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CommScope(COMM) - 2023 Q4 - Annual Report
COMMCommScope(COMM)2024-02-28 16:00
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Financial Performance - Revenues for the year ended December 31, 2023 were 5.79billion,withalossfromcontinuingoperationsof5.79 billion, with a loss from continuing operations of 851.3 million[30] - Consolidated net sales decreased by 1,735.5million(23.11,735.5 million (23.1%) to 5,789.2 million in 2023, with significant declines in CCS and OWN segments[293] - CCS segment net sales decreased by 1,079.4million(28.51,079.4 million (28.5%) in 2023, primarily due to lower sales volumes in the U.S. and EMEA regions[293][294] - NICS segment net sales increased by 178.0 million (18.9%) in 2023, driven by higher sales volumes and increased pricing[293][297] - ANS segment net sales decreased by 246.2million(18.5246.2 million (18.5%) in 2023, with declines in the U.S., CALA, and APAC regions[293][298] - Consolidated operating loss improved by 500.2 million (81.6%) to 112.9millionin2023,drivenbyreducedlossesintheANSsegment[293]−Non−GAAPconsolidatedadjustedEBITDAdecreasedby112.9 million in 2023, driven by reduced losses in the ANS segment[293] - Non-GAAP consolidated adjusted EBITDA decreased by 224.4 million (18.3%) to 999.0millionin2023,reflectinglowerperformanceacrosscoresegments[293]−Non−GAAPproformaadjustedEBITDAfor2023was999.0 million in 2023, reflecting lower performance across core segments[293] - Non-GAAP pro forma adjusted EBITDA for 2023 was 1,101.2 million, including annualized savings of 102.2millionfromcostreductioninitiatives[306]−Non−GAAPadjustedEBITDAfor2023was102.2 million from cost reduction initiatives[306] - Non-GAAP adjusted EBITDA for 2023 was 999.0 million, compared to 1,223.4millionin2022,withadjustmentsincluding1,223.4 million in 2022, with adjustments including 571.4 million in asset impairments and 327.1millioninamortizationofpurchasedintangibleassets[316]DebtandFinancialObligations−Thecompanyhassubstantialindebtedness,with327.1 million in amortization of purchased intangible assets[316] Debt and Financial Obligations - The company has substantial indebtedness, with 3.1 billion in variable rate debt, leading to increased interest costs due to rising rates in 2023[105] - The company has approximately 9.3billionofindebtednessasofDecember31,2023,with9.3 billion of indebtedness as of December 31, 2023, with 688.0 million remaining availability under its Revolving Credit Facility[117] - The company may need to refinance or restructure its 1.3billionof6.01.3 billion of 6.0% senior notes due June 15, 2025, in 2024[111] - Interest payments on long-term debt are expected to total 1,831.1 million over the duration, with 643.0millionduein2024[282]−Thecompanyrepurchased643.0 million due in 2024[282] - The company repurchased 133.1 million of 8.25% senior notes due 2027, 58.4millionof7.12558.4 million of 7.125% senior notes due 2028, and 25.4 million of 6.00% senior notes due 2025, totaling 142.6millionincashconsideration[312]−Netcashusedinfinancingactivitiesin2023was142.6 million in cash consideration[312] - Net cash used in financing activities in 2023 was 181.7 million, primarily due to 142.6millioninlong−termdebtrepurchasesand142.6 million in long-term debt repurchases and 32.0 million in long-term debt repayments[318] Cash Flow and Liquidity - Cash and cash equivalents increased by 170.8millionin2023,with44170.8 million in 2023, with 44% held outside the U.S. as of December 31, 2023[285] - Net cash generated by operating activities increased by 99.9 million (52.6%) to 289.9millionin2023,drivenbyreducedinventorypurchasesandcost−savinginitiatives[286][288]−Netcashgeneratedbyinvestingactivitiesimprovedby289.9 million in 2023, driven by reduced inventory purchases and cost-saving initiatives[286][288] - Net cash generated by investing activities improved by 120.4 million to 38.3millionin2023,primarilydueto38.3 million in 2023, primarily due to 71.2 million from the sale of property, plant, and equipment[286][289] - Cash and cash equivalents increased in 2023 primarily due to 289.9milliongeneratedfromoperatingactivitiesand289.9 million generated from operating activities and 71.2 million from the sale of property, plant, and equipment, partially offset by 142.6millionindebtrepurchasesand142.6 million in debt repurchases and 53.3 million in capital expenditures[308] - As of December 31, 2023, the company had 688.0millioninremainingavailabilityunderitsRevolvingCreditFacility,withaborrowingbaseof688.0 million in remaining availability under its Revolving Credit Facility, with a borrowing base of 785.9 million reduced by 97.9 million in letters of credit[313] Business Segments and Market Trends - The OWN segment focuses on macro and metro cell markets, including base station antennas, RF filters, and wireless spectrum management[32] - The ANS segment provides solutions like CMTS, video