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COMM > SEC Filings for COMM > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for COMMSCOPE HOLDING COMPANY, INC.

Form 10-Q for COMMSCOPE HOLDING COMPANY, INC.


7-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following narrative is an analysis of the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012. The discussion is provided to increase the understanding of, and should be read in conjunction with, the unaudited condensed consolidated financial statements and accompanying notes included in this document as well as the audited consolidated financial statements, related notes thereto and management's discussion and analysis of financial condition and results of operations, including management's discussion and analysis regarding the application of critical accounting policies as well as the risk factors, included in our audited consolidated financial statements.

Overview

We are a global provider of essential infrastructure solutions for wireless, business enterprise and residential broadband networks. Our solutions and services for wired and wireless networks enable high-bandwidth data, video and voice applications. Our global position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions and global manufacturing and distribution scale.

CRITICAL ACCOUNTING POLICIES

There have been no changes in our critical accounting policies or significant accounting estimates as disclosed in our audited consolidated financial statements.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2013 WITH THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012



                                                        Three Months Ended
                                                          September 30,
                                                 2013                        2012
                                                     % of Net                    % of Net       Dollar          %
                                        Amount        Sales         Amount        Sales         Change       Change
                                                      (dollars in millions, except per share amounts)
Net sales                               $ 888.0          100.0 %    $ 894.0          100.0 %    $  (6.0 )       (0.7 )%
Gross profit                              310.2           34.9        302.8           33.9          7.4          2.4
SG&A expense                              122.4           13.8        114.8           12.8          7.6          6.6
R&D expense                                31.8            3.6         31.0            3.5          0.8          2.6
Amortization of purchased intangible
assets                                     44.0            5.0         44.1            4.9         (0.1 )       (0.2 )
Restructuring costs                         4.9            0.6          1.6            0.2          3.3        206.3
Asset impairments                           7.3            0.8         38.3            4.3        (31.0 )      (80.9 )
Net interest expense                       53.3            6.0         45.2            5.1          8.1         17.9
Other expense, net                          3.4            0.4          1.8            0.2          1.6         88.9
Income tax expense                         31.8            3.6         20.7            2.3         11.1         53.6
Net income                              $  11.3            1.3 %    $   5.3            0.6 %    $   6.0        113.2 %
Diluted earnings per share              $  0.07                     $  0.03


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                                                        Nine Months Ended
                                                          September 30,
                                               2013                          2012
                                                    % of Net                       % of Net        Dollar          %
                                      Amount         Sales          Amount          Sales          Change       Change
                                                      (dollars in millions, except per share amounts)
Net sales                            $ 2,633.6          100.0 %    $ 2,473.7           100.0 %     $ 159.9          6.5 %
Gross profit                             909.1           34.5          783.3            31.7         125.8         16.1
SG&A expense                             354.8           13.5          337.7            13.7          17.1          5.1
R&D expense                               95.6            3.6           88.8             3.6           6.8          7.7
Amortization of purchased
intangible assets                        130.9            5.0          132.4             5.4          (1.5 )       (1.1 )
Restructuring costs                       16.4            0.6           17.0             0.7          (0.6 )       (3.5 )
Asset impairments                         41.8            1.6           38.3             1.5           3.5          9.1
Net interest expense                     145.6            5.5          140.5             5.7           5.1          3.6
Other expense, net                         8.7            0.3            8.3             0.3           0.4          4.8
Income tax expense                        87.0            3.3           26.4             1.1          60.6        229.5 %

Net income (loss) $ 28.3 1.1 % $ (6.1 ) (0.2 )% $ 34.4 NM Diluted earnings (loss) per share $ 0.18 $ (0.04 )

NM - Not meaningful

Net sales

For the three months ended September 30, 2013, the decrease in net sales was attributable to lower net sales in our Broadband segment partially offset by higher sales in our Wireless segment. The increase in net sales for the nine months ended September 30, 2013 as compared to the corresponding prior year period was attributable to higher Wireless segment net sales that were partially offset by lower net sales in our Broadband and Enterprise segments. Net sales on a year-over-year basis were higher in the U.S. in both the three and nine months ended September 30, 2013, but lower in the Asia Pacific (APAC) region for both the three and nine months ended September 30, 2013, than the comparable prior year periods. Although net sales in the Central and Latin America (CALA) region were lower in the three months ended September 30, 2013, CALA net sales were higher in the nine months ended September 30, 2013 as compared to the same period in 2012. Foreign exchange rate changes had a negative impact on net sales of $5.0 million and $9.9 million for the three and nine months ended September 30, 2013, respectively, as compared to the same 2012 periods. For further details by segment, see the section titled "Segment Results" below.

