Vistance Networks, Inc. (VISN) FY 2023 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations is for the year ended December 31, 2023 compared with the year ended December 31, 2022. This comparison should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” included in Part I, Item 1A or in other parts of this Annual Report on Form 10-K. For a discussion and analysis of our financial condition and results of operations for the year ended December 31, 2022 compared to December 31, 2021, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2022 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 23, 2023.

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-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 that should enable us to take advantage of the expected recovery in demand in the second half of 2024. To that end, we incurred $29.7 million, $63.0 million and $85.1 million of net restructuring costs and $27.1 million, $35.1 million and $50.6 million of transaction, transformation and integration costs during the years ended December 31, 2023, 2022 and 2021, respectively, primarily related to CommScope NEXT initiatives. We expect to continue to incur such costs during 2024 as we continue executing on CommScope NEXT initiatives, and the resulting charges and cash requirements could be material.

In 2021, as a step in our CommScope NEXT transformation plan, 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 entered into a Call Option Agreement with Vantiva SA, a société anonyme organized under the Laws of France (Vantiva), pursuant to which we granted Vantiva a binding call option to acquire our Home segment and substantially all of the associated segment assets and liabilities (Home business), which was subsequently exercised and a Purchase Agreement signed on December 7, 2023. The transaction closed on January 9, 2024.

We determined the anticipated sale of our Home business met the “held for sale” criteria and the “discontinued operations” criteria in accordance with Accounting Standards Codification (ASC) No. 360-10, Impairment and Disposal of Long Lived Assets, and ASC No. 205-20, Presentation of Financial Statements: Discontinued Operations in the fourth quarter of 2023 due to its relative size and strategic rationale. For all periods presented, amounts have been recast to reflect the discontinuation of our Home business in accordance with ASC 205-20. 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 Consolidated Financial Statements included elsewhere in the Annual Report on Form 10-K.

43

The results of our recast continuing operations do not align with our historical “Core” measures, which excluded the Home segment. Our continuing operations results 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, since they were not directly attributable to the discontinued operations of the Home segment. In future years, these costs will be reallocated to our remaining segments and will be at least partially offset by income from our transition services agreement with Vantiva or eliminated with future restructuring actions.

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 segment: Connectivity and Cable Solutions (CCS), Outdoor Wireless Networks (OWN), Networking, Intelligent Cellular and Security Solutions (NICS) and Access Network Solutions (ANS). For all periods presented, amounts have been recast to reflect these operating segment changes.

Impacts of Current Economic Conditions

In 2023, macroeconomic factors such as higher interest rates and concerns about continued inflation and 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 negatively impacted net sales in our CCS, OWN and ANS segments for the year ended December 31, 2023 and may continue to have a material negative impact on net sales into at least the first half of 2024. Conversely, in our NICS segment, we saw higher demand and favorable pricing impacts that partially offset the impact of lower demand in our other segments for the full year of 2023. However, NICS segment net sales were down in the fourth quarter of 2023 as we saw order rates decline as channel partners paused to digest inventory.

We saw lower input costs across most of our segments as inflation settled during the year. We proactively implemented cost savings initiatives that favorably impacted our profitability for the year ended December 31, 2023 and should enable us to take advantage of the expected recovery in demand in the second half of 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” elsewhere in this Annual Report on Form 10-K.

44

RESULTS OF OPERATIONS

Comparison of results of operations for the year ended December 31, 2023 with the year ended December 31, 2022

(1)
Core segment adjusted EBITDA reflects the results of our CCS, OWN, NICS and ANS segments, in the aggregate, and excludes general corporate costs that were previously allocated to the Home segment and are now classified as continuing operations, since the costs were not directly attributable to the discontinued operations of the Home segment. See the Segment Results section below for illustration of the aggregation of Core segment adjusted EBITDA.

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

Net sales

Net sales in 2023 decreased $1,735.5 million, or 23.1%, compared to the prior year primarily driven by decreased sales volumes as certain customers reduced purchases as they right-size their inventories and others paused capital spending, partially offset by higher pricing. The decrease was driven by lower net sales in the CCS segment of $1,079.4 million, the OWN segment of $587.9 million and the ANS segment of $246.2 million, partially offset by higher net sales of $178.0 million in the NICS segment. For further details by segment, see the discussion of Segment Results below.

