NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
ARRIS Group, Inc. (together with its consolidated subsidiaries, except as the context otherwise indicates,
ARRIS or the Company), is a global communications technology company, headquartered in Suwanee, Georgia. ARRIS operates in three business segments, Broadband Communications Systems, Access, Transport & Supplies, and
Media & Communications Systems. ARRIS specializes in integrated broadband network solutions that include products, systems and software for content and operations management (including video on demand(VOD), and professional
services. ARRIS is a leading developer, manufacturer and supplier of telephony, data, video, construction, rebuild and maintenance equipment for the broadband communications industry. In addition, the Company is a leading supplier of infrastructure
products used by cable system operators to build-out and maintain hybrid fiber-coaxial (HFC) networks. The Company provides its customers with products and services that enable reliable, high-speed, two-way broadband transmission of
video, telephony, and data.
Note 2. Summary of Significant Accounting Policies
(a) Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned foreign and domestic
subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
(b) Use
of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
(c) Cash, Cash Equivalents, and Investments
ARRIS cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) are
primarily held in money market funds that pay either taxable or non-taxable interest. The Company holds investments consisting of mutual funds and debt securities classified as available-for-sale, which are stated at estimated fair value. The debt
securities consist primarily of commercial paper, certificates of deposits, short term corporate obligations and U.S. government agency financial instruments. These investments are on deposit with major financial institutions.
From time to time, the Company has held certain investments in the common stock or preferred stock of publicly-traded and private
companies, which were classified as available-for-sale or cost-method investments. As of December 31, 2012 and 2011, the Companys holdings in these investments were $6.0 million and $5.8 million, respectively. As of December 31, 2012
and 2011, ARRIS had unrealized gains (losses) related to available-for-sale securities of approximately $0.2 million and $(0.3) million, respectively, included in accumulated other comprehensive income (loss).
The Company has a deferred compensation plan that does not qualify under Section 401(k) of the Internal Revenue Code, which was
available to certain current and former officers and key executives of C-COR Incorporated (C-COR). During 2008, this plan was merged into a new non-qualified deferred compensation plan which is also available to key executives of the
Company. Employee compensation deferrals and matching contributions are held in a rabbi trust, which is a funding vehicle used to protect the deferred compensation from various events (but not from bankruptcy or insolvency).
The Company previously offered a deferred compensation arrangement, which allowed certain employees to defer a portion of their earnings
and defer the related income taxes. As of December 31, 2004, the plan was frozen and no further contributions are allowed. The deferred earnings are invested and held in a rabbi trust.
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The Company also has a deferred retirement salary plan, which was limited to certain current
or former officers of C-COR. The present value of the estimated future retirement benefit payments is being accrued over the estimated service period from the date of signed agreements with the employees. ARRIS holds an investment to cover its
liability.
(d) Inventories
Inventories are stated at the lower of average cost, approximating first-in, first-out, or market. The cost of work-in-process and
finished goods is comprised of material, labor, and overhead.
(e) Revenue recognition
ARRIS generates revenue as a result of varying activities, including the delivery of stand-alone equipment, custom design
and installation services, and bundled sales arrangements inclusive of equipment, software and services. The revenue from these activities is recognized in accordance with applicable accounting guidance and their related interpretations.
Revenue is recognized when all of the following criteria have been met:
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When persuasive evidence of an arrangement exists
. Contracts and customer purchase orders are used to determine the
existence of an arrangement. For professional services evidence that an agreement exists includes information documenting the scope of work to be performed, price, and customer acceptance. These are contained in the signed contract, purchase order,
or other documentation that shows scope, price and customer acceptance.
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Delivery has occurred
. Shipping documents, proof of delivery and customer acceptance (when applicable) are used to verify
delivery.
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The fee is fixed or determinable
. Pricing is considered fixed or determinable at the execution of a customer arrangement,
based on specific products and quantities to be delivered at specific prices. This determination includes a review of the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment or future
discounts.
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Collectability is reasonably assured
. The Company assesses the ability to collect from customers based on a number of
factors that include information supplied by credit agencies, analyzing customer accounts, reviewing payment history and consulting bank references. Should a circumstance arise where a customer is deemed not creditworthy, all revenue related to the
transaction will be deferred until such time that payment is received and all other criteria to allow the Company to recognize revenue have been met.
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Revenue is deferred if any of the above revenue recognition criteria is not met as well as when certain circumstances exist for any of our products or services, including, but not limited to:
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When undelivered products or services that are essential to the functionality of the delivered product exist, revenue is deferred until such
undelivered products or services are delivered as the customer would not have full use of the delivered elements.
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When required acceptance has not occurred.
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When trade-in rights are granted at the time of sale, that portion of the sale is deferred until the trade-in right is exercised or the right expires.
In determining the deferral amount, management estimates the expected trade-in rate and future value of the product upon trade-in. These factors are periodically reviewed and updated by management, and the updates may result in either an increase or
decrease in the deferral.
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Equipment
The Company provides cable system operators with equipment
that can be placed within various stages of a broadband cable system that allows for the delivery of cable telephony, video and high-speed data as well as outside plant construction and maintenance equipment. For equipment sales, revenue recognition
is generally established when the products have been shipped, risk of loss has transferred, objective evidence
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exists that the product has been accepted, and no significant obligations remain relative to the transaction. Additionally, based on historical experience, ARRIS has established reliable
estimates related to sales returns and other allowances for discounts. These estimates are recorded as a reduction to revenue at the time the revenue is initially recorded.
Software Sold Without Tangible Equipment
ARRIS sells internally developed software as well as software developed by outside third parties that does not require significant production,
modification or customization. For arrangements that contain only software and the related post-contract support, the Company recognizes revenue in accordance with the applicable software revenue recognition guidance. If the arrangement includes
multiple elements that are software only, then the software revenue recognition guidance is applied and the fee is allocated to the various elements based on vendor-specific objective evidence (VSOE) of fair value. If sufficient VSOE of
fair value does not exist for the allocation of revenue to all the various elements in a multiple element software arrangement, all revenue from the arrangement is deferred until the earlier of the point at which such sufficient VSOE of fair value
is established or all elements within the arrangement are delivered. If VSOE of fair value exists for all undelivered elements, but does not exist for one or more delivered elements, the arrangement consideration is allocated to the various elements
of the arrangement using the residual method of accounting. Under the residual method, the amount of the arrangement consideration allocated to the delivered elements is equal to the total arrangement consideration less the aggregate fair value of
the undelivered elements. Under the residual method, if VSOE of fair value exists for the undelivered element, generally post contract support (PCS), the fair value of the undelivered element is deferred and recognized ratably over the
term of the PCS contract, and the remaining portion of the arrangement is recognized as revenue upon delivery. If sufficient VSOE of fair value does not exist for PCS, revenue for the arrangement is recognized ratably over the term of support.
Standalone Services
Installation, training, and professional services are generally recognized in service
revenues when performed or upon completion of the service when the final act is significant in relation to the overall service transaction. The key element for Professional Services in determining when service transaction revenue has been earned is
determining the pattern of delivery or performance which determines the extent to which the earnings process is complete and the extent to which customers have received value from services provided. The delivery or performance conditions of our
service transactions are typically evaluated under the proportional performance or completed performance model.
Incentives
Customer incentive programs that include consideration, primarily rebates/credits to be used against future product purchases and certain volume discounts, have been recorded as a reduction of revenue when the shipment of the requisite
equipment occurs.
Value Added Resellers
ARRIS typically employs the sell-in method of accounting for revenue
when using a Value Added Reseller (VAR) as our channel to market. Because product returns are restricted, revenue under this method is generally recognized at the time of shipment to the VAR provided all criteria for recognition are met.
There are occasions, based on facts and circumstances surrounding the VAR transaction, where ARRIS will employ the sell-through method of recognizing revenue and defer that revenue until payment occurs.
Multiple Element Arrangements
Certain customer transactions may include multiple deliverables based on the bundling of
equipment, software and services. When a multiple element arrangement exists, the fee from the arrangement is allocated to the various deliverables, to the extent appropriate, so that the proper amount can be recognized as revenue as each element is
delivered. Based on the composition of the arrangement, the Company analyzes the provisions of the accounting guidance to determine the appropriate model that is applied towards accounting for the multiple element arrangement. If the arrangement
includes a combination of elements that fall within different applicable guidance, ARRIS follows the provisions of the hierarchal literature to separate those elements from each other and apply the relevant guidance to each.
For multiple element arrangements that include software or have a software-related element that is more than incidental and does involve
significant production, modification or customization, revenue is recognized using the contract accounting guidelines by applying the percentage-of-completion or completed-contract method. The Company recognizes software license and associated
professional services revenue for its mobile workforce management software license product installations using the percentage of completion method of
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accounting as the Company believes that its estimates of costs to complete and extent of progress toward completion of such contracts are reliable. For certain software license arrangements where
professional services are being provided and are deemed to be essential to the functionality or are for significant production, modification, or customization of the software product, both the software and the associated professional service revenue
are recognized using the completed contract method. The completed-contract method is used for these particular arrangements because they are considered short-term arrangements and the financial position and results of operations would not be
materially different from those under the percentage-of-completion method. Under the completed-contract method, revenue is recognized when the contract is complete, and all direct costs and related revenues are deferred until that time. The entire
amount of an estimated loss on a contract is accrued at the time a loss on a contract is projected. Actual profits and losses may differ from these estimates.
For arrangements that fall within the software revenue recognition guidance, the fee is allocated to the various elements based on VSOE of fair value. If sufficient VSOE of fair value does not exist for
the allocation of revenue to all the various elements in a multiple element arrangement, all revenue from the arrangement is deferred until the earlier of the point at which such sufficient VSOE of fair value is established or all elements within
the arrangement are delivered. If VSOE of fair value exists for all undelivered elements, but does not exist for one or more delivered elements, the arrangement consideration is allocated to the various elements of the arrangement using the residual
method of accounting. Under the residual method, the amount of the arrangement consideration allocated to the delivered elements is equal to the total arrangement consideration less the aggregate fair value of the undelivered elements. Using this
method, any potential discount on the arrangement is allocated entirely to the delivered elements, which ensures that the amount of revenue recognized at any point in time is not overstated. Under the residual method, if VSOE of fair value exists
for the undelivered element, generally PCS, the fair value of the undelivered element is deferred and recognized ratably over the term of the PCS contract, and the remaining portion of the arrangement is recognized as revenue upon delivery, which
generally occurs upon delivery of the product or implementation of the system.
Many of ARRIS products are sold in
combination with customer support and maintenance services, which consist of software updates and product support. Software updates provide customers with rights to unspecified software updates that ARRIS chooses to develop and to maintenance
releases and patches that the Company chooses to release during the period of the support period. Product support services include telephone support, remote diagnostics, email and web access, access to on-site technical support personnel and repair
or replacement of hardware in the event of damage or failure during the term of the support period. Maintenance and support service fees are recognized ratably under the straight-line method over the term of the contract, which is generally one
year. The Company does not record receivables associated with maintenance revenues without a firm, non-cancelable order from the customer. VSOE of fair value is determined based on the price charged when the same element is sold separately and based
on the prices at which our customers have renewed their customer support and maintenance. For elements that are not yet being sold separately, the price established by management, if it is probable that the price, once established, will not change
before the separate introduction of the element into the marketplace is used to measure VSOE of fair value for that element.
(f) Shipping and Handling Fees
Shipping and handling costs for the years ended December 31, 2012, 2011, and 2010 were approximately $3.6 million, $3.3 million and $11.3 million, respectively, and are classified in net sales and
cost of sales.
(g) Depreciation of Property, Plant and Equipment
The Company provides for depreciation of property, plant and equipment on the straight-line basis over estimated useful lives of 10 to 40
years for buildings and improvements, 2 to 10 years for machinery and equipment, and the shorter of the term of the lease or useful life for leasehold improvements. Included in depreciation expense is the amortization of landlord funded tenant
improvements which amounted to $0.5 million in 2012 and $0.6 million in 2011. Depreciation expense, including amortization of capital leases, for the years ended December 31, 2012, 2011, and 2010 was approximately $28.0 million, $24.1 million,
and $22.9 million, respectively.
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(h) Goodwill and Long-Lived Assets
Goodwill relates to the excess of cost over the fair value of net assets resulting from an acquisition. On an annual basis, the
Companys goodwill is tested for impairment, or more frequently if events or changes in circumstances indicate that the asset is more likely than not impaired, in which case a test would be performed sooner. The impairment testing is a two-step
process. The first step is to identify a potential impairment by comparing the fair value of a reporting unit with its carrying amount. ARRIS has determined that its reporting units are the reportable segments based on the organizational structure,
the financial information that is provided to and reviewed by segment management and aggregation criteria of its component businesses that are economically similar. The estimates of fair value of a reporting unit are determined based on a discounted
cash flow analysis and guideline public company analysis. A discounted cash flow analysis requires the Company to make various judgmental assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions
about future cash flows and growth rates are based on the current and long-term business plans of each reporting unit. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting
units. If necessary, the second step of the goodwill impairment test compares the implied fair value of the reporting units goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in a similar
manner as the determination of goodwill recognized in a business combination. As part of managements review process of the fair values assumed for the reporting units, the Company reconciled the combined fair value of the reporting units to
the market capitalization of ARRIS and concluded that the fair values used were reasonable.
The annual tests were performed in
the fourth quarters of 2010, 2011, and 2012 with an assessment date of October 1.
In 2010 and 2012, no impairments of
goodwill were recorded. In 2011, in performing step one of impairment testing, the Company determined that the fair value of the MCS reporting unit was less than its respective carrying amount, as a result of a decline in the expected future cash
flows for the reporting unit. The Company proceeded to step two of the goodwill impairment test to determine the implied fair value of the MCS goodwill. The Company concluded that the implied fair value of the goodwill was less than its carrying
value, which resulted in a full impairment charge as of October 1, 2011 of $41.2 million before tax ($33.9 million after tax) for the MCS reporting unit.
As of December 31, 2012, the Company had goodwill of $194.1 million, of which $34.7 million related to the ATS reporting unit and $159.4 million related to the BCS reporting unit.
Other intangible assets represent acquired intangible assets, which include developed technology, in-process research and development,
customer relationships, covenants not-to-compete, and order backlog. Amounts assigned to other identifiable intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives as follows:
Intangibles with finite useful lives:
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Acquired technology
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4 -10 years
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Customer relationships
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2 -10 years
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Non-compete agreements
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2 years
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Trademarks
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2 years
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Order backlog
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1 - 2 years
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Intangibles with indefinite useful lives:
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In-process research and development
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Indefinite
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Acquired in-process research and development assets are initially recognized and measured at
fair value and classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition date, this asset will not be
amortized as charges to earnings; instead these assets will be subject to periodic impairment testing. Upon successful completion of the development process for the acquired in-process research and development project, the asset would then be
considered a finite-lived intangible asset and amortization of the asset will commence.
As of December 31, 2012, the
financial statements included intangible assets of $94.5 million, net of accumulated amortization of $239.7 million. As of December 31, 2011, the financial statements included intangible assets of $124.8 million, net of accumulated amortization
of $209.4 million. The values assigned were calculated using an income approach utilizing the cash flow expected to be generated by these intangible assets.
No review for impairment of long-lived assets was conducted in 2010 or 2012 as no indicators of impairment existed. In 2011, indicators of impairment existed for long-lived assets associated with the MCS
reporting unit due to changes in projected operating results and cash flows. In the fourth quarter of 2011, an impairment loss of $47.4 million before tax ($29.1 million after tax) related to MCS customer relationships was recorded.
See Note 14 of Notes to the Consolidated Financial Statements for further information on goodwill and intangible assets.
(i) Advertising and Sales Promotion
Advertising and sales promotion costs are expensed as incurred. Advertising expense was approximately $0.2 million, $0.6 million, and $0.7 million for the years ended December 31, 2012, 2011 and
2010, respectively.
(j) Research and Development
Research and development (R&D) costs are expensed as incurred. ARRIS research and development expenditures for the
years ended December 31, 2012, 2011 and 2010 were approximately $170.7 million, $146.5 million, and $140.5 million, respectively. The expenditures include compensation costs, materials, other direct expenses, and allocated costs of information
technology, telecommunications, and facilities.
(k) Warranty
ARRIS provides warranties of various lengths to customers based on the specific product and the terms of individual agreements. For
further discussion, see Note 9 of the Notes to the Consolidated Financial Statements, Guarantees for further discussion.
(l) Income Taxes
ARRIS uses the liability method of accounting for income taxes, which requires recognition of temporary differences between financial statement and income tax bases of assets and liabilities, measured by
enacted tax rates.
If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits that are
not expected to be realized based on available evidence. ARRIS reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if
any, related to unrecognized tax benefits in income tax expense.
See Note 17 of Notes to the Consolidated Financial Statements
for further discussion.
(m) Foreign Currency Translation
A significant portion of the Companys products are manufactured or assembled in China and Mexico, and we have research and
development centers in China, Ireland and Israel. Sales into international markets have been and are expected in the future to be an important part of the Companys business. These foreign operations are subject to the usual risks inherent in
conducting business abroad, including risks with respect to currency exchange rates, economic and political destabilization, restrictive actions and taxation by foreign governments, nationalization, the laws and policies of the United States
affecting trade, foreign investment and loans, and foreign tax laws.
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Certain international customers are billed in their local currency. The Company uses a
hedging strategy and enters into forward or currency option contracts based on a percentage of expected foreign currency revenues. The percentage can vary, based on the predictability of the revenues denominated in foreign currency.
As of December 31, 2012, the Company had option collars outstanding with notional amounts totaling 7.5 million euros and
26.3 million Israeli shekels, which mature through 2013. As of December 31, 2012, the Company had forward contracts outstanding with notional amounts totaling 1.5 million euros, which mature through 2013. The fair value of option and
forward contracts as of December 31, 2012 and 2011 were a net asset of approximately $0.1 million and $2.7 million. During the years ended December 31, 2012, 2011 and 2010, the Company recognized net gain of $0.3 million, $0.8 million, and
$1.0 million, respectively, related to option contracts.
Currently, all foreign currency hedges are recorded at fair value and
the gains or losses are included in loss (gain) on foreign currency on the Consolidated Statements of Operations.
(n) Israeli Severance Pay
The Companys wholly-owned subsidiary located in Israel is required to fund future severance liabilities determined in accordance with Israeli severance pay laws. Under these laws, employees are
entitled upon termination to one months salary for each year of employment or portion thereof. The Company records compensation expense to accrue for these costs over the employment period, based on the assumption that the benefits to which
the employee is entitled, if the employee separates immediately. The Company funds the liability by monthly deposits in insurance policies and severance funds. The value of the severance fund assets are primarily recorded in other non-current assets
on the Companys consolidated balance sheets, which was $3.8 million as of December 31, 2012. The liability for long-term severance accrued on the Companys consolidated balance sheets was $4.2 million as of
December 31, 2012.
(o) Stock-Based Compensation
See Note 19 of Notes to the Consolidated Financial Statements for further discussion of the Companys significant accounting policies
related to stock based compensation.
(p) Concentrations of Credit Risk
Financial instruments that potentially subject ARRIS to concentrations of credit risk consist principally of cash, cash equivalents and
short-term investments, and accounts receivable. ARRIS places its temporary cash investments with high credit quality financial institutions. Concentrations with respect to accounts receivable occur as the Company sells primarily to large,
well-established companies including companies outside of the United States. The Companys credit policy generally does not require collateral from its customers. ARRIS closely monitors extensions of credit to other parties and, where
necessary, utilizes common financial instruments to mitigate risk or requires cash on delivery terms. Overall financial strategies and the effect of using a hedge are reviewed periodically. When deemed uncollectible, accounts receivable balances are
written off against the allowance for doubtful accounts.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
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Cash, cash equivalents, and short-term investments: The carrying amounts reported in the consolidated balance sheets for cash, cash equivalents, and
short-term investments approximate their fair values.
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Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate
their fair values. The Company establishes a reserve for doubtful accounts based upon its historical experience in collecting accounts receivable.
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Marketable securities: The fair values for trading and available-for-sale equity securities are based on quoted market prices or observable prices
based on inputs not in active markets but corroborated by market data.
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Non-marketable securities: Non-marketable equity securities are subject to a periodic impairment review; however, there are no open-market valuations,
and the impairment analysis requires significant judgment. This analysis includes assessment of the investees financial condition, the business outlook for its products and technology, its projected results and cash flow, recent rounds of
financing, and the likelihood of obtaining subsequent rounds of financing.
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Current portion of long-term debt: The fair value of the Companys convertible subordinated debt is based on its quoted market price and totaled
approximately $222.1 million and $233.8 million at December 31, 2012 and 2011, respectively.
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Foreign exchange contracts: The fair values of the Companys foreign currency contracts are estimated based on dealer quotes, quoted market prices
of comparable contracts adjusted through interpolation where necessary, maturity differences or if there are no relevant comparable contracts on pricing models or formulas by using current assumptions. As of December 31, 2012, the Company had
option collars outstanding with notional amounts totaling 7.5 million euros and 26.30 million Israeli shekels, which mature through 2013. As of December 31, 2012, the Company had forward contracts outstanding with notional amounts
totaling 1.5 million euros, which mature through 2013. The fair value of option and forward contracts as of December 31, 2012 and 2011 were net asset of approximately $0.1 million and $2.7 million.
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(q) Computer Software
The Company capitalizes costs associated with internally developed and/or purchased software systems for internal use that have reached the application development stage and meet recoverability tests.
Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software and payroll and payroll-related expenses for employees who are directly associated with and devote time to the
internal-use software project. Capitalization of such costs begins when the preliminary project stage is complete and ceases no later than the point at which the project is substantially complete and ready for its intended purpose. These capitalized
costs are amortized on a straight-line basis over periods of two to seven years, beginning when the asset is ready for its intended use. Capitalized costs are included in property, plant, and equipment on the consolidated balance sheets. The
carrying value of the software is reviewed regularly and impairment is recognized if the value of the estimated undiscounted cash flow benefits related to the asset is less than the remaining unamortized costs.
Research and development costs are charged to expense as incurred. ARRIS generally has not capitalized any such development costs because
the costs incurred between the attainment of technological feasibility for the related software product through the date when the product is available for general release to customers has been insignificant.
(r) Comprehensive Income (Loss)
The components of comprehensive income (loss) include net income (loss), unrealized gains (losses) on available-for-sale securities, and change in unfunded pension liability, net of tax, if applicable.
Comprehensive income (loss) is presented in the consolidated statements of comprehensive income (loss).
Note 3. Impact of Recently Issued Accounting Standards
In July 2012, the FASB issued a new accounting guidance that simplifies the impairment test for indefinite-lived
intangible assets other than goodwill. The new guidance gives the option to first assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount as a
basis for determining whether it is necessary to perform a quantitative valuation test. This guidance is effective for indefinite-lived intangible asset impairment tests performed in interim and annual periods for fiscal years beginning after
September 15, 2012. Early adoption is permitted. ARRIS adopted the accounting standard in the fourth quarter of 2012. The adoption of this guidance did not have a significant impact on the Companys consolidated financial statements.
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In December 2011, the Financial Accounting Standards Board (FASB) issued new
disclosure requirements that are intended to enhance current disclosures on offsetting financial assets and liabilities. The new disclosures require an entity to disclose both gross and net information about financial instruments eligible for offset
on the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. This new guidance is effective for the Company beginning January 1, 2013. The Companys accounting policy is to not
offset amounts in its financial statements, and therefore, the adoption of this guidance will not have any impact on its consolidated financial statements.
In September 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance intended to simplify goodwill impairment testing. Entities will be allowed to perform a
qualitative assessment on goodwill impairment to determine whether a quantitative assessment is necessary. This new guidance is effective for the Company beginning January 1, 2012. The adoption of this guidance did not have a significant impact
on the Companys consolidated financial statements.
In June 2011, FASB issued guidance regarding the presentation of
comprehensive income. This guidance requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two
separate but consecutive statements. The guidance is effective on a retrospective basis for the interim and annual periods ending on or after December 15, 2011. ARRIS adopted the accounting standard in the first quarter of 2012 and elected to
present the information in two separate but consecutive statements. The adoption of this guidance did not change the items that must be reported in other comprehensive income and therefore did not affect the Companys consolidated financial
statements.
In May 2011, FASB issued amendments to some fair value measurement principles and disclosure requirements for fair
value measurements. The provisions of this guidance are effective for the interim and annual periods ending on or after December 15, 2011. ARRIS adopted the accounting standard in the first quarter of 2012. The adoption of this guidance did not
have a significant impact on the Companys consolidated financial statements.
Note 4. Investments
ARRIS investments as of December 31, 2012 and 2011 consisted of the following (in thousands):
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As of December 31,
2012
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As of December 31,
2011
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Current Assets:
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Available-for-sale securities
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$
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398,414
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$
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282,904
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Noncurrent Assets:
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Available-for-sale securities
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80,164
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70,095
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Cost method investments
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6,000
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1,000
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Total classified as non-current assets
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86,164
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71,095
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Total
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$
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484,578
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$
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353,999
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ARRIS investments in debt and marketable equity securities are categorized as available-for-sale.
The Company currently does not hold any held-to-maturity securities. Realized and unrealized gains and losses on trading securities and realized gains and losses on available-for-sale securities are included in net income. Unrealized gains and
losses on available-for-sale securities are included in our consolidated balance sheet as a component of accumulated other comprehensive income (loss). The total losses (gains) included in the accumulated other comprehensive income related to
available-for-sale securities were $0.2 million and $(0.3) million as of December 31, 2012 and December 31, 2011, respectively. The unrealized gains and losses by individual investment as of December 31, 2012 and 2011 were not
material. The amortized cost basis of the Companys investments approximates fair value.
89
ARRIS holds cost method investments in private companies. Due to the fact the investments
are in private companies, the Company is exempt from estimating the fair value on an interim and annual basis. It is not practical to estimate the fair value since the quoted market price is not available. Furthermore, the cost of obtaining an
independent valuation appears excessive considering the materiality of the investments to the Company. However, ARRIS is required to estimate the fair value if there has been an identifiable event or change in circumstance that may have a
significant adverse effect on the fair value of the investment. Each quarter, the Company evaluates its investments for any other-than-temporary impairment, by reviewing the current revenues, bookings and long-term plan of the private companies.
During the evaluations performed in 2012, ARRIS concluded that two of the private companies had indicators of impairment, and that their fair value had declined. This resulted in other-than-temporary impairment charges of $1.5 million during the
year ended December 31, 2012. As a result of the evaluations performed in 2011, ARRIS recorded other-than-temporary impairment charges of $3.0 million. Purchases of cost method investments during the year ended December 31, 2012 were $7.2
million, and disposals during the year were $0.7 million. These investments are recorded at $6.0 million and $1.0 million as of December 31, 2012 and 2011, respectively.
Classification of available-for-sale securities as current or non-current is dependent upon managements intended holding period, the securitys maturity date and liquidity consideration based
on market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current.
The contractual maturities of the Companys investments as of December 31, 2012 are as follows (in thousands):
|
|
|
|
|
|
|
December 31,
2012
|
|
Due in one year or less
|
|
$
|
398,414
|
|
Due in one to five years
|
|
|
53,914
|
|
Due after five years
|
|
|
26,250
|
|
|
|
|
|
|
Total
|
|
|
478,578
|
|
|
|
|
|
|
Note 5. Fair Value Measurements
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgement used to estimate the fair value of assets and liabilities. In order to
increase consistency and comparability in fair value measurements, the FASB has established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. An asset or liabilitys
categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by the authoritative guidance are as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or
liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices
that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable
inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
90
The following table presents the Companys assets measured at fair value on a recurring
basis as of December 31, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Current investments
|
|
$
|
164,941
|
|
|
$
|
233,472
|
|
|
$
|
|
|
|
$
|
398,414
|
|
Noncurrent investments
|
|
|
405
|
|
|
|
79,759
|
|
|
|
|
|
|
|
80,164
|
|
Foreign currency contracts asset position
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
590
|
|
Foreign currency contracts liability position
|
|
|
513
|
|
|
|
|
|
|
|
|
|
|
|
513
|
|
In addition to the amounts disclosed in the above table, the fair value of the Companys Israeli
severance pay assets, which were almost fully comprised of Level 2 assets, was $3.8 million and $3.7 million as of December 31, 2012 and December 31, 2011, respectively.
All of the Companys short-term and long-term investments at December 31, 2012 are classified within Level 1 or Level 2 of the
fair value hierarchy as they are valued using quoted market prices, market prices for similar securities, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in
active markets include the Companys investment in money market funds, mutual funds and municipal bonds. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other
observable inputs include the Companys cash surrender value of company owned life insurance, corporate obligations and bonds, commercial paper and certificates of deposit. Such instruments are classified within Level 2 of the fair value
hierarchy.
In determining the value of certain Level 1 and Level 2 instruments, ARRIS has performed steps to verify the
accuracy of the valuations provided by ARRIS brokerage firms. ARRIS has reviewed the most recent Statement on Standards for Attestation Engagements No. 16 (SSAE report) for each brokerage firm holding investments for ARRIS. The SSAE
report for each did not identify any control weakness in the brokerages policies and procedures, in particular as they relate to the pricing and valuation of financial instruments. ARRIS has determined the third party pricing source used by
each firm to be a reliable recognized source of financial valuations. In addition ARRIS has performed further testing on a large sample of its corporate obligations and commercial paper investments. These tests did not show any material
discrepancies in the valuations provided by the brokerage firms. It is the Companys intent to continue to verify valuations on a quarterly basis, using one or more reliable recognized third party pricing providers. See Note 4 and Note 6 for
further information on the Companys investments and derivative instruments.
All of the Companys foreign currency
contracts are over-the-counter instruments. There is an active market for these instruments, and therefore, they are classified as Level 1 in the fair value hierarchy. ARRIS does not enter into currency contracts for trading purposes. The Company
has a master netting agreement with the primary counterparty to the derivative instruments. This agreement allows for the net settlement of assets and liabilities arising from different transactions with the same counterparty.
Note 6. Derivative Instruments and Hedging Activities
ARRIS has certain international customers who are billed in their local currency. Changes in the monetary exchange
rates may adversely affect the Companys results of operations and financial condition. When appropriate, ARRIS enters into various derivative transactions to enhance its ability to manage the volatility relating to these typical business
exposures. The Company does not hold or issue derivative instruments for trading or other speculative purposes. The Companys derivative instruments are recorded in the Consolidated Balance Sheets at their fair values. The Companys
derivative instruments are not designated as hedges, and accordingly, all changes in the fair value of the instruments are recognized as a loss (gain) on foreign currency in the Consolidated Statements of Operations. The maximum time frame for
ARRIS derivatives is currently less than 12 months. Derivative instruments which are subject to master netting arrangements are not offset in the Consolidated Balance Sheets.
91
The fair values of ARRIS derivative instruments recorded in the Consolidated Balance
Sheet as of December 31, 2012 and 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
As of December 31, 2011
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts asset derivatives
|
|
Other current assets
|
|
$
|
590
|
|
|
Other current assets
|
|
$
|
3,295
|
|
Foreign exchange contracts liability derivatives
|
|
Other accrued liabilities
|
|
$
|
513
|
|
|
Other accrued liabilities
|
|
$
|
546
|
|
The change in the fair values of ARRIS derivative instruments recorded in the Consolidated
Statements of Operations during the years ended December 31, 2012, 2011, and 2010 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
Statement of Operations Location
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Gain on foreign currency
|
|
$
|
268
|
|
|
$
|
809
|
|
|
$
|
957
|
|
ARRIS performs additional testing, on a quarterly basis, of the valuations provided by the financial
institutions who are counter-parties to the derivative positions. This testing, to date, has not shown any material or significant differences to the valuations reported by the counter-party financial institutions.
Note 7. Business Acquisitions
Acquisition of BigBand Networks, Inc.
On November 21, 2011, ARRIS completed its tender offer for all outstanding shares of common stock of BigBand Networks, Inc. Pursuant
to the Agreement and Plan of Merger, all outstanding shares of common stock of BigBand were canceled and converted into the right to receive cash equal to $2.24 per share, without interest and net of applicable withholding taxes. This transaction
was accounted for as a business combination. The acquisition supports ARRIS strategy of expanding its video product suite and investing in the evolution towards network convergence on an all IP platform. This expanded portfolio and access to new
market channels is expected to provide greater opportunities to grow ARRIS customer base worldwide. The goodwill and intangible assets resulting from this acquisition are recorded in the BCS segment.
92
The following is a summary of the total consideration transferred of the transaction and the
fair values of the assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Cash paid at $2.24 per common share
|
|
$
|
162,417
|
|
Converted restricted shares for which service was performed pre-acquisition
|
|
|
280
|
|
|
|
|
|
|
Total consideration transferred
|
|
$
|
162,697
|
|
|
|
|
|
|
Tangible assets and liabilities acquired:
|
|
|
|
|
Cash, short-term and long-term investments
|
|
$
|
109,263
|
|
Account receivable
|
|
|
4,612
|
|
Inventory
|
|
|
7,005
|
|
Other assets
|
|
|
9,670
|
|
Property, plant and equipment
|
|
|
6,010
|
|
Deferred tax assets
|
|
|
21,960
|
|
Deferred revenue
|
|
|
(9,967
|
)
|
Accrued compensation, including change of control and Israeli severance liabilities
|
|
|
(19,427
|
)
|
Accrued legal liability
|
|
|
(495
|
)
|
Other liabilities
|
|
|
(6,342
|
)
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
122,289
|
|
Identifiable intangible assets:
|
|
|
|
|
Acquired in-process research and development
|
|
|
7,800
|
|
Other identifiable intangible assets:
|
|
|
|
|
Existing technology
|
|
|
16,400
|
|
Order backlog
|
|
|
700
|
|
Customer relationships
|
|
|
12,400
|
|
|
|
|
|
|
Identifiable intangible assets
|
|
|
37,300
|
|
Goodwill
|
|
|
3,108
|
|
|
|
|
|
|
|
|
$
|
162,697
|
|
|
|
|
|
|
Pending acquisition
On December 19, 2012, ARRIS, General Instrument Holdings, Inc. (Seller), Motorola Mobility LLC (Mobility), ARRIS
Enterprises I, Inc., a subsidiary of ARRIS (New Holding Company), and ARRIS Enterprises II, Inc., a subsidiary of New Holding Company (Merger Sub), entered into an Acquisition Agreement (the Agreement), pursuant
to which, subject to the satisfaction or waiver of the conditions therein, ARRIS will acquire the Motorola Home business from Seller (the Transaction). Seller and Mobility are both indirect subsidiaries of Google, Inc.
Pursuant to the Agreement, ARRIS will merge with and into Merger Sub, with ARRIS as the surviving corporation, thereby making New Holding
Company, a holding company that then would own ARRIS, the surviving corporation (the Holding Company Formation). Immediately following the Holding Company Formation, Seller will contribute all of the outstanding shares of General
Instrument Corporation to New Holding Company (the Contribution). In connection with the Contribution, Seller will receive approximately $2.2 billion in cash and approximately $150 million in newly issued shares of New Holding Company
common stock. As part of the Holding Company Formation, each then outstanding share of ARRIS common stock will become, without any action of shareholders, a share of common stock of New Holding Company. New Holding Company will be renamed ARRIS
Group, Inc. Both the cash and equity consideration to be received by Seller are subject to certain adjustments as provided for in the Agreement.
93
The acquisition will enhance the Companys scale and product breadth in the telecom
industry. Notably, the acquisition will bring to ARRIS, Motorola Homes product scale and scope in video processing and delivery, including a full range of QAM and IP set top box products as well as IP Gateway CPE equipment for data services
for telephone service providers. The acquisition will diversify the Companys customer base and expand dramatically the Companys international presence. The acquisition will enhance the depth and scale of the Companys R & D
capabilities, particularly in the video arena, and will approximately double the Companys patent portfolio to nearly 2000 patents and patent applications. In addition, via a license, the Company is provided access to approximately 20,000
Motorola Mobility patents as they relate to the Motorola Home business.
The Transaction is subject to the satisfaction of
customary closing conditions, including clearance under the Hart-Scott-Rodino Act (the HSR Act). On February 11, 2013, ARRIS received a request for additional information and documentary materials (a Second Request) from the
Department of Justice regarding ARRIS proposed acquisition. The information request was issued in conjunction with the DOJs review of the transaction under the HSR Act. The effect of the Second Request is to extend the waiting period
imposed by the HSR Act until 30 days after each party to the transaction has substantially complied with the Second Request. ARRIS intends to respond to the information request as quickly as practicable and continue to work cooperatively with the
DOJ in connection with its review. ARRIS still expects the Transaction to close in the second quarter of 2013.
Under the
Agreement, Seller has agreed to cap ARRIS potential liability from certain intellectual property infringement litigation, including certain claims brought by TiVo. The ARRIS exposure is limited to 50% of the first $100 million of exposure for
past and future harms or $50 million. ARRIS also has agreed to pay a termination fee of $117.5 million upon the termination of the Agreement in certain circumstances, including the failure to obtain clearance under the HSR Act.
In connection with and subject to the closing of the Transaction, on January 11, 2013, ARRIS entered into an agreement with a subsidiary
of Comcast Corporation providing for the purchase of approximately 10.6 million shares of common stock for $150.0 million, subject to the satisfaction of certain closing conditions. The proceeds from the sale will be used to finance a portion of the
cash consideration to be paid in the Transaction. As a result of the sale to Comcast, following the closing of the Transaction, Comcast and Google will each own approximately 7.85% of the outstanding ARRIS shares based on ARRIS current
capitalization plus these two issuances. The share price valuation for the $150 million of shares to be issued to each of the Google, Inc and Comcast Corporation affiliates is exactly the same and was based on the share prices of ARRIS prior to the
execution of the Agreement on December 19, 2012.
ARRIS entered into a debt financing commitment letter with Bank of America,
N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Royal Bank of Canada, pursuant to which these institutions have committed, subject to conditions, to arrange and provide to ARRIS up to $2.175 billion in senior secured credit
facilities comprised of two term loan facilities, in the aggregate amount of up to $1.925 billion, and a revolving credit facility of $250 million. The proceeds from the term loan facilities, together with cash on hand, will be used to pay the
remaining portion of the cash consideration for the Transaction and for the payment of expenses related to the Transaction. The revolving credit facility will be used for working capital needs and other general corporate purposes.
Note 8. Disposal of Product Line
In March of 2012, the Company completed the sale of certain assets of its ECCO electronic connector product line to
Eclipse Embedded Technologies, Inc. for approximately $3.9 million, which included $3.2 million paid as of closing and delivery of a promissory note in the principal amount of $0.7 million together with interest. The sale included inventory,
accounts receivable, property, plant and equipment, as well as accounts payable and certain accrued liabilities. The Company recorded a net loss of $(0.3) million on the sale, which included approximately $0.3 million of transaction related costs.
The ECCO electronic connector product line disposal group, represented a component of the entity that was comprised of
operations and cash flows that were clearly distinguished operationally and for financial reporting purposes and although meeting the criteria for reporting in discontinued operations, the Company has determined the results of the ECCO product line
are immaterial to the overall financial results of the Company and presentation as discontinued operations would not result in a material change to our consolidated financial results.
94
Note 9. Guarantees
Warranty
ARRIS provides warranties of various lengths to customers based on the specific product and the terms of individual agreements. The Company provides for the estimated cost of product warranties based on
historical trends, the embedded base of product in the field, failure rates, and repair costs at the time revenue is recognized. Expenses related to product defects and unusual product warranty problems are recorded in the period that the problem is
identified. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers, the estimated warranty obligation could be affected by changes in ongoing product
failure rates, material usage and service delivery costs incurred in correcting a product failure, as well as specific product failures outside of ARRIS baseline experience. If actual product failure rates, material usage or service delivery
costs differ from estimates, revisions (which could be material) would be recorded against the warranty liability.
The Company
offers extended warranties and support service agreements on certain products. Revenue from these agreements is deferred at the time of the sale and recognized on a straight-line basis over the contract period. Costs of services performed under
these types of contracts are charged to expense as incurred, which approximates the timing of the revenue stream.
Information
regarding the changes in ARRIS aggregate product warranty liabilities for the years ending December 31, 2012 and 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
January 1,
|
|
$
|
6,387
|
|
|
$
|
5,340
|
|
Accruals related to warranties (including changes in estimates)
|
|
|
3,125
|
|
|
|
3,445
|
|
Settlements made (in cash or in kind)
|
|
|
(3,443
|
)
|
|
|
(2,398
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
6,069
|
|
|
$
|
6,387
|
|
|
|
|
|
|
|
|
|
|
Note 10. Segment Information
The management approach has been used to present the following segment information. This approach is based
upon the way the management of the Company organizes segments within an enterprise for making operating decisions and assessing performance. Financial information is reported on the basis that it is used internally by the chief operating decision
maker (CODM) for evaluating segment performance and deciding how to allocate resources to segments. The Companys chief executive officer has been identified as the CODM.
The
Broadband Communications Systems
segments product solutions include Headend and Subscriber Premises equipment that enable
cable operators to provide Voice over IP, Video over IP and high-speed data services to residential and business subscribers.
The
Access, Transport & Supplies
segments product lines cover all components of a HFC network, including managed and
scalable headend and hub equipment, optical nodes, radio frequency products, transport products and supplies.
The
Media & Communications Systems
segment provides content and operations management systems, including products for Video on Demand, Ad Insertion, Digital Advertising, Service Assurance, Service Fulfillment and Mobile Workforce
Management.
These operating segments were determined based on the nature of the products and services offered.
The Company evaluates performance based on several factors, of which the primary financial measures are revenues and gross margins. A
measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance and allocating resources to the segment. The accounting policies of the operating segments are the same as those described
in Note 2 of the Notes to the Consolidated Financial Statements.
95
The table below presents information about the Companys reportable segments for the
years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Business Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
BCS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,081,246
|
|
|
$
|
824,008
|
|
|
$
|
841,164
|
|
Gross Margin
|
|
|
373,493
|
|
|
|
319,925
|
|
|
|
343,884
|
|
ATS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
207,513
|
|
|
|
197,687
|
|
|
|
181,067
|
|
Gross Margin
|
|
|
47,079
|
|
|
|
49,272
|
|
|
|
45,971
|
|
MCS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
64,904
|
|
|
|
66,990
|
|
|
|
65,275
|
|
Gross Margin
|
|
|
42,005
|
|
|
|
41,316
|
|
|
|
34,234
|
|
Total :
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,353,663
|
|
|
$
|
1,088,685
|
|
|
$
|
1,087,506
|
|
Gross Margin
|
|
$
|
462,577
|
|
|
$
|
410,513
|
|
|
$
|
424,089
|
|
The following table summarizes the Companys net intangible assets and goodwill by reportable
segment as of December 31, 2012 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
Communications
Systems
|
|
|
Access,
Transport &
Supplies
|
|
|
Media &
Communications
Systems
|
|
|
Total
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
159,443
|
|
|
$
|
34,672
|
|
|
$
|
|
|
|
$
|
194,115
|
|
Intangible assets, net
|
|
|
40,154
|
|
|
|
52,728
|
|
|
|
1,647
|
|
|
|
94,529
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
158,682
|
|
|
$
|
35,860
|
|
|
$
|
|
|
|
$
|
194,542
|
|
Intangible assets, net
|
|
|
47,601
|
|
|
|
73,764
|
|
|
|
3,458
|
|
|
|
124,823
|
|
The Companys two largest customers (including their affiliates, as applicable) are Comcast and Time
Warner Cable. Over the past year, certain customers beneficial ownership may have changed as a result of mergers and acquisitions. Therefore the revenue for ARRIS customers for prior periods has been adjusted to include the affiliates
under common control. A summary of sales to these customers for 2012, 2011 and 2010 is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Comcast and affiliates
|
|
$
|
421,772
|
|
|
$
|
286,987
|
|
|
$
|
268,149
|
|
% of sales
|
|
|
31.2
|
%
|
|
|
26.4
|
%
|
|
|
24.7
|
%
|
Time Warner Cable and affiliates
|
|
$
|
243,151
|
|
|
$
|
180,740
|
|
|
$
|
192,680
|
|
% of sales
|
|
|
18.0
|
%
|
|
|
16.6
|
%
|
|
|
17.7
|
%
|
ARRIS sells its products primarily in the United States. The Companys international revenue is
generated from Asia Pacific, Canada, Europe and Latin America. The Asia Pacific market primarily includes China, Hong Kong, Japan, Korea, Singapore, and Taiwan. The European market primarily includes Austria, Belgium, France, Germany, Great Britain,
Hungry, Ireland, Israel, the Netherlands, Norway, Poland, Portugal, Romania, Russia, Spain, Sweden, Switzerland and Turkey. The Latin American market primarily includes Argentina, Bahamas,
96
Brazil, Chile, Columbia, Costa Rica, Ecuador, Honduras, Jamaica, Mexico, Panama, Peru and Puerto Rico. Sales to international customers were approximately 24.6%, 31.3% and 35.2% of total sales
for the years ended December 31, 2012, 2011 and 2010, respectively. International sales for the years ended December 31, 2012, 2011 and 2010 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Americas, excluding U.S
(1)
|
|
$
|
202,887
|
|
|
$
|
195,500
|
|
|
$
|
222,185
|
|
Asia Pacific
|
|
|
65,554
|
|
|
|
59,194
|
|
|
|
63,492
|
|
EMEA
|
|
|
65,162
|
|
|
|
85,824
|
|
|
|
96,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
333,603
|
|
|
$
|
340,518
|
|
|
$
|
382,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes U.S. sales of $1,020.1 million, $748.2 million and $705.2 million for the years ended December 31, 2012, 2011 and 2010, respectively.
|
The following table summarizes ARRIS international long-lived assets by geographic region as of
December 31, 2012 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Americas, excluding U.S.
|
|
$
|
354
|
|
|
$
|
411
|
|
Asia Pacific
|
|
|
1,847
|
|
|
|
1,948
|
|
EMEA
|
|
|
2,549
|
|
|
|
4,042
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,750
|
|
|
$
|
6,401
|
|
|
|
|
|
|
|
|
|
|
Note 11. Restructuring Charges
ARRIS has restructuring accruals representing contractual obligations that relate to excess leased facilities and
equipment in ARRIS ATS segment. Payments will be made over their remaining lease terms through 2014, unless terminated earlier (in thousands):
|
|
|
|
|
Balance as of December 31, 2011
|
|
$
|
1,144
|
|
Payments
|
|
|
(381
|
)
|
Adjustments to accrual
|
|
|
|
|
|
|
|
|
|
Balance as December 31, 2012
|
|
$
|
763
|
|
|
|
|
|
|
In the fourth quarter of 2011, the Company initiated a restructuring plan as a result of its acquisition
of BigBand Networks. The plan focuses on the rationalization of personnel, facilities and systems across multiple segments in the ARRIS organization. During the fourth quarter of 2011, ARRIS recorded a restructuring charge of $3.4 million, of which
$3.3 million was related to severance and termination benefits and $0.1 million was related to facilities. In 2012, ARRIS recorded an additional restructuring charge of $6.8 million, of which $5.6 million was related to severance and termination
benefits and $1.2 million was related to facilities. As of December 31, 2012, the total liability remaining for this restructuring plan was approximately $0.4 million and is related to facilities. This remaining liability will be paid over the
remaining lease terms through 2016, unless terminated earlier (in thousands):
|
|
|
|
|
Balance as of December 31, 2011
|
|
$
|
3,052
|
|
Restructuring charges
|
|
|
6,761
|
|
Payments
|
|
|
(9,413
|
)
|
|
|
|
|
|
Balance as December 31, 2012
|
|
$
|
400
|
|
|
|
|
|
|
97
Note 12. Inventories
Inventories are stated at the lower of average cost, approximating first-in, first-out, or market. The components of
inventory are as follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Raw material
|
|
$
|
24,798
|
|
|
$
|
22,759
|
|
Work in process
|
|
|
2,800
|
|
|
|
3,551
|
|
Finished goods
|
|
|
106,250
|
|
|
|
89,602
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
133,848
|
|
|
$
|
115,912
|
|
|
|
|
|
|
|
|
|
|
Note 13. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Land
|
|
$
|
2,562
|
|
|
$
|
2,612
|
|
Buildings and leasehold improvements
|
|
|
25,995
|
|
|
|
25,243
|
|
Machinery and equipment
|
|
|
177,657
|
|
|
|
163,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,214
|
|
|
|
191,706
|
|
Less: Accumulated depreciation
|
|
|
(151,836
|
)
|
|
|
(130,331
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
54,378
|
|
|
$
|
61,375
|
|
|
|
|
|
|
|
|
|
|
Note 14. Goodwill and Intangible Assets
Goodwill relates to the excess of cost over the fair value of net assets resulting from an acquisition. The
Companys goodwill is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset is more likely than not impaired. The Companys goodwill impairment assessment date is
October 1, which aligns with the timing of the Companys annual strategic planning process, which enables the Company to incorporate the reporting units long-term financial projections which are generated from the annual strategic
planning process as a basis for performing our impairment testing. For purposes of impairment testing, the Company has determined that its reporting units are the operating segments based on our organizational structure, the financial information
that is provided to and reviewed by segment management and aggregation criteria applicable to component businesses that are economically similar. The impairment testing is a two-step process. The first step is to identify a potential impairment by
comparing the fair value of a reporting unit with its carrying amount. The Company concluded that a taxable transaction approach should be used. The Company determined the fair value of each of its reporting units using a combination of an income
approach using discounted cash flow analysis and a market approach comparing actual market transactions of businesses that are similar to those of the Company. In addition, market multiples of publicly traded guideline companies also were
considered. The Company considered the relative strengths and weaknesses inherent in the valuation methodologies utilized in each approach and consulted with a third party valuation specialist to assist in determining the appropriate weighting. The
discounted cash flow analysis requires the Company to make various judgmental assumptions, including assumptions about future cash flows, growth rates and weighted average cost of capital (discount rate). The assumptions about future cash flows and
growth rates are based on the current and long-term business plans of each reporting unit. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. If necessary, the second
step of the goodwill impairment test compares the implied fair value of the reporting units goodwill with the carrying amount of that
98
goodwill. If the carrying amount of a reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount in excess of the carrying
amount of goodwill over its implied fair value. The implied fair value of goodwill is determined in a similar manner as the determination of goodwill recognized in a business combination. The Company assigns the fair value of a reporting unit to all
of the assets and liabilities of that unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities
represents the implied fair value of goodwill.
The valuation methodologies described above have been consistently applied for
all years presented below. See Part II, Item 7, Critical Accounting Policies for further information regarding the Companys goodwill impairment testing, including key assumptions and sensitivity analysis.
2010 Impairment Analysis There was no impairment of goodwill for our three reporting units from our annual goodwill impairment
assessment performed as of October 1, 2010. The fair value of our MCS reporting unit exceeded its carrying value by 4.2% and thus was at risk of failing step one of the goodwill impairment test, and was therefore at risk of a future impairment
in the event of significant unfavorable changes in the forecasted cash flows or the key assumptions used in the analysis, including the weighted average cost of capital (discount rate) and growth rates utilized in the discounted cash flow analysis.
2011 Impairment Analysis There was no impairment of goodwill for our BCS and ATS reporting units from our
annual goodwill impairment assessment performed as of October 1, 2011. The fair value of our ATS reporting unit exceeded its carrying value by 7.6% and thus was at risk of failing step one of the goodwill impairment test, and was therefore at
risk of a future impairment in the event of significant unfavorable changes in the forecasted cash flows or the key assumptions used in the analysis, including the weighted average cost of capital (discount rate) and growth rates utilized in the
discounted cash flow analysis. The Company determined during its step one of impairment testing that the fair value of the MCS reporting unit was less than its respective carrying value, as a result of a decline in the expected future cash flows for
the reporting unit. In making the assessment regarding MCS future cash flows, a number of specific factors arose from the annual strategic planning process in the fourth quarter, including an assessment of historical operating results, key customer
inputs, and anticipated development expenditures required to migrate the product portfolio in line with the changing market dynamics, including the evolution from a proprietary to open standards IP architecture. As a result of these factors, the
Company decided to shift some investment from the MCS reporting unit to its BCS reporting unit. Given the decision to reduce our investment going forward, the Company correspondingly moderated its long term projections for the MCS segment. The
Company proceeded to step two of the goodwill impairment test to determine the implied fair value of the MCS goodwill. The Company concluded that the implied fair value of the goodwill was less than its carrying value, which resulted in a write off
of all goodwill as of October 1, 2011 of $41.2 million before tax ($33.9 million after tax) for the MCS reporting unit. This expense was recorded in the impairment of goodwill and intangibles line on the consolidated statements of operations.
2012 Impairment Analysis There was no impairment of goodwill for our BCS and ATS reporting units from our annual
goodwill impairment assessment performed as of October 1, 2012. The fair value of the ATS reporting unit exceeded its carrying value by $48.6 million, or 22.1%, and thus was at risk of failing step one of the goodwill impairment test, and was
therefore at risk of a future impairment in the event of significant unfavorable changes in the forecasted cash flows or the key assumptions used in the analysis, including the weighted average cost of capital (discount rate) and growth rates
utilized in the discounted cash flow analysis.
The following table sets forth the information regarding the ATS reporting
unit as of October 1, 2012 (annual goodwill impairment testing date), including key assumptions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Assumptions
|
|
|
% Fair Value
Exceeds
Carrying
Value as of
October 1, 2012
|
|
|
Goodwill as of
October 1,
2012
|
|
|
|
Discount Rate
|
|
|
Terminal
Growth
Rate
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percent of
Total Assets
|
|
ATS
|
|
|
13.0
|
%
|
|
|
3.0
|
%
|
|
|
22.1
|
%
|
|
$
|
35,027
|
|
|
|
11.2
|
%
|
99
The table below provides sensitivity analysis related to the impact of each of the key
assumptions, on a standalone basis, on the resulting percentage change in fair value of the ATS reporting unit as of October 1, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Reduction in Fair Value (Income Approach)
|
|
|
|
Assuming Hypothetical
10% Reduction
in cash
flows
|
|
|
Assuming Hypothetical
1%
increase in Discount
Rate
|
|
|
Assuming Hypothetical
1%
decrease in Terminal
Growth Rate
|
|
ATS
|
|
|
-6.6
|
%
|
|
|
-7.0
|
%
|
|
|
-2.8
|
%
|
Following is a summary of the Companys goodwill activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BCS
|
|
|
ATS
|
|
|
MCS
|
|
|
Total
|
|
Balance as of December 31, 2010
|
|
$
|
156,335
|
|
|
$
|
36,856
|
|
|
$
|
41,773
|
|
|
$
|
234,964
|
|
Adjustment to deferred tax assets C-COR acquisition
|
|
|
|
|
|
|
(996
|
)
|
|
|
(583
|
)
|
|
|
(1,579
|
)
|
Acquisition of BigBand Networks
|
|
|
2,347
|
|
|
|
|
|
|
|
|
|
|
|
2,347
|
|
Impairment
|
|
|
|
|
|
|
|
|
|
|
(41,190
|
)
|
|
|
(41,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
|
|
$
|
158,682
|
|
|
$
|
35,860
|
|
|
$
|
|
|
|
$
|
194,542
|
|
Adjustment to deferred tax assets C-COR acquisition
|
|
|
|
|
|
|
(1,188
|
)
|
|
|
|
|
|
|
(1,188
|
)
|
Adjustment to deferred tax assets BigBand acquisition
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
159,443
|
|
|
$
|
34,672
|
|
|
$
|
|
|
|
$
|
194,115
|
|
Intangibles
ARRIS tests its long-lived assets for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Examples of such circumstances include, but are
not limited to, operating or cash flow losses from the use of such assets or changes in our intended uses of such assets. To test for recovery, the Company groups assets (an asset group) in a manner that represents the lowest level for
which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The carrying amount of a long-lived asset or an asset group is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset or asset group. In determining future undiscounted cash flows, the Company has made a policy decision to use pre-tax cash flows in our evaluation, which is
consistently applied.
If the Company determines that an asset or asset group is not recoverable, then the Company would record
an impairment charge if the carrying value of the asset or asset group exceeds its fair value. Fair value is based on estimated discounted future cash flows expected to be generated by the asset or asset group. The assumptions underlying cash flow
projections would represent managements best estimates at the time of the impairment review.
No review for impairment of
long-lived assets was conducted in 2010 and 2012 as no indicators of impairment existed. In 2011, indicators of impairment existed for long-lived assets associated with the MCS reporting unit due to changes in projected operating results and cash
flows. As such, the Company tested the MCS long-lived assets for recoverability by grouping assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The Company
compared the undiscounted cash flows over the estimated useful life of the primary asset in the group. The estimated cash flows included revenues and expenses directly associated with and arise from the use of the asset group. Based upon the
analysis, the undiscounted cash flows used in the recoverability test were less than the carrying amount of the asset group. The Company determined the fair value of the long-lived asset group and recognized an impairment loss for the amount the
carrying amount of the long-lived asset group exceeded its fair value. In the fourth quarter of 2011, an impairment loss of $47.4 million before tax ($29.1 million after tax) related to MCS customer relationships was recorded. This expense was
recorded in the impairment of goodwill and intangibles line on the consolidated statements of operations.
100
In 2011, the Company recorded acquired in-process research and development assets of $7.8
million associated with the BigBand acquisition which was initially recognized at fair value and classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly,
during the development period after the acquisition date, this asset was not amortized as a charge to earnings; instead these assets were subject to periodic impairment testing. In 2012, upon successful completion of the development process for the
acquired in-process research and development projects, the Company determined no impairment existed with regard to the asset. The asset was then considered a finite-lived intangible asset and reclassified as part of developed technology and
amortization of the asset commenced.
The Companys intangible assets have an amortization period of six months to ten
years. The gross carrying amount and accumulated amortization of the Companys intangible assets as of December 31, 2012 and December 31, 2011 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Customer relationships
|
|
$
|
250,009
|
|
|
$
|
190,285
|
|
|
$
|
59,724
|
|
|
|
4.0
|
|
|
$
|
250,009
|
|
|
$
|
172,648
|
|
|
$
|
77,361
|
|
|
|
4.9
|
|
Developed technology
|
|
|
77,769
|
|
|
|
42,964
|
|
|
|
34,805
|
|
|
|
4.4
|
|
|
|
69,969
|
|
|
|
30,809
|
|
|
|
39,160
|
|
|
|
4.6
|
|
Trademarks & patents
|
|
|
257
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
257
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
Order backlog
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
2,498
|
|
|
|
502
|
|
|
|
1.0
|
|
Non-compete agreements
|
|
|
3,162
|
|
|
|
3,162
|
|
|
|
|
|
|
|
|
|
|
|
3,162
|
|
|
|
3,162
|
|
|
|
|
|
|
|
|
|
In-process R&D
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,800
|
|
|
|
|
|
|
|
7,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
334,197
|
|
|
$
|
239,668
|
|
|
$
|
94,529
|
|
|
|
|
|
|
$
|
334,197
|
|
|
$
|
209,374
|
|
|
$
|
124,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on the intangible assets listed in the above table for the years ended
December 31, 2012, 2011 and 2010 was $30.3 million, $33.6 million, and $36.0 million, respectively. Amortization on the in-process research and development assets began in the second quarter of 2012. The estimated total amortization expense for
each of the next five fiscal years is as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
30,245
|
|
2014
|
|
|
23,845
|
|
2015
|
|
|
23,203
|
|
2016
|
|
|
6,773
|
|
2017
|
|
|
3,383
|
|
Thereafter
|
|
|
7,080
|
|
Note 15. Convertible Senior Notes
In 2006, the Company issued $276.0 million of 2% convertible senior notes due 2026. The notes are convertible, at the
option of the holder, based on an initial conversion rate, subject to adjustment, of 62.1504 shares per $1,000 principal amount (which represents an initial conversion price of approximately $16.09 per share of our common stock). Upon conversion,
the holder will receive up to the principal amount in cash and may receive, depending on the price of ARRIS common stock, an additional payment, in cash, ARRIS common stock or a combination thereof, at the option of the Company. The
additional payment, if any, will be based on a formula which calculates the difference between the initial conversion rate ($16.09) and the market price of ARRIS common stock during a period following the date of the conversion. The notes may
be converted only upon the occurrence of specified events and during specified periods, including during any calendar quarter in which the closing price of ARRIS common stock for 20 or more trading days in a period of 30 consecutive trading
days ending on the last trading day of the immediately preceding calendar quarter exceeds 120% of the conversion price in effect on the last trading day of the last calendar quarter (which, based on the current conversion price, would be $19.31). As
of February 27, 2013, the notes could not be converted by the holders thereof.
101
The Company may redeem the notes at any time on or after November 15, 2013, subject to
certain conditions. In addition, the holders may require the Company to purchase all or a portion of their convertible notes (i) on November 15, 2013, November 15, 2016 and November 15, 2021 and (ii) for a period of
time following the occurrence of specified fundamental changes. Upon a redemption, the holder will receive the principal amount of the notes in cash plus any accrued and unpaid interest.
Following the Holding Company Formation that will be undertaken in connection with the acquisition of the Motorola Home business, the
conversion feature of the notes will relate to the Holding Companys common stock, instead of ARRIS common stock. Thus, if a holder converts notes following the Holding Company Formation, the amount of consideration paid to such holder
will be measured with respect to the Holding Companys common stock and any equity consideration will be paid in the common stock of the Holding Company. Also, holders will be able to convert the notes or have the Company redeem the notes
during a specified period following the Holding Company Formation.
The notes are unsecured senior obligations, and are
effectively subordinated to all liabilities, including trade payables and lease obligations of the Companys subsidiaries. Interest is payable on May 15 and November 15 of each year. There are no significant financial covenants
related to the notes. As of December 31, 2012, the carrying amount of the convertible senior notes was $222.1 million and was recorded in current liabilities on the Companys consolidated balance sheets.
During 2011, the Company acquired $5.0 million face value of the notes for approximately $5.0 million. The Company allocated $2 thousand
to the reacquisition of the equity component of the notes. The Company also wrote off approximately $33 thousand of deferred finance fees associated with the portion of the notes acquired. As a result, the Company realized a loss of approximately
$19 thousand on the retirement of the notes.
During 2010, ARRIS acquired $24.0 million principal amount of the notes, which
had a book value, net of debt discount, of $20.0 million for approximately $23.3 million. The Company allocated $0.1 million to the reacquisition of the equity component of the notes. The Company also wrote off approximately $0.2 million of deferred
finance fees associated with the portion of the notes acquired. As a result, the Company realized a gain of approximately $0.4 million on the retirement of the notes.
ARRIS accounts for the liability and equity components of the notes separately. The Company is accreting the debt discount related to the equity component to non-cash interest expense over the estimated
seven year life of the convertible notes, which corresponds to the November 15, 2013 redemption date discussed above. The equity and liability components related to the notes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Carrying amount of the equity component
|
|
$
|
48,209
|
|
|
$
|
48,209
|
|
|
|
|
|
|
|
|
|
|
Principal amount of the liability component
|
|
$
|
232,050
|
|
|
$
|
232,050
|
|
Unamortized discount
|
|
|
(9,926
|
)
|
|
|
(22,284
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount of the liability component
|
|
$
|
222,124
|
|
|
$
|
209,766
|
|
|
|
|
|
|
|
|
|
|
The following table presents the contractual interest coupon and the amortization of the discount on the
equity component related to the notes as of December 31, 2012 and December 31, 2011. (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Contractual interest recognized
|
|
$
|
4,641
|
|
|
$
|
4,706
|
|
Amortization of discount
|
|
|
12,358
|
|
|
|
11,545
|
|
The effective annual interest rate on the debt component is 7.93%.
102
The Company paid approximately $7.8 million of finance fees related to the issuance of the
notes. Of the $7.8 million, approximately $5.3 million was attributed to the debt component and $2.5 million was attributed to the equity component of the convertible debt instrument. The portion related to the debt component is being amortized over
seven years. The remaining balance of unamortized financing costs from these notes as of December 31, 2012 and December 31, 2011 was $0.6 million and $1.2 million, respectively.
The Company has not paid cash dividends on its common stock since its inception.
Note 16. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share
computations for the periods indicated (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
53,459
|
|
|
$
|
(17,662
|
)
|
|
$
|
64,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
114,161
|
|
|
|
120,157
|
|
|
|
125,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.47
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
53,459
|
|
|
$
|
(17,662
|
)
|
|
$
|
64,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
114,161
|
|
|
|
120,157
|
|
|
|
125,157
|
|
Net effect of dilutive shares
|
|
|
2,353
|
|
|
|
|
|
|
|
3,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
116,514
|
|
|
|
120,157
|
|
|
|
128,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.46
|
|
|
$
|
(0.15
|
)
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In November 2006, the Company issued $276.0 million of convertible senior notes. Upon conversion, ARRIS
will satisfy at least the principal amount in cash, rather than common stock. This reduced the potential earnings dilution to only include the conversion premium, which is the difference between the conversion price per share of common stock and the
average share price. The average share price in 2012, 2011 and 2010 was less than the conversion price and, consequently, did not result in dilution.
Excluded from the dilutive securities described above are employee stock options to acquire 1.7 million, 3.6 million and 3.8 million shares as of December 31, 2012, 2011 and 2010,
respectively. These exclusions are made if the exercise prices of these options are greater than the average market price of the common stock for the period, or if we have net losses, both of which have an anti-dilutive effect.
