NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
)
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 premier video and broadband technology company that transforms how service providers worldwide deliver entertainment and communications without boundaries. Its powerful end-to-end platforms enable service and content
providers to improve the way people connect with each other and with their favorite content. The Companys vision and expertise continue to drive the industrys innovations, as they have for more than 60 years. Headquartered
north of Atlanta, in Suwanee, Georgia, ARRIS has R&D, sales and support centers throughout the world.
ARRIS operates in two business
segments, Network and Cloud (N&C) and Customer Premises Equipment (CPE). (See Note 16
Segment Information
for additional details) ARRIS specializes in integrated broadband network solutions that include products,
systems software and systems integration services for multiscreen video delivery, user interfaces, content security, processing and management, video on demand and network operations management. ARRIS is a leading developer, manufacturer and
supplier of telephony, data, video, construction, rebuild and maintenance equipment for broadband communications service providers including telephone companies and cable system operators. In addition, ARRIS is a leading supplier of infrastructure
products used by cable system operators to build-out and maintain hybrid fiber-coaxial (HFC) networks. ARRIS also manufactures video encoding, processing, and storage equipment used by service providers, programmers, and internet video
distributors. ARRIS broadband modem products also are sold directly to consumers through retail stores and internet outlets. The Company provides its customers with products and services that enable reliable transmission of video and high speed
two-way broadband data and telephony.
On April 17, 2013, the Company completed its acquisition of Motorola Home from General Instrument
Holdings, Inc., a subsidiary of Google, Inc. (See Note 3
Business Acquisitions
for additional details.)
The condensed consolidated
financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary for a fair presentation of the consolidated financial statements for the periods shown. Certain balance sheet
and cash flow line items in prior periods have been reclassified to conform to the current financial statement presentation. Interim results of operations are not necessarily indicative of results to be expected from a twelve-month period. These
financial statements should be read in conjunction with the Companys most recently audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2012,
as filed with the United States Securities and Exchange Commission (SEC).
Note 2. Recent Accounting Pronouncements
Adoption of New Accounting Standards
- In February 2013, the Financial Accounting Standards Board (FASB) issued an
accounting standards update that adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. This update requires that companies present either in a single note or parenthetically on the face of the
financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source (e.g., the release due to cash flow hedges from interest rate contracts) and the income statement
line items affected by the reclassification (e.g., interest income or interest expense). If a component is not required to be reclassified to net income in its entirety (e.g., the net periodic pension cost), companies would instead cross reference
to the related footnote for additional information (e.g., the pension footnote). This update was adopted by ARRIS beginning in the first quarter of 2013. The adoption of this guidance did not have a material impact on our consolidated financial
position and results of operations.
In December 2011, FASB issued guidance that requires entities to disclose both gross and net information
about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. In January 2013, the FASB issued guidance to clarify
the scope of the disclosures about offsetting assets and liabilities guidance. The guidance is effective for annual periods beginning on or after January 1, 2013. This update was adopted by ARRIS beginning in the first quarter of 2013. The adoption
of this guidance did not have a material impact on our consolidated financial position and results of operations.
Accounting Standards
Issued But Not Yet Effective
- In July 2013, the FASB issued an accounting standard update which provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements
7
as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does
not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. This update is effective for fiscal years, and interim periods within those years, beginning after December 15,
2013.
Accounting pronouncements issued but not in effect until after September 30, 2013 are not expected to have a significant impact on
our consolidated financial position or results of operations.
Note 3. Business Acquisitions
Acquisition of Motorola Home
On April 17, 2013, ARRIS completed its acquisition of Motorola Home from General Instrument Holdings, Inc. (Seller), a subsidiary of Google, Inc. Consideration for the acquisition
consisted of approximately $2,208.1 million in cash, inclusive of working capital adjustments, and 10.6 million shares of ARRIS common stock (the Acquisition).
The Acquisition enhanced the Companys scale and product breadth in the telecom industry and diversified the Companys customer base and expanded dramatically the Companys international
presence. Notably, the acquisition brought to ARRIS, Motorola Homes product scale and scope in end-to-end 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
and voice services for broadband service providers. The Acquisition also enhanced the depth and scale of the Companys R&D capabilities, particularly in the video arena, and approximately doubled the Companys patent portfolio to
nearly 2,000 patents and patent applications. In addition, via a license, the Company was provided access to approximately 20,000 Motorola Mobility patents as they relate to Motorola Home.
The following table summarizes the fair value of consideration transferred for Motorola Home, net of cash acquired (in thousands):
|
|
|
|
|
Cash transferred
(1)
|
|
$
|
2,208,114
|
|
Fair value of Shares issued to Seller
(2)
|
|
|
176,410
|
|
Total value of consideration
|
|
$
|
2,384,524
|
|
|
(1)
|
At closing the actual cash transferred as part of the transaction was $2,159.8 million, net of cash acquired of $78.0 million. During the quarter ended
September 30, 2013, an additional $48.3 million of cash was transferred as part of working capital adjustments. The cash portion of the consideration was funded with cash on hand, borrowings under ARRIS senior secured credit facilities
(see Note 14
Long-Term Indebtedness
for additional details) and through the sale by ