CommScope Holding Company, Inc. — Q2 2017 Form 10-Q
Entity note: The request identifies Vistance Networks, Inc., but the supplied filing is for CommScope Holding Company, Inc. This summary reflects the filing provided. The unaudited quarter and six-month period ended June 30, 2017; comparisons are with the corresponding 2016 periods.
Business context and results
CommScope supplies wired and wireless communications-network infrastructure. Its reporting segments are CommScope Connectivity Solutions (CCS) and CommScope Mobility Solutions (CMS).
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,174.1 million | $1,306.8 million | $2,311.4 million | $2,450.8 million |
| Gross margin | 40.3% | 42.4% | 40.1% | 40.8% |
| Operating income | $137.8 million | $183.9 million | $259.1 million | $274.6 million |
| Net income | $55.5 million | $62.0 million | $89.0 million | $74.5 million |
| Diluted EPS | $0.28 | $0.32 | $0.45 | $0.38 |
| Adjusted operating income (non-GAAP) | $242.4 million | $291.0 million | $459.7 million | $502.4 million |
Q2 net sales fell 10.2%, operating income 25.1%, and non-GAAP adjusted operating income 16.7%. For the first half, sales fell 5.7%, operating income 5.6%, and adjusted operating income 8.5%; net income rose 19.5%, aided in part by lower tax expense.
Cash flow, debt and liquidity
- First-half operating cash flow was $190.0 million, down from $285.3 million. Capital expenditures were $30.6 million; the filing attributes weaker cash generation mainly to prior-year vendor-payment timing, incentive compensation paid in 2017, and higher cash taxes.
- At June 30, cash and equivalents were $484.5 million, current assets $2,092.1 million, and current liabilities $756.8 million. Revolver availability was approximately $474.2 million, with no revolver borrowings.
- Debt principal totaled $4,646.3 million; the balance-sheet carrying amount was $4,570.0 million. The weighted-average effective interest rate was 5.36%. The company reported compliance with debt covenants.
- In March, the company issued $750 million of 5.00% notes due 2027 and used the proceeds and cash on hand to redeem $500 million of 2020 notes and repay $250 million of term loans, among other costs. It also repriced its 2022 term loan, lowering the interest-rate margin.
- Financing cash outflow included a $100 million share repurchase. The company completed its prior $100 million authorization; on August 2, the board authorized a new program of up to $100 million through July 31, 2018.
Drivers, outlook and notable items
- Both segments reported lower Q2 sales. CCS sales declined 6.7% and CMS sales 15.2%. Management cited weaker indoor copper demand, slower North American service-provider projects, early-2017 integration issues affecting CCS service and order rates, and softer CMS operator spending in Q2. Large APAC projects from 2016 did not recur.
- Lower sales volume and unfavorable product mix reduced gross margin; cost-reduction initiatives and lower incentive compensation partly offset pressure. Q2 segment adjusted operating income fell in both CCS and CMS.
- Management expects cautious near-term spending by certain North American service providers and wireless operators, and continuing weakness in indoor CCS products. It expects North American growth to return in 2018. Longer-term demand drivers cited include fiber deployment, mobile-data growth, network capacity needs, and 5G; the filing provides no numerical earnings or revenue guidance.
- Integration and transaction costs were $12.6 million in Q2 and $26.2 million in the first half, primarily related to BNS integration; management expected comparable cash costs over the next year. Further BNS-related restructuring actions and costs may be material.
- On August 1, 2017, the company acquired Cable Exchange for approximately $120 million, funded with cash on hand. This occurred after quarter-end.
- Q2 other income included a $6.0 million pretax gain on a partial sale of Hydrogenics shares; the first-half result also included the $14.8 million premium paid to redeem 2020 notes and $1.1 million of term-loan modification costs. A lower effective tax rate reflected $13.1 million of first-half excess share-based compensation tax benefits and foreign earnings taxed at lower rates.
Risks and contingencies
Management cited exposure to customer and channel-partner concentration, volatile carrier capital spending, BNS integration and systems conversion, substantial debt and interest-rate changes, international and foreign-exchange risks, supply and manufacturing constraints, product quality and warranty claims, and potential future restructuring or impairment charges. Anixter accounted for 12% of Q2 sales and 12% of receivables at quarter-end. The company reported pending legal matters in the ordinary course and did not expect them to have a material adverse effect; it also reported no material change to previously disclosed risk factors.
Investor verification priorities
- Confirm the issuer identity: the filing is CommScope Holding Company, Inc., not Vistance Networks, Inc.
- Track whether sales and margins stabilize, particularly in CMS and North American CCS markets, and assess the basis for management’s 2018 growth expectation.
- Monitor operating cash conversion, working-capital movements, debt service and covenant headroom, and the effect of term-loan repricing.
- Evaluate BNS integration progress, remaining restructuring cash costs, and the financial contribution and integration of the Cable Exchange acquisition.
- Separate recurring performance from adjustments and unusual items, including non-GAAP exclusions, tax benefits, debt-redemption costs, and investment-sale gains.