Note 17. Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
67,620
|
|
|
$
|
(32,759
|
)
|
|
$
|
91,373
|
|
Foreign
|
|
|
6,676
|
|
|
|
4,248
|
|
|
|
3,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74,296
|
|
|
$
|
(28,511
|
)
|
|
$
|
94,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
Income tax expense (benefit) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Current Federal
|
|
$
|
26,196
|
|
|
$
|
20,901
|
|
|
$
|
15,482
|
|
State
|
|
|
3,440
|
|
|
|
2,223
|
|
|
|
4,274
|
|
Foreign
|
|
|
4,855
|
|
|
|
2,406
|
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,491
|
|
|
|
25,530
|
|
|
|
20,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Federal
|
|
|
(10,522
|
)
|
|
|
(31,084
|
)
|
|
|
8,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
(2,238
|
)
|
|
|
(6,358
|
)
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(894
|
)
|
|
|
1,063
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,654
|
)
|
|
|
(36,379
|
)
|
|
|
9,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
20,837
|
|
|
$
|
(10,849
|
)
|
|
$
|
30,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax rate of 35% and the effective income tax rates is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Statutory federal income tax expense (benefit)
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
Effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
1.4
|
|
|
|
(6.5
|
)
|
|
|
3.2
|
|
Impairment of goodwill
Domestic manufacturing deduction
|
|
|
(4.0
|
)
|
|
|
27.4
(9.6
|
)
|
|
|
(2.4
|
)
|
Changes in valuation allowance
|
|
|
(0.7
|
)
|
|
|
(8.0
|
)
|
|
|
0.1
|
|
Non-deductible officer compensation
|
|
|
1.0
|
|
|
|
2.4
|
|
|
|
0.5
|
|
Foreign taxes on U.S. entities less foreign tax credits
|
|
|
(0.4
|
)
|
|
|
2.5
|
|
|
|
(1.2
|
)
|
Facilitative acquisition costs
|
|
|
|
|
|
|
4.1
|
|
|
|
|
|
Research and development tax credits
|
|
|
(4.8
|
)
|
|
|
(20.0
|
)
|
|
|
(4.3
|
)
|
Other, net
|
|
|
0.6
|
|
|
|
4.6
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28.1
|
%
|
|
|
(38.1
|
)%
|
|
|
32.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
Deferred income taxes reflect the net tax effects of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of ARRIS net deferred income tax assets (liabilities) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
|
Inventory costs
|
|
$
|
6,407
|
|
|
$
|
6,509
|
|
Federal research and development credits
|
|
|
806
|
|
|
|
433
|
|
Federal/state net operating loss carryforwards
|
|
|
3,876
|
|
|
|
1,165
|
|
Foreign net operating loss carryforwards
|
|
|
205
|
|
|
|
750
|
|
Accrued vacation
|
|
|
1,592
|
|
|
|
1,793
|
|
Warranty reserve
|
|
|
781
|
|
|
|
788
|
|
Deferred revenue
|
|
|
14,938
|
|
|
|
18,820
|
|
Other, principally operating expenses
|
|
|
3,978
|
|
|
|
5,300
|
|
|
|
|
|
|
|
|
|
|
Total current deferred income tax assets
|
|
|
32,583
|
|
|
|
35,558
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred income tax assets:
|
|
|
|
|
|
|
|
|
Federal/state net operating loss carryforwards
|
|
|
21,245
|
|
|
|
51,753
|
|
Federal capital loss carryforwards
|
|
|
5,678
|
|
|
|
5,733
|
|
Investments
|
|
|
|
|
|
|
142
|
|
Foreign net operating loss carryforwards
|
|
|
7,969
|
|
|
|
7,115
|
|
Federal research and development credits
|
|
|
13,041
|
|
|
|
9,379
|
|
Pension and deferred compensation
|
|
|
11,440
|
|
|
|
11,351
|
|
Equity compensation
|
|
|
10,623
|
|
|
|
11,280
|
|
Warranty reserve
|
|
|
1,224
|
|
|
|
1,162
|
|
Capitalized R&D
|
|
|
9,174
|
|
|
|
10,146
|
|
Other, principally operating expenses
|
|
|
5,719
|
|
|
|
3,365
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred income tax assets
|
|
|
86,113
|
|
|
|
111,426
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
118,696
|
|
|
|
146,984
|
|
|
|
|
|
|
|
|
|
|
Current deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, principally operating expenses
|
|
|
(1,742
|
)
|
|
|
(6,904
|
)
|
|
|
|
|
|
|
|
|
|
Total current deferred income tax liabilities
|
|
|
(1,742
|
)
|
|
|
(6,904
|
)
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, depreciation and basis differences
|
|
|
(1,833
|
)
|
|
|
(4,612
|
)
|
Excess tax on future repatriation of foreign earnings
|
|
|
(1,954
|
)
|
|
|
(1,946
|
)
|
Section 481(a) Adjustment Deferred Revenue
|
|
|
(1,021
|
)
|
|
|
|
|
Other noncurrent liabilities
|
|
|
(7,243
|
)
|
|
|
(5,722
|
)
|
Convertible debt
|
|
|
(3,639
|
)
|
|
|
(8,187
|
)
|
Goodwill and Intangibles
|
|
|
(11,266
|
)
|
|
|
(17,548
|
)
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred income tax liabilities
|
|
|
(26,956
|
)
|
|
|
(38,015
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(28,698
|
)
|
|
|
(44,919
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
89,998
|
|
|
|
102,065
|
|
Valuation allowance
|
|
|
(17,974
|
)
|
|
|
(42,039
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets (liabilities)
|
|
$
|
72,024
|
|
|
$
|
60,026
|
|
|
|
|
|
|
|
|
|
|
105
The valuation allowance for deferred income tax assets of $18.0 million and $42.0 million at
December 31, 2012 and 2011, respectively, relates to the uncertainty surrounding the realization of certain deferred income tax assets in various jurisdictions. The $24.0 million net decrease in valuation allowances for the year was due
primarily to the waiver of BigBand net operating losses, which were previously offset by valuation allowances. Based on the applicable IRC Section 382 loss limitation on BigBand net operating losses generated prior to its acquisition by ARRIS,
the Company determined that approximately $70.7 million of losses would have expired unutilized. Therefore, the company elected on the 2011 income tax return to waive these losses pursuant to Treasury Regulation 1.1502-32(b)(4), in order to preserve
the tax basis of the stock in BigBand Networks, Inc. A valuation allowance should be established and maintained when it is more-likely-than-not that all or a portion of deferred income tax assets will not be realized. The Company continually reviews
the adequacy of its valuation allowances by reassessing whether it is more-likely-than-not to realize its various deferred income tax assets.
As of December 31, 2012 and December 31, 2011, ARRIS had $47.0 million and $123.5 million, respectively, of U.S. Federal net operating losses available to offset against future ARRIS taxable
income. During 2012, ARRIS utilized approximately $3.3 million of U.S. Federal net operating losses against taxable income. ARRIS waived approximately $70.7 million of U.S. Federal net operating losses relating to the BigBand transaction, in order
to preserve stock basis, pursuant to Treasury Regulation 1.1502-32(b)(4). The U.S. Federal net operating losses may be carried forward for twenty years. The available acquired U.S. Federal net operating losses as of December 31, 2012, will
expire between the years 2013 and 2030.
As of December 31, 2012, ARRIS also had $186.7 million of U.S. state net
operating loss carryforwards in various states. The amounts available for utilization vary by state due to the apportionment of the Companys taxable income and state law governing the expiration of these net operating losses. U.S. state net
operating loss carryforwards of approximately $30.0 million relate to the exercise of employee stock options and restricted stock (equity compensation). Any future cash benefit resulting from the utilization of these U.S. state net
operating losses attributable to this portion of equity compensation will be credited directly to paid in capital during the year in which the cash benefit is realized.
Additionally, ARRIS has foreign net operating loss carryforwards available, as of December 31, 2012, of approximately $40.8 million with varying expiration dates. Approximately $19.9 million of the
total foreign net operating loss carryforwards relate to ARRIS Irish subsidiary and have an indefinite life.
ARRIS
ability to use U.S. Federal and state net operating loss carryforwards to reduce future taxable income, or to use research and development tax credit carryforwards to reduce future income tax liabilities, is subject to restrictions attributable to
equity transactions that resulted in a change of ownership during prior tax years, as defined in Internal Revenue Code Sections 382 and 383. All of the tax attributes (net operating losses carried forward and tax credits carried forward) acquired
from the C-COR Incorporated transaction and the BigBand Networks, Inc. transaction are subject to restrictions arising from equity transactions, including transactions that created ownership changes within C-COR and BigBand prior to their
acquisitions by ARRIS. With the exception of $44.1 million of post-apportioned and $61.0 million of its pre-apportioned U.S. state net operating loss carryforwards and $5.2 million of R&D credit carryforwards, ARRIS does not expect that the
limitations placed on its net operating losses and research and development tax credits as a result of applying these and other rules will result in the expiration of its net operating loss and research and development tax credit carryforwards.
However, future equity transactions could further limit the utilization of these tax attributes.
During the past several
years, ARRIS has identified and reported U.S. federal research and development tax credits in the amount of $65.2 million, and domestic state research and development tax credits in the amount of $18.6 million. During the tax years ending
December 31, 2012, and 2011, we utilized $1.2 million and $12.1 million, respectively, to offset against U.S. federal and state income tax liabilities. As of December 31, 2012, ARRIS has $5.6 million of available domestic federal research
and development tax credits and $14.1 million of available domestic state research and development tax credits to carry forward to subsequent years. The remaining unutilized domestic federal research and development tax credits can be carried back
one year and carried forward twenty years. The domestic state research and development tax credits carry forward and will expire pursuant to the various applicable domestic state rules.
106
The federal research and development credit expired on December 31, 2011. On
January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. Under this act, the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2011 and before
January 1, 2014. The effects of these changes in the tax law will result in a tax benefit which will be recognized in the first quarter of 2013, which is the quarter in which the law was enacted. The rate reconciliation for 2012 was favorably
impacted by certain out of period elements of the research and development tax credit, primarily from the reversal of uncertain tax positions relating to the tax credit as prior year statute of limitations expired during 2012, and from certain 2011
tax return to tax provision adjustments.
For the years ended December 31, 2012, 2011, and 2010, ARRIS reported $6.7
million, $4.2 million, and $3.3 million, respectively, of pre-tax net income from non-U.S. entities operating in foreign jurisdictions. Pre-tax net income (loss) from the worldwide operations of U.S. entities was $67.6 million, $(32.7) million, and
$91.3 million for years ended December 31, 2012, 2011, and 2010.
With the exception of approximately $8.9 million of
earnings associated with its Israeli subsidiary, ARRIS intends to indefinitely reinvest the undistributed earnings of its foreign subsidiaries. ARRIS has recorded approximately $1.9 million of deferred tax liability relating to the $8.9 million of
distributable earnings of the Israeli subsidiary. This deferred tax liability was recorded as part of purchase accounting for the acquisition of BigBand, and accordingly, the amount was offset by an increase in goodwill. No deferred income taxes
have been recorded for the difference between its financial and tax basis investment in its other foreign subsidiaries. If the earnings of the other foreign subsidiaries were distributed to the U.S. in the form of dividends, or otherwise, ARRIS
would have additional U.S. taxable income and, depending on the companys tax posture in the year of repatriation, may have to pay additional U.S. income taxes. Withholding taxes may also apply to the repatriation of foreign earnings.
Determination of the amount of unrecognized income tax liability related to these permanently reinvested and undistributed foreign subsidiary earnings is currently not practicable. However, we expect that the income tax liability from a repatriation
of these earnings would not be material because almost all of ARRIS undistributed earnings are held by legal entities that file income tax returns in the United States.
Tabular Reconciliation of Unrecognized Tax Benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Beginning balance
|
|
$
|
26,232
|
|
|
$
|
20,495
|
|
|
$
|
17,276
|
|
Gross increases tax positions in prior period
|
|
|
|
|
|
|
374
|
|
|
|
606
|
|
Gross decreases tax positions in prior period
|
|
|
|
|
|
|
(105
|
)
|
|
|
|
|
Gross increases current-period tax positions
|
|
|
2,684
|
|
|
|
5,922
|
|
|
|
2,841
|
|
Increases from acquired businesses
|
|
|
|
|
|
|
1,719
|
|
|
|
|
|
Other
|
|
|
100
|
|
|
|
|
|
|
|
|
|
Decreases due to lapse of statute of limitations
|
|
|
(3,312
|
)
|
|
|
(2,173
|
)
|
|
|
(228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
25,704
|
|
|
$
|
26,232
|
|
|
$
|
20,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various
state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2001. The Company and its subsidiaries are currently
under income tax audit in only seven jurisdictions (the state of Georgia, the state of California, the state of New York, the state of Illinois, the state of Michigan, the United States and Israel) and they have not received notices of any planned
or proposed income tax audits. The Company has no outstanding unpaid income tax assessments for prior income tax audits.
The
Company is currently being audited by the Internal Revenue Service in the United States for the year ended December 31, 2010. We expect the audit to conclude during 2013. We do not anticipate any audit adjustments in excess of our current
accrual for uncertain tax positions.
