Background and Basis of Presentation

9 Months Ended

Sep. 30, 2024

Accounting Policies [Abstract]

Background and Basis of Presentation

1. BACKGROUND AND BASIS OF PRESENTATION

Background

CommScope Holding Company, Inc., along with its direct and indirect subsidiaries (CommScope or the Company), is a global provider of infrastructure solutions for communication, data center and entertainment networks. The Company’s solutions for wired and wireless networks enable service providers, including cable, telephone and digital broadcast satellite operators and media programmers, to deliver media, voice, Internet Protocol (IP) data services and Wi-Fi to their subscribers and allow enterprises to experience constant wireless and wired connectivity across complex and varied networking environments. The Company’s solutions are complemented by services including technical support, systems design and integration. CommScope is a leader in digital video and IP television distribution systems, broadband access infrastructure platforms and equipment that delivers data and voice networks to homes. CommScope’s global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale.

On July 18, 2024, the Company entered into a definitive agreement with Amphenol Corporation, a Delaware corporation (Amphenol), pursuant to which Amphenol has agreed to acquire the Company’s Outdoor Wireless Networks (OWN) segment and the Distributed Antenna Systems (DAS) business unit of its Networking, Intelligent Cellular & Security Solutions (NICS) segment in exchange for approximately $2.1 billion in cash, to be paid by Amphenol upon closing. The sale is expected to close within the first quarter of 2025, subject to customary closing conditions, including receipt of applicable regulatory approvals. The Company determined the anticipated sale of the OWN segment and DAS business unit met the “held for sale” criteria and the “discontinued operations” criteria in accordance with Accounting Standards Codification (ASC) No. 360-10, Impairment and Disposal of Long–Lived Assets, and ASC No. 205-20, Presentation of Financial Statements: Discontinued Operations, in the third quarter of 2024 due to its relative size and strategic rationale. For all periods presented, amounts in these consolidated financial statements have been recast to reflect the discontinuation of the OWN segment and DAS business unit in accordance with guidance.

The Company completed the acquisition of certain assets of Casa Systems, Inc. and its subsidiaries (Casa) on June 7, 2024 (the Casa Transaction). As part of the Casa Transaction, the Company acquired certain assets (the Casa Assets) and assumed certain specified liabilities (the Casa Liabilities) of Casa. The sale was conducted pursuant to the bid procedures (the Bid Procedures) established in the chapter 11 cases of Casa Systems, Inc. and certain affiliates in the United States (U.S.) Bankruptcy Court for the District of Delaware (the Bankruptcy Court). Pursuant to the Bid Procedures, the Company was designated as the successful bidder following an auction held on May 29, 2024. On June 5, 2024, the Bankruptcy Court entered an order authorizing the sale of the Casa Assets to the Company pursuant to section 363 of the U.S. Bankruptcy Code (subject to the terms thereof). The sale closed on June 7, 2024 and, at such time, the Company funded the purchase price of $45.1 million and settled certain assumed Casa Liabilities, with cash on hand. The Company plans to integrate this strategic acquisition into its Access Network Solutions (ANS) segment and expects the acquisition to strengthen its ANS segment’s position by enhancing its virtual cable modem termination systems ( CMTS) and passive optical network (PON) product offerings, which will enable customers to migrate to distributed access architecture (DAA) solutions at their own speed, and further grow its customer base. See Note 2 for additional discussion of the Casa Transaction.

On January 9, 2024, the Company completed the sale of its Home Networks (Home) segment and substantially all of the associated segment assets and liabilities (Home business) to Vantiva SA (Vantiva) pursuant to the Call Option Agreement entered into on October 2, 2023 and Purchase Agreement dated as of December 7, 2023. In the fourth quarter of 2023, the Company determined the sale of the Home business met the “held for sale” criteria and the “discontinued operations” criteria in accordance with accounting guidance. All prior period amounts in these condensed consolidated financial statements have been recast to reflect the discontinuation of the Home business.

