Vistance Networks, Inc.: Form 10-Q for the period ended Jun 30, 2024

The following narrative is an analysis of the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023. 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, 2023 (2023 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.

We completed the acquisition of certain assets of Casa Systems, Inc. and its subsidiaries (Casa) on June 7, 2024 (the Casa Transaction). As part of the Casa Transaction, we acquired certain assets (the Casa Assets) and assumed certain specified liabilities (the Casa Liabilities) of Casa. The sale was conducted pursuant to the bid procedures (the Bid Procedures) established in the chapter 11 cases of Casa Systems, Inc. and certain affiliates in the U.S. Bankruptcy Court for the District of Delaware (the Bankruptcy Court). Pursuant to the Bid Procedures, we were designated as the successful bidder following an auction held on May 29, 2024. On June 5, 2024, the Bankruptcy Court entered an order authorizing the sale of the Casa Assets to us pursuant to section 363 of the Bankruptcy Court (subject to the terms thereof). The sale closed on June 7, 2024 and, at such time, we funded the purchase price of $45.1 million and settled certain assumed Casa Liabilities, with cash on hand. We plan to integrate this strategic acquisition into our Access Network Solutions (ANS) segment and expect the acquisition to strengthen our ANS segment’s position by enhancing its virtual cable modem termination systems and passive optical network product offerings, which will enable customers to migrate to distributed access architecture solutions at their own speed, and further grow our customer base. We recorded $1.0 million of transaction and integration costs for both the three and six months ended June 30, 2024 related to the Casa Transaction, and these costs were recognized in selling, general and administrative expense in the Condensed Consolidated Statements of Operations. See Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion of the Casa Transaction.

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-leverage our indebtedness 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, capacity expansion and operational efficiencies. In 2023, we experienced headwinds related to a slow-down in spending by our customers as discussed further below, but we continued to execute under CommScope NEXT to improve our profitability and cash flows by continuing to drive operational efficiencies and focusing on portfolio optimization. In the first half of 2024, we continued to focus on driving operational efficiencies and other cost savings initiatives as well as portfolio optimization, all of which should enable us to take advantage of the expected recovery in demand in the second half of 2024. To that end, we incurred $0.9 million and $31.5 million of net restructuring costs and $23.7 million and $32.3 million of transaction, transformation and integration costs during the three and six months ended June 30, 2024, respectively, primarily related to CommScope NEXT initiatives. We expect to continue to incur such costs during the remainder of 2024 as we continue executing on CommScope NEXT initiatives, and the resulting charges and cash requirements could be material.

On January 9, 2024, we completed the sale of our Home Networks (Home) segment and substantially all of the associated segment assets and liabilities (Home business) to Vantiva SA (Vantiva) pursuant to the Call Option Agreement entered into on October 2, 2023 and the Purchase Agreement dated as of December 7, 2023. In the fourth quarter of 2023, we determined the sale of our Home business met the “held for sale” criteria and the “discontinued operations” criteria in accordance with accounting guidance. All prior period amounts have been recast to reflect the discontinuation of our Home business. Unless otherwise noted, the following discussions relate solely to our continuing operations. For further discussion of the discontinued operation related to our Home business, see Note 3 in the Notes to Unaudited Condensed Consolidated Financial Statements.

Our continuing operations results for the prior year periods include general corporate costs that were previously allocated to the Home segment. These indirect costs, reflected on the corporate and other line item within our segment information below, are classified as continuing operations for the prior year periods presented, since they were not directly attributable to the discontinued operations of the Home segment. Beginning in the first quarter of 2024, these costs have been reallocated to our remaining segments and partially offset by income from our transition services agreement with Vantiva.

As a result of the divestiture of the Home business, we are now reporting financial performance based on the following remaining four operating segments, which excludes our Home business: Connectivity and Cable Solutions (CCS), Outdoor Wireless Networks (OWN), Networking, Intelligent Cellular and Security Solutions (NICS) and ANS. For the prior year periods presented, amounts have been recast to reflect these operating segment changes.

