Vistance Networks, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following narrative is an analysis of the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022. 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 report 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 and the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Annual Report).

We discuss certain financial measures in management’s discussion and analysis of financial condition and results of operations, including adjusted EBITDA, that differ from measures calculated in accordance with generally accepted accounting principles (GAAP) in the United States (U.S.). See "Reconciliation of Non-GAAP Measures" included below for more information about these non-GAAP financial measures, including our reasons for including the measures and material limitations with respect to the usefulness of the measures.

Overview

We are a global provider of infrastructure solutions for communication, data center and entertainment networks. Our solutions for wired and wireless networks enable service providers, including cable, telephone and digital broadcast satellite operators and media programmers to deliver media, voice, Internet Protocol (IP) data services and Wi-Fi to their subscribers and allow enterprises to experience constant wireless and wired connectivity across complex and varied networking environments. Our solutions are complemented by services including technical support, systems design and integration. We are a leader in digital video and IP television distribution systems, broadband access infrastructure platforms and equipment that delivers data and voice networks to homes. Our global leadership position is built upon innovative technology, broad solution offerings, high-quality and cost-effective customer solutions, and global manufacturing and distribution scale.

CommScope NEXT

Since 2021, we have been engaged in a transformation initiative referred to as CommScope NEXT, which is designed to drive shareholder value through three pillars: profitable growth, operational efficiency and portfolio optimization. We believe these efforts are critical to making us more competitive and allowing us to invest in growth, de-lever and maximize stockholder and other stakeholder value in the future. In 2022, CommScope NEXT generated positive impacts on net sales, profitability and cash flow from our execution on pricing initiatives, expanding capacity and driving operational efficiencies. In 2023, we are experiencing headwinds related to a slow-down in spending by our customers as discussed further below, but we expect to continue to execute under CommScope NEXT, improving our profitability and cash flows by continuing to drive operational efficiencies and focusing on portfolio optimization. To that end, we incurred $20.4 million and $51.8 million of net restructuring costs and $16.8 million and $25.9 million of transaction, transformation and integration costs during the three and nine months ended September 30, 2023, respectively. During the three and nine months ended September 30, 2022, we incurred $2.5 million and $53.1 million, respectively, of net restructuring costs and $5.9 million and $36.4 million, respectively, of transaction, transformation and integration costs. These costs were primarily related to CommScope NEXT. We expect to continue to incur such costs during the remainder of 2023 as we continue executing on CommScope NEXT initiatives, and the resulting charges and cash requirements could be material.

As a step in our CommScope NEXT transformation plan, in 2021, we announced a plan to separate the Home Networks (Home) segment and began analyzing the financial results of our “Core” business separately from Home. On October 2, 2023, we signed an agreement with Vantiva SA (Vantiva) to divest of our Home segment under a call option agreement as further discussed in Note 11 in the Notes to Unaudited Condensed Consolidated Financial Statements included herein. In light of the planned divestiture, we continue to analyze the financial results of our “Core” business separately from the Home segment. As such, below we refer to certain supplementary Core financial measures, which reflect the results of our Connectivity and Cable Solutions (CCS), Outdoor Wireless Networks (OWN), Networking, Intelligent Cellular and Security Solutions (NICS) and Access Network Solutions (ANS) segments in the aggregate. See the Segment Results section below for the aggregation of our Core financial measures.

Impacts of Current Economic Conditions

Macroeconomic factors such as higher interest rates, inflation and concerns about a global economic slow-down have softened demand for our products, with certain customers reducing purchases as they right-size their inventories and others pausing capital spending. This has negatively impacted our net sales in certain segments for the three and nine months ended September 30, 2023 and may continue to negatively impact net sales during the remainder of 2023 and into the first half of 2024. Conversely, in certain of our segments, we have seen higher demand and favorable pricing impacts that have partially offset the impact of lower demand in our other segments. We are also seeing lower input costs, and we proactively implemented cost savings initiatives that have favorably impacted our profitability for the three and nine months ended September 30, 2023.

Primarily due to a sustained decrease in the market value of our debt and common stock affecting the overall business and changes in expected future cash flows due to reduced earnings forecasts and current macroeconomic conditions, including a rising interest rate environment, during the third quarter of 2023, we concluded that a triggering event occurred and performed an interim quantitative goodwill impairment test as of September 30, 2023 for our ANS and Building and Data Center Connectivity (BDCC) reporting units, which were most sensitive to negative performance and outlook, to compare the fair value of the reporting unit to their carrying amounts, including the goodwill.

The fair value of the reporting unit was determined using a discounted cash flow (DCF) model and a guideline public company approach, with 75% of the value determined using the DCF model and 25% of the value determined using the guideline public company approach. Under the DCF method, the fair value of a reporting unit is based on the present value of estimated future cash flows. To determine the fair value of our ANS and BDCC reporting units, we developed a revised forecast for 2023 and updated the annual forecasts for the years beyond 2023. We used a discount rate of 15% for the ANS reporting unit, which reflects increased risk from our 2022 annual test due to higher market uncertainty, and 12% for the BDCC reporting unit. Under the guideline public company method, the fair value is based upon market multiples of revenue and earnings derived from publicly-traded companies with similar operating and investment characteristics as the reporting unit.