Gross profit (net sales less cost of sales)

The improvement in gross profit and gross profit margin for the three months ended September 30, 2013 was primarily due to charges of $5.7 million recorded in the three months ended September 30, 2012 related to a Broadband product warranty matter. For the nine months ended September 30, 2013, gross profit and gross profit margin increased primarily due to higher sales volumes, a favorable change in the mix of products sold and benefits from cost savings initiatives.

Selling, general and administrative expense

Selling, general and administrative (SG&A) expense increased for the three and nine months ended September 30, 2013 as compared to the corresponding 2012 periods due to incremental costs from acquisitions (iTRACS and Redwood), increases in equity-based compensation expense, increases in compensation expense as a result of expanded sales efforts in emerging markets, particularly within the Enterprise segment, and higher sales commissions. SG&A expense for the nine months ended September 30, 2013 was also higher than the corresponding prior year period due to an increase in cash incentive compensation partially offset by a decrease in bad debt expense.

Research and development

Research and development (R&D) expense was higher for the three and nine months ended September 30, 2013 as compared to the comparable prior year periods. Increases in R&D expense in the three months ended September 30, 2013 from iTRACS and Redwood were partially offset by reductions in R&D expense in the Wireless segment as a result of restructuring actions that were initiated in 2012. The increase in R&D expense for the nine months ended September 30, 2013 over the prior year period was due to the iTRACS and Redwood acquisitions and increased equity-


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based compensation, partially offset by the reductions in the Wireless segment that resulted from the restructuring actions. R&D expense as a percentage of net sales for the three and nine months ended September 30, 2013 was comparable to the prior year periods. R&D activities generally relate to ensuring that our products are capable of meeting the developing technological needs of our customers, bringing new products to market and modifying existing products to better serve our customers.

Amortization of purchased intangible assets

The amortization of purchased intangible assets was $0.1 million and $1.5 million lower in the three and nine months ended September 30, 2013, respectively, as compared to the prior year periods due to impairment charges that were recognized on certain intangible assets in the three months ended September 30, 2012, partially offset by the additional amortization resulting from the acquisitions of iTRACS and Redwood. The amortization is primarily related to intangible assets established as a result of applying acquisition accounting following the Carlyle acquisition of CommScope, Inc.

Restructuring costs

We recognized net restructuring costs of $4.9 million and $16.4 million during the three and nine months ended September 30, 2013, respectively, compared with $1.6 million and $17.0 million during the three and nine months ended September 30, 2012, respectively. The restructuring costs recognized in 2013 and 2012 were primarily related to announced workforce reductions and other cost reduction initiatives at various U.S. and international facilities.

Additional pretax costs related to completing actions announced to date are not expected to be significant. Additional restructuring actions may be identified and resulting charges and cash requirements could be material.

Asset impairments

We recognized impairment charges of $7.3 million and $41.8 million in the three and nine months ended September 30, 2013, respectively. The impairment charges were primarily related to the impairment of goodwill in the Broadband segment. We recognized impairment charges of $38.3 million in the three and nine months ended September 30, 2012 related to long-lived assets in the Wireless segment.