From a regional perspective in 2023, net sales decreased in the U.S. by $1,268.1 million, the Europe, Middle East and Africa (EMEA) region by $184.4 million, the Asia Pacific (APAC) region by $114.0 million, the Caribbean and Latin American (CALA) region by $106.9 million, and Canada by $62.1 million. Net sales to customers located outside of the U.S. comprised 35% of total net sales for 2023 compared to 33% for 2022. Foreign exchange rate changes did not have a material impact on our net sales during 2023. For additional information on regional sales by segment, see discussion of Segment Results below and Note 17 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

45

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

Gross profit (net sales less cost of sales)

Gross profit decreased in 2023 compared to the prior year 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 2023, selling, general and administrative (SG&A) expense decreased by $167.6 million compared to 2022, primarily due to cost saving initiatives, lower variable incentive compensation expense of $59.3 million and lower bad debt expense. Bad debt expense in 2022 was driven by a $20.9 million reserve related to an OWN segment customer. Although our transaction, transformation, and integration costs have decreased year-over-year, we expect to continue to incur these costs in 2024 due to ongoing CommScope NEXT initiatives, and the resulting charges and cash requirements could be material.

We also incurred costs of $5.5 million in 2023 related to the identification, investigation, defense, recovery efforts and litigation claims 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 for 2023 decreased by $83.9 million 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, Restructuring costs, net and Asset impairments

Amortization of purchased intangible assets

The amortization of purchased intangible assets was lower in 2023 compared to the prior year because certain of our intangible assets became fully amortized.

Restructuring costs, net

The net restructuring costs recorded in 2023 were primarily related to CommScope NEXT and reflected a gain of $33.9 million, primarily related to selling owned properties, including an international manufacturing facility, along with U.S. office and warehouse facilities. We received proceeds of $67.6 million related to these sales. Excluding the impacts of these facility sales, our restructuring costs were $63.6 million, and we paid $110.8 million to settle restructuring liabilities. We expect to pay an additional $11.7 million in 2024 related to the 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.

46

Asset impairments

We recorded goodwill impairment charges of $472.3 million and $99.1 million in 2023 related to our ANS and Building Data Center Connectivity (BDCC) reporting units, respectively. The ANS reporting unit is the same as our ANS segment and the BDCC reporting unit is in our CCS segment. See the discussion below under “Critical Accounting Policies and Estimates” for more information regarding the goodwill impairment tests performed during 2023. We recorded goodwill impairment charges of $1,119.6 million in 2022 related to our ANS reporting unit.

Other income (expense), net

Foreign currency loss

Foreign currency 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 loss in 2023 compared to 2022 was primarily driven by certain unhedged currencies.

Other income, net

The change in other income, net in 2023 compared to 2022 was primarily driven by a gain of $74.3 million on the early extinguishment of debt related to our debt repurchases as further discussed in Note 8 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Interest expense, Interest income and Income taxes

Interest expense and Interest income

The increase in interest expense in 2023 compared to 2022 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. 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 December 31, 2023 and 6.91% at December 31, 2022. Our interest expense will continue to increase if the Federal Reserve raises interest rates.

Income tax (expense) benefit

For 2023, we recognized income tax expense of $133.4 million on a pretax loss of $717.9 million. Our tax expense on a pretax loss was less than the statutory rate of 21.0% in 2023 primarily due to the unfavorable impact related to a goodwill impairment charge of $571.4 million, for which minimal tax benefits were recorded. Our tax expense was also unfavorably impacted by an additional net $165.4 million of valuation allowance recorded during the year. Our tax expense was also impacted unfavorably by the U.S. anti-deferral provisions and non-creditable withholding taxes, partially offset by tax benefits related to federal tax credits. See Note 13 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for more discussion of our income tax (expense) benefit.

47

For 2022, we recognized an income tax benefit of $15.0 million on a pretax loss of $1,199.7 million. Our tax benefit was less than the statutory rate of 21.0% in 2022 primarily due to a goodwill impairment charge of $1,119.6 million, for which minimal tax benefits were recorded. Our tax benefit was also impacted by the unfavorable impacts of U.S. anti-deferral provisions and non-creditable withholding taxes, partially offset by tax benefit related to federal tax credits.

