CommScope Holding Company, Inc., along with its direct and indirect subsidiaries (CommScope or the Company), is a global provider of infrastructure solutions for communication 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, 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 a broad array of services including technical support, systems design and integration. CommScope is a leader in digital video and Internet Protocol Television distribution systems, broadband access infrastructure platforms, and associated data and voice Customer Premises Equipment. 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 April 4, 2019, the Company completed the acquisition of ARRIS International plc (ARRIS) (the Acquisition) in an all-cash transaction with a total purchase price of approximately $7.7 billion, including debt assumed. The results of operations of ARRIS’ products and services are reflected in the new reporting segments of Customer Premises Equipment (CPE), Network and Cloud (N&C) and Ruckus Networks (Ruckus). The Company borrowed approximately $7.0 billion, issued $1.0 billion in Series A Convertible Preferred Stock (the Convertible Preferred Stock) and used cash on hand to fund the Acquisition and related costs. See Note 2 for additional discussion of the Acquisition, Note 7 for additional discussion of the debt financing transactions and Note 12 for additional discussion of the Convertible Preferred Stock.

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.

The Acquisition was accounted for using the acquisition method of accounting and the ARRIS results of operations are reported in the Company’s unaudited condensed consolidated financial statements from April 4, 2019, the date of acquisition, through June 30, 2019.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) 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, 2018 (the 2018 Annual Report).

Effective April 1, 2019, the Company made a voluntary change in accounting principle related to its classification of internal handling costs to prepare goods for shipment. Historically, the Company presented these handling costs within selling, general and administrative expense (SG&A). Under the new policy, the Company is presenting these expenses within cost of sales in the Condensed Consolidated Statements of Operations. The Company believes that this change is preferable as the classification in cost of sales better reflects the costs of generating the related revenue and results in more meaningful presentation of gross margin. Additionally, this presentation enhances the comparability of the Company’s financial statements with industry peers and provides more consistency in the treatment of all shipping and handling costs. The accounting policy change was applied retrospectively to all periods presented. There was no change to net income (loss), earnings (loss) per share, retained earnings (accumulated deficit) or cash flows; however, cost of sales increased by $14.2 million and $27.7 million and SG&A decreased by the same amounts for the three and six months ended June 30, 2018, respectively. The Company recorded handling costs as a component of cost of sales for the three and six months ended June 30, 2019. The Condensed Consolidated Statements of Operations was adjusted to reflect this change; however, there was no other impact on the condensed consolidated financial statements.

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 2018 Annual Report. Other than the enhancements described below to revenue recognition polices as a result of the Acquisition, the changes described below to lease policies as a result of the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases and the change in accounting principle related to the classification of internal handling costs described above, there were no material changes in the Company’s significant accounting policies during the three or six months ended June 30, 2019.

The Company recognizes revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. The Company’s revenue is generated from product or equipment sales; bundled sales arrangements inclusive of product, software and services; and custom design and installation 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:

For product 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 the Company’s 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.

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, and revenue is recognized on a relative standalone selling price basis upon transfer of control of each deliverable. To determine the standalone selling price, the Company first looks 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, the Company will make an estimate based on market conditions, customer specific factors and customer class. The Company may use a combination of approaches to estimate the standalone selling price.

For performance obligations recognized over time, judgment is required to evaluate assumptions, including the total estimated costs to determine progress towards completion of the performance obligation and to calculate the corresponding amount of revenue to recognize. If estimated total costs on any contract are greater than the net contract revenues, the entire estimated costs are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.

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.

Other customer contract types include a variety of post-contract support services offerings, including:

Revenue is measured based on the consideration the Company expects 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.

Unbilled receivables are recorded when revenues are recognized in advance of invoice issuance. A contract asset is any portion of unbilled receivables for which the right to consideration is conditional on a factor other than the passage of time, which is common for certain project contract performance obligations. These assets are presented on a combined basis with accounts receivable and are converted to accounts receivable once the Company’s right to the consideration becomes unconditional, which varies by contract but is generally based on achieving certain acceptance milestones. The Company recognizes 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.

The Company includes shipping and handling costs billed to customers in net sales and includes 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.

The Company determines if a contract is a lease or contains a lease at inception. Right of use assets related to operating type leases are reported in other noncurrent assets and the present value of remaining lease obligations is reported in accrued and other liabilities and other noncurrent liabilities on the Condensed Consolidated Balance Sheets. CommScope does not currently have any financing type leases.

Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The majority of the Company’s leases do not provide an implicit rate; therefore, the Company uses the incremental borrowing rates applicable to the economic environment and the duration of the lease, based on the information available at commencement date, in determining the present value of future payments. The right of use asset for operating leases is measured using the lease liability adjusted for the impact of lease payments made prior to commencement, lease incentives received, initial direct costs incurred and any asset impairments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company remeasures and reallocates the consideration in a lease when there is a modification of the lease that is not accounted for as a separate contract. The lease liability is remeasured when there is a change in the lease term or a change in the assessment of whether the Company will exercise a lease option. The Company assesses right of use assets for impairment in accordance with its long-lived asset impairment policy.