The discussions in these condensed consolidated financial statements relate solely to the Company’s continuing operations, unless otherwise noted. As a result, the Company is reporting financial performance based on the following remaining three operating segments, which excludes the OWN segment, DAS business unit in NICS and Home business: Connectivity and Cable Solutions (CCS), NICS (excluding DAS) and ANS. See Note 3 for further discussion of the discontinued operations related to the OWN segment, DAS business unit and Home business.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The results of operations for these interim periods are not necessarily indicative of the results of operations to be expected for any future period or the full fiscal year. Certain prior year amounts have been reclassified to conform to the current year presentation.

As of January 1, 2024, management shifted certain product lines from the Company’s CCS segment to its ANS segment to better align with how the businesses are managed. All prior period amounts in these condensed consolidated financial statements have been recast to reflect these operating segment changes.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the U.S. for interim financial information and are presented in accordance with the applicable requirements of Regulation S-X. Accordingly, these financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the 2023 Annual Report). The significant accounting policies followed by the Company are set forth in Note 2 within the Company’s audited consolidated financial statements included in the 2023 Annual Report. There were no material changes in the Company’s significant accounting policies during the three or nine months ended September 30, 2024.

Liquidity

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of September 30, 2024, the Company has $1.27 billion outstanding on its 6.00% senior unsecured notes that mature on June 15, 2025 (the 2025 Notes), which is less than a year from the date that these condensed consolidated financial statements are issued for the quarter ended September 30, 2024. The Company does not currently have sufficient cash or liquidity to repay the 2025 Notes when they mature on June 15, 2025.

Proceeds of approximately $2.1 billion from the pending sale of the Company’s OWN segment and DAS business unit may be used under certain circumstances to retire the 2025 Notes due to the flexibility under the Company’s debt documents. The Company believes this is probable of occurring and will alleviate substantial doubt about the Company’s ability to operate as a going concern.

Concurrently, the Company is negotiating with creditors to explore both restructuring and/or refinancing of the 2025 Notes. No commitments have been obtained regarding this alternative as of the filing date, although it remains part of the Company’s plans to mitigate conditions that give rise to substantial doubt about the Company’s ability to operate as a going concern.

Management has assessed its plan to mitigate the conditions that give rise to substantial doubt and, considering the pending sale of the Company’s OWN segment and DAS business unit, management believes such plan is probable and will alleviate substantial doubt about the Company’s ability to operate as a going concern.

Concentrations of Risk and Related Party Transactions

No direct customer accounted for 10% or more of the Company’s total net sales during the three or nine months ended September 30, 2024. Net sales to Charter Communications, Inc. (Charter) accounted for 13% of the Company’s total net sales during the three months ended September 2023. During the nine months ended September 30, 2023, Comcast Corporation and affiliates (Comcast) and Charter each accounted for 11% of the Company’s total net sales. Accounts receivable from Comcast and Anixter International Inc. and its affiliates (Anixter) represented approximately 11% and 10%, respectively, of accounts receivable as of September 30, 2024. Other than Comcast and Anixter, no direct customer accounted for 10% or more of the Company’s accounts receivable.

The Company relies on sole suppliers or a limited group of suppliers for certain key components, subassemblies and modules and a limited group of contract manufacturers to manufacture a significant portion of its products. Any disruption or termination of these arrangements could have a material adverse impact on the Company’s results of operations.

As of September 30, 2024, funds affiliated with Carlyle Partners VII S1 Holdings, L.P. (Carlyle) owned 100% of the Company's Series A convertible preferred stock (the Convertible Preferred Stock), which was sold to Carlyle to fund a portion of the acquisition of ARRIS International plc (ARRIS) in 2019. See Note 11 for further discussion of the Convertible Preferred Stock. Other than transactions related to the Convertible Preferred Stock and the Company’s continuing involvement with Vantiva discussed in Note 3, there were no material related party transactions for the three or nine months ended September 30, 2024.

Commitments and Contingencies

Product Warranties

The Company recognizes a liability for the estimated claims that may be paid under its customer assurance-type warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products. These product warranties extend over various periods, depending on the product subject to the warranty and the terms of the individual agreements. The Company records a provision for estimated future warranty claims as cost of sales based upon the historical relationship of warranty claims to sales and specifically identified warranty issues. The Company bases its estimates on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when events or changes in circumstances indicate that revisions may be necessary. Such revisions may be material.