48

Segment Results

(1)
Core financial measures reflect the results of our CCS, OWN, NICS and ANS segments, in the aggregate, and exclude general corporate costs that were previously allocated to the Home segment reflected on the corporate and other line item. These indirect costs are classified as continuing operations since they were not directly attributable to the discontinued operations of the Home segment. In future years, these costs will be reallocated to our remaining segments and will be at least partially offset by income from our transition services agreement with Vantiva or eliminated with future restructuring actions.

(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 in 2023 compared to the prior year primarily due to lower sales volumes as certain customers paused spending as they right-size their inventory levels. From a regional perspective in 2023, net sales decreased in the U.S. by $783.2 million, the EMEA region by $169.9 million, the APAC region by $50.0 million, Canada by $43.4 million and the CALA region by $32.9 million compared to the prior year. Foreign exchange rate changes did not have a material impact on CCS segment net sales during 2023.

49

For 2023, CCS segment operating income and adjusted EBITDA were unfavorably impacted by lower sales volumes, partially offset by lower SG&A, material, freight and R&D costs, and favorable product mix. 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. In 2023, CCS segment operating income was unfavorably impacted by a goodwill impairment charge of $99.1 million, but this was partially offset by a reduction of $24.0 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 $8.9 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 for $2.7 million when we determined they were uncollectible due to the Russia/Ukraine conflict. Goodwill impairment charges, 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 the discussion below under “Critical Accounting Policies and Estimates” for more information regarding the annual goodwill impairment test performed during 2023. Also see “Reconciliation of Segment Adjusted EBITDA” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.

Outdoor Wireless Networks Segment

For 2023, OWN segment net sales decreased compared to the prior year primarily due to lower sales volumes as a result of reductions in spending by certain North American operators. From a regional perspective in 2023, OWN segment net sales decreased in the U.S. by $513.0 million, the APAC region by $23.7 million, Canada by $24.5 million, the CALA region by $15.6 million and the EMEA region by $11.1 million compared to the prior year. Foreign exchange rate changes did not have a material impact on OWN segment net sales during 2023.

For 2023, OWN segment operating income and adjusted EBITDA decreased compared to the prior year 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 lower bad debt expense, lower variable incentive compensation expense and cost savings initiatives. The bad debt expense in 2022 was driven by a $20.9 million reserve related a distributor customer. OWN segment operating income was favorably impacted by a reduction of $15.8 million in restructuring costs, a reduction of $12.0 million in amortization expense and a reduction of $3.9 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” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.

Networking, Intelligent Cellular and Security Solutions Segment

Net sales for the NICS segment increased in 2023 compared to the prior year primarily due to higher sales volumes of our Ruckus products as well as our distributed antenna systems products and was favorably impacted by pricing, although to a lesser degree than volume. From a regional perspective in 2023, net sales increased in the U.S. by $124.1 million, the EMEA region by $35.5 million, the APAC region by $13.8 million, Canada by $4.5 million and the CALA region by $0.1 million compared to the prior year. Foreign exchange rate changes did not have a material impact on NICS segment net sales during 2023.

For 2023, NICS segment operating income and adjusted EBITDA increased compared to the prior year primarily due to higher sales volumes, increased pricing and lower freight, R&D, material and SG&A costs. NICS segment operating income was unfavorably impacted by $4.0 million in higher transaction, transformation and integrations cost but was favorably impacted by a gain of $3.5 million related to the settlement of an intellectual property litigation claim. Transaction, transformation and integration costs and intellectual property litigation costs are not reflected in adjusted EBITDA. See “Reconciliation of Segment Adjusted EBITDA” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.

Access Network Solutions Segment

Net sales for our ANS segment decreased in 2023 due to lower sales volume as a result of a pause in customer spending. From a regional perspective in 2023, net sales decreased in the U.S. by $96.0 million, the CALA region by $58.5 million, the APAC region by $54.1 million and the EMEA region by $38.9 million but increased in Canada by $1.3 million compared to the prior year. Foreign exchange rate changes did not have a material impact on ANS segment net sales during 2023.

