment operating income for the three months endedMarch 31, 2022 was favorably impacted by a$3.6 million reduction in restructuring expense which is not reflected in adjusted EBITDA. See "Reconciliation of Segment Adjusted EBITDA" below.
Networking, Intelligent Cellular and Security Solutions Segment
For the three months endedMarch 31, 2022 , NICS segment net sales decreased slightly compared to the prior year period. Sales of our Ruckus products were unfavorably impacted by material shortages, but the decrease was partially offset by the favorable impacts of pricing. NICS segment net sales also benefitted from increased demand for our distributed antenna systems and small cell products. We believe the material shortages experienced by our Ruckus business could continue for the remainder of 2022 and into 2023. From a regional perspective, for the three months endedMarch 31, 2022 , net sales decreased inCanada by$4.5 million , theU.S. by$1.1 million and the CALA region by$1.1 million but increased in the EMEA region by$2.8 million and the APAC region by$0.7 million compared to the prior year period. Foreign exchange rate changes impacted NICS segment net sales unfavorably by approximately 1% during the three months endedMarch 31, 2022 compared to the prior year period. For the three months endedMarch 31, 2022 , NICS segment operating loss decreased and adjusted EBITDA increased compared to the prior year period primarily due to favorable pricing impacts on certain products, favorable product mix and lower selling expenses, partially offset by lower sales volumes, higher material costs and higher R&D costs. Compared to the prior year period, NICS segment operating loss was favorably impacted by a$7.6 million reduction in restructuring expense and a$2.5 million reduction in amortization expense which are not reflected in adjusted EBITDA. See "Reconciliation of Segment Adjusted EBITDA" below.
Access Network Solutions Segment
For the three months endedMarch 31, 2022 , net sales decreased in the ANS segment due to the negative impact of supply shortages resulting in delays on our ability to meet customer demand. These shortages could continue for the remainder of 2022. From a regional perspective, for the three months endedMarch 31, 2022 , net sales decreased in theU.S. by$57.5 million , the APAC region by$7.4 million and the CALA region by$6.0 million but increased in the EMEA region by$5.4 million andCanada by$3.6 million compared to the prior year period. Foreign exchange rate changes had no significant impact on ANS segment net sales during the three months endedMarch 31, 2022 compared to the prior year period. For the three months endedMarch 31, 2022 , ANS segment operating loss increased and adjusted EBITDA decreased compared to the prior year period primarily due to lower sales volumes and unfavorable geographic and product mix, partially offset by lower material and freight costs and lower SG&A and R&D costs. Compared to the prior year period, ANS segment operating loss was unfavorably impacted by a$3.8 million transformation cost related to the termination of a supply agreement as part of CommScope NEXT but was favorably impacted by a$2.2 million reduction in restructuring expense. Neither of these items is reflected in adjusted EBITDA. See "Reconciliation of Segment Adjusted EBITDA" below. 29 --------------------------------------------------------------------------------
Home Networks Segment
Net sales for the Home segment decreased slightly for the three months endedMarch 31, 2022 compared to the prior year period. While net sales of broadband solution products benefitted from favorable pricing impacts, these increases were more than offset by lower net sales volumes of our other Home products due to continued supply shortages, which delayed our ability to meet customer demand. Although we are working to secure components from key suppliers, we still expect to experience supply chain challenges through 2022 and into 2023. From a regional perspective, for the three months endedMarch 31, 2022 , net sales decreased in the CALA region by$29.8 million , theU.S. by$6.5 million and the EMEA region by$5.4 million but increased inCanada by$32.2 million and the APAC region by$2.5 million compared to the prior year period. Foreign exchange rate changes impacted Home segment net sales unfavorably by less than 1% during the three months endedMarch 31, 2022 compared to the prior year period. For the three months endedMarch 31, 2022 , Home segment operating loss decreased and adjusted EBITDA increased compared to the prior year period primarily due to favorable pricing impacts, benefits from cost savings initiatives, lower warranty costs and favorable product mix. These benefits were partially offset by higher component and freight costs and lower sales volumes. Compared to the prior year period, Home segment operating loss for the three months endedMarch 31, 2022 was favorably impacted by a reduction of$5.1 million in restructuring expense and a$3.4 million reduction in transaction, transformation and integration costs which are not reflected in adjusted EBITDA. See "Reconciliation of Segment Adjusted EBITDA" below.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes certain key measures of our liquidity and capital resources (in millions, except percentage data).