As a result of our interim goodwill impairment test, we recorded a goodwill impairment charge of $425.9 million for the three and nine months ended September 30, 2023 to partially write down the carrying amount of the ANS reporting unit goodwill. There was no impairment identified in our BDCC reporting unit as of September 30, 2023.

Considering the low headroom going forward for each of the ANS and BDCC reporting units, there is a risk for future impairment in the event of further declines in general economic, market or business conditions or any significant unfavorable change in the forecasted cash flows, weighted average cost of capital or growth rates. If current and long-term projections for the ANS and BDCC reporting units are not realized or decrease materially, we may be required to recognize additional goodwill impairment charges, and these charges could be material to our results of operations.

During the third quarter of 2023, we also determined there was an indicator of impairment for long-lived assets in our Home segment. Our assessment utilized a held in use framework, giving consideration to the expectation that, more likely than not, our Home segment (asset group) would be sold before the end of its previously estimated useful life, due to the recently announced planned divestiture. We estimated the fair value of the asset group using Company-specific inputs, including estimates of consideration to be received upon the impending sale, as well as other market participant assumptions. As a result, we recorded an impairment charge of $469.2 million for the three and nine months ended September 30, 2023 related to the Home segment's intangible assets.

For more discussion on risks related to our customers, our supply chain and future impairments, see Part I, Item 1A, “Risk Factors” in our 2022 Annual Report. For more discussion on the asset impairments recorded during the third quarter of 2023, see Notes 1, 2 and 6 in the Notes to Unaudited Condensed Consolidated Financial Statements included herein.

CRITICAL ACCOUNTING POLICIES

There have been no changes in our critical accounting policies as disclosed in our 2022 Annual Report.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 WITH THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022

(dollars in millions, except per share amounts)

(1) Core financial measures reflect the results of our CCS, OWN, NICS and ANS segments, in the aggregate, and exclude the results of our Home segment. See "Segment Results" below for illustration of the aggregation of our Core financial measures.

(2) See “Reconciliation of Non-GAAP Measures” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.

Net sales

(dollars in millions)

27

Net sales for the three and nine months ended September 30, 2023 decreased $781.9 million, or 32.8%, and $1,390.8 million, or 20.1%, respectively, compared to the prior year periods primarily driven by decreased sales volumes as certain customers have reduced purchases as they right-size their inventories and others have paused capital spending. For the nine months ended September 30, 2023, the decreased sales volumes are partially offset by higher pricing compared to the prior year period. Core net sales for the three and nine months ended September 30, 2023 decreased $639.9 million, or 32.2%, and $995.9 million, or 17.8%, respectively, compared to the prior year periods. The decrease in core net sales for the three months ended September 30, 2023 was driven by decreases of $375.2 million in the CCS segment, $171.8 million in the OWN segment and $124.0 million in the ANS segment, partially offset by an increase of $31.1 million in the NICS segment. The decrease in Core net sales for the nine months ended September 30, 2023 was driven by decreases of $678.2 million in the CCS segment, $465.6 million in the OWN segment and $101.9 million in the ANS segment, partially offset by an increase of $249.8 million in the NICS segment. For the three and nine months ended September 30, 2023, net sales in the Home segment decreased $142.0 million and $394.9 million, respectively, compared to the prior year periods. For further details by segment, see "Segment Results" below.

From a regional perspective, for the three months ended September 30, 2023 compared to the prior year period, net sales decreased in the U.S. by $537.7 million, the Europe, Middle East and Africa (EMEA) region by $98.2 million, the Caribbean and Latin American (CALA) region by $73.7 million, the Asia Pacific (APAC) region by $38.7 million and Canada by $33.6 million. For the nine months ended September 30, 2023 compared to the prior year period, net sales decreased in the U.S. by $885.7 million, the EMEA region by $186.7 million, the CALA region by $150.3 million, the APAC region by $111.3 million and Canada by $56.8 million. Net sales to customers located outside of the U.S. comprised 40.1% and 38.7% of total net sales for the three and nine months ended September 30, 2023, respectively, compared to 37.2% and 38.3% for the three and nine months ended September 30, 2022, respectively. Foreign exchange rate changes impacted net sales favorably by less than 1% for the three months ended September 30, 2023 but unfavorably by less than 1% for the nine months ended September 30, 2023 compared to the prior year periods. For additional information on regional sales by segment, see "Segment Results" below and Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements included herein.

Gross profit, SG&A expense and R&D expense

(dollars in millions)

Gross profit (net sales less cost of sales)

Gross profit decreased by $190.1 million and $200.7 million, respectively, for the three and nine months ended September 30, 2023 compared to the prior year periods primarily due to lower net sales volumes, partially offset by lower freight and material costs and favorable product mix.

Selling, general and administrative expense

For the three and nine months ended September 30, 2023, selling, general and administrative (SG&A) expense decreased by $52.0 million and $96.8 million, respectively, compared to the prior year periods. The decrease in the three and nine months ended September 30, 2023 was primarily due to cost saving initiatives and lower variable incentive compensation expense of $26.8 million and $39.9 million, respectively. During the three months ended September 30, 2023, these favorable impacts were partially offset by higher transaction, transformation and integration costs of $10.9 million. Although our transaction, transformation and integration costs have decreased year-over-year during the nine months ended September 30, 2023, as indicated by the increased costs during the third quarter of 2023, we expect to continue to incur these costs during the remainder of 2023 and into 2024 due to ongoing CommScope NEXT initiatives, and the resulting charges and cash requirements could be material.

We also incurred costs of $1.7 million and $5.8 million during the three and nine months ended September 30, 2023, respectively, related to the identification, investigation, defense and recovery efforts connected to a cyber incident that occurred in late March of 2023. The incident resulted in minimal impact to our business operations, and we do not expect significant additional costs related to the recovery effort.

Research and development expense

Research and development (R&D) expense decreased for the three and nine months ended September 30, 2023 compared to the prior year periods primarily due to lower spending across all segments. R&D activities generally involve ensuring that our products are capable of meeting the evolving technological needs of our customers, bringing new products to market and modifying existing products to better serve our customers.

Amortization of purchased intangible assets and restructuring costs, net and Asset impairments

(dollars in millions)

Amortization of purchased intangible assets

For the three and nine months ended September 30, 2023, amortization of purchased intangible assets was lower compared to the prior year periods because certain of our intangible assets became fully amortized.

Restructuring costs, net

The net restructuring costs recorded during the three and nine months ended September 30, 2023 and 2022 were primarily related to CommScope NEXT. The net restructuring costs for the nine months ended September 30, 2023 reflected a gain on the sale of property, primarily related to a gain of $20.2 million on the sale of an international manufacturing facility. We received proceeds of $38.4 million related to the sale. Excluding the impacts of the sale, for the three and nine months ended September 30, 2023, our restructuring costs were $20.4 million and $31.6 million, respectively, and we paid $40.1 million and $90.3 million, respectively, to settle restructuring liabilities. We expect to pay an additional $21.3 million by the end of 2023 and $13.6 million in 2024 related to restructuring actions that have been initiated. Additional restructuring actions related to CommScope NEXT are expected to be identified, and the resulting charges and cash requirements could be material.

Asset impairments

For the three and nine months ended September 30, 2023, we recorded a goodwill impairment charge of $425.9 million related to our ANS reporting unit in our ANS segment. We also recorded an intangible assets impairment charge of $469.2 million related to the Home segment. We did not record any asset impairment charges during the three or nine months ended September 30, 2022. For more discussion on the asset impairments recorded during the third quarter of 2023, see Notes 1, 2 and 6 in the Notes to Unaudited Condensed Consolidated Financial Statements included herein.

Other income, net

(dollars in millions)

29

Foreign currency gain (loss)

Foreign currency gain (loss) includes the net foreign currency gains and losses resulting from the settlement of receivables and payables, foreign currency contracts and short-term intercompany advances in a currency other than the subsidiary’s functional currency. The change in foreign currency gain (loss) for the three and nine months ended September 30, 2023 compared to the prior year periods was primarily driven by certain unhedged currencies.

Other income, net

The change in other income, net for the three and nine months ended September 30, 2023 compared to the prior year periods was primarily driven by a gain of $8.6 million and $19.0 million, respectively, on the early extinguishment of debt related to our debt repurchases as further discussed in Note 5 in the Notes to Unaudited Condensed Consolidated Financial Statements included herein.

Interest expense, Interest income and Income taxes

(dollars in millions)

Interest expense and interest income

The increase in interest expense for the three and nine months ended September 30, 2023 compared to the prior year periods was driven by the increased variable interest rate on our senior secured term loan due 2026 (2026 Term Loan) as a result of the Federal Reserve’s increases in interest rates beginning in 2022. Our interest expense will continue to increase if the Federal Reserve raises interest rates. Our weighted average effective interest rate on outstanding borrowings, including the impact of the interest rate swap contracts and the amortization of debt issuance costs and original issue discount, was 7.23% at September 30, 2023, 6.91% at December 31, 2022 and 6.53% at September 30, 2022.

Income tax (expense) benefit

For the three and nine months ended September 30, 2023, we recognized an income tax benefit of $158.6 million on a pretax loss of $987.3 million and an income tax benefit of $158.0 million on a pretax loss of $1,083.7 million, respectively. Our tax benefit was less than the statutory rate of 21% for the three and nine months ended September 30, 2023 primarily due to the unfavorable impact related to a goodwill impairment charge of $425.9 million for which minimal tax benefits were recorded. Our tax benefit was favorably impacted by $4.1 million related to tax law changes for the three and nine months ended September 30, 2023. In addition to the unfavorable impact of the goodwill impairment change mentioned above, for the nine months ended September 30, 2023, our tax benefit was also unfavorably impacted by excess tax costs of $7.1 million related to equity compensation awards but favorably impacted by $9.6 million related to the release of various uncertain tax positions.

For the three and nine months ended September 30, 2022, we recognized a tax benefit of $12.2 million on pretax income of $10.7 million and $4.2 million of income tax expense on a pretax loss of $173.8 million, respectively. For the three months ended September 30, 2022, our tax benefit was driven by the impacts of federal tax credits, partially offset by unfavorable impacts of U.S. anti-deferral provisions, non-creditable withholding taxes and $3.7 million of tax expense related to state law changes. For the nine months ended September 30, 2022, our tax expense was driven by the unfavorable impacts of U.S. anti-deferral provisions, non-creditable withholding taxes and the tax expense related to state law changes, partially offset by the impacts of federal tax credits.

Segment Results

(dollars in millions)

31

(dollars in millions)

(1) Core financial measures reflect the results of our CCS, OWN, NICS and ANS segments, in the aggregate, and exclude the results of our Home segment.

(2) See “Reconciliation of Non-GAAP Measures” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Connectivity and Cable Solutions Segment

Net sales for the CCS segment decreased for the three and nine months ended September 30, 2023 compared to the prior year periods primarily due to lower sales volumes as certain customers have paused spending as they right-size their inventory levels. From a regional perspective, for the three months ended September 30, 2023, net sales decreased in the U.S. by $293.2 million, the EMEA region by $52.9 million, Canada by $15.7 million, the CALA region by $10.5 million and the APAC region by $2.9 million compared to the prior year period. For the nine months ended September 30, 2023, net sales decreased in the U.S. by $463.8 million, the EMEA region by $112.6 million, the APAC region by $43.8 million, Canada by $31.8 million and the CALA region by $26.2 million compared to the prior year period. Foreign exchange rate changes impacted CCS segment net sales favorably by less than 1% for the three months ended September 30, 2023 but unfavorably by less than 1% during the nine months ended September 30, 2023 compared to the prior year periods.

For the three and nine months ended September 30, 2023, CCS segment operating income and adjusted EBITDA decreased compared to the prior year periods primarily due to lower sales volumes, partially offset by lower SG&A, material, freight and R&D costs. The reductions in SG&A costs impacting both operating income and adjusted EBITDA were primarily due to lower variable incentive compensation expense and cost savings initiatives, partially offset by higher bad debt expense. For the nine months ended September 30, 2023, CCS segment operating income and adjustment EBITDA also benefitted from favorable product mix. CCS segment operating income for the three months ended September 30, 2023 was also unfavorably impacted by an increase of $15.5 million in restructuring costs but favorably impacted by a decrease of $5.2 million in amortization expense. CCS operating income for the nine months ended September 30, 2023 was favorably impacted by a reduction of $24.1 million in amortization expense, a gain on the sale of an international manufacturing facility of $20.2 million that was recorded as a reduction to restructuring costs, a reduction of $9.4 million in transaction, transformation and integration costs and a $2.0 million recovery of accounts receivable that we had previously reserved during the prior year period for $3.7 million when we determined they were uncollectible due to the Russia/Ukraine conflict. During the nine months ended September 30, 2023, CCS operating income was unfavorably impacted by an increase of $20.3 million in restructuring costs, excluding the gain on the sale of a facility discussed above. Amortization expense, restructuring costs, transaction, transformation and integration costs and the charges and recoveries related to accounts receivable that were determined to be uncollectible as a result of the Russia/Ukraine conflict are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” below.

Outdoor Wireless Networks Segment

For the three and nine months ended September 30, 2023, OWN segment net sales decreased compared to the prior year periods primarily due to lower sales volumes as a result of reductions in spending by certain North American operators. From a regional perspective, for the three months ended September 30, 2023, OWN segment net sales decreased in the U.S. by $150.8 million, the APAC region by $12.2 million, Canada by $5.0 million, the CALA region by $3.5 million and the EMEA region by $0.3 million compared to the prior year period. For the nine months ended September 30, 2023, net sales decreased in the U.S. by $389.7 million, the APAC region by $26.9 million, Canada by $23.9 million, the EMEA region by $12.7 million and the CALA region by $12.4 million compared to the prior year period. Foreign exchange rate changes impacted OWN segment net sales favorably by less than 1% for the three months ended September 30, 2023 but unfavorably by less than 1% during the nine months ended September 30, 2023 compared to the prior year periods.

For the three and nine months ended September 30, 2023, OWN segment operating income and adjusted EBITDA decreased compared to the prior year periods primarily due to lower sales volumes and unfavorable product mix, partially offset by lower freight, material, SG&A and R&D costs. The reductions in SG&A costs impacting both operating income and adjusted EBITDA were primarily due to cost savings initiatives and lower variable incentive compensation expense. OWN segment operating income for the three months ended September 30, 2023 was favorably impacted by a decrease of $3.1 million in amortization expense. OWN segment operating income for the nine months ended September 30, 2023 was favorably impacted by a reduction of $15.4 million in restructuring costs, a reduction of $9.0 million in amortization expense and a reduction of $4.0 million in transaction, transformation and integration costs. Amortization expense, restructuring costs and transaction, transformation and integration costs are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” below.

Networking, Intelligent Cellular and Security Solutions Segment

For the three and nine months ended September 30, 2023, NICS segment net sales increased compared to the prior year periods primarily due to higher sales volumes of our Ruckus products as well as our distributed antenna systems products. Net sales for the nine months ended September 30, 2023 were also favorably impacted by pricing, although to a lesser degree than volume. From a regional perspective, for the three months ended September 30, 2023, NICS segment net sales increased in the U.S. by $34.2 million, the EMEA region by $4.3 million and Canada by $1.9 million, but decreased in the APAC region by $5.7 million and the CALA region by $3.6 million compared to the prior year period. For the nine months ended September 30, 2023, net sales increased in the U.S. by $159.9 million, the EMEA region by $62.5 million, the APAC region by $18.7 million, Canada by $6.7 million and the CALA region by $2.0 million compared to the prior year period. Foreign exchange rate changes impacted NICS segment net sales favorably by less than 1% during the three and nine months ended September 30, 2023 compared to the prior year periods.

