CommScope Holding Company, Inc. — Q2 2020 Form 10-Q
Filing identity: The supplied filing is for CommScope Holding Company, Inc. (NASDAQ: COMM), not Vistance Networks, Inc. It reports unaudited results for the quarter and six months ended June 30, 2020; the 2019 acquisition of ARRIS affects year-over-year comparability.
Business context and reporting period
CommScope provides wired and wireless communications-network infrastructure and related products and services. From January 1, 2020, it reported four segments: Broadband, Home, Outdoor Wireless Networks (OWN), and Venue and Campus Networks (VCN). Prior-period segment results were recast. The company completed its approximately $7.7 billion ARRIS acquisition in April 2019.
Financial results and liquidity
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Net sales | $2,102.8 million; down 18.1% year over year | $4,136.0 million; up 12.8% |
| Gross profit / margin | $656.1 million / 31.2% | $1,297.3 million / 31.4% |
| Operating loss | $194.8 million | $226.6 million |
| Adjusted EBITDA (non-GAAP) / margin | $279.8 million / 13.3%, down 29.3% | $511.0 million / 12.4%, down 15.4% |
| Net loss | $321.1 million; diluted loss per share $1.71 | $481.0 million; diluted loss per share $2.60 |
| Operating cash flow | Not presented separately for the quarter | $166.3 million, versus cash used of $261.6 million in 2019 |
Q2 sales declines were concentrated in Home (down $265.0 million), OWN (down $129.7 million) and VCN (down $71.6 million); Broadband was roughly flat. First-half sales growth reflects additional ARRIS ownership in 2020, while existing businesses faced declines. Q2 gross margin was 31.2%, but the comparable 2019 margin was 32.1% after excluding $164.1 million of prior-year acquisition accounting adjustments.
At June 30, cash and equivalents were $823.4 million, up from $598.2 million at year-end. Current assets were $3,747.8 million and current liabilities $2,141.4 million. Debt had a $10,126.0 million principal balance ($9,978.8 million including current portion, net of discounts and issuance costs); long-term debt was 88.3% of total capitalization. Revolver availability was $521.6 million. The company reported $1,027.7 million of Series A preferred stock, with a cumulative 5.5% annual dividend.
First-half investing cash use was $47.6 million, including $47.7 million of capital expenditures. Financing generated $128.6 million, including a $250.0 million revolver draw, partly offset by $116.0 million of debt repayments. Operating cash flow improvement reflected better receivables collections and lower acquisition-related cash costs, offset partly by higher interest and litigation payments.
Material changes versus the prior comparable period
- Q2 sales fell 18.1% and adjusted EBITDA fell 29.3%; all segments except Broadband reported lower Q2 sales. Management attributed weakness to lower demand, especially for video, wireless-network, enterprise and Wi-Fi products, and to COVID-19 effects.
- First-half sales rose 12.8% due substantially to ARRIS consolidation, but adjusted EBITDA fell 15.4% and net loss widened to $481.0 million from $336.3 million.
- A $206.7 million goodwill impairment fully eliminated the remaining goodwill in Home. The company cited accelerated video-device declines, streaming substitution and COVID-19-related macroeconomic impacts.
- Q2 transaction and integration costs declined substantially from the prior year, while restructuring continued. A $12.8 million first-half charge for intellectual-property claims and litigation also affected results.
Outlook, commentary, risks and unusual items
- Management expected the sales decline related to the economic slowdown to persist through 2020. It anticipated ongoing softness in Home, including continued video-product declines; COVID-19 was also expected to continue affecting OWN and VCN. Broadband demand benefited from network needs, and management did not expect COVID-19 to significantly affect that segment for the remainder of 2020.
- Management estimated COVID-related supply disruptions reduced revenue by $50 million in Q2 and $90 million in the first half, and reduced gross profit by $30 million and $45 million, respectively. It cautioned that the pandemic’s duration and impacts remained uncertain.
- Management said cash, operating cash flow and revolver availability were expected to meet anticipated needs and reported compliance with debt covenants at June 30. Nonetheless, substantial debt, interest costs, restrictive covenants and uncertain cash flows remain material considerations.
- Enterprise (VCN) and Network and Cloud (Broadband) reporting units were identified as potentially at risk of future goodwill impairment if sales or cash-flow projections are not achieved. Other risks include supply-chain and supplier concentration, customer spending, competition, technology changes, foreign exchange and unresolved intellectual-property claims.
- The company recorded a $39.8 million liability for certain intellectual-property assertions; a $19.0 million matter was settled in July, with payment due in the second half of 2020. Management said some other claim outcomes could not be reasonably estimated and an adverse outcome could be material.
- After quarter-end, the company issued $700 million of 7.125% senior unsecured notes due 2028 and used proceeds plus cash to retire all outstanding 2021 notes and 5.50% 2024 notes. It also repaid the $250 million revolver borrowing on July 8, 2020.
- ARRIS integration and restructuring costs were expected to continue and could be material. The company expected approximately $21.0 million of cash restructuring payments by year-end and $7.3 million in 2021–2022 for initiated actions; further ARRIS-related actions were anticipated.
Important facts for investors to verify
- Whether subsequent filings show that management’s 2020 sales expectations, especially for Home, OWN and VCN, were realized.
- Whether cash generation, revolver availability, covenant headroom and debt refinancing remain adequate given the company’s high leverage and interest burden.
- Whether further goodwill impairment, particularly in Enterprise or Network and Cloud, or additional restructuring charges are recorded.
- How the $39.8 million intellectual-property liability, the July settlement payment and other unresolved claims develop.
- How much of first-half sales growth reflects ARRIS consolidation versus underlying performance, and how adjusted EBITDA trends compare with GAAP results.