107
At the end of 2012, the Companys total tax liability related to uncertain net tax
positions totaled approximately $25.4 million, all of which would cause the effective income tax rate to change upon the recognition. The difference between the $25.7 million of unrecognized tax benefits reported in the tabular reconciliation above
and the $25.4 million of total tax liability relating to uncertain net tax positions are attributable to interest, penalties and the Federal benefit of state deductions. Based on information currently available, the Company anticipates that over the
next twelve month period, statutes of limitations may close relating to existing unrecognized tax benefits of approximately $.1 million primarily arising from various state tax issues. The Company reported approximately $2.3 million and $1.7
million, respectively, of interest and penalty accrual related to the anticipated payment of these potential tax liabilities as of December 31, 2012 and 2011. The Company classifies interest and penalties recognized on the liability for
uncertain tax positions as income tax expense.
Note 18. Commitments
ARRIS leases office, distribution, and warehouse facilities as well as equipment under long-term leases expiring at
various dates through 2023. Included in these operating leases are certain amounts related to restructuring activities; these lease payments and related sublease income are included in restructuring accruals on the consolidated balance sheets.
Future minimum operating lease payments under non-cancelable leases at December 31, 2012 were as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
|
2013
|
|
$
|
10,624
|
|
2014
|
|
|
8,937
|
|
2015
|
|
|
7,139
|
|
2016
|
|
|
5,159
|
|
2017
|
|
|
3,870
|
|
Thereafter
|
|
|
5,668
|
|
Less sublease income
|
|
|
(917
|
)
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
40,480
|
|
|
|
|
|
|
Total rental expense for all operating leases amounted to approximately $12.4 million, $10.7 million and
$10.0 million for the years ended December 31, 2012, 2011 and 2010, respectively.
As of December 31, 2012, the
Company had approximately $4.7 million of restricted cash. Of the total restricted cash, $2.7 million related to outstanding letters of credit that were cash collateralized and $2.0 million is security for hedge transactions. Additionally, the
Company had contractual obligations of approximately $214.4 million under agreements with non-cancelable terms to purchase goods or services over the next year. All contractual obligations outstanding at the end of prior years were satisfied within
a 12 month period, and the obligations outstanding as of December 31, 2012 are expected to be satisfied in 2013.
Should
the closing of the Motorola Home acquisition be delayed beyond March 19, 2013, which ARRIS currently expects, the Company will be subject to ticking fees under the commitment letter entered into with respect to the Credit
Facility that will be used to partially finance the acquisition. For the first 30 days, the ticking fees for both the Term Loan A and the Term Loan B will be 0.50% per annum of the total amount committed for each term loan under the
commitment letter. After 30 days, the ticking fee for the Term Loan A will remain 0.50% per annum, but the ticking fee for the Term Loan B will be calculated at 50% of the applicable margin for LIBOR advances as determined in accordance
with the commitment letter. Ticking fees will accrue until the earlier of the termination of the commitment letter for the proposed Credit Facility and the closing of the transaction.
108
Note 19. Stock-Based Compensation
ARRIS grants stock options under its 2011 Stock Incentive Plan (SIP). Upon approval of the 2011 SIP, all
shares available for grant under existing stock incentive plans were no longer available. However, all outstanding options granted under the previous plans are still exercisable. The Board of Directors approved the SIP and the prior plans to
facilitate the retention and continued motivation of key employees, consultants and directors, and to align more closely their interests with those of the Company and its stockholders.
Awards under the SIP may be in the form of stock options, stock grants, stock units, restricted stock, stock appreciation rights,
performance shares and units, and dividend equivalent rights. A total of 17,500,000 shares of the Companys common stock may be issued pursuant to the SIP. The SIP has been designed to allow for flexibility in the form of awards; however,
awards denominated in shares of common stock other than stock options and stock appreciation rights will be counted against the SIP limit as 1.87 shares for every one share covered by such an award. The vesting requirements for issuance under the
SIP may vary; however, awards generally are required to have a minimum three-year vesting period or term.
In connection with
the 2011 acquisition of BigBand Networks, Inc., ARRIS assumed the BigBand Networks, Inc. 2007 Equity Incentive Plan (the Assumed BigBand Plan), including the restricted stock units outstanding under the Assumed BigBand Plan at the time
of the acquisition. ARRIS may continue to grant awards under the Assumed BigBand Plan in certain circumstances so long as the grants comply with the applicable requirements of NASDAQ. A total of 97,997 shares of the Companys common stock
remain available for issuance under the Assumed BigBand Plan.
Stock Options
ARRIS grants stock options to certain employees. Upon stock option exercise the Company issues new shares. Stock options generally vest
over three or four years of service and have either seven or ten year contractual terms. The exercise price of an option is equal to the fair market value of ARRIS stock on the date of grant. ARRIS uses the Black-Scholes model and engages an
independent third party to assist the Company in determining the Black-Scholes valuation of its equity awards. The volatility factors are based upon a combination of historical volatility over a period of time and estimates of implied volatility
based on traded option contracts on ARRIS common stock. The expected term of the awards granted are based upon a weighted average life of exercise activity of the grantee population. The risk-free interest rate is based upon the U.S. treasury strip
yield at the grant date, using a remaining term equal to the expected life. The expected dividend yield is 0%, as the Company has not paid cash dividends on its common stock since its inception. In calculating the stock compensation expense, ARRIS
applies an estimated pre-vesting forfeiture rate based upon historical rates. The stock compensation expense is amortized over the vesting period using the straight-line method.
A summary of activity of ARRIS options granted under its stock incentive plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Term
(in years)
|
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
|
Beginning balance, January 1, 2012
|
|
|
4,466,759
|
|
|
$
|
10.38
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,063,325
|
)
|
|
|
8.25
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,500
|
)
|
|
|
5.95
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(24,485
|
)
|
|
|
9.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2012
|
|
|
2,376,449
|
|
|
|
12.24
|
|
|
|
1.25
|
|
|
$
|
6,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2012
|
|
|
2,376,449
|
|
|
|
12.24
|
|
|
|
1.25
|
|
|
$
|
6,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
There were no new options granted in 2012, 2011 and 2010. The total intrinsic value of
options exercised during 2012, 2011 and 2010 was approximately $10.2 million, $9.6 million and $3.2 million, respectively.
The
following table summarizes ARRIS options outstanding as of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
$ 4.57 to $ 4.99
|
|
|
68,903
|
|
|
1.37 years
|
|
$
|
4.89
|
|
|
|
68,903
|
|
|
$
|
4.89
|
|
$5.00 to $ 6.99
|
|
|
67,099
|
|
|
1.18 years
|
|
$
|
6.32
|
|
|
|
67,099
|
|
|
$
|
6.32
|
|
$7.00 to $8.99
|
|
|
21,134
|
|
|
1.50 years
|
|
$
|
8.42
|
|
|
|
21,134
|
|
|
$
|
8.42
|
|
$9.00 to $10.99
|
|
|
282,674
|
|
|
1.50 years
|
|
$
|
9.23
|
|
|
|
282,674
|
|
|
$
|
9.23
|
|
$ 11.00 to $13.99
|
|
|
1,936,639
|
|
|
1.20 years
|
|
$
|
13.19
|
|
|
|
1,936,639
|
|
|
$
|
13.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4.57 to $13.99
|
|
|
2,376,449
|
|
|
1.25 years
|
|
$
|
12.24
|
|
|
|
2,376,449
|
|
|
$
|
12.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock (Non-Performance) and Stock Units
ARRIS grants restricted stock and stock units to certain employees and its non-employee directors. The Company records a fixed
compensation expense equal to the fair market value of the shares of restricted stock granted on a straight-line basis over the requisite services period for the restricted shares. The Company applies an estimated post-vesting forfeiture rate based
upon historical rates.
The following table summarizes ARRIS unvested restricted stock (excluding performance-related)
and stock unit transactions during the year ending December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested at January 1, 2012
|
|
|
4,974,616
|
|
|
$
|
10.46
|
|
Granted
|
|
|
2,530,147
|
|
|
|
11.05
|
|
Vested
|
|
|
(2,070,700
|
)
|
|
|
9.43
|
|
Forfeited
|
|
|
(304,983
|
)
|
|
|
10.95
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2012
|
|
|
5,129,080
|
|
|
|
11.13
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares Subject to Performance Targets
ARRIS grants to certain employees restricted shares, in which the number of shares is dependent upon performance targets. The number of
shares which could potentially be issued ranges from zero to 150% of the target award. Compensation expense is recognized using the graded method and is based upon the fair market value of the shares estimated to be earned. The fair value of the
restricted shares is estimated on the date of grant using the same valuation model as that used for stock options and other restricted shares.
The following table summarizes ARRIS unvested performance-related restricted stock transactions during the year ending December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested at January 1, 2012
|
|
|
52,976
|
|
|
$
|
5.65
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(52,976
|
)
|
|
|
5.65
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
Restricted Shares Subject to Comparative Market Performance
ARRIS grants to certain employees restricted shares, in which the number of shares is dependent upon the Companys total shareholder
return as compared to the shareholder return of the NASDAQ composite over a three year period. The number of shares which could potentially be issued ranges from zero to 200% of the target award. For the shares granted in 2010, the three-year
measurement period ended on December 31, 2012. This resulted in an achievement of 98.6% of the target award, or 182,578 shares. The remaining grants outstanding that are subject to market performance are 554,720 shares at target; at 200%
performance 1,109,440 would be issued. Compensation expense is recognized on a straight-line basis over three year measurement period and is based upon the fair market value of the shares estimated to be earned. The fair value of the restricted
shares is estimated on the date of grant using a lattice model.
The total intrinsic value of restricted shares, including both
non-performance and performance-related shares, vested and issued during 2012, 2011 and 2010 was $27.1 million, $24.1 million and $18.8 million, respectively.
Employee Stock Purchase Plan (ESPP)
ARRIS offers an ESPP to
certain employees. The plan complies with Section 423 of the U.S. Internal Revenue Code, which provides that employees will not be immediately taxed on the difference between the market price of the stock and a discounted purchase price if it
meets certain requirements. Participants can request that up to 10% of their base compensation be applied toward the purchase of ARRIS common stock under ARRIS ESPP. Purchases by any one participant are limited to $25,000 (based upon the fair
market value) in any one year. The exercise price is the lower of 85% of the fair market value of the ARRIS common stock on either the first day of the purchase period or the last day of the purchase period. A plan provision which allows for the
more favorable of two exercise prices is commonly referred to as a look-back feature. Any discount offered in excess of five percent generally will be considered compensatory and appropriately is recognized as compensation expense.
Additionally, any ESPP offering a look-back feature is considered compensatory. ARRIS uses the Black-Scholes option valuation model to value shares issued under the ESPP. The valuation is comprised of two components; the 15% discount of a share of
common stock and 85% of a six month option held (related to the look-back feature). The weighted average assumptions used to estimate the fair value of purchase rights granted under the ESPP for 2012, 2011 and 2010, were as follows: risk-free
interest rates of 0.1%, 0.1% and 0.2%, respectively; a dividend yield of 0%; volatility factor of the expected market price of ARRIS common stock of 0.33, 0.41, and 0.36, respectively; and a weighted average expected life of 0.5 year for each.
The Company recorded stock compensation expense related to the ESPP of approximately $0.9 million, $0.8 million and $0.7 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Unrecognized Compensation Cost
As of December 31, 2012, there was approximately $41.4 million of total unrecognized compensation cost related to unvested share-based awards granted under the Companys incentive plans. This
compensation cost is expected to be recognized over a weighted-average period of 3.1 years.
Treasury Stock
In 2012, ARRIS repurchased 4.5 million shares of the Companys common stock at an average price of $11.55 per share for an
aggregate consideration of approximately $51.9 million.
In 2011, ARRIS repurchased 10.0 million shares of the
Companys common stock at an average price of $10.95 per share for an aggregate consideration of approximately $109.1 million.
The repurchased shares are held as treasury stock on the Consolidated Balance Sheet as of December 31, 2012.
111
Note 20. Employee Benefit Plans
The Company sponsors a qualified and a non-qualified non-contributory defined benefit pension plan that cover certain
U.S. employees. As of January 1, 2000, the Company froze the qualified defined pension plan benefits for its participants. These participants elected to enroll in ARRIS enhanced 401(k) plan. Due to the cessation of plan accruals for such
a large group of participants, a curtailment was considered to have occurred.
The U.S. pension plan benefit formulas generally
provide for payments to retired employees based upon their length of service and compensation as defined in the plans. ARRIS investment policy is to fund the qualified plan as required by the Employee Retirement Income Security Act of 1974
(ERISA) and to the extent that such contributions are tax deductible.
