Business context and reporting period
This summary covers CommScope Holding Company, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2019; the filing identifies CommScope, not “Vistance Networks, Inc.,” as the registrant. CommScope supplies infrastructure solutions for wired and wireless communications networks. ARRIS’s operations were not included in the quarter’s results. CommScope completed its approximately $7.7 billion acquisition of ARRIS on April 4, 2019, after quarter-end.
Financial results and liquidity
Amounts are in millions except per-share data. Comparisons are with the three months ended March 31, 2018.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,099.5 | $1,120.5 | Down 1.9% |
| Gross profit / margin | $411.8 / 37.5% | $411.4 / 36.7% | Margin up 0.8 percentage points |
| Operating income / margin | $90.7 / 8.2% | $103.7 / 9.3% | Down 12.6% |
| Net income (loss) | $(2.3) | $33.7 | Declined $36.0 |
| Diluted EPS | $(0.01) | $0.17 | Down $0.18 |
| Operating cash flow | $(10.0) | $35.2 | Down $45.2 |
| Capital expenditures | $21.4 | $13.6 | Up $7.8 |
Non-GAAP adjusted operating income was $190.7 million, up 1.1%, and adjusted EBITDA was $208.4 million, essentially flat. These measures exclude specified costs and are not GAAP substitutes. Interest expense rose to $97.5 million from $59.8 million, including $38.3 million of incremental acquisition-financing interest and ticking fees. Interest income increased to $11.8 million, including $10.1 million earned on acquisition proceeds held in escrow. The effective tax rate was negative 242.6%; the company recorded $1.6 million of tax expense despite a $0.7 million pretax loss.
Cash and equivalents were $176.4 million at March 31, versus $458.2 million at year-end 2018. Working capital excluding cash was $739.7 million. Long-term debt carrying value was $7,459.6 million ($7,561.3 million principal); debt was 81.0% of total capitalization, versus 69.4% at year-end. The quarter-end balance included acquisition notes whose proceeds were restricted in escrow; the new $3.2 billion term loan was not funded until April 4. Existing revolver availability at quarter-end was $490.7 million. Cash used in operations reflected, in part, increased receivables and inventory; receivables increased $150.7 million and inventory $62.4 million in the cash-flow reconciliation.
Material changes and segment performance
- CCS sales fell 4.1% to $646.1 million; adjusted EBITDA fell 12.2% to $107.7 million. Management cited foreign exchange, pricing pressure, and nonrecurring prior-year projects in Asia-Pacific.
- CMS sales rose 1.5% to $453.4 million; adjusted EBITDA rose 17.9% to $100.7 million. U.S. 4G network deployments and favorable mix supported results, partly offset by lower prices and weaker Asia-Pacific sales.
- International sales declined 10.3% to $460.4 million; U.S. sales increased 5.2% to $639.1 million. Foreign-exchange movements reduced overall sales by approximately 2%.
- SG&A rose 7.6% to $199.2 million, primarily reflecting $20.8 million in ARRIS transaction and integration costs. Restructuring costs rose to $12.4 million from $5.5 million.
Outlook, acquisition, risks and contingencies
Management expected near-term CCS sales to decline modestly, citing pricing pressure and business conditions; it expected modest near-term CMS sales growth, while warning that operator spending could weaken. Longer-term CMS demand may benefit from wireless capacity expansion and 5G. No specific consolidated earnings or revenue guidance was provided in the supplied filing text.
The April 4 ARRIS closing was financed with the escrowed notes, a $3.2 billion LIBOR-plus-3.25% term loan, cash, and $1.0 billion of Series A convertible preferred stock issued to Carlyle. The preferred stock carries a 5.50% annual dividend and is convertible at $27.50 per common share, subject to share-issuance limits. The new asset-based revolver had $972.2 million availability at closing. Pro forma debt was approximately $10.5 billion, according to the filing’s risk discussion.
Management cited integration execution, material expected integration and restructuring costs, substantial leverage and interest-rate exposure, customer concentration, pricing pressure, foreign exchange, trade tariffs, and volatile network-capital spending as significant risks. ARRIS synergies were estimated at $150 million annually within three years, including approximately $60 million in the first full year; expected integration and restructuring costs to achieve them were approximately $150 million. The filing cautions that savings may be delayed or not achieved. Management said liquidity sources should meet anticipated needs and reported compliance with debt covenants at March 31. It expected additional ARRIS-related restructuring actions and charges to be material. Management did not expect pending ordinary-course legal matters to materially adversely affect business or financial condition.
Important facts for investors to verify
- Post-acquisition debt, interest burden, liquidity and covenant headroom, including the effect of variable rates and the LIBOR transition.
- ARRIS integration progress, actual synergy realization, and total integration and restructuring spending versus estimates.
- Whether operating cash flow improves as receivables and inventory are converted to cash; monitor collections and working-capital requirements.
- Whether CCS pricing and international demand stabilize, and whether CMS growth persists amid customer capital-spending volatility.
- Preferred-stock dividend and conversion terms, Carlyle’s resulting ownership and governance rights, and the outcome of the planned shareholder approval process.