infrastructure, and cloud solutions for residential and metro distribution networks[33] - Network convergence trends are driving operators to combine voice, video, and data into single converged networks[34] - Private LTE and 5G networks are becoming critical for enterprises, shifting demand toward wireless solutions[38] - Small cell and DAS solutions are addressing indoor capacity and speed requirements, improving overall network performance[39] - The company is developing technologies to address industry shifts, such as the transition to 5G and distributed access architecture (DAA), but faces risks of losing market share[100] Operational Risks and Challenges - The company's business is highly dependent on third-party capital spending for data, communication, and entertainment equipment, with reductions potentially adversely affecting operations[83] - A significant portion of the company's sales is derived from a limited number of key customers and channel partners, increasing vulnerability to their financial conditions[83][97] - The company faces competitive pressures across all major product groups, with competitors potentially offering more complete solutions or innovative products[88][98] - The company's ability to sell products is highly dependent on the quality of post-sale support services, with inadequate support potentially harming business[91] - The company's performance is tied to the cyclical nature of capital spending in the communications industry, which experienced a significant decrease in 2023[94] - The company's reliance on open standards and third-party technology providers may limit its ability to commercialize products and recapture R&D investments[101] - The company's support organization faces challenges in delivering high-quality support across international operations, potentially impacting business performance[102] - Changes in the regulatory environment and government-funded programs, such as the Infrastructure Investment and Jobs Act (IIJA), could negatively impact customer capital spending decisions[103] - The company may recognize additional impairment charges related to goodwill, identified intangible assets, fixed assets, and right of use assets, which could have a material adverse effect on its financial condition and results of operations[108][121] - The company relies on unaffiliated contract manufacturers, which exposes it to risks such as reduced control over quality assurance, product supply, and costs[110] - The company is dependent on certain raw materials and components linked to commodity markets, such as aluminum, copper, steel, and silicon chips, which are subject to price volatility and supply shortages[123] - The company has historically relied on acquisitions for growth, such as the acquisition of ARRIS in 2019 and TE Connectivity's Broadband Network Solutions business in 2015, but there is no guarantee of future acquisition opportunities[130] - The company may incur significant additional indebtedness in the future, which could exacerbate risks associated with its substantial financial leverage[119] - The company's ability to generate sufficient cash flow to service its indebtedness and pay dividends on preferred stock depends on factors beyond its control, including earnings from subsidiaries[115] - The company's reliance on sole suppliers for certain components increases the risk of product issues or failures, which could negatively impact its results of operations[136] - The company's strategic alliances with leading technology companies are not guaranteed to continue, and the loss of any such relationship could have a material adverse effect on its business[133] - Goodwill and identified intangible assets represented approximately 55% of total assets as of December 31, 2023, with impairment charges of 571.4 million in 2023 and 1,119.6millionin2022[138]−Thecompanyreliesonalimitednumberofkeysuppliersforrawmaterialsandcomponents,withrisksincludingsupplyshortagesandincreasedcosts,particularlyformemorydevices,capacitors,andsiliconchipspost−COVID−19[140]−PotentialadverseimpactsonearningsduetochangesinU.S.orinternationaltradelaws,includingnewtariffsortraderestrictions[141]−Capacityconstraintsorproductiondelaysinglobalmanufacturingoperationscouldleadtolostsalesopportunitiesandcustomerrelationsissues[142]−TheCommScopeNEXTtransformationplanaimstodrivestakeholdervaluebutcarriesriskssuchaslostcustomers,highercosts,andsupplychaindisruptions[145]−Manufacturingrealignmentinitiativesmayresultinlostsales,increasedoperatingcosts,andcustomerrelationsproblemsifnotsuccessfullyimplemented[147]−Acquisitions,suchasARRIS,involverisksincludingintegrationchallenges,unanticipatedcosts,andpotentialfailuretoachieveexpectedgrowthprospects[148]−Carlyleownsapproximately171,119.6 million in 2022[138] - The company relies on a limited number of key suppliers for raw materials and components, with risks including supply shortages and increased