50

In 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. 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. For 2023, ANS segment operating loss was negatively impacted by a goodwill impairment charge of $472.3 million, and an increase of $3.3 million in transaction, transformation and integration costs. These negative impacts were partially offset by a decrease of $18.2 million in restructuring costs and reductions of $73.3 million in amortization expense in 2023. The reduction in restructuring costs reflects a gain on the sale of a U.S. warehouse facility of $19.4. Goodwill impairment charges, transaction, transformation and integration costs, amortization expense and restructuring expense are not reflected in adjusted EBITDA. See the discussion below under “Critical Accounting Policies and Estimates” for more information regarding the annual goodwill impairment test performed during 2023. Also see “Reconciliation of Segment Adjusted EBITDA” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations, below.

Liquidity and Capital Resources

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

(1)
Working capital is net of assets and liabilities held for sale and consists of current assets of $2,584.1 million less current liabilities of $1,102.2 million as of December 31, 2023 and current assets of $3,104.3 million less current liabilities of $1,584.9 million as of December 31, 2022.

(2)
Total capitalization includes long-term debt, including the current portion, Series A convertible preferred stock (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. 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.

51

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. 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, 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.

Our interest payments on long-term debt are expected to total $1,831.1 million over the duration of the debt, with $643.0 million due in 2024 (assuming interest rates in effect as of December 31, 2023 on our variable rate debt). In 2023, the interest payments on our variable rate debt increased as a result of the Federal Reserve’s increase in interest rates. Our interest payments on our variable rate debt will continue to increase if the Federal Reserve continues to increase rates. For additional information regarding our long-term debt obligations, see Note 8 in the Notes to Consolidated Financial Statements and our discussion of our interest rate risk in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this Annual Report on Form 10-K. For information on our obligations related to our Convertible Preferred Stock, see Note 14 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

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.

We have $115.7 million in unrecognized tax benefits; however, the timing of the related tax payments is highly uncertain. We anticipate a reduction of up to $8.0 million of unrecognized tax benefits during the next twelve months. See Note 13 in the Notes to Consolidated Financial Statements included elsewhere in the Annual Report on Form 10-K for further discussion.

We are contingently liable under open standby letters of credit issued by our banks to support performance obligations of a third-party contractor that totaled $35.9 million as of December 31, 2023. These amounts represent our estimate of the maximum amounts we would expect to incur upon the contractual non-performance of the contractor, but we also have cross-indemnities in place that may enable us to recover some or all of our losses in the event of the contractor’s non-performance. We believe the likelihood of having to perform under these guarantees is remote. There were no material amounts recorded in our consolidated financial statements related to third-party guarantee agreements as of December 31, 2023 or 2022.

52

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 year ended December 31, 2023, our non-GAAP pro forma adjusted EBITDA, as measured pursuant to the indentures governing our notes, was $1,101.2 million, which included annualized savings expected from cost reduction initiatives of $102.2 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 at December 31, 2023.

Cash and cash equivalents increased by $170.8 million during 2023 as described under the Cash Flow Overview section below. As of December 31, 2023, approximately 44% 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, decreased during 2023 primarily due to lower accounts receivable with unfavorable operating performance driving lower net sales 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 2023, we sold accounts receivable under customer-sponsored supplier financing agreements. This had an impact of approximately $44 million on working capital, excluding cash and cash equivalents and the current portion of long-term debt, as of December 31, 2023. Under these agreements, we are able to sell 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 2023 reflected the net loss for the year.

Cash Flow Overview

The cash flows related to discontinued operations have not been segregated. Accordingly, the following cash flow overview includes the results of continuing and discontinued operations. Cash and cash equivalents increased during 2023 primarily driven by cash generated by operating activities of $289.9 million and proceeds from the sale of property, plant and equipment of $71.2 million, partially offset by cash paid for debt repurchases of $142.6 million and capital expenditures of $53.3 million. The proceeds on the sale of property, plant and equipment primarily relate to selling an international manufacturing facility, along with U.S. office and warehouse facilities that were closed and consolidated into other locations as part of CommScope NEXT.

53

Operating Activities

During 2023, the increase in cash generated by operating activities compared to the prior year was primarily driven by reduced inventory purchases, the impacts of cost saving initiatives and lower cash paid for taxes, partially offset by higher interest payments. For information on significant non-cash operating activities related to our discontinued operations, see Note 3 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Investing Activities

During 2023, the increase in cash used generated by (used in) investing activities compared to the prior year was primarily driven by $71.2 million of proceeds from the sale of property, plant and equipment and a $48.0 decrease in capital expenditures. Capital expenditures related to our discontinued operations were $2.4 million in 2023 and $4.0 million in 2022. The current period proceeds on the sale of property, plant and equipment primarily relate to the sales of an international manufacturing facility as well as U.S. office and warehouse facilities that were closed as part of CommScope NEXT. Cash generated by other investing activities was favorably impacted in the current year by proceeds of $11.1 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 other investing activities in the prior year period was favorably impacted 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.