The Company accounts for lease agreements with contractually required lease and non-lease components on a combined basis. Lease payments made for cancellable leases, variable amounts that are not based on an observable index and lease agreements with an original duration of less than twelve months are recorded directly to lease expense.

No direct customer accounted for 10% or more of the Company’s total net sales during the three or six months ended June 30, 2019. No direct customer accounted for 10% or more of the Company’s accounts receivable as of June 30, 2019.

Net sales to Anixter International Inc. and its affiliates (Anixter) accounted for 11% of the Company’s total net sales during both the three and six months ended June 30, 2018. Net sales to KGP Companies (KGPCo) accounted for 10% of the Company’s net sales during the three months ended June 30, 2018. Other than Anixter and KGPCo, no direct customer accounted for 10% or more of the Company’s total net sales for the three or six months ended June 30, 2018.

As of June 30, 2019, funds affiliated with Carlyle Partners VII S1 Holdings, L.P. (Carlyle) owned 100% of the Convertible Preferred Stock, which is approximately 16% of the Company’s common stock on an if-converted basis.

The Company recognizes a liability for the estimated claims that may be paid under its customer warranty agreements to remedy potential deficiencies of quality or performance of the Company’s products. These product warranties extend over various periods, depending upon 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:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Product warranty accrual, beginning of period	$	14.1		$	16.2		$	15.6		$	16.9
Obligation assumed in ARRIS acquisition		57.4			—			57.4			—
Provision for warranty claims		6.5			0.4			6.0			1.9
Warranty claims paid		(11.5	)		(1.7	)		(12.4	)		(4.0	)
Foreign exchange		0.1			(0.1	)		—			—
Product warranty accrual, end of period	$	66.6		$	14.8		$	66.6		$	14.8

The Company is either a plaintiff or a defendant in certain pending legal matters in the normal course of business. The Company may also be called upon to indemnify certain customers for costs related to products or services sold to such customers. Management believes none of these legal matters, including the matter further described below, will have a material adverse effect on the Company’s business or financial condition upon final disposition.

The Company intervened as defendants in Fractus, S.A. (Fractus) v. CommScope Technologies LLC, T-Mobile U.S., Inc., T-Mobile USA, Inc., Verizon Communications, Inc. and Cello Partnership d/b/a Verizon Wireless, which is a consolidated patent infringement action brought by Fractus, in the United States (U.S.) District Court for the Eastern District of Texas (the Court) alleging that defendants infringed on Fractus’ patents on cellular base station antenna technologies. The Court has set the action for trial commencing on September 9, 2019. The Company believes that Fractus will not succeed on the merits of their claims and the Company intends to defend vigorously against them, and as such, the Company cannot reasonably estimate the amount of loss that could result from an unfavorable outcome in this matter. The outcome of this action is uncertain, but based on current information, the Company does not expect it to have a material adverse effect on its financial condition and results of operations.

In addition, 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 materially adverse effect on the Company’s financial condition or results of operations.

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. During the first quarter of 2019, the Company assessed goodwill for impairment due to a change in reporting units in the Connectivity segment. As a result, the Company performed impairment testing for goodwill under the Connectivity segment reporting unit structure immediately before the change and determined that no impairment existed. The Company reallocated goodwill to the new reporting units and performed impairment testing for goodwill immediately after the change and determined no impairment existed.

Since the closing of the Acquisition on April 4, 2019, the ARRIS reporting units (CPE, N&C and Ruckus) have continued to experience challenges that have impacted the Company’s performance. These challenges include declines in spending by cable operator customers that have resulted in recent declines in net sales and operating income for these reporting units and the loss of key leaders of these reporting units following the Acquisition. Certain of these challenges are expected to persist throughout the remainder of 2019 and will impact management’s ability to grow these businesses at the rate that was originally estimated when the Acquisition was closed. Based on these factors, during the second quarter of 2019, the Company determined that indicators of possible goodwill impairment existed for the reporting units from the recently acquired ARRIS business. The Company performed goodwill impairment testing and determined that no impairment existed. There were no goodwill impairments identified during the three and six months ended June 30, 2019 or 2018.

Property, plant and equipment and intangible assets with finite lives 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 carried at 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, there were no definite-lived intangible or other long-lived asset impairments identified during the three and six months ended June 30, 2019 or 2018.

For the three and six months ended June 30, 2019, the Company’s effective tax rate was 10.1% and 9.6%, respectively, and the Company recognized a tax benefit of $37.5 million on a net loss of $371.5 million and a tax benefit of $35.9 million on a net loss of $372.2 million, respectively. The Company’s tax benefit was unfavorably impacted by the impact of U.S. anti-deferral provisions and foreign withholding taxes but this impact was partially offset by the favorable impact of federal tax credits for the three and six months ended June 30, 2019. The impact of excess tax costs related to equity-based compensation awards was not material for the three or six months ended June 30, 2019.