As of January 1, 2024, we shifted certain product lines from our CCS segment to our ANS segment to better align with how the businesses are being managed. All prior period amounts have been recast to reflect these operating segment changes.

In July 2024, we entered into a definitive agreement to sell our OWN segment as well as the Distributed Antenna Systems (DAS) business unit of our NICS segment to Amphenol Corporation. As such, below we refer to certain supplementary Core financial measures, which reflect the results of the CCS, NICS excluding Distributed Antenna Systems (DAS), and ANS segments, in the aggregate. Core financial measures exclude the results and performance of the OWN segment and DAS business unit in NICS. The Core results and the OWN and DAS results represent the business results as currently managed and reported by the Company. Future results and the composition of any business divested in the future may vary and differ materially from the presentation of the Core financial measures. See the Segment Results section below for the aggregation of our Core financial measures.

Impacts of Current Economic Conditions

In 2023, macroeconomic factors such as higher interest rates, inflation and concerns about a global economic slow-down softened demand for our products, with certain customers reducing purchases as they right-sized their inventories and others pausing capital spending. This industry recession has continued to negatively impact our net sales in all segments for the first half of 2024. We are beginning to see a recovery in demand in certain businesses and expect to see additional recovery in demand later in 2024.

In 2023, we began implementing additional cost savings initiatives to improve profitability, and we continued to implement further initiatives during the first half of 2024. These initiatives should enable us to take advantage of the expected recovery in demand later in 2024. If the expected recovery in demand of our products does not occur in 2024, our outlook will be materially impacted.

For more discussion on risks related to our customers, see Part I, Item 1A, “Risk Factors” in our 2023 Annual Report.

CRITICAL ACCOUNTING POLICIES

Other than an update to the impairment reviews of goodwill, there have been no changes in our critical accounting policies as disclosed in our 2023 Annual Report.

Asset Impairment Reviews

Impairment Reviews of Goodwill

Our annual goodwill impairment test as of October 1, 2023, resulted in partial impairment charges of $99.1 million and $46.3 million for the Enterprise (previously Building and Data Center Connectivity) and ANS reporting units, respectively. As of the most recent interim impairment test on January 1, 2024, immediately before and after changes in the composition of those reporting units, the implied fair value of the Enterprise and ANS reporting units exceeded its respective carrying amount by 8% and 7%, respectively.

Considering the low headroom going forward for each of the ANS and Enterprise reporting units, management has continued to disclose the risk for future impairment in the event of 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 Enterprise 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.

Consistent with the information previously provided in our 2023 Annual Report, the following table provides summary information regarding our reporting units with goodwill balances as of January 1, 2024, that have the lowest level of headroom. The table presents key assumptions used in our interim goodwill analysis, along with sensitivity analyses showing the effect of a change in certain key assumptions, assuming all other assumptions remain constant, to the resulting fair value using an income approach.

(dollars in millions)

29

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2024 WITH THE THREE AND SIX MONTHS ENDED JUNE 30, 2023

(dollars in millions, except per share amounts)

NM – Not meaningful

(1) Core financial measures reflect the results of the CCS, NICS (excluding DAS), and ANS segments, in the aggregate. Core financial measures exclude the results and performance of the OWN segment and DAS business unit in NICS. See “Segment Results” section below for 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)

30

Net sales for the three and six months ended June 30, 2024 decreased $201.9 million, or 12.7%, and $697.9 million, or 21.5%, respectively, compared to the prior year periods primarily driven by decreased sales volumes as certain customers have continued their reduced purchasing as they right-size their inventories and others have continued their pause in capital spending. Core net sales for the three and six months ended June 30, 2024 decreased $215.6 million, or 17.0%, and $634.1 million, or 24.5%, respectively, compared to the prior year periods. The decrease in core net sales for the three months ended June 30, 2024 was driven by lower net sales of $142.6 million in the ANS segment and $104.4 million in the NICS segment (excluding DAS), partially offset by increased net sales of $31.4 million in the CCS segment. The decrease in core net sales for the six months ended June 30, 2024 was driven by lower net sales of $255.6 million in the ANS segment, $193.5 million in the NICS segment (excluding DAS) and $185.0 million in the CCS segment. For the three and six months ended June 30, 2024, net sales in the OWN segment increased $27.5 million and decreased $34.9 million, respectively. For the three and six months ended June 30, 2024, net sales in the DAS business unit decreased $13.8 million and $28.9 million, respectively. For further details by segment, see “Segment Results” below.

From a regional perspective, for the three months ended June 30, 2024 compared to the prior year period, net sales decreased in the U.S. by $107.7 million, the Europe, Middle East and Africa (EMEA) region by $59.0 million, the Caribbean and Latin American (CALA) region by $40.5 million and the Asia Pacific (APAC) region by $4.9 million, but increased in Canada by $10.2 million. For the six months ended June 30, 2024 compared to the prior year period, net sales decreased in the U.S. by $498.2 million, the EMEA region by $120.1 million, the CALA region by $62.2 million, the APAC region by $13.9 million and Canada by $3.5 million. Net sales to customers located outside of the U.S. comprised 35.9% and 35.6% of total net sales for the three and six months ended June 30, 2024, respectively, compared to 37.3% and 34.1% for three and six months ended June 24, 2023, respectively. Foreign exchange rate changes did not have a material impact on our net sales during the three or six months ended June 30, 2024 compared to the prior year periods. For additional information on regional sales by segment, see “Segment Results” below and Note 9 in the Notes to Unaudited Condensed Consolidated Financial Statements included herein.

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

(dollars in millions)

Gross profit (net sales less cost of sales)

Gross profit decreased by $21.3 million and $249.3 million for the three and six months ended June 30, 2024, respectively, compared to the prior year periods primarily due to lower net sales volumes, partially offset by favorable product mix and lower input costs.

Transition service agreement income

Transition service agreement (TSA) income is related to the TSA we entered into with Vantiva in conjunction with the closing of the transaction to divest of the Home business in January 2024. Under the TSA agreement, we are providing (and in some instances receiving) certain post-closing support on a transitional basis. The TSA has varying terms for duration up to sixteen months, depending on the service, and provides for options to extend services for up to two renewal terms of three months each. The majority of the services are expected to cease by the end of 2024.

Selling, general and administrative expense

For the three and six months ended June 30, 2024, selling, general and administrative (SG&A) expense decreased by $19.7 million and $52.0 million, respectively, compared to the prior year periods primarily due to cost savings initiatives, lower bad debt expense of $7.5 million and $8.9 million, respectively, and lower variable incentive compensation expense of $1.2 million and $4.8 million, respectively. These favorable impacts were partially offset by higher transaction, transformation and integration costs of $20.9 million and $29.2 million for the three and six months ended June 30, 2024, respectively, due to ongoing CommScope NEXT initiatives. We expect to continue to incur these costs during the remainder of 2024, and the resulting charges and cash requirements could be material.

Research and development expense

Research and development (R&D) expense decreased by $28.6 million and $57.9 million for the three and six months ended June 30, 2024, respectively, compared to the prior year periods primarily due to lower spending primarily within the CCS, NICS and ANS 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

(dollars in millions)

Amortization of purchased intangible assets

For the three and six months ended June 30, 2024, 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 six months ended June 30, 2024 and 2023 were primarily related to CommScope NEXT. For the three and six months ended June 30, 2024, our restructuring costs were $0.9 million and $31.5 million, respectively, and we paid $7.0 million and $16.3 million, respectively, to settle restructuring liabilities. We expect to pay an additional $9.9 million during the remainder of 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.

Other income, net

(dollars in millions)

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 six months ended June 30, 2024 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 six months ended June 30, 2024 compared to the prior year periods was primarily driven by a gain of $2.9 million and $10.4 million, respectively, on the early extinguishment of debt related to our debt repurchases in the prior year periods. There were no debt repurchases during the three or six months ended June 30, 2024.

Interest expense, Interest income and Income taxes

(dollars in millions)

Interest expense and Interest income

Interest expense for the three and six months ended June 30, 2024 did not change significantly when compared to the prior year periods. For the three and six months ended June 30, 2024, interest expense was favorably impacted by lower long-term debt balances as a result of the debt repurchases in 2023, and unfavorably impacted by 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. 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 7.22% at June 30, 2024, 7.22% at December 31, 2023 and 7.24% at June 30, 2023.