54

Financing Activities

In 2023, we repurchased $133.1 million aggregate principal amount of our 8.25% senior notes due 2027, $58.4 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 $142.6 million. We also paid quarterly scheduled amortization payments totaling $32.0 million on the 2026 Term Loan. We did not borrow under our Revolving Credit Facility during 2023.

As of December 31, 2023, we had no outstanding borrowings under the Revolving Credit Facility and the remaining availability was $688.0 million, reflecting a borrowing base subject to maximum capacity of $785.9 million reduced by $97.9 million of letters of credit issued under the Revolving Credit Facility. In the future, the availability under our Revolving Credit Facility will likely be lower with the closing of the divestiture transaction for the Home business and the sale of the related assets.

In 2022, we borrowed $333.0 million and repaid $333.0 million under the Revolving Credit Facility. We also paid four quarterly scheduled amortization payments totaling $32.0 million on our 2026 Term Loan during 2022. In connection with the refinancing of our Revolving Credit Facility in October 2022, we paid $7.2 million of debt issuance costs.

In 2023, we paid dividends of $61.8 million in additional shares due under the Convertible Preferred Stock. In 2022, we paid cash dividends of $14.9 million and paid $44.1 million of dividends in additional shares of the Convertible Preferred Stock. During 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 $9.1 million compared to $14.8 million in the prior year.

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. This financial measure should not be considered as an alternative 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.

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.

55

Consolidated

(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. In 2021, primarily reflects transaction separation costs related to the planned separation of the Home segment from CommScope, transformation costs related to CommScope NEXT and integration costs related to the ARRIS acquisition.

(2)
In 2023, 2022 and 2021, reflects ARRIS acquisition accounting adjustments related to reducing deferred revenue to its fair value.

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

56

Reconciliation of Segment Adjusted EBITDA

Segment adjusted EBITDA is provided as a performance measure in Note 17 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. 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 that footnote.

The corporate and other line item as presented in Note 17 in the Notes to Consolidated Financial Statements represents general corporate costs that were previously allocated to the Home segment. These indirect costs are classified as continuing operations since they were not directly attributable to the discontinued operations of the Home business. In future years, these costs will be reallocated to our remaining segments and will be at least partially offset by income from our transition services agreement with Vantiva or eliminated with future restructuring actions.

Connectivity and Cable Solutions Segment

Outdoor Wireless Networks Segment

57

Networking, Intelligent Cellular and Security Solutions Segment

Access Network Solutions Segment

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) in the United States (U.S.). The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and their underlying assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other objective sources. Management bases its estimates on historical experience and on assumptions that are believed to be reasonable under the circumstances and revises its estimates, as appropriate, when changes in events or circumstances indicate that revisions may be necessary.

The following critical accounting policies and estimates reflected in our financial statements are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events. While we have generally not experienced significant deviations from our critical estimates in the past, it is reasonably possible that these estimates may ultimately differ materially from actual results. See Note 2 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a description of all our significant accounting policies.

58

Asset Impairment Reviews

Impairment Reviews of Goodwill

We test goodwill at the reporting unit level for impairment annually as of October 1 and on an interim basis when events occur or circumstances exist that indicate the carrying value may no longer be recoverable. We compare the fair value of our reporting units with the carrying amount, including goodwill. We recognize an impairment charge for the amount by which the reporting unit’s carrying amount exceeds its fair value.