March 31, December 31,
2022 2021 Change % Change
(dollars in millions)
Cash and cash equivalents $ 314.7 $ 360.3 $ (45.6 ) (12.7 ) %
Working capital (1), excluding cash
and cash
equivalents and current portion of
long-term debt 1,138.8 1,068.9 69.9 6.5
Availability under revolving credit
facility 715.6 684.1 31.5 4.6
Long-term debt, including current
portion 9,508.3 9,510.5 (2.2 ) -
Total capitalization (2) 10,264.8 10,410.0 (145.2 ) (1.4 )
Long-term debt as a percentage of
total capitalization 92.6 % 91.4 %
(1) Working capital consisted of current assets of $3,643.4 million less current
liabilities of $2,221.9 million at March 31, 2022 . Working capital consisted of
current assets of $3,579.7 million less current liabilities of $2,182.5 million
at December 31, 2021 .
(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. We expect the interest payments on our senior secured term loan due in 2026 (2026 Term Loan) and our senior secured asset-based revolving credit facility (Revolving Credit Facility) to increase in 2022 as a result of theFederal Reserve's increase in interest rates inMarch 2022 and the expectation that they will continue to raise interest rates further in 2022. See Part II, Item 7A, "Quantitative and Qualitative Disclosure About Market Risk" in our 2021 Annual Report for further discussion of our interest rate risk. We believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our 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 our 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. 30 -------------------------------------------------------------------------------- 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 twelve months endedMarch 31, 2022 , our non-GAAP pro forma adjusted EBITDA, as measured pursuant to the indentures governing our notes, was$1,132.6 million , which included annualized savings expected from cost reduction initiatives ($52.0 million ) so that the impact of 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 atMarch 31, 2022 . Cash and cash equivalents decreased during the three months endedMarch 31, 2022 primarily driven by cash used for operating activities of$14.6 million , capital expenditures of$27.4 million and tax withholding payments for vested equity-based compensation awards of$10.6 million . As ofMarch 31, 2022 , approximately 71% 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 the three months endedMarch 31, 2022 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. Offsetting the increase in inventory was an increase in accounts payable mainly driven by higher inventory balances and a shift in payments timing. In the first quarter of 2022, we sold approximately$82 million of accounts receivable under customer-sponsored supplier financing agreements. Approximately$60 million of that amount impacted working capital, excluding cash and cash equivalents and the current portion of long-term debt, as ofMarch 31, 2022 . Under these agreements, we are able to sell certain 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 the three months ended
Cash Flow Overview
Three Months Ended
March 31, %
2022 2021 Change Change
(dollars in millions)
Net cash used in operating activities
(88.2 )%
Net cash used in investing activities (16.0 ) (25.4 ) 9.4 (37.0 )
Net cash used in financing activities (17.2 ) (42.7 ) 25.5 (59.7 )
Operating Activities
Three Months Ended
March 31,
2022 2021
(in millions)
Net loss $ (139.9 ) $ (97.6 )
Adjustments to reconcile net loss to net cash generated by
operating activities:
Depreciation and amortization 180.2 199.2
Equity-based compensation 16.5 23.5
Deferred income taxes 2.3 (53.4 )
Changes in assets and liabilities:
Accounts receivable (60.5 ) (164.2 )
Inventories (73.7 ) (10.7 )
Prepaid expenses and other assets 29.6 4.1
Accounts payable and other liabilities 23.5 (23.9 ) Other 7.4 (1.0 ) Net cash used in operating activities$ (14.6 )
During the three months endedMarch 31, 2022 , cash used for operating activities decreased compared to the prior year period primarily as a result of higher collections of accounts receivable and a shift in the timing of certain variable incentive compensation payments, partially offset by higher inventory costs. 31
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Investing Activities
Three Months Ended
March 31,
2022 2021
(in millions)
Additions to property, plant and equipment $ (27.4 ) $ (26.4 )
Proceeds from sale of property, plant and equipment - 1.0
Other 11.4 - Net cash used in investing activities$ (16.0 ) $
(25.4 )
During the three months endedMarch 31, 2022 , the decrease in cash used in investing activities compared to the prior year period was primarily driven by proceeds of$6.9 million on the sale of an equity method investment and a return of$4.5 million on equity method investments. Financing Activities Three Months Ended March 31, 2022 2021 (in millions) Long-term debt repaid$ (93.0 ) $ (8.0 ) Long-term debt proceeds 85.0 - Dividends paid on Series A convertible preferred stock - (14.3 ) Proceeds from the issuance of common shares under equity-based compensation plans 0.1
3.9
Tax withholding payments for vested equity-based compensation awards
(10.6 ) (24.3 )
Other 1.3 -
Net cash used in financing activities $ (17.2
)
During the three months ended