The following table summarizes the activity in the product warranty accrual, included in accrued and other liabilities and other noncurrent liabilities on the Condensed Consolidated Balance Sheets:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2024			2023			2024			2023
Product warranty accrual, beginning of period	$	19.7		$	29.5		$	20.6		$	28.3
Provision for warranty claims		5.6			0.7			14.3			9.6
Warranty claims paid		(4.7	)		(3.9	)		(14.3	)		(11.7	)
Foreign exchange		—			(0.1	)		—			—
Product warranty accrual, end of period	$	20.6		$	26.2		$	20.6		$	26.2

Non-cancellable Purchase Obligations

In the third quarter of 2023, the Company entered into a long-term supply contract with a third-party to secure the supply of certain raw materials. Under the terms of the contract, the Company will make advance payments through 2026 totaling $120.0 million (undiscounted), and such advance payments will be credited and applied to future orders on a quarterly basis beginning in 2027 through 2031 based on the ability to meet certain minimum purchase requirements. Advance payments of $45.0 million and $30.0 million are capitalized as other noncurrent assets in the Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023, respectively. Under this agreement, the Company committed to purchases of raw materials that began in 2023, growing to a level of approximately $137 million per year by 2026 and continuing through 2032.

Legal Proceedings

The Company is party to certain intellectual property claims and also periodically receives notices asserting that its products infringe on another party’s patents and other intellectual property rights. These claims and assertions, whether against the Company directly or against its customers, could require the Company to pay damages or royalties, stop offering the relevant products and/or cease other activities. The Company may also be called upon to indemnify certain customers for costs related to products sold to such customers. The outcome of these claims and notices is uncertain, and a reasonable estimate of the loss from unfavorable outcomes in certain of these matters either cannot be determined or is estimated at the minimum amount of a range of estimates. The actual loss, through settlement or trial, could be material and may vary significantly from the Company’s estimates. From time to time, the Company may also be involved as a plaintiff in certain intellectual property claims. Gain contingencies, if any, are recognized when they are realized.

The Company is also either a plaintiff or a defendant in certain other pending legal matters in the normal course of business. Management believes none of these other pending legal matters will have a material adverse effect on the Company’s business or financial condition upon final disposition.

The Company is subject to various federal, state, local and foreign laws and regulations governing the use, discharge, disposal and remediation of hazardous materials. Compliance with current laws and regulations has not had, and is not expected to have, a material adverse effect on the Company’s financial condition or results of operations.

Asset Impairments

Goodwill

Goodwill is tested for impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of the reporting unit may exceed its fair value. As of January 1, 2024, the Company assessed goodwill for impairment due to a change in the composition of reporting units as a result of the new segment structure and certain other intrasegment realignments. The Company performed impairment testing immediately before and after the change and determined that no goodwill impairment existed. As of the most recent impairment test on January 1, 2024, the implied fair value of the Enterprise and ANS reporting units exceeded its respective carrying amount by 8% and 7%, respectively. There were no goodwill impairments identified during the three or nine months ended September 30, 2024. See Note 4 for further discussion.

During the third quarter of 2023, the Company concluded that a triggering event occurred, primarily due to a sustained decrease in the market value of the Company’s debt and common stock affecting the overall business and changes in expected future cash flows due to reduced earnings forecasts and current macroeconomic conditions, including a rising interest rate environment. The Company performed an interim quantitative goodwill impairment test as of September 30, 2023 for its ANS and Building and Data Center Connectivity (BDCC) reporting units, which were most sensitive to negative performance and outlook, to compare the fair values of the reporting units to their carrying amounts, including the goodwill. As a result, for the three and nine months ended September 30, 2023, the Company recorded a goodwill impairment charge of $425.9 million in asset impairments in the Condensed Consolidated Statements of Operations to partially write down the carrying amount of the ANS reporting unit goodwill. As of September 30, 2023, there was no impairment identified in the BDCC reporting unit within the CCS reportable segment. See Note 4 for further discussion.

Subsequently, the Company’s ANS and BDCC reporting units failed the annual goodwill impairment test, and partial impairments were recorded as of October 1, 2023.