Our interest expense and payments on our variable rate debt could increase if the Federal Reserve increases interest rates in the remainder of 2024. See Part II, Item 7A, “Quantitative and Qualitative Disclosure About Market Risk” in our 2023 Annual Report for further discussion of our interest rate risk.

Income tax (expense) benefit

For the three and six months ended June 30, 2024, we recognized an income tax benefit of $43.7 million on pretax income of $31.1 million and income tax expense of $56.1 million on a pretax loss of $131.2 million, respectively. Our income taxes for the three and six months ended June 30, 2024, were unfavorably impacted by $67.8 million of additional valuation allowance related to current year federal and state interest limitation carryforwards, U.S. anti-deferral provisions and excess tax costs of $7.3 million related to equity compensation awards, partially offset by tax benefits related to federal tax credits. For the three and six months ended June 30, 2024, we used a discrete calculation to compute the net tax benefit associated with external interest. Using the estimated annual tax rate for this component of income would have produced significant variability in the estimated annual effective tax rate, and use of the discrete method for this component results in the best estimate of the estimated annual effective tax rate.

For the three and six months ended June 30, 2023, we recognized an income tax benefit of $3.6 million on a pretax loss of $66.7 million and an income tax benefit of $7.6 million on a pretax loss of $40.9 million, respectively. This tax benefit was unfavorably impacted by U.S. anti-deferral provisions and noncreditable withholding taxes for the three and six months ended June 30, 2023. Excess tax costs of $5.4 million and $6.9 million related to equity compensation awards also impacted the tax benefit unfavorably for the three and six months ended June 30, 2023, respectively. These unfavorable impacts were partially offset by the favorable impacts of federal income tax credits as well as $1.5 million and $9.8 million of tax benefits related to the release of various uncertain tax positions for the three and six months ended June 30, 2023, respectively.

Segment Results

(dollars in millions)

34

(dollars in millions)

(1) Core financial measures reflect the results of the CCS, NICS (excluding DAS), and ANS segments, in the aggregate. Core financial measures exclude the results and performance of the OWN segment and DAS business unit in NICS.

(2) The prior year periods include general corporate costs that were previously allocated to the Home segment. These indirect costs have been classified as continuing operations for the prior year periods, since they were not directly attributable to the discontinued operations of the Home segment. Beginning in the first quarter of 2024, these costs have been reallocated to our remaining segments and partially offset by income from our transition service agreement with Vantiva.

(3) 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 increased for the three months ended compared to the prior year period primarily due to higher sales volumes in the Enterprise business. CCS segment net sales decreased for the six months ended June 30, 2024 compared to the prior year period primarily due to lower sales volumes as certain customers paused spending in the first quarter as they right-sized their inventory levels. From a regional perspective, for the three months ended June 30, 2024, net sales increased in the U.S. by $29.6 million, the APAC region by $14.1 million and Canada by $4.4 million, but decreased in the CALA region by $15.4 million and the EMEA region by $1.3 million, compared to the prior year period. For the six months ended June 30, 2024, net sales decreased in the U.S. by $145.1 million, the CALA region by $29.3 million, the EMEA region by $15.5 million and Canada by $3.3 million, but increased in the APAC region by $8.2 million compared to the prior year period. Foreign exchange rate changes did not have a material impact on our CCS net sales during the three or six months ended June 30, 2024.

For the three months ended June 30, 2024, CCS segment operating income and adjusted EBITDA increased compared to the prior year period primarily due to higher sales volumes and favorable product mix. For the six months ended June 30, 2024, CCS segment operating income and adjusted EBITDA increased compared to the prior year period primarily due to favorable product mix and lower SG&A, input and R&D costs, partially offset by lower sales volumes. The reductions in SG&A costs impacting both operating income and adjusted EBITDA were primarily due to cost savings initiatives. For the three months ended June 30, 2024, CCS segment operating income was also favorably impacted by a reduction in restructuring costs of $12.8 million, partially offset by an increase in transaction, transition and integration costs of $7.2 million. For the six months ended June 30, 2024, CCS segment operating income was unfavorably impacted by an increase in transaction, transition and integration costs of $7.4 million. Restructuring costs and transaction, transition and integration costs are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” below.