The effective income tax rate of 36.0% and 33.2% for the three and six months ended June 30, 2018, respectively, was higher than the statutory rate of 21.0% primarily due to the effect of the provision for state income taxes, the impact of earnings in foreign jurisdictions that are taxed at rates higher than the U.S. statutory rate, the impact of U.S. anti-deferral provisions and the impact of repatriation taxes. These increases to the effective tax rate were partially offset by the favorable impact of $0.4 million and $4.7 million of excess tax benefits related to equity-based compensation awards for the three and six months ended June 30, 2018, respectively.

Basic earnings (loss) per share (EPS) is computed by dividing net income (loss), 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 is based on the basic EPS 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 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 six months ended June 30, 2019, 12.2 million shares and 8.9 million shares, respectively, of outstanding equity-based compensation awards were not included in the computation of diluted EPS because the effect was either antidilutive or the performance conditions were not met. Of those amounts, for the three and six months ended June 30, 2019, 2.2 million shares and 2.5 million shares, respectively, would have been considered dilutive if the Company had not been in a net loss position. For the three and six months ended June 30, 2018, 2.2 million and 1.7 million shares, respectively, were not included in the computation of diluted EPS because the effect was either antidilutive or the performance conditions were not met.

For the three and six months ended June 30, 2019, 34.8 million and 17.5 million, respectively, of as-if converted shares related to the Convertible Preferred Stock were excluded from the diluted share count because they were anti-dilutive, however, they would have been considered dilutive if the Company had not been in a net loss position.

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

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2019			2018		2019			2018
Numerator:
Net income (loss)	$	(334.0	)	$	65.9	$	(336.3	)	$	99.7
Dividends on Series A convertible preferred stock		(13.1	)		—		(13.1	)		—
Deemed dividends on Series A convertible preferred stock		(3.0	)		—		(3.0	)		—
Net income (loss) attributable to common stockholders	$	(350.1	)	$	65.9	$	(352.4	)	$	99.7

Denominator:
Weighted average common shares outstanding - basic		193.6			192.2		193.2			191.8
Dilutive effect of as-if converted Series A convertible preferred stock		—			—		—			—
Dilutive effect of equity-based awards		—			3.0		—			3.5
Weighted average common shares outstanding - diluted		193.6			195.2		193.2			195.3

Earnings (loss) per share:
Basic	$	(1.81	)	$	0.34	$	(1.82	)	$	0.52
Diluted	$	(1.81	)	$	0.34	$	(1.82	)	$	0.51

On January 1, 2019, the Company adopted ASU No. 2016-02, Leases, and all subsequently issued clarifying guidance. Under the new guidance, lessees are required to recognize assets and lease liabilities for the rights and obligations created by leased assets previously classified as operating leases. In July 2018, the FASB issued ASU No. 2018-11, which permitted entities to record the impact of adoption using a modified retrospective method with any cumulative-effect as an adjustment to retained earnings (accumulated deficit) as opposed to restating comparative periods for the effects of applying the new standard. The Company elected this transition approach; therefore, the Company’s prior period reported results are not restated to include the impact of this adoption. In addition, the Company elected the package of three transition practical expedients which alleviate the requirement to reassess embedded leases, lease classification and initial direct costs for leases commencing prior to the adoption date.

The adoption effect of the new guidance increased total assets and total liabilities in the Condensed Consolidated Balance Sheets by $98.8 million as of January 1, 2019 due to the addition of right-of-use assets and lease obligations for operating type leases, net of the elimination of existing prepaid rent, deferred rent and lease termination cost amounts. The adoption of the new standard did not materially affect the Condensed Consolidated Statements of Operations; and therefore, no cumulative effect adjustment was recorded. Adoption of the new standard also did not materially affect the Condensed Consolidated Statements of Cash Flows. See Note 5 for further discussion of the Company’s leasing activities.

On January 1, 2019, the Company adopted ASU No. 2017-04, Simplifying the Test of Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under the new guidance, the Company will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize a goodwill impairment charge for the excess of the reporting unit’s carrying amount over its fair value, up to the amount of goodwill allocated to that reporting unit. Adoption of the new standard did not materially affect the Company’s consolidated financial statements.

On January 1, 2019, the Company adopted ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement (CCA) that is a Service Contract. The new guidance aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Adoption of the new standard did not materially impact the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The new guidance replaces the current incurred loss method used for determining credit losses on financial assets, including trade receivables, with an expected credit loss method. ASU No. 2016-13 is effective for the Company as of January 1, 2020 and early adoption is permitted. The Company plans to adopt this guidance as of January 1, 2020 and is evaluating the impact of the new guidance on the consolidated financial statements.