Net interest expense

We incurred net interest expense of $53.3 million and $145.6 million during the three and nine months ended September 30, 2013, respectively, compared to $45.2 million and $140.5 million for the three and nine months ended September 30, 2012, respectively. As a result of amending the senior secured term loan during the first quarter of 2013, primarily to lower the interest rate, interest expense included a write-off of deferred financing costs and original issue discount of $0.5 million. The amendments to the senior secured term loan and asset-based revolving credit facility during the first quarter of 2012 resulted in a write-off of deferred financing costs and original issue discount of $3.1 million which was included in interest expense. We incurred $9.5 million and $13.0 million of interest expense during the three and nine months ended September 30, 2013, respectively, on the senior PIK toggle notes issued in May 2013. Excluding the charges related to the refinancings and the interest expense from the senior PIK toggle notes, net interest expense decreased in the three and nine months ended September 30, 2013 compared to the prior year periods primarily due to interest savings resulting from the amendments to the senior secured term loan.

Our weighted average effective interest rate on outstanding borrowings, including the amortization of deferred financing costs and original issue discount, was 7.09% as of September 30, 2013, 7.33% as of December 31, 2012 and 7.34% as of September 30, 2012.

Other expense, net

Foreign exchange losses of $2.7 million and $5.6 million were included in other expense, net for the three and nine months ended September 30, 2013, respectively, compared to $0.4 million and $4.3 million for the three and nine months ended September 30, 2012, respectively. We incurred costs of $1.9 million during the nine months ended September 30, 2013 related to amending our senior secured term loan, compared to costs of $3.1 million in the nine months ended September 30, 2012, related to the amendments of our senior secured term loan and revolving credit facility. Additionally, other expense, net for the three and nine months ended September 30, 2013 included our share of losses in our equity investments of $1.1 million and $1.3 million, respectively, compared to $1.2 million and $2.3 million for the three and nine months ended September 30, 2012, respectively. Also included in other expense, net for the nine months ended September 30, 2013 was the write-off of one such equity investment of $0.8 million.


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Income taxes

For the three and nine months ended September 30, 2013, income tax expense reflected net increases in valuation allowances of $4.0 million and $25.2 million, respectively, related to (1) foreign tax credit carryforwards that we have determined are not likely to be realized, primarily due to an increase in future interest expense expected as a result of current year borrowings and
(2) net operating loss carryforwards in certain foreign jurisdictions as a result of changes in profitability. In addition to the impact of the valuation allowances, the effective income tax rate for the three and nine months ended September 30, 2013 was also affected by goodwill impairment charges for which no tax benefit was recognized, losses in certain foreign jurisdictions where we did not recognize tax benefits due to the likelihood of them not being realizable, tax costs associated with repatriation of foreign earnings and adjustments related to prior years' tax returns in various jurisdictions.

Income tax expense for the three and nine months ended September 30, 2012 reflected net increases in valuation allowances in foreign jurisdictions, adjustments related to filing the 2011 U.S. federal income tax return and additional expense related to uncertain tax positions. In addition to these items, the effective income tax rate for the prior year periods was also impacted by losses in certain foreign jurisdictions where we did not recognize tax benefits due to the likelihood of them not being realizable and tax costs associated with repatriation of foreign earnings.

Excluding the items listed above, the effective income tax rate for the three and nine months ended September 30, 2013 and 2012 was higher than the statutory rate of 35% primarily due to the provision for state income taxes and certain tax costs associated with repatriation of foreign earnings. We expect to continue to provide for U.S. taxes on substantially all of our current year foreign earnings in anticipation that such earnings will be repatriated to the U.S.

Segment Results



                                                        Three Months Ended
                                                          September 30,
                                                2013                         2012
                                                     % of Net                     % of Net       Dollar          %
                                       Amount         Sales         Amount         Sales         Change       Change
                                                                   (dollars in millions)
Net sales by segment:
Wireless                               $ 552.6            62.2 %    $ 535.5            59.9 %    $  17.1          3.2 %
Enterprise                               212.2            23.9        212.0            23.7          0.2          0.1
Broadband                                124.6            14.0        148.0            16.6        (23.4 )      (15.8 )
Inter-segment eliminations                (1.4 )          (0.1 )       (1.5 )          (0.2 )        0.1

Consolidated net sales                 $ 888.0           100.0 %    $ 894.0           100.0 %    $  (6.0 )       (0.7 )%


Total domestic sales                   $ 495.4            55.8 %    $ 472.9            52.9 %    $  22.5          4.8 %
Total international sales                392.6            44.2        421.1            47.1        (28.5 )       (6.8 )