As a result of the new segment structure and certain other intrasegment realignments, as of January 1, 2024, the BDCC and Network Cable and Connectivity (NCC) reporting units are being referred to as Enterprise and Broadband, respectively, which are both in the CCS reportable segment.

Considering the low headroom going forward for each of the ANS and Enterprise reporting units, there is a risk for future impairment in the event of declines in general economic, market or business conditions or any significant unfavorable change in the forecasted cash flows, weighted average cost of capital or growth rates. If current and long-term projections for the ANS and Enterprise reporting units are not realized or decrease materially, the Company may be required to recognize additional goodwill impairment charges, and these charges could be material to the Company’s results of operations.

Long-lived Assets

Long-lived assets, which include property, plant and equipment, intangible assets with finite lives and right of use assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable, based on the undiscounted cash flows expected to be derived from the use and ultimate disposition of the assets. Assets identified as impaired are adjusted to estimated fair value. Equity investments without readily determinable fair values are evaluated each reporting period for impairment based on a qualitative assessment and are then measured at fair value if an impairment is determined to exist. Other than certain assets impaired as a result of restructuring actions and as part of discontinued operations, there were no definite-lived intangible or other long-lived asset impairments identified during the three or nine months ended September 30, 2024 or 2023.

Income Taxes

For the three and nine months ended September 30, 2024, the Company recognized income tax expense of $26.7 million on a pretax loss of $70.0 million and income tax expense of $41.2 million on a pretax loss of $356.7 million, respectively. The Company’s income taxes for the three and nine months ended September 30, 2024, were unfavorably impacted by $35.9 million and $103.7 million, respectively, of additional valuation allowance related to current year federal and state interest limitation carryforwards and U.S. anti-deferral provisions, partially offset by tax benefits related to federal tax credits. For the three and nine months ended September 30, 2024, the Company used a discrete calculation to compute the net tax benefit associated with external interest. Using the estimated annual tax rate for this component of income would have produced significant variability in the estimated annual effective tax rate, and use of the discrete method for this component results in the best estimate of the estimated annual effective tax rate.

For the three and nine months ended September 30, 2023, the Company recognized an income tax benefit of $34.5 million on a pretax loss of $568.3 million and an income tax benefit of $74.4 million on a pretax loss of $756.3 million, respectively. The Company’s tax benefit for the three and nine months ended September 30, 2023, was unfavorably impacted by a goodwill impairment charge of $425.9 million for which minimal tax benefits were recorded. The Company’s tax benefit was favorably impacted by $4.1 million related to tax law changes for the three and nine months ended September 30, 2023. In addition to the unfavorable impact of the goodwill impairment charge mentioned above, for the nine months ended September 30, 2023, the Company’s tax benefit was also unfavorably impacted by excess tax costs of $7.1 million related to equity compensation awards but favorably impacted by $9.6 million related to the release of various uncertain tax positions.

Earnings (Loss) Per Share

Basic earnings (loss) per share (EPS) from continuing operations is computed by dividing income (loss) from continuing operations, less any dividends and deemed dividends related to the Convertible Preferred Stock, by the weighted average number of common shares outstanding during the period. The numerator in diluted EPS from continuing operations is based on the basic EPS from continuing operations numerator, adjusted to add back any dividends and deemed dividends related to the Convertible Preferred Stock, subject to antidilution requirements. The denominator used in diluted EPS from continuing operations is based on the basic EPS computation plus the effect of potentially dilutive common shares related to the Convertible Preferred Stock and equity-based compensation plans, subject to antidilution requirements.

Basic EPS from discontinued operations is computed by dividing income (loss) from discontinued operations, net of income taxes by the weighted average number of common shares outstanding during the period. The numerator in diluted EPS from discontinued operations is the same as the basic EPS from discontinued operations numerator. The denominator used in diluted EPS from discontinued operations is based on the basic EPS computation plus the effect of potentially dilutive common shares related to the Convertible Preferred Stock and equity-based compensation plans, subject to antidilution requirements.