Outdoor Wireless Networks Segment

For the three months ended June 30, 2024, OWN segment net sales increased compared to the prior year period primarily due to higher sales volumes. For the six months ended June 30, 2024, OWN segment net sales decreased compared to the prior year period primarily due to lower sales volumes as a result of reductions in spending in the first quarter by certain North American operators. From a regional perspective, for the three months ended June 30, 2024, OWN segment net sales increased in the U.S. by $22.3 million, the CALA region by $1.9 million, the EMEA region by $1.6 million, the APAC region by $1.1 million and Canada by $0.6 million compared to the prior year period. For the six months ended June 30, 2024, OWN segment net sales decreased in the U.S. by $40.9 million and Canada by $0.2 million, but increased in the APAC region by $3.2 million, the CALA region by $2.1 million and the EMEA region by $0.9 million, compared to the prior year period. Foreign exchange rate changes did not have a material impact on our OWN net sales during the three and six months ended June 30, 2024.

For the three months ended June 30, 2024, OWN segment operating income and adjusted EBITDA increased compared to the prior year period primarily due to higher sales volumes, favorable product mix and lower input costs. For the six months ended June 30, 2024, OWN segment operating income and adjusted EBITDA increased compared to the prior year period primarily due to lower SG&A costs, favorable product mix and lower input costs, partially offset by lower sales volumes. The reductions in SG&A costs impacting both operating income and adjusted EBITDA were primarily due to cost savings initiatives. See “Reconciliation of Segment Adjusted EBITDA” below.

Networking, Intelligent Cellular and Security Solutions Segment

For the three and six months ended June 30, 2024, NICS segment net sales decreased compared to the prior year periods primarily due to lower sales volumes of our Ruckus products driven from lower demand and channel inventory digestion. From a regional perspective, for the three months ended June 30, 2024, NICS segment net sales decreased in the U.S. by $50.4 million, the EMEA region by $44.4 million, the APAC region by $19.9 million, the CALA region by $3.2 million and Canada by $0.3 million compared to the prior year period. For the six months ended June 30, 2024, NICS segment net sales decreased in the U.S. by $117.9 million, the EMEA region by $69.4 million, the APAC region by $28.6 million, the CALA region by $5.5 million and Canada by $1.0 million compared to the prior year period. Foreign exchange rate changes did not have a material impact on our NICS net sales during the three or six months ended June 30, 2024.

For the three and six months ended June 30, 2024, NICS segment operating loss increased and adjusted EBITDA decreased compared to the prior year periods primarily due to lower sales volumes, lower pricing and higher inventory reserves, partially offset by lower SG&A and R&D costs and favorable product mix. The reductions in SG&A costs impacting both operating loss and adjusted EBITDA were primarily due to cost savings initiatives. See “Reconciliation of Segment Adjusted EBITDA” below.

Access Network Solutions Segment

For the three and six months ended June 30, 2024, net sales decreased in the ANS segment due to lower sales volumes 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 June 30, 2024, ANS segment net sales decreased in the U.S. by $109.2 million, the CALA region by $23.8 million, the EMEA region by $14.9 million and the APAC region by $0.2 million, but increased in Canada by $5.5 million, compared to the prior year period. For the six months ended June 30, 2024, ANS segment net sales decreased in the U.S. by $194.3 million, the EMEA region by $36.1 million and the CALA region by $29.5 million, but increased in the APAC region by $3.3 million and Canada by $1.0 million, compared to the prior year period. Foreign exchange rate changes did not have a material impact on our ANS net sales during the three or six months ended June 30, 2024.