We estimate the fair value of a reporting unit using a discounted cash flow (DCF) method or, as appropriate, a combination of the DCF method and a market approach known as the guideline public company method. Under the DCF method, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. The significant assumptions in the DCF model primarily include, but are not limited to, forecasts of annual revenue growth rates, annual EBITDA margin and the discount rate used to determine the present value of the cash flow projections. When determining these assumptions and preparing these estimates, we consider historical performance trends, terminal growth rates, industry data, insight derived from customers, relevant changes in the reporting unit’s underlying business and other market trends that may affect the reporting unit. The discount rate is based on the estimated weighted average cost of capital as of the test date of market participants in the industry in which the reporting unit operates and is commensurate with the risk and uncertainty inherent in each reporting unit and in internally developed forecasts. Under the guideline public company method, we estimate the fair value based upon market multiples of revenue and earnings derived from publicly-traded companies with similar operating and investment characteristics as the reporting unit. The weighting of the fair value derived from the market approach may vary depending on the level of comparability of these publicly-traded companies to the reporting unit. When comparable public companies are not meaningful or not available, we may estimate the fair value of a reporting unit using only the DCF method.

Estimating the fair value of a reporting unit involves uncertainties because it requires management to develop numerous assumptions, including assumptions about the future growth and potential volatility in revenues and costs, capital expenditures, industry economic factors and future business strategy. Changes in projected revenue growth rates, projected EBITDA margins or estimated discount rates due to uncertain market conditions, loss of one or more key customers, changes in our strategy, changes in technology or other factors could negatively affect the fair value in one or more of our reporting units and result in a material impairment charge in the future.

To assess the reasonableness of the calculated fair values of our reporting units, we also compare the sum of the reporting units’ fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting units’ fair values over the market capitalization). If the implied control premium is not reasonable, we will reevaluate the fair value estimates of the reporting units by adjusting the discount rates and/or other assumptions.

2023 Interim and Annual Goodwill Analysis

Interim Test

Goodwill is tested for impairment annually or at other times if events have occurred or circumstances exist that indicate the carrying value of the reporting unit may exceed its fair value. During the third quarter of 2023, we concluded that a triggering event occurred, 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. We performed an interim quantitative goodwill impairment test for our ANS and 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 ANS reporting unit is the same as the ANS segment, and the BDCC reporting unit is part of the CCS segment.

The fair value of the reporting unit was determined using a 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.

59

As a result of our interim goodwill impairment test, we recorded a goodwill impairment charge of $425.9 million during the third quarter of 2023 to partially write down the carrying amount of the ANS reporting unit goodwill. There was no impairment identified in our BDCC reporting unit in the Q3 2023 interim goodwill impairment test.

Annual Test

The annual test of goodwill impairment was performed for each of the reporting units with goodwill balances as of October 1, 2023. For the 2023 annual goodwill test, we determined the fair value of each reporting unit using a 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 market approach. The range of discount rates used in our annual tests was 11.0% to 15.0% for 2023. The Company determined the goodwill balance in the ANS and BDCC reporting units was impaired and recorded partial impairment charges of $46.3 million and $99.1 million, respectively. The impairment charges resulted from the Company's assessment in the fourth quarter of further lower revenue growth and EBITDA margins, due to adverse impacts of market conditions on the current year profitability and estimated future business results and cash flows. We used a discount rate of 15% for the ANS reporting unit and 12% for the BDCC reporting unit, which were consistent with the Q3 2023 interim test.

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.

The following table provides summary information regarding our reporting units with goodwill balances as of December 31, 2023 that have the lowest level of headroom. The table presents key assumptions used in our annual goodwill analysis, along with sensitivity analysis 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.

Definite-Lived Intangible Assets and Other Long-Lived Assets

Management reviews definite-lived intangible assets and other long-lived assets for impairment when events or changes in circumstances indicate that their carrying values may not be fully recoverable. This analysis differs from our goodwill impairment analysis in that an intangible or other long-lived asset impairment is only deemed to have occurred if the sum of the forecasted undiscounted future net cash flows related to the assets being evaluated is less than the carrying value of the assets. If the forecasted net cash flows are less than the carrying value, then the asset is written down to its estimated fair value. Other than certain assets impaired as a result of restructuring actions, we did not identify any impairments of definite-lived intangible assets or other long-lived assets in 2023. Changes in the estimates of forecasted net cash flows or changes in classification from held for use may result in future asset impairments that could be material to our results of operations.

Revenue Recognition

We recognize revenue based on the satisfaction of distinct obligations to transfer goods and services to customers. Our revenue is generated primarily from product or equipment sales. We apply a five-step approach as defined in ASC 606, Revenue from Contracts with Customers, in determining the amount and timing of revenue to be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when a corresponding performance obligation is satisfied. Most contracts with customers are to provide distinct products or services within a single contract. However, if a contract is separated into more than one performance obligation, the total transaction price is allocated to each performance obligation in an amount based on the estimated relative standalone selling price.

