CommScope Holding Company, Inc. — 2019 Form 10-K
Entity note: Request metadata names Vistance Networks, Inc., but the supplied filing is for CommScope Holding Company, Inc. (Nasdaq: COMM). The filing covers the fiscal year ended December 31, 2019; it is not a fourth-quarter-only report.
Business context and reporting period
CommScope supplies wired and wireless communications-network infrastructure, equipment and services. On April 4, 2019, it acquired ARRIS in a transaction valued at approximately $7.7 billion, including debt assumed. ARRIS results are consolidated from the acquisition date, so year-over-year revenue comparisons are substantially affected by the acquisition. The company reported five segments in 2019 and announced a four-segment realignment effective January 2020.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $8.345 billion | $4.569 billion |
| Gross profit / margin | $2.404 billion / 28.8% | $1.633 billion / 35.8% |
| Operating income (loss) | $(508.5) million | $450.0 million |
| Net income (loss) | $(929.5) million | $140.2 million |
| Diluted earnings (loss) per share | $(5.02) | $0.72 |
| Cash from operating activities | $596.4 million | $494.1 million |
| Capital expenditures | $104.1 million | $82.3 million |
2019 included $376.1 million of goodwill impairment, $264.2 million of acquisition-accounting adjustments, and $195.3 million of transaction and integration costs. Non-GAAP adjusted EBITDA was $1.298 billion (15.5% of sales), versus $913.6 million (20.0%) in 2018; these non-GAAP measures exclude significant items and should not be treated as GAAP results. ARRIS contributed $4.0 billion of reported sales and an operating loss of $863.6 million from its acquisition date through year-end.
Cash and cash equivalents were $598.2 million at year-end. Working capital was $1.470 billion. Debt principal was $9.992 billion, with $9.832 billion reported as long-term debt including current maturities; the company also had $1.0 billion of Series A convertible preferred stock. Revolving-credit availability was $796.8 million, with no borrowings outstanding. Debt represented 84.3% of total capitalization. Weighted average effective borrowing cost was 6.13%.
Fourth-quarter 2019 sales were $2.299 billion, gross profit was $736.2 million, and net loss was $436.7 million. The quarter included the $376.1 million goodwill impairment charge.
Material changes versus the prior comparable period
- Reported sales rose 82.7%, principally because ARRIS was consolidated for part of 2019. Excluding ARRIS, CommScope said legacy sales declined; lower volumes accounted for about half of the decline, pricing pressure about 35%, and foreign exchange and other factors the remainder.
- Gross margin fell to 28.8% from 35.8%. Excluding the $264.2 million acquisition-accounting adjustments, 2019 gross margin was 32.0%; the filing also reports 34.8% for legacy CommScope excluding ARRIS.
- Net interest expense increased to $559.1 million from $235.0 million, reflecting acquisition financing. Cash interest paid was $465.2 million, compared with $231.3 million.
- Operating cash flow increased by $102.3 million, but remained affected by acquisition-related interest, integration costs and restructuring payments. Investing cash outflow was $5.155 billion, primarily reflecting the acquisition.
- Connectivity sales declined 9.1% to $2.557 billion; Mobility sales were essentially flat at $1.754 billion. Post-acquisition reported sales were $2.539 billion for CPE, $1.074 billion for Network & Cloud, and $420.9 million for Ruckus. These segment figures are not directly comparable with 2018, when those segments were not included in CommScope’s reported results.
Outlook, commentary, risks and unusual items
- Management cited network convergence, fiber deployment, 5G, IoT, Wi-Fi 6, cloud and data-center demand as market opportunities. It provided no specific 2020 revenue or earnings guidance in the supplied filing text.
- Management said it was on track for at least $75 million of ARRIS cost synergies in the first year after closing and expected to exceed $150 million in annual run-rate savings before the third anniversary. Further integration and restructuring costs were expected and could be material.
- The company identified substantial leverage and debt-service demands, variable-rate exposure and covenant restrictions. It reported compliance with debt covenants at December 31, 2019. A 1% increase in the relevant interest-rate index was estimated to raise projected interest payments on variable-rate debt by approximately $30–34 million annually, depending on period.
- Goodwill and identifiable intangible assets represented approximately 67% of total assets. The CPE, Network & Cloud and Ruckus reporting units incurred impairment charges; DCCS had less than 10% fair-value headroom, and further impairment was a risk if forecasts or market conditions weakened.
- Other material risks include customer and channel concentration (Comcast represented 11% of actual 2019 sales; pro forma top two direct customers represented about 21%), cyclical customer network spending, competition and pricing, component supply constraints, tariffs, foreign exchange, cybersecurity and privacy, and execution of the ARRIS integration.
- A $55 million Fractus patent-litigation settlement was recorded in cost of sales, payable in two 2020 installments. Other intellectual-property matters remained subject to uncertain outcomes; management said a reasonable estimate of loss for certain claims could not be determined.
- The $1.0 billion preferred stock issued to Carlyle carries a 5.5% cumulative annual dividend and conversion terms. Carlyle owned approximately 16% of common stock on an if-converted basis. Common-stock dividends were not planned for the foreseeable future.
- The annual financial-statement audit and internal-control audit received unqualified opinions; management and the auditor concluded internal control over financial reporting was effective. The filing describes ongoing control integration work related to ARRIS.
Important facts for investors to verify
- Confirm the issuer identity: the supplied document is CommScope Holding Company, Inc., not Vistance Networks, Inc.
- Separate acquisition-driven reported growth from legacy-business performance and review ARRIS’s standalone and pro forma results.
- Track debt reduction, interest expense, preferred-stock dividends, refinancing needs and covenant headroom.
- Assess whether forecast synergies are achieved and whether integration, restructuring or further goodwill impairments generate additional costs.
- Review segment performance under the new 2020 reporting structure, customer spending trends and exposure to major customers.
- Check the status and resolution of outstanding litigation, tax matters, supply constraints and trade-related manufacturing changes.