Total worldwide sales                  $ 888.0           100.0 %    $ 894.0           100.0 %    $  (6.0 )       (0.7 )%


Operating income (loss) by segment:
Wireless                               $  90.3            16.3 %    $  36.7             6.9 %    $  53.6        146.0 %
Enterprise                                21.7            10.2         34.6            16.3        (12.9 )      (37.3 )
Broadband                                (12.2 )          (9.8 )        1.7             1.1        (13.9 )         NM

Consolidated operating income          $  99.8            11.2 %    $  73.0             8.2 %    $  26.8         36.7 %


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                                                          Nine Months Ended
                                                            September 30,
                                                 2013                           2012
                                                       % of Net                       % of Net       Dollar          %
                                        Amount          Sales          Amount          Sales         Change       Change
                                                                     (dollars in millions)
Net sales by segment:
Wireless                               $ 1,640.6            62.3 %    $ 1,401.1            56.6 %    $ 239.5         17.1 %
Enterprise                                 622.7            23.6          637.8            25.8        (15.1 )       (2.4 )
Broadband                                  375.5            14.3          439.2            17.7        (63.7 )      (14.5 )
Inter-segment eliminations                  (5.2 )          (0.2 )         (4.4 )          (0.1 )       (0.8 )

Consolidated net sales                 $ 2,633.6           100.0 %    $ 2,473.7           100.0 %    $ 159.9          6.5 %


Total domestic sales                   $ 1,473.5            56.0 %    $ 1,310.2            53.0 %    $ 163.3         12.5 %
Total international sales                1,160.1            44.0        1,163.5            47.0         (3.4 )       (0.3 )

Total worldwide sales                  $ 2,633.6           100.0 %    $ 2,473.7           100.0 %    $ 159.9          6.5 %


Operating income (loss) by segment:
Wireless                               $   246.0            15.0 %    $    65.4             4.7 %    $ 180.6        276.1 %
Enterprise                                  63.7            10.2           93.5            14.7        (29.8 )      (31.9 )
Broadband                                  (40.1 )         (10.7 )         10.2             2.3        (50.3 )         NM

Consolidated operating income          $   269.6            10.2 %    $   169.1             6.8 %    $ 100.5         59.4 %

NM - Not meaningful

Wireless Segment

We provide merchant RF wireless network connectivity solutions and small cell distributed antenna systems (DAS) solutions. Our solutions, marketed primarily under the Andrew brand, enable wireless operators to deploy both macro cell sites and small cell DAS solutions to meet 2G, 3G and 4G cellular coverage and capacity requirements. Our macro cell site solutions can be found at wireless tower sites and on rooftops and include base station antennas, microwave antennas, hybrid fiber-feeder and power cables, coaxial cables, connectors, amplifiers, filters and backup power solutions, including fuel cells. Our small cell DAS solutions are primarily composed of distributed antenna systems that allow wireless operators to increase spectral efficiency and thereby extend and enhance cellular coverage and capacity in challenging network conditions such as commercial buildings, urban areas, stadiums and transportation systems.

The Wireless segment experienced an increase in net sales for the three and nine months ended September 30, 2013 as compared to the comparable periods in the prior year primarily as a result of higher capital spending by U.S. wireless operators, including 4G deployments, and sales to a major Middle Eastern wireless operator. These higher sales were partially offset by lower sales in the APAC region in both the three and nine month periods ended September 30, 2013. Foreign exchange rate changes had a negligible negative impact on Wireless segment net sales for the three and nine months ended September 30, 2013 as compared to the same periods in 2012.

We expect demand for our Wireless products to be positively affected by wireless coverage and capacity expansion in emerging markets and growth in mobile data services (including 4G deployments) in developed markets. Uncertainty in the global economy or a particular region may slow the growth or cause a decline in capital spending by wireless operators and negatively impact our net sales.