60

Product sales, to end-customers or distributors, represent over 90% of our revenue and are generally recognized at the point in time when products have been shipped, right to payment has been obtained and risk of loss has been transferred. Certain of our product performance obligations include proprietary operating system software, which typically is not considered separately identifiable. Therefore, sales of these products and the related software are considered one performance obligation.

License contracts include revenue recognized for the licensing of intellectual property, including software, sold separately without products. Functional intellectual property licenses do not meet the criteria for revenue to be recognized over time, and revenue is most commonly recognized upon delivery of the license/software to the customer.

Revenue is measured based on the consideration to which we expect to be entitled based on customer contracts. Sales are adjusted for variable consideration amounts, including, but not limited to, estimated discounts, rebates, distributor price protection programs and returns. These estimates are determined based upon historical experience, contract terms, inventory levels in the distributor channel and other related factors. Adjustments to variable consideration estimates are recorded when circumstances indicate revisions may be necessary. Variable consideration is primarily related to sales to our distributors, system integrators and value-added resellers.

Contingencies and Litigation

We are a party to lawsuits, claims and proceedings incident to the operation of our business, including intellectual property infringement matters, those pertaining to labor and employment contracts and other matters, some of which allege substantial monetary damages. We assess these matters in order to determine if a contingent liability should be recorded. In making this determination, management may, depending on the nature of the matter, consult with internal and external legal counsel and technical experts. We expense legal fees associated with consultations and defense of lawsuits as incurred. We accrue for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. Gain contingencies are recognized when they are realized.

Litigation outcomes are difficult to predict and are often resolved over long periods of time, making our estimates highly judgmental. Estimating probable losses requires the analysis of multiple possible outcomes that often depend on judgments about potential actions by third parties, such as future changes in facts and circumstances, differing interpretations of the law, assessments of the amount of damages and other factors beyond our control. There is the potential for a material adverse effect on our results of operations and cash flows if one or more matters are resolved in a particular period in an amount materially in excess of what we anticipated. Alternatively, if the judgments and estimates made by management are incorrect and a particular contingent loss does not occur, the contingent loss recorded would be reversed, thereby favorably impacting our results of operations.

Inventory Reserves

We maintain reserves to reduce the value of inventory based on the lower of cost or net realizable value, including allowances for excess and obsolete inventory. These reserves are based on management’s assumptions about and analysis of relevant factors including current levels of orders and backlog, forecasted demand, market conditions and new products or innovations that diminish the value of existing inventories. If actual market conditions deteriorate from those anticipated by management, additional allowances for excess and obsolete inventory could be required and may be material to our results of operations.

Tax Valuation Allowances and Liabilities for Unrecognized Tax Benefits

We establish an income tax valuation allowance when available evidence indicates that it is more likely than not that all or a portion of a deferred tax asset will not be realized. In assessing the need for a valuation allowance, we consider the amounts, character, source and timing of expected future deductions or carryforwards as well as sources of taxable income and tax planning strategies that may enable utilization. We maintain an existing valuation allowance until sufficient positive evidence exists to support its reversal. Changes in the amount or timing of expected future deductions or taxable income may have a material impact on the level of income tax valuation allowances. If we determine that we will not be able to realize all or part of a deferred tax asset in the future, an increase to an income tax valuation allowance would be charged to earnings in the period such determination was made.

We also establish allowances related to value-added and similar recoverable taxes when it is considered probable that those assets are not recoverable. Changes in the probability of recovery or in the estimates of the amount recoverable are recognized in the period such determination is made and may be material to our loss from continuing operations.

61

We recognize income tax benefits related to particular tax positions only when it is considered more likely than not that the tax position will be sustained if examined on its technical merits by tax authorities. The amount of benefit recognized is the largest amount of tax benefit that is evaluated to be greater than 50% likely to be realized. Considerable judgment is required to evaluate the technical merits of various positions and to evaluate the likely amount of benefit to be realized. Lapses in statutes of limitations, developments in tax laws, regulations and interpretations, and changes in assessments of the likely outcome of uncertain tax positions could have a material impact on the overall tax provision.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.