As ofMarch 31, 2022 , we had no outstanding borrowings under the Revolving Credit Facility and the remaining availability was$715.6 million , reflecting a borrowing base of$807.5 million reduced by$91.9 million of letters of credit issued under the Revolving Credit Facility. During the three months endedMarch 31, 2022 , we received proceeds of$0.1 million related to the exercise of stock options compared to$3.9 million in the prior year period. Also during the three months endedMarch 31, 2022 , 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$10.6 million compared to$24.3 million in the prior year period. 32
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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. 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. We also believe presenting these non-GAAP results for the twelve months endedMarch 31, 2022 provides an additional tool for assessing our recent performance. Such amounts are unaudited and are derived by subtracting the data for the three months endedMarch 31, 2021 from the data for the year endedDecember 31, 2021 and then adding the data for the three months endedMarch 31, 2022 . 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 Three Months Year Twelve Months Ended Ended Ended March 31, December 31, March 31, 2022 2021 2021 2022 (in millions) Net loss$ (139.9 ) $ (97.6 ) $ (462.6 ) $ (504.9 ) Income tax expense (benefit) 30.9 (29.5 ) (71.9 ) (11.5 ) Interest income (0.7 ) (0.5 ) (1.9 ) (2.1 ) Interest expense 136.5 137.5 561.2 560.2 Other (income) expense, net - (1.0 ) 23.8 24.8 Operating income$ 26.8 $ 8.9 $ 48.6 $ 66.5 Adjustments: Amortization of purchased intangible assets 140.7 154.7 613.0 599.0 Restructuring costs, net 12.1 44.4 91.9 59.6 Equity-based compensation 16.5 23.5 79.6 72.6 Asset impairments - - 13.7 13.7 Transaction, transformation and integration costs (1) 15.6 15.7 90.3 90.2 Acquisition accounting adjustments (2) 2.0 3.3 11.5 10.2 Patent claims and litigation settlements 1.2 1.5 31.7 31.4 Reserve for Russian accounts receivable 5.4 - - 5.4 Depreciation 33.0 37.7 136.7 132.0 Non-GAAP adjusted EBITDA$ 253.3 $ 289.7 $ 1,117.0 $ 1,080.6
Note: Components may not sum to total due to rounding.
(1)
In 2022, primarily reflects transformation costs related to CommScope NEXT and integration costs related to the ARRIS acquisition. In 2021, primarily reflects transaction costs related to the planned spin-off of the Home Networks business, transformation costs related to CommScope NEXT and integration costs related to the ARRIS acquisition.
(2)
In 2022 and 2021, reflects acquisition accounting adjustments related to reducing deferred revenue to its estimated fair value.
33
--------------------------------------------------------------------------------Reconciliation of Segment Adjusted EBITDA
Segment adjusted EBITDA is provided as a performance measure in Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements included herein. 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.
Connectivity and Cable Solutions Segment
Three Months Ended
March 31,
2022 2021
(in millions)
Operating income $ 37.3 $ 26.1
Adjustments:
Amortization of purchased intangible assets 29.4 40.2
Restructuring costs, net 2.9 16.7
Equity-based compensation 4.0 5.7
Transaction, transformation and integration costs 4.4 4.2
Patent claims and litigation settlements 1.6 -
Reserve for Russian accounts receivable 4.9 -
Depreciation 14.0 13.0
Adjusted EBITDA $ 98.6 $ 106.0 Outdoor Wireless Networks Segment
Three Months Ended
March 31,
2022 2021
(in millions)
Operating income $ 52.9 $ 50.8
Adjustments:
Amortization of purchased intangible assets 8.1 8.8
Restructuring costs, net 2.2 5.8
Equity-based compensation 1.9 2.5
Transaction, transformation and integration costs 1.8 1.9
Reserve for Russian accounts receivable 0.1 -
Depreciation 3.8 3.9
Adjusted EBITDA $ 71.0 $ 73.7 Networking Intelligent Cellular and Security Solutions Segment
Three Months Ended
March 31,
2022 2021
(in millions)
Operating loss $ (43.0 ) $ (60.4 )
Adjustments:
Amortization of purchased intangible assets 15.5 18.0
Restructuring costs, net 3.6 11.2
Equity-based compensation 3.6 5.1
Transaction, transformation and integration costs 1.2 1.4 Acquisition accounting adjustments
0.6 1.5
Patent claims and litigation settlements - 0.3
Reserve for Russian accounts receivable 0.4 -
Depreciation 4.4 5.5
Adjusted EBITDA $ (13.8 ) $ (17.4 )
34
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Access Network Solutions Segment
Three Months Ended
March 31,
2022 2021
(in millions)
Operating income (loss) $ (6.6 ) $ 23.9
Adjustments:
Amortization of purchased intangible assets 61.7 61.7
Restructuring costs, net 2.6 4.8
Equity-based compensation 4.2 6.3
Transaction, transformation and integration costs 5.5 2.2
Acquisition accounting adjustments 0.8 1.2
Depreciation 6.0 7.8
Adjusted EBITDA $ 74.2 $ 108.0
Home Networks Segment
Three Months Ended
March 31,
2022 2021
(in millions)
Operating loss $ (13.8 ) $ (31.5 )
Adjustments:
Amortization of purchased intangible assets 26.0 26.0
Restructuring costs, net 0.8 5.9
Equity-based compensation 2.9 3.9
Transaction, transformation and integration costs 2.6 6.0 Acquisition accounting adjustments
0.4 0.5
Patent claims and litigation settlements (0.4 ) 1.2
Depreciation 4.8 7.5
Adjusted EBITDA $ 23.3 $ 19.4 Note: Components may not sum to total due to rounding.