Wireless segment operating income increased to $90.3 million and $246.0 million for the three and nine months ended September 30, 2013, respectively, as compared to the comparable periods in the prior year. Wireless segment operating income for the three and nine months ended September 30, 2013 increased as compared to the prior year periods primarily due to the higher level of net sales, with additional benefit from favorable mix of products sold and the benefit of cost reduction initiatives, partially offset by the impact of foreign exchange rate changes. The increase in the three months ended September 30, 2013 as compared to the three months ended September 30, 2012 was partially due to $38.3 million of asset impairment charges that had been recorded in the three months ended September 30, 2012. Restructuring charges were $0.2 million and $6.8 million lower in the three and nine months ended September 30, 2013 as compared the 2012 periods. Operating income during the first nine months of 2012 included a charge of $2.0 million related to prior years' customs and duties obligations.


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Enterprise Segment

We provide enterprise connectivity solutions for data centers and commercial buildings. Our offerings include voice, video, data and converged solutions that support mission-critical, high-bandwidth applications including storage area networks, streaming media, data backhaul, cloud applications and grid computing. These comprehensive solutions, sold primarily under the SYSTIMAX and Uniprise brands, include optical fiber and twisted pair structured cabling solutions, intelligent infrastructure software, network rack and cabinet enclosures, intelligent building sensors, advance LED lighting control systems and network design services.

Enterprise segment net sales were essentially unchanged in the three months ended September 30, 2013 as lower sales in the APAC region were offset by higher sales in all other major geographic regions. The Enterprise segment experienced a decrease in net sales for the nine months ended September 30, 2013 compared to the same period in the prior year primarily due to lower net sales in the EMEA region, reflecting the continued economic slowdown in Europe, and the APAC region. Foreign exchange rate changes had a negligible negative impact on Enterprise segment net sales for the three and nine months ended September 30, 2013 as compared to the comparable 2012 periods. Net sales for the three and nine months ended September 30, 2013 that resulted from the 2013 acquisitions of iTRACS and Redwood were immaterial.

We expect long-term demand for Enterprise products to be driven by global information technology and data center spending as the ongoing need for bandwidth and intelligence in the network continues to create demand for high-performance structured connectivity solutions in the enterprise market. Uncertain global economic conditions, an ongoing slowdown in commercial construction activity, uncertain levels of information technology spending and reductions in the levels of distributor inventories may negatively affect demand for our products.

The decrease in Enterprise segment operating income for the three months ended September 30, 2013 as compared to the prior year period was primarily attributable to the impact of iTRACS and Redwood, as investments are made to develop product offerings and integrate the acquired businesses. For the three and nine months ended September 30, 2013, iTRACS and Redwood decreased operating income by $6.3 million and $9.0 million, respectively. In addition to the impact of iTRACS and Redwood, lower net sales and unfavorable product mix negatively affected Enterprise operating income in the nine months ended September 30, 2013.

Broadband Segment

We provide cable and communications products that support the multi-channel video, voice and high-speed data services provided by multi-system operators (MSOs). We are a global manufacturer of coaxial cable for hybrid fiber coaxial networks globally and a supplier of fiber optic cable for North American MSOs.

Broadband segment net sales decreased for the three and nine months ended September 30, 2013 as compared to the comparable prior year periods in all major geographic regions as a result of the completion of large scale international projects and the impact of decreased U.S. federal stimulus spending. Foreign exchange rate changes had a negligible negative impact on Broadband segment net sales for the three and nine months ended September 30, 2013 as compared to the prior year periods.

We expect demand for Broadband products to continue to be influenced by ongoing maintenance requirements of cable networks, cable providers' competition with telecommunication service providers and activity in the residential construction market. Spending by our Broadband customers on maintaining and upgrading networks is expected to continue to be influenced by uncertain regional and global economic conditions.

Broadband segment operating income decreased $13.9 million and $50.3 million during the three and nine months ended September 30, 2013, respectively, as compared to the prior year periods primarily due to goodwill impairment charges of $7.3 million and $36.2 million in the three and nine months ended September 30, 2013, respectively. Broadband segment operating results were also negatively impacted by higher restructuring charges ($3.4 million increase and $5.6 million increase in the three and nine months ended September 30, 2013, respectively), lower net sales and unfavorable mix in the 2013 periods and continued investment in new technologies.


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LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes certain key measures of our liquidity and capital
resources.


. . .
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