costs, particularly for memory devices, capacitors, and silicon chips post-COVID-19[140] - Potential adverse impacts on earnings due to changes in U.S. or international trade laws, including new tariffs or trade restrictions[141] - Capacity constraints or production delays in global manufacturing operations could lead to lost sales opportunities and customer relations issues[142] - The CommScope NEXT transformation plan aims to drive stakeholder value but carries risks such as lost customers, higher costs, and supply chain disruptions[145] - Manufacturing realignment initiatives may result in lost sales, increased operating costs, and customer relations problems if not successfully implemented[147] - Acquisitions, such as ARRIS, involve risks including integration challenges, unanticipated costs, and potential failure to achieve expected growth prospects[148] - Carlyle owns approximately 17% of the company's common stock and has significant influence on business decisions, potentially leading to conflicts of interest with other stockholders[150] - The company faces risks in innovation efforts, including delays in product development, failure to meet customer preferences, and inability to compete with market-accepted products[151][152][153] - Cybersecurity incidents, including data breaches and ransomware, could disrupt operations, result in financial losses, and damage the company's reputation[159] - Climate change risks, including extreme weather events, could disrupt operations, increase costs, and impact financial performance[161][176] - The company faces risks related to counterfeit products, which could harm reputation and reduce net sales[167] - Labor-related risks, including strikes or work stoppages, could disrupt manufacturing and supply chain operations[162][178] - The company is exposed to foreign currency rate fluctuations, particularly in Chinese yuan, E.U. euro, and British pound sterling, which could impact sales and earnings[181] - The company is subject to export and import controls, including compliance with the Uyghur Forced Labor Prevention Act (UFLPA), which could result in penalties or loss of sales opportunities[182] - Intellectual property litigation could result in significant costs, liabilities, or the need to cease using proprietary third-party technology[184][185] Workforce and Manufacturing - Manufacturing employees make up 64% of the global workforce, with most located in low-cost regions like Mexico, China, India, and the Czech Republic[54] - The company employs approximately 20,000 people worldwide as of December 31, 2023[54] Strategic Initiatives and Transformation - CommScope NEXT initiative aims to improve operational efficiency, drive adjusted EBITDA expansion, and increase cash flow for debt reduction[43] - The CommScope NEXT transformation plan aims to drive stakeholder value but carries risks such as lost customers, higher costs, and supply chain disruptions[145] Customer Concentration and Sales - Approximately 17% of consolidated net sales in 2023 came from the top two direct customers, highlighting customer concentration risks[65] - The company's international sales represented 35% of consolidated net sales for the year ended December 31, 2023, with lower gross profit percentages compared to domestic sales[179] Dividends and Shareholder Transactions - Dividends paid in 2023 amounted to 61.8 million in additional shares under the Convertible Preferred Stock[320] - Cash dividends paid in 2022 totaled 14.9million,with14.9 million, with 44.1 million paid in additional shares of the Convertible Preferred Stock[320] - Employee share surrenders in 2023 reduced cash flows by 9.1million,comparedto9.1 million, compared to 14.8 million in the prior year[320] Supply Chain and Raw Materials - The company entered into a long-term supply contract in July 2023, committing to advance payments totaling 120.0millionthrough2026andrawmaterialpurchasesgrowingtoapproximately120.0 million through 2026 and raw material purchases growing to approximately 137 million per year by 2026[283] - The company relies on third-party cloud services (AWS, GCE, Azure) for Wi-Fi-related cloud services, and any disruption could adversely impact operations[172][173] Interest Rates and Borrowing Costs - The weighted average effective interest rate on outstanding borrowings increased to 7.22% in 2023 from 6.91% in 2022, driven by Federal Reserve rate hikes[290] Impairment and Tax Considerations - ANS segment operating loss in 2023 was negatively impacted by a goodwill impairment charge of 472.3millionandanincreaseof472.3 million and an increase of 3.3 million in transaction, transformation, and integration costs, partially offset by a decrease of 18.2millioninrestructuringcostsand18.2 million in restructuring costs and 73.3 million in amortization expense[299] - The company anticipates a reduction of up to $8.0 million in unrecognized tax benefits over the next twelve months[304]