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--------------------------------------------------------------------------------FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q or any other oral or written statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These statements may discuss goals, intentions or expectations as to future plans, trends, events, results of operations or financial condition or otherwise, in each case, based on current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. These forward-looking statements are generally identified by their use of such terms and phrases as "intend," "goal," "estimate," "expect," "project," "projections," "plans," "potential," "anticipate," "should," "could," "designed to," "foreseeable future," "believe," "think," "scheduled," "outlook," "target," "guidance" and similar expressions, although not all forward-looking statements contain such terms. This list of indicative terms and phrases is not intended to be all-inclusive. These forward-looking statements are subject to various risks and uncertainties, many of which are outside our control, including, without limitation, risks related to the successful execution of CommScope NEXT; changes in cost and availability of key raw materials, components and commodities and the potential effect on customer pricing and timing of delivery of products to customers; risks associated with our dependence on a limited number of key suppliers for certain raw materials and components; potential difficulties in realigning global manufacturing capacity and capabilities among our global manufacturing facilities or those of our contract manufacturers that may affect our ability to meet customer demands for products; possible future restructuring actions; the risk that our manufacturing operations, including our contract manufacturers that we rely on, encounter capacity, production, quality, financial or other difficulties causing difficulty in meeting customer demands; substantial indebtedness and restrictive debt covenants; our ability to incur additional indebtedness; our ability to generate cash to service our indebtedness; the potential separation of the Home Networks business or any other potential separation, divestiture or discontinuance of a business or product line, including uncertainty regarding the timing of the separation, achieving the expected benefits and the potential disruption to the business; our ability to integrate and fully realize anticipated benefits from prior or future divestitures, acquisitions or equity investments; our dependence on customers' capital spending on data and communication systems; concentration of sales among a limited number of customers and channel partners; risks associated with our sales through channel partners; changes to the regulatory environment in which we and our customers operate; changes in technology; industry competition and the ability to retain customers through product innovation, introduction, and marketing; possible future impairment charges for fixed or intangible assets, including goodwill; our ability to attract and retain qualified key employees; labor unrest; product quality or performance issues, including those associated with our suppliers or contract manufacturers, and associated warranty claims; our ability to maintain effective management information technology systems and to successfully implement major systems initiatives; cyber-security incidents, including data security breaches, ransomware or computer viruses; the use of open standards; the long-term impact of climate change; significant international operations exposing us to economic risks like variability in foreign exchange rates and inflation as well as political and other risks, including the impact of wars, regional conflicts and terrorism; the potential impact of higher than normal inflation; our ability to comply with governmental anti-corruption laws and regulations and export and import controls and sanctions worldwide; our ability to compete in international markets due to export and import controls to which we may be subject; changes in the laws and policies inthe United States affecting trade, including the risk and uncertainty related to tariffs or potential trade wars and potential changes to laws and policies, that may impact our products; cost of protecting or defending intellectual property; costs and challenges of compliance with domestic and foreign environmental laws; the impact of litigation and similar regulatory proceedings that we are involved in or may become involved in, including the costs of such litigation; the scope, duration and impact of disease outbreaks and pandemics, such as COVID-19, on our business including employees, sites, operations, customers, supply chain and the global economy; income tax rate variability and ability to recover amounts recorded as deferred tax assets; and other factors beyond our control. These and other factors are discussed in greater detail in our 2021 Annual Report, and may be updated from time to time in our annual reports, quarterly reports, current reports and other filings we make with theSecurities and Exchange Commission . Although the information contained in this Quarterly Report on Form 10-Q represents our best judgment as of the date of this report based on information currently available and reasonable assumptions, we can give no assurance that the expectations will be attained or that any deviation will not be material. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date made. We are not undertaking any duty or obligation to update this information to reflect developments or information obtained after the date of this report, except as otherwise may be required by law.
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