For the three and six months ended June 30, 2024, ANS segment operating income (loss) and adjusted EBITDA were impacted unfavorably by lower sales volumes but benefited from lower SG&A and R&D costs, favorable product mix, lower freight and lower input costs compared to the prior year periods. The reductions in SG&A costs impacting both operating income (loss) and adjusted EBITDA were primarily due to cost savings initiatives. For the three months ended June 30, 2024, ANS segment operating income (loss) was also favorably impacted by reductions in amortization expense of $13.1 million and restructuring costs of $10.4 million. For the six months ended June 30, 2024, operating income (loss) was favorably impacted by a reduction in amortization expense of $37.0 million, partially offset by increases in restructuring costs of $17.2 million and transaction, transformation and integration costs of $6.9 million. Restructuring costs, transaction, transformation and integration costs and amortization expense 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 is net of assets and liabilities held for sale and consists of current assets of $2,564.8 million less current liabilities of $2,473.1 million as of June 30, 2024 and current assets of $2,584.1 million less current liabilities of $1,102.2 million as of December 31, 2023.

(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.

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. As of June 30, 2024, we have $1.27 billion outstanding on our 6.00% senior unsecured notes which mature on June 15, 2025 (the 2025 Notes), which is within one year of the date that the condensed consolidated financial statements are issued for the quarter ended June 30, 2024. We do not currently have sufficient cash or liquidity to repay the 2025 Notes when they mature on June 15, 2025.

Proceeds of approximately $2.1 billion from the pending sale of our OWN segment and DAS business unit, may be used under certain circumstances to retire the 2025 Notes due to flexibility under our credit agreements. We believe this is probable of occurring and will alleviate substantial doubt about our ability to operate as a going concern.

Concurrently, we are negotiating with our noteholders and lenders to explore both restructuring and/or refinancing of the 2025 Notes. No commitments have been obtained regarding this alternative as of the filing date, thus it has not reached a level of being considered probable at this time, although it remains part of our plans to mitigate conditions that give rise to substantial doubt about our ability to operate as a going concern.

Management has assessed our plan to mitigate the conditions that give rise to substantial doubt and, considering the pending sale of our OWN segment and DAS business unit, management believes such plan is probable and will alleviate substantial doubt about our ability to operate as a going concern.

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, exchange or repurchase our outstanding indebtedness and/or raise additional equity or other 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, amendment, refinancing, restructuring, exchange or repurchases 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 senior secured asset-based revolving credit facility (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.

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, tender offers or exchange offers 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.

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 June 30, 2024, our non-GAAP pro forma adjusted EBITDA, as measured pursuant to the indentures governing our notes, was $926.1 million, which included annualized savings expected from cost reduction initiatives of $38.4 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 June 30, 2024.

Cash and cash equivalents decreased during the six months ended June 30, 2024 primarily driven by cash used in operating activities of $126.9 million and cash paid of $45.1 million related to the Casa Transaction. As of June 30, 2024, approximately 66% of our cash and cash equivalents were held outside the U.S.

Working capital, net of assets and liabilities held for sale and excluding cash and cash equivalents and the current portion of long-term debt, increased during the six months ended June 30, 2024 compared to the fourth quarter of 2023 primarily due to higher accounts receivable balances due to increased net sales in the second quarter of 2024 compared to the fourth quarter of 2023 and lower accrued liabilities due to the pay-out of our 2023 variable incentive compensation. These increases were partially offset by increases in accounts payable and other liabilities. During the six months ended June 30, 2024, we sold accounts receivable under customer-sponsored supplier financing agreements. This had an impact of approximately $53 million on working capital, excluding cash and cash equivalents and the current portion of long-term debt, as of June 30, 2024. 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 six months ended June 30, 2024 reflected the net loss for the period.

Cash Flow Overview

(dollars in millions)

Operating Activities

(in millions)

During the six months ended June 30, 2024, net cash generated by (used in) operating activities decreased compared to the prior year period primarily due to better operating performance in the first half of 2023 compared to the first half of 2024, partially offset by lower variable incentive compensation paid in the first half of 2024 compared to the first half of 2023.