The investment strategies of the plans place
a high priority on benefit security. The plans invest conservatively so as not to expose assets to depreciation in adverse markets. The plans strategy also places a high priority on earning a rate of return greater than the annual inflation
rate along with maintaining average market results. The plan has targeted asset diversification across different asset classes and markets to take advantage of economic environments and to also act as a risk minimizer by dampening the
portfolios volatility. The following table summarizes the weighted average pension asset allocations as December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Allocation
|
|
|
|
Target
|
|
|
Actual
|
|
|
|
2012
|
|
|
2012
|
|
|
2011
|
|
Equity securities
|
|
|
45
|
%
|
|
|
61
|
%
|
|
|
43
|
%
|
Debt securities
|
|
|
50
|
%
|
|
|
39
|
%
|
|
|
54
|
%
|
Cash and cash equivalents
|
|
|
5
|
%
|
|
|
0
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys pension plan assets by category and by level (as
described in Note 5 of the Notes to the Consolidated Financial Statements) as of December 31, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
(1)
|
|
$
|
|
|
|
$
|
5,804
|
|
|
$
|
|
|
|
$
|
5,804
|
|
Equity securities
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
1,298
|
|
U.S. mid cap
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
1,298
|
|
U.S. small cap
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
|
1,298
|
|
International
|
|
|
1,796
|
|
|
|
|
|
|
|
|
|
|
|
1,796
|
|
Fixed income securities
(3)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate bonds
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
843
|
|
U.S. government bonds
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
843
|
|
U.S. mortgage
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
843
|
|
Foreign bonds
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,062
|
|
|
$
|
5,804
|
|
|
$
|
|
|
|
$
|
14,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash and cash equivalents, which are used to pay benefits and administrative expenses, are held in a stable value fund.
|
(2)
|
Equity securities consist of mutual funds and the underlying investments are indexes. Investments in mutual funds are valued at the net asset value per share multiplied
by the number of shares held.
|
(3)
|
Fixed income securities consist of bonds securities in mutual funds, and are valued at the net asset value per share multiplied by the number of shares held.
|
112
The Company has established a rabbi trust to fund the pension obligations of the Chief
Executive Officer under his Supplemental Retirement Plan including the benefit under the Companys non-qualified defined benefit plan. In addition, the Company has established a rabbi trust for certain executive officers to fund the
Companys pension liability to those officers under the non-qualified plan.
During the fourth quarter of 2012, in an
effort to reduce the volatility and administration expense in connection with the Companys pension obligation, the Company notified eligible employees of a limited opportunity to voluntarily elect an early payout of their pension benefits.
These payouts were approximately $7.7 million and was funded from existing pension assets. The Company accounted for the lump-sum payments as a settlement and recorded a noncash pension settlement charge of approximately $3.1 million in the fourth
quarter of 2012.
Summary data for the non-contributory defined benefit pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Change in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
46,912
|
|
|
$
|
39,441
|
|
Service cost
|
|
|
335
|
|
|
|
312
|
|
Interest cost
|
|
|
2,085
|
|
|
|
2,142
|
|
Actuarial loss
|
|
|
1,625
|
|
|
|
5,798
|
|
Benefit payments
|
|
|
(1,167
|
)
|
|
|
(781
|
)
|
Other
|
|
|
(7,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
42,082
|
|
|
$
|
46,912
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
21,491
|
|
|
$
|
22,067
|
|
Actual return on plan assets
|
|
|
1,637
|
|
|
|
121
|
|
Company contributions
|
|
|
613
|
|
|
|
84
|
|
Expenses and benefits paid from plan assets
|
|
|
(1,167
|
)
|
|
|
(781
|
)
|
Other
|
|
|
(7,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year (1)
|
|
$
|
14,866
|
|
|
$
|
21,491
|
|
|
|
|
|
|
|
|
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
$
|
(27,216
|
)
|
|
$
|
(25,421
|
)
|
Unrecognized actuarial loss
|
|
|
10,830
|
|
|
|
13,487
|
|
Unamortized prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(16,386
|
)
|
|
$
|
(11,934
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
In addition to the pension plan assets, ARRIS has established two rabbi trusts to further fund the pension obligations of the Chief Executive and certain executive
officers of $17.8 million and $14.3 million respectively, and are included in Investments on the Consolidated Balance Sheets.
|
113
Amounts recognized in the statement of financial position consist of:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Current liabilities
|
|
$
|
(333
|
)
|
|
$
|
(161
|
)
|
Noncurrent liabilities
|
|
|
(26,883
|
)
|
|
|
(25,260
|
)
|
Accumulated other comprehensive income (1)
|
|
|
10,830
|
|
|
|
13,487
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(16,386
|
)
|
|
$
|
(11,934
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
The total unfunded pension liability on the Consolidated Balance Sheets as of December 31, 2012 and 2011 included a related income tax effect of $2.3 million and
$3.3 million, respectively.
|
Other changes in plan assets and benefit obligations recognized in other
comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Net loss
|
|
$
|
1,247
|
|
|
$
|
7,301
|
|
Amortization of net loss
|
|
|
(840
|
)
|
|
|
(288
|
)
|
Amortization of prior service cost
|
|
|
-
|
|
|
|
|
|
Settlement charge
|
|
|
(3,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income (loss)
|
|
$
|
(2,657
|
)
|
|
$
|
7,013
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the amounts in other comprehensive income (loss) expected to be amortized
and recognized as a component of net periodic benefit cost in 2013 (in thousands):
|
|
|
|
|
Amortization of net loss
|
|
$
|
615
|
|
Information for defined benefit plans with accumulated benefit obligations in excess of plan assets is as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Accumulated benefit obligation
|
|
$
|
41,764
|
|
|
$
|
45,709
|
|
Projected benefit obligation
|
|
$
|
42,082
|
|
|
$
|
46,912
|
|
Plan assets
|
|
$
|
14,866
|
|
|
$
|
21,491
|
|
Net periodic pension cost for 2012, 2011 and 2010 for pension and supplemental benefit plans includes the
following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Service cost
|
|
$
|
335
|
|
|
$
|
312
|
|
|
$
|
273
|
|
Interest cost
|
|
|
2,085
|
|
|
|
2,142
|
|
|
|
2,114
|
|
Return on assets (expected)
|
|
|
(1,260
|
)
|
|
|
(1,624
|
)
|
|
|
(1,520
|
)
|
Amortization of net actuarial loss
|
|
|
840
|
|
|
|
288
|
|
|
|
280
|
|
Amortization of prior service cost (1)
|
|
|
|
|
|
|
|
|
|
|
260
|
|
Settlement charge
|
|
|
3,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
5,064
|
|
|
$
|
1,118
|
|
|
$
|
1,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan.
|
114
The weighted-average actuarial assumptions used to determine the benefit obligations for the
three years presented are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Assumed discount rate for non-qualified plan participants
|
|
|
3.75
|
%
|
|
|
4.50
|
%
|
|
|
5.50
|
%
|
Assumed discount rate for qualified plan participants
|
|
|
3.75
|
%
|
|
|
4.50
|
%
|
|
|
5.50
|
%
|
Rate of compensation increase
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
The weighted-average actuarial assumptions used to determine the net periodic benefit costs are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Assumed discount rate for non-qualified plan participants
|
|
|
4.50
|
%
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
Assumed discount rate for qualified plan participants
|
|
|
4.50
|
%
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
Rate of compensation increase
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
Expected long-term rate of return on plan assets
|
|
|
6.00
|
%
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
The expected long-term rate of return on assets is derived using the building block approach which
includes assumptions for the long term inflation rate, real return, and equity risk premiums.
No minimum funding contributions
are required in 2013 for the plan; however, the Company may make a voluntary contribution.
As of December 31, 2012, the
expected benefit payments related to the Companys defined benefit pension plans during the next ten years are as follows (in thousands):
|
|
|
|
|
2013
|
|
$
|
1,505
|
|
2014
|
|
|
13,916
|
|
2015
|
|
|
1,494
|
|
2016
|
|
|
1,506
|
|
2017
|
|
|
1,574
|
|
2018-2022
|
|
|
8,607
|
|
Other Benefit Plans
ARRIS has established defined contribution plans pursuant to the Internal Revenue Code Section 401(k) that cover all eligible U.S. employees. ARRIS contributes to these plans based upon the dollar
amount of each participants contribution. ARRIS made matching contributions to these plans of approximately $5.7 million, $5.0 million and $4.9 million in 2012, 2011 and 2010, respectively.
The Company has a deferred compensation plan that does not qualify under Section 401(k) of the Internal Revenue Code, which was
available to certain current and former officers and key executives of C-COR. During 2008, this plan was merged into a new non-qualified deferred compensation plan which is also available to key executives of the Company. Employee compensation
deferrals and matching contributions are held in a rabbi trust. The total of net employee deferrals and matching contributions, which is reflected in other long-term liabilities, was $2.7 million and $2.6 million at December 31, 2012 and 2011,
respectively. Total expenses included in continuing operations for the matching contributions were approximately $0.1 million in 2012 and $0.2 million in 2011.
The Company previously offered a deferred compensation arrangement, which allowed certain employees to defer a portion of their earnings and defer the related income taxes. As of December 31, 2004,
the plan was frozen and no further contributions are allowed. The deferred earnings are invested in a rabbi trust. The total of net employee deferral and matching contributions, which is reflected in other long-term liabilities, was $2.1 million and
$2.6 million at December 31, 2012 and 2011, respectively.
115
The Company also has a deferred retirement salary plan, which was limited to certain current
or former officers of C-COR. The present value of the estimated future retirement benefit payments is being accrued over the estimated service period from the date of signed agreements with the employees. The accrued balance of this plan, the
majority of which is included in other long-term liabilities, was $2.0 million and $2.2 million at December 31, 2012 and 2011, respectively. Total expenses (income) included in continuing operations for the deferred retirement salary plan were
approximately $0.1 million and $(0.2) million for 2012 and 2011, respectively.
The Companys wholly-owned subsidiary
located in Israel is required to fund future severance liabilities determined in accordance with Israeli severance pay laws. Under these laws, employees are entitled upon termination to one months salary for each year of employment or portion
thereof. The Company records compensation expense to accrue for these costs over the employment period, based on the assumption that the benefits to which the employee is entitled, if the employee separates immediately. The Company funds the
liability by monthly deposits in insurance policies and severance funds.
Note 21. Repurchases of ARRIS Common Stock
In March 2009, the Company announced that its Board of Directors had authorized a plan for ARRIS to repurchase up to
$100 million of our common stock. The Company did not repurchase any shares under the plan during 2009. During the fiscal year 2010, ARRIS repurchased and retired approximately 6.8 million shares of its common stock at an average price of
$10.24 per share for an aggregate purchase price of $69.3 million. In May 2011, the share repurchase authorization amount under the 2009 plan was exhausted.
In May 2011, the Board authorized a new plan for the Company to purchase up to $150 million of the Companys common stock. In 2011, ARRIS repurchased and retired approximately 10.0 million
shares of the Companys common stock at an average price of $10.95 per share for an aggregate consideration of approximately $109.1 million.
During the first three months of 2012, ARRIS repurchased approximately 2.3 million shares of the Companys common stock at an average price of $11.32 per share, for an aggregate consideration of
approximately $26.3 million. During the second quarter of 2012, ARRIS repurchased approximately 1.4 million shares of the Companys common stock at an average price of $11.21 per share, for an aggregate consideration of approximately $15.2
million. During the third quarter of 2012, ARRIS repurchased approximately 0.8 million shares of the Companys common stock at an average price of $12.76 per share, for an aggregate consideration of approximately $10.4 million. The
remaining authorized amount for stock repurchases under this plan was $19.6 million as of December 31, 2012, and will expire when the Company has used all authorized funds for repurchase.
In the fourth quarter of 2012, the Companys Board of Directors authorized a new plan for the Company to purchase up to an additional
$150 million of the Companys common stock. No repurchases have been made under this new plan. Unless terminated earlier by a Board resolution, the new plan will expire when the Company has used all authorized funds for repurchase.
Note 22. Summary Quarterly Consolidated Financial Information (unaudited)
The following table summarizes ARRIS quarterly consolidated financial information (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2012 Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Net sales
|
|
$
|
302,901
|
|
|
$
|
349,327
|
|
|
$
|
357,432
|
|
|
$
|
344,003
|
|
Gross margin
|
|
|
108,908
|
|
|
|
118,526
|
|
|
|
111,952
|
|
|
|
123,191
|
|
Operating income
|
|
|
11,691
|
|
|
|
26,925
|
|
|
|
23,123
|
|
|
|
25,531
|
|
Net income
|
|
$
|
5,799
|
|
|
$
|
15,001
|
|
|
$
|
17,864
|
|
|
$
|
14,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share
|
|
$
|
0.05
|
|
|
$
|
0.13
|
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
Net income per diluted share
|
|
$
|
0.05
|
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
0.13
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2011 Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Net sales
|
|
$
|
267,436
|
|
|
$
|
265,799
|
|
|
$
|
274,374
|
|
|
$
|
281,076
|
|
Gross margin
|
|
|
96,946
|
|
|
|
106,898
|
|
|
|
100,124
|
|
|
|
106,545
|
|
Operating income (loss)
|
|
|
15,124
|
|
|
|
25,457
|
|
|
|
18,451
|
|
|
|
(73,640
|
)
|
Net income (loss)
|
|
$
|
11,564
|
|
|
$
|
16,690
|
|
|
$
|
13,713
|
|
|
$
|
(59,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per basic share
|
|
$
|
0.09
|
|
|
$
|
0.14
|
|
|
$
|
0.11
|
|
|
$
|
(0.51
|
)
|
Net income (loss) per diluted share
|
|
$
|
0.09
|
|
|
$
|
0.13
|
|
|
$
|
0.11
|
|
|
$
|
(0.51
|
)
|
117