For the three and nine months ended September 30, 2023, NICS segment operating income and adjusted EBITDA both increased compared to the prior year periods primarily due to higher sales volumes, increased pricing and lower freight, R&D, material and SG&A costs. NICS segment operating income was favorably impacted by a gain of $3.5 million related to the settlement of an intellectual property litigation claim during the three and nine months ended September 30, 2023. The impacts of intellectual property litigation settlements are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” below.

Access Network Solutions Segment

For the three and nine months ended September 30, 2023, net sales decreased in the ANS segment due to lower sales volumes compared to the prior year periods. From a regional perspective, for the three months ended September 30, 2023, ANS segment net sales decreased in the U.S. by $62.2 million, the CALA region by $30.7 million, the EMEA region by $14.7 million, the APAC region by $12.9 million and Canada by $3.5 million compared to the prior year period. For the nine months ended September 30, 2023, net sales decreased in the CALA region by $49.7 million, the APAC region by $47.4 million and the EMEA region by $11.3 million, but increased in Canada by $4.7 million and the U.S. by $1.8 million compared to the prior year period. Foreign exchange rate changes impacted net sales favorably by less than 1% during the three months ended September 30, 2023 and unfavorably by less than 1% during the nine months ended September 30, 2023 compared to the prior year periods.

For the three and nine months ended September 30, 2023, ANS segment operating loss and adjusted EBITDA were impacted unfavorably by lower sales volumes but benefited from lower freight, SG&A and R&D costs compared to the prior year periods. The reductions in SG&A costs impacting both operating income and adjusted EBITDA were primarily due to cost savings initiatives and lower variable incentive compensation expense. ANS segment operating loss and adjusted EBITDA also benefited from favorable product mix for the three months ended September 30, 2023 compared to the prior year period. For the three and nine months ended September 30, 2023, ANS segment operating loss was negatively impacted by a goodwill impairment charge of $425.9 million and increases of $2.6 million and $6.1 million in restructuring costs, respectively. These negative impacts were partially offset by reductions of $24.3 million and $49.0 million in amortization expense in the three and nine months ended September 30, 2023, respectively. For the three months ended September 30, 2023, ANS segment operating loss was also unfavorably impacted by an increase of $10.4 million in transaction, transformation and integration costs. Goodwill impairment charges, amortization expense and transaction, transformation and integration costs are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” below.

Home Networks Segment

Net sales for the Home segment decreased for the three and nine months ended September 30, 2023 due to lower sales volumes compared to the prior year periods. From a regional perspective, for the three months ended September 30, 2023, Home segment net sales decreased in the U.S. by $65.8 million, the EMEA region by $34.6 million, the CALA region by $25.3 million, Canada by $11.3 million and the APAC region by $5.0 million compared to the prior year period. For the nine months ended September 30, 2023, net sales decreased in the U.S. by $194.0 million, the EMEA region by $112.6 million, the CALA region by $63.9 million, Canada by $12.5 million and the APAC region by $11.9 million compared to the prior year period. Foreign exchange rate changes did not have a significant impact to Home segment net sales for the three months ended September 30, 2023 and impacted Home segment net sales unfavorably by less than 1% during the nine months ended September 30, 2023 compared to the prior year periods.

For the three and nine months ended September 30, 2023, Home segment operating loss and adjusted EBITDA compared to the prior year periods were unfavorably impacted by lower sales volumes, partially offset by favorable product mix and lower freight, SG&A and R&D costs. For the three months ended September 30, 2023, Home segment operating loss and adjusted EBITDA were also favorably impacted by lower material costs. For the three and nine months ended September 30, 2023, Home segment operating loss was unfavorably impacted by an intangible asset impairment charge of $469.2 million. For the nine months ended September 30, 2023, Home segment operating loss was unfavorably impacted by an increase of $7.7 million in restructuring costs and $5.6 million in transaction, transformation and integration costs, partially offset by a favorable impact of the reversal of $11.0 million in intellectual property litigation settlement charges related to a claim that was settled for less than previously estimated. Asset impairment charges, intellectual property litigation settlement charges, transaction, transformation and integration costs and restructuring costs are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” below.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes certain key measures of our liquidity and capital resources (in millions, except percentage data):

(dollars in millions)

(1) Working capital consisted of current assets of $3,214.7 million less current liabilities of $1,546.5 million as of September 30, 2023. Working capital consisted of current assets of $3,726.2 million less current liabilities of $2,107.5 million as of December 31, 2022.

(2) Total capitalization includes long-term debt, including the current portion, Series A convertible preferred stock (the Convertible Preferred Stock) and stockholders’ deficit.

Our principal sources of liquidity on a short-term basis are cash and cash equivalents, cash flows provided by operations and availability under our credit facilities. On a long-term basis, our potential sources of liquidity also include raising capital through the issuance of additional equity and/or debt.

In the second quarter of 2023, we amended our 2026 Term Loan to replace LIBOR with an adjusted Secured Overnight Financing Rate as administered by the Federal Reserve Bank of New York (SOFR) as the reference interest rate in anticipation of the cessation of LIBOR in 2023. The changes were effective July 1, 2023 and we do not anticipate a material impact on our results of operations or cash flows with the transition to SOFR in our variable rate debt.

The primary uses of liquidity include debt service requirements, voluntary debt repayments, redemptions or purchases on the open market, working capital requirements, capital expenditures, business separation transaction costs, transformation costs, restructuring costs, dividends related to the Convertible Preferred Stock if we elect to pay such dividends in cash, litigation settlements, income tax payments and other contractual obligations.

We currently believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our Revolving Credit Facility, will be sufficient to meet our presently anticipated future cash needs for at least the next 12 months. However, we may be required to obtain additional financing in the future to address our liquidity needs, and, subject to market conditions, we may from time to time seek to amend, refinance, restructure or repurchase our outstanding indebtedness and/or raise additional equity financing. Any debt we incur in the future may have terms (including cash interest rate, financial covenants and covenants limiting our operating flexibility or ability to obtain additional financings) that are not favorable to us, and any such additional equity financing may dilute the economic and/or voting interests of our existing stockholders, may be preferred in right of payment to our outstanding common stock or confer other privileges to the holders and may contain financial or operational covenants that restrict our operating flexibility or ability to obtain additional financings. Furthermore, our failure to obtain any necessary financing could have a material and adverse effect on our results of operations, cash flows, financial condition and liquidity.

We may experience volatility in cash flows between periods due to, among other reasons, variability in the timing of vendor payments and customer receipts. We may, from time to time, seek to obtain alternative sources of financing, by borrowing additional amounts under our Revolving Credit Facility, issuing debt or equity securities or incurring other indebtedness, if market conditions are favorable, utilizing trade credit, selling assets (including businesses or business lines) or securitizing receivables to meet future cash needs or to reduce our borrowing costs. Any issuance of equity or debt may be for cash or in exchange for our outstanding securities or indebtedness, or a combination thereof.

We are aware that our outstanding debt securities and debt under our credit facilities are currently trading at substantial discounts to their respective principal amounts. In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may, from time to time, purchase such debt for cash, in exchange for common or preferred stock or debt, or for a combination thereof, in each case in open-market purchases and/or privately negotiated transactions and upon such terms and at such prices as we may determine. Any such transactions will be dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions and applicable regulatory, legal and accounting factors. Whether or not we engage in any such transactions will be determined at our discretion. The amounts involved in any such transactions, individually or in the aggregate, may be material.

During the nine months ended September 30, 2023, the interest payments on our variable rate debt increased as a result of the Federal Reserve’s increase in interest rates that began in 2022. Our interest payments on our variable rate debt will continue to increase if the Federal Reserve continues to raise interest rates. See Part II, Item 7A, “Quantitative and Qualitative Disclosure About Market Risk” in our 2022 Annual Report for further discussion of our interest rate risk.

In July 2023 we entered into a long-term supply contract with a third party to secure the supply of certain raw materials. Under the terms of the contract, we will make advance payments through 2026 totaling $120.0 million (undiscounted) and based on meeting certain minimum purchase requirements through 2031, such advance payments will be credited and applied to future orders on a quarterly basis beginning in 2027 through 2031. We have committed to purchases of raw material under this agreement beginning in 2023 and growing to a level of approximately $137 million per year by 2026 and continuing through 2032.

Although there are no financial maintenance covenants under the terms of our senior notes, there is a limitation, among other limitations, on certain future borrowings based on an adjusted leverage ratio or a fixed charge coverage ratio. These ratios are based on financial measures similar to non-GAAP adjusted EBITDA as presented in the “Reconciliation of Non-GAAP Measures” section below, but also give pro forma effect to certain events, including acquisitions, synergies and savings from cost reduction initiatives such as facility closures and headcount reductions. For the twelve months ended September 30, 2023, our non-GAAP pro forma adjusted EBITDA, as measured pursuant to the indentures governing our notes, was $1,329.1 million, which included annualized savings expected from cost reduction initiatives of $132.7 million so that the impact of cost reduction initiatives is fully reflected in the twelve-month period used in the calculation of the ratios. In addition to limitations under these indentures, our senior secured credit facilities contain customary negative covenants based on similar financial measures. We believe we are in compliance with the covenants under our indentures and senior secured credit facilities as of September 30, 2023.

Cash and cash equivalents increased during the nine months ended September 30, 2023 primarily driven by cash generated by operating activities of $229.5 million and proceeds from the sale of property, plant and equipment of $41.8 million, partially offset by cash paid for debt repurchases of $92.1 million and capital expenditures of $43.9 million. The proceeds on the sale of property, plant and equipment primarily relate to the sale of an international manufacturing facility that was closed as part of CommScope NEXT. As of September 30, 2023, approximately 46% of our cash and cash equivalents were held outside the U.S.

Working capital, excluding cash and cash equivalents and the current portion of long-term debt, decreased during the nine months ended September 30, 2023 primarily due to lower accounts receivable with unfavorable operating performance driving lower net sales in the third quarter of 2023 compared to the fourth quarter of 2022 and lower inventory due to inventory reduction initiatives. These were partially offset by reductions in current liabilities with unfavorable operating performance driving lower accounts payable and lower accrued liabilities due to the pay out of our 2022 variable incentive compensation and a reduced 2023 incentive. During the nine months ended September 30, 2023, we sold accounts receivable under customer-sponsored supplier financing agreements. This had an impact of approximately $40 million on working capital, excluding cash and cash equivalents and the current portion of long-term debt, as of September 30, 2023. Under these agreements, we are able to sell certain accounts receivable to a bank, and we retain no interest in and have no servicing responsibilities for the accounts receivable sold. The net reduction in total capitalization during the nine months ended September 30, 2023 reflected the net loss for the period.

Cash Flow Overview

(dollars in millions)

Operating Activities

(in millions)

During the nine months ended September 30, 2023, the increase in cash generated by operating activities compared to the prior year period was primarily driven by reduced inventory purchases and cost saving initiatives, partially offset by higher interest payments.

Investing Activities

(in millions)

37

During the nine months ended September 30, 2023, the increase in cash generated by (used in) investing activities compared to the prior year period was primarily driven by $41.8 million of proceeds from the sale of property, plant and equipment and a $34.8 decrease in capital expenditures. The current period proceeds on the sale of property, plant and equipment primarily relate to the sale of an international manufacturing facility that was closed as part of CommScope NEXT. Cash generated by (used in) investing activities were favorably impacted in the current year period by proceeds of $11.2 million related to the sale of an equity investment and proceeds of $9.3 million on the sale of certain nonfinancial assets. Cash used in investing activities in the prior year period was impacted favorably by proceeds of $6.9 million related to the sale of an equity method investment, a return of $4.5 million on equity method investments and proceeds of $5.0 million on the sale of certain nonfinancial assets.

Financing Activities

(in millions)

During the nine months ended September 30, 2023, we repurchased $81.4 million aggregate principal amount of our 8.25% senior notes due 2027, $4.3 million aggregate principal amount of our 7.125% senior notes due 2028 and $25.4 million aggregate principal amount of our 6.00% senior notes due 2025, for total cash consideration paid of $92.1 million. During the nine months ended September 30, 2023, we also paid three quarterly scheduled amortization payments totaling $24.0 million on the 2026 Term Loan. We did not borrow under our senior secured asset-based revolving credit facility (Revolving Credit Facility) during the nine months ended September 30, 2023. As of September 30, 2023, we had no outstanding borrowings under the Revolving Credit Facility and the remaining availability was $771.4 million, reflecting a borrowing base subject to maximum capacity of $865.3 million reduced by $93.9 million of letters of credit issued under the Revolving Credit Facility.

During the nine months ended September 30, 2022, we borrowed $333.0 million and repaid $228.0 million under the Revolving Credit Facility. We also paid three quarterly scheduled amortization payments totaling $24.0 million on the 2026 Term Loan during the nine months ended September 30, 2022.

Cash generated by (used in) financing activities for the nine months ended September 30, 2023 was favorably impacted by the $45.9 million of dividends paid in additional shares of the Convertible Preferred Stock in the current year period compared to the $14.9 million cash dividend payment and $29.2 million of dividends paid in additional shares of the Convertible Preferred Stock in the prior year period. During the nine months ended September 30, 2023, employees surrendered shares of our common stock to satisfy their tax withholding requirements on vested restricted stock units and performance share units, which reduced cash flows by $8.9 million compared to $14.0 million in the prior year period.

Reconciliation of Non-GAAP Measures

We believe that presenting certain non-GAAP financial measures enhances an investor’s understanding of our financial performance. We further believe that these financial measures are useful in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business. We also use certain of these financial measures for business planning purposes and in measuring our performance relative to that of our competitors.

We believe these financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the term "non-GAAP adjusted EBITDA" may vary from that of others in our industry. These financial measures should not be considered as alternatives to operating income (loss), net income (loss) or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance, operating cash flows or liquidity.

We also believe presenting these non-GAAP results for the twelve months ended September 30, 2023 provides an additional tool for assessing our recent performance. Such amounts are unaudited and are derived by subtracting the data for the nine months ended September 30, 2022 from the data for the year ended December 31, 2022 and then adding the data for the nine months ended September 30, 2023.

Although there are no financial maintenance covenants under the terms of our senior notes, there is a limitation, among other limitations, on certain future borrowings based on an adjusted leverage ratio or a fixed charge coverage ratio. These ratios are based on financial measures similar to non-GAAP adjusted EBITDA as presented in this section, but also give pro forma effect to certain events, including acquisitions and savings from cost reduction initiatives such as facility closures and headcount reductions.

Consolidated

(in millions)

(1) In 2023, primarily reflects transaction costs related to certain CommScope NEXT initiatives. In 2022, primarily reflects transformation costs related to CommScope NEXT and integration costs related to the ARRIS International plc (ARRIS) acquisition.

(2) In 2023 and 2022, reflects ARRIS acquisition accounting adjustments related to reducing deferred revenue to its estimated fair value.

(3) In 2023, primarily reflects costs of the identification, investigation, defense and recovery efforts related to a cyber incident that occurred in late March of 2023.

Reconciliation of Segment Adjusted EBITDA

Segment adjusted EBITDA is provided as a performance measure in Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements included herein. Below we reconcile segment adjusted EBITDA for each segment, individually, to operating income (loss) for that segment to supplement the reconciliation of the total segment adjusted EBITDA to consolidated operating income (loss) in Note 7.

Connectivity and Cable Solutions Segment

(in millions)

Outdoor Wireless Networks Segment

(in millions)

40

Networking Intelligent Cellular and Security Solutions Segment

(in millions)

Access Network Solutions Segment

(in millions)

Home Networks Segment

(in millions)

Note: Components may not sum to total due to rounding.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q or any other oral or written statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These statements may discuss goals, targets, intentions or expectations as to future plans, trends, events, results of operations or financial condition or otherwise, in each case, based on current beliefs and expectations of management, as well as assumptions made by, and information currently available to, management. These forward-looking statements are generally identified by their use of such terms and phrases as “intend,” “goal,” “estimate,” “expect,” “project,” “projections,” “plans,” “potential,” “anticipate,” “should,” “could,” “designed to,” “foreseeable future,” “believe,” “think,” “scheduled,” “outlook,” “target,” “guidance” and similar expressions, although not all forward-looking statements contain such terms. This list of indicative terms and phrases is not intended to be all-inclusive.

These forward-looking statements are subject to various risks and uncertainties, many of which are outside our control, including, without limitation, our dependence on customers’ capital spending on data, communication and entertainment equipment, which could be negatively impacted by a regional or global economic downturn, among other factors; the potential impact of higher than normal inflation; concentration of sales among a limited number of customers and channel partners; risks associated with our sales through channel partners; changes to the regulatory environment in which we and our customers operate; changes in technology; industry competition and the ability to retain customers through product innovation, introduction, and marketing; changes in cost and availability of key raw materials, components and commodities and the potential effect on customer pricing and timing of delivery of products to customers; risks related to our ability to implement price increases on our products and services; risks associated with our dependence on a limited number of key suppliers for certain raw materials and components; risks related to the successful execution of CommScope NEXT; potential difficulties in realigning global manufacturing capacity and capabilities among our global manufacturing facilities or those of our contract manufacturers that may affect our ability to meet customer demands for products; possible future restructuring actions; the risk that our manufacturing operations, including our contract manufacturers on which we rely, encounter capacity, production, quality, financial or other difficulties causing difficulty in meeting customer demands; substantial indebtedness and restrictive debt covenants; our ability to incur additional indebtedness and increases in interest rates; our ability to generate cash to service our indebtedness; the divestiture of the Home segment and its effect on our remaining businesses; the potential separation, divestiture or discontinuance of another business or product line, including uncertainty regarding the timing of the separation, achievement of the expected benefits and the potential disruption to the business; our ability to integrate and fully realize anticipated benefits from prior or future divestitures, acquisitions or equity investments; possible future additional impairment charges for fixed or intangible assets, including goodwill; our ability to attract and retain qualified key employees; labor unrest; product quality or performance issues, including those associated with our suppliers or contract manufacturers, and associated warranty claims; our ability to maintain effective management information technology systems and to successfully implement major systems initiatives; cyber-security incidents, including data security breaches, ransomware or computer viruses; the use of open standards; the long-term impact of climate change; significant international operations exposing us to economic risks like variability in foreign exchange rates and inflation, as well as political and other risks, including the impact of wars, regional conflicts and terrorism; our ability to comply with governmental anti-corruption laws and regulations worldwide; the impact of export and import controls and sanctions worldwide on our supply chain and ability to compete in international markets; changes in the laws and policies in the United States affecting trade, including the risk and uncertainty related to tariffs or potential trade wars and potential changes to laws and policies, that may impact our products; the costs of protecting or defending intellectual property; costs and challenges of compliance with domestic and foreign social and environmental laws; the impact of litigation and similar regulatory proceedings in which we are involved or may become involved, including the costs of such litigation; the scope, duration and impact of disease outbreaks and pandemics, such as COVID-19, on our business, including employees, sites, operations, customers, supply chain logistics and the global economy; our stock price volatility; income tax rate variability and ability to recover amounts recorded as deferred tax assets; and other factors beyond our control. These and other factors are discussed in greater detail in our 2022 Annual Report on Form 10-K and may be updated from time to time in our annual reports, quarterly reports, current reports and other filings we make with the Securities and Exchange Commission. Although the information contained in this Quarterly Report on Form 10-Q represents our best judgment as of the date of this report based on information currently available and reasonable assumptions, we can give no assurance that the expectations will be attained or that any deviation will not be material. Given these uncertainties, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date made. We are not undertaking any duty or obligation to update this information to reflect developments or information obtained after the date of this report, except as otherwise may be required by law.

There have been no material changes in the interest rate risk, commodity price risk or foreign currency exchange rate risk information previously reported under Item 7A of our 2022 Annual Report, as filed with the SEC on February 23, 2023.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

During the third quarter of 2023, as part of our integration initiatives, we transitioned our ANS segment to our SAP S/4HANA enterprise resource planning platform. We assessed any potential impacts on our internal controls and processes related both to the implementation of the system and the activities performed using the new system. As a result, we have updated our current processes and the respective control activities to align with the upgraded system functionality. We believe the necessary steps have been taken to monitor and maintain appropriate internal control over financial reporting during this period of change, and we will continue to evaluate the operating effectiveness of related key controls during subsequent periods.

Reference should be made to our 2022 Annual Report for additional information regarding discussion of the effectiveness of the Company’s controls and procedures. Other than the SAP S/4HANA integration initiative noted above, there have been no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company’s business, financial condition, results of operations and cash flows are subject to various risks which could cause actual results to vary from recent results or from anticipated future results. There have been no material changes to our risk factors disclosed in Part I, Item 1A, "Risk Factors" of our 2022 Annual Report.