For the three and nine months ended September 30, 2024, 18.7 million and 18.6 million shares, respectively, of outstanding equity-based compensation awards were not included in the computation of diluted EPS because the effect was antidilutive or the performance conditions were not met. Of those amounts, for the three and nine months ended September 30, 2024, 7.0 million and 3.4 million shares, respectively, would have been considered dilutive if the Company had not been in a loss from continuing operations position. For the three and nine months ended September 30, 2023, 18.9 million and 17.2 million shares, respectively, of outstanding equity-based compensation awards were not included in the computation of diluted EPS because the effect was antidilutive or the performance conditions were not met. Of those amounts, for the three and nine months ended September 30, 2023, 0.6 million and 2.0 million shares, respectively, would have been considered dilutive if the Company had not been in a loss from continuing operations position.

For the three and nine months ended September 30, 2024, 43.4 million and 42.8 million, respectively, of as-if converted shares related to the Convertible Preferred Stock were excluded from the diluted share count because they were antidilutive. For the three and nine months ended September 30, 2023, 41.1 million and 40.6 million, respectively, of as-if converted shares related to the Convertible Preferred Stock were excluded from the diluted share count because they were antidilutive; however, they may have been considered dilutive if the Company had not been in a loss from continuing operations position.

The following table presents the basis for the EPS computations (in millions, except per share data):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2024			2023			2024			2023
Numerator:
Loss from continuing operations	$	(96.7	)	$	(533.8	)	$	(397.9	)	$	(681.9	)
Income (loss) from discontinued operations, net of tax		63.7			(294.9	)		50.1			(243.8	)
Net loss	$	(33.0	)	$	(828.7	)	$	(347.8	)	$	(925.7	)
Dividends on Series A convertible preferred stock		(16.4	)		(15.5	)		(48.6	)		(45.9	)
Net loss attributable to common stockholders	$	(49.4	)	$	(844.2	)	$	(396.4	)	$	(971.6	)
Denominator:
Weighted average common shares outstanding – basic		215.9			211.9			213.9			210.4
Dilutive effect of as-if converted Series A convertible preferred stock		—			—			—			—
Dilutive effect of equity-based awards		—			—			—			—
Weighted average common shares outstanding – diluted		215.9			211.9			213.9			210.4
Basic:
Loss from continuing operations per share	$	(0.52	)	$	(2.59	)	$	(2.09	)	$	(3.46	)
Earnings (loss) from discontinued operations per share		0.29			(1.39	)		0.24			(1.16	)
Loss per share	$	(0.23	)	$	(3.98	)	$	(1.85	)	$	(4.62	)
Diluted:
Loss from continuing operations per share	$	(0.52	)	$	(2.59	)	$	(2.09	)	$	(3.46	)
Earnings (loss) from discontinued operations per share		0.29			(1.39	)		0.24			(1.16	)
Loss per share	$	(0.23	)	$	(3.98	)	$	(1.85	)	$	(4.62	)

Recent Accounting Pronouncements

Adopted During the Nine Months Ended September 30, 2024

On January 1, 2024, the Company adopted the rollforward disclosure requirement of Accounting Standards Update (ASU) No. 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The new guidance improves the transparency of supplier finance programs by requiring that a buyer in a supplier finance program disclose sufficient qualitative and quantitative information about the program to allow a user of its financial statements to understand the program’s nature, activity during the period, changes from period to period and potential effect on an entity’s financial statements. The requirement to disclose rollforward information was effective prospectively for the Company as of January 1, 2024. The impact of adopting this new guidance was not material to the condensed consolidated financial statements and related disclosures.

Issued but Not Adopted

In December 2023, the Financial Accounting Standards Board (FASB) issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The new guidance is expected to improve income tax disclosures by requiring additional information related to the rate reconciliation and income taxes paid, including 1) consistent categories and greater disaggregation of information in the rate reconciliation and 2) disaggregation of income taxes paid by jurisdiction. The guidance is effective for the Company on a prospective basis, although retrospective application is permitted, as of January 1, 2025 for the annual period. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on the condensed consolidated financial statements.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The new guidance is expected to improve reportable segment disclosure requirements primarily through enhanced disclosures for significant segment expenses. The guidance is effective for the Company on a retrospective basis as of January 1, 2024 for the annual period and January 1, 2025 for the interim periods. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on the condensed consolidated financial statements.