Investing Activities

(in millions)

39

During the six months ended June 30, 2024, the decrease in cash generated by (used in) investing activities compared to the prior year period was primarily driven by cash paid of $45.1 million related to the Casa Transaction and decreased capital expenditures of $23.9 million, partially offset by prior year period proceeds of $41.6 million from the sale of property, plant and equipment mostly related to the sale of an international manufacturing facility that was closed as part of CommScope NEXT. Cash used in investing activities in the current year period was favorably impacted by proceeds of $8.6 million on the sale of certain nonfinancial assets. Cash generated by investing activities in the prior year period was favorably impacted 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.

Financing Activities

(in millions)

During the six months ended June 30, 2024, we paid the quarterly scheduled amortization payment of $16.0 million on the 2026 Term Loan. We did not borrow under our Revolving Credit Facility. As of June 30, 2024, we had no outstanding borrowings under the Revolving Credit Facility and the remaining availability was $535.4 million, reflecting a borrowing base subject to maximum capacity of $634.4 million reduced by $99.0 million of letters of credit issued under the Revolving Credit Facility.

During the six months ended June 30, 2023, we repurchased $56.9 million aggregate principal amount of our 8.25% senior notes due 2027, $3.1 million aggregate principal amount of our 7.125% senior notes due 2028 and $25.4 million aggregate principal amount of the 2025 Notes, for total cash consideration paid of $75.0 million. We also paid two quarterly scheduled amortization payments totaling $16.0 million on the 2026 Term Loan during the six months ended June 30, 2023.

During the six months ended June 30, 2024, employees surrendered shares of our common stock to satisfy their tax withholding requirements on vested restricted stock units (RSUs) and performance share units (PSUs), which reduced cash flows by $1.8 million compared to $8.9 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 June 30, 2024 provides an additional tool for assessing our recent performance. Such amounts are unaudited and are derived by subtracting the data for the six months ended June 30, 2023 from the data for the year ended December 31, 2023 and then adding the data for the six months ended June 30, 2024.

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 2024 and 2023, primarily reflects transaction costs related to certain CommScope NEXT initiatives.

(2) In 2023, 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 9 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 in Note 9.

Connectivity and Cable Solutions Segment

(in millions)

Networking, Intelligent Cellular and Security Solutions Segment (excluding DAS)

(in millions)

Access Network Solutions Segment

(in millions)

42

Outdoor Wireless Networks Segment

(in millions)

Distributed Antenna Systems

(in millions)

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

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes certain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our current views with respect to future events and financial performance. 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 and other cost saving initiatives; 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; our substantial indebtedness, including our upcoming maturities and evaluation of capital structure alternatives and restrictive debt covenants; our ability to refinance existing indebtedness prior to its maturity or incur additional indebtedness at acceptable interest rates or at all; our ability to generate cash to service our indebtedness; the divestiture of the Home segment and its effect on our remaining businesses; the expected timing of the closing of the sale of the OWN and DAS businesses (the Transaction); the expected benefits of the Transaction, including the expected financial performance of CommScope following the Transaction; the ability of the parties to obtain any required regulatory approvals in connection with the Transaction and to complete the Transaction considering the various closing conditions; expenses related to the Transaction and any potential future costs; the occurrence of any event, change or other circumstance that could give rise to the termination of the definitive agreement governing the Transaction, or an inability to consummate the Transaction on the terms described or at all; the effect of the announcement of the Transaction on the ability of CommScope to retain and hire key personnel and maintain relationships with its key business partners and customers, and others with whom it does business, or on its operating results and businesses generally; the response of CommScope’s competitors, creditors and other stakeholders to the Transaction; risks associated with the disruption of management’s attention from ongoing business operations due to the Transaction; the ability to meet expectations regarding the timing and completion of the Transaction; potential litigation relating to the Transaction; restrictions during the pendency of the Transaction that may impact the ability to pursue certain business opportunities, 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 U.S. 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 2023 Annual Report 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 Quarterly Report on Form 10-Q, except to the extent 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 2023 Annual Report, as filed with the Securities and Exchange Commission on February 29, 2024.

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

Reference should be made to our 2023 Annual Report for additional information regarding discussion of the effectiveness of the Company’s controls and procedures. There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2024 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 2023 Annual Report.