Business context and reporting period
The supplied filing is CommScope Holding Company, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017; it does not identify Vistance Networks, Inc. as the registrant. CommScope provides wired and wireless communications-network infrastructure through its CommScope Connectivity Solutions (CCS) and CommScope Mobility Solutions (CMS) segments.
Comparability note: the acquired BNS business contributed 13 weeks in Q3 2017 versus 14 weeks in Q3 2016 because CommScope eliminated a one-day reporting lag in 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,128.8 million | $1,293.9 million | $3,440.2 million | $3,744.7 million |
| Gross profit / margin | $429.6 million / 38.1% | $542.9 million / 42.0% | $1,357.2 million / 39.5% | $1,543.7 million / 41.2% |
| Operating income / margin | $126.8 million / 11.2% | $180.7 million / 14.0% | $386.0 million / 11.2% | $455.3 million / 12.2% |
| Adjusted operating income, non-GAAP | $223.5 million | $296.7 million | $683.2 million | $799.1 million |
| Net income | $51.2 million | $93.8 million | $140.2 million | $168.4 million |
| Diluted EPS | $0.26 | $0.48 | $0.71 | $0.86 |
- Q3 sales fell 12.8%; nine-month sales fell 8.1%. Q3 operating income declined 29.8% and net income declined 45.4%. Nine-month operating income declined 15.2% and net income declined 16.7%.
- Both segments contracted. Q3 CCS sales declined 13.5% and CMS sales 11.5%; nine-month declines were 7.4% and 9.3%, respectively.
- Management attributed weaker gross profit chiefly to lower sales volume, price reductions, unfavorable manufacturing variances and higher material costs, partly offset by cost savings. SG&A and R&D expenses declined, including from lower incentive compensation.
- Operating cash flow for the first nine months was $335.4 million, down from $551.1 million. Investing used $141.5 million, including $105.2 million for Cable Exchange net of acquired cash and $51.2 million of capital expenditures. Financing used $229.3 million. Cash ended at $411.2 million, versus $428.2 million at year-end 2016.
Debt, liquidity and capital allocation
- At September 30, 2017, principal debt was $4.621 billion; reported long-term debt carrying value was $4.548 billion. Cash was $411.2 million. The effective borrowing rate was 5.34%.
- The company issued $750 million of 5.00% notes due 2027 and used the proceeds with cash on hand to redeem $500 million of 2020 notes, repay term loans and fund related costs. It amended the 2022 term loan to reduce its interest-rate margin and voluntarily repaid another $25 million during Q3.
- No revolving-credit borrowings were outstanding; availability was approximately $415.8 million after borrowing-base limits and letters of credit. Management said existing cash, operating cash flow and facility availability should meet anticipated needs and reported compliance with debt covenants.
- Current assets were $1.994 billion and current liabilities $717.0 million. Working capital excluding cash and current debt was $865.7 million. Approximately 80% of cash was held outside the U.S.; the filing says taxes had been provided so repatriation of cash not needed for foreign operations would not create significant tax cost.
- Share repurchases totaled $175 million in the first nine months (4.8 million shares). A second authorization had $25 million remaining at quarter-end.
Outlook, risks and unusual items
- No quantified company-wide financial guidance is provided. Management expected cautious near-term spending by certain North American service providers and wireless operators, continuing weakness in indoor CCS demand, and a return to North American growth in 2018.
- Demand risks include customer capital-spending volatility, service-provider and wireless-operator consolidation, weaker indoor-network demand, project timing, pricing pressure, input costs and global economic uncertainty. Management cited BNS integration issues early in 2017 that hurt customer service levels and order rates.
- Management expected Q4 2017 integration and transaction costs comparable to Q3, with significantly lower costs in 2018. It also anticipated additional restructuring actions; resulting charges and cash needs could be material. Restructuring cash payments of $8.7 million were expected by year-end 2017 and $17.2 million during 2018–2022 for actions initiated.
- Notable items included a $14.8 million redemption premium on the 2020 notes, $9.6 million of written-off debt issuance costs and discount, and a $2.4 million Q3 gain from selling the remainder of the Hydrogenics investment. The 2017 effective tax rate benefited from expired uncertain-tax-position statutes and $13.5 million of excess share-based compensation tax benefits for the nine-month period.
- Cable Exchange was acquired August 1 for a stated net acquisition cost of $123.2 million in the purchase-price allocation; Q3 sales from the business were not material to CCS. Its preliminary allocation included $49.6 million of goodwill and $61.1 million of identifiable intangible assets.
- The filing cites substantial indebtedness, foreign-exchange exposure, customer and supplier concentration, integration execution, product quality and warranty claims, cybersecurity, raw-material availability and potential future asset impairments among risks. Anixter represented 12% of Q3 sales; Anixter and Verizon each represented about 11% of receivables at quarter-end.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for CommScope Holding Company, Inc., not Vistance Networks, Inc.
- Assess how much of the year-over-year sales and margin decline reflects underlying demand, the BNS reporting-week difference, pricing and manufacturing costs.
- Track North American service-provider spending and whether the anticipated 2018 return to growth materializes in both CCS and CMS.
- Monitor operating cash generation, debt service and covenant headroom, alongside the company’s use of cash for acquisitions and share repurchases.
- Review BNS integration progress, restructuring requirements and Cable Exchange’s finalized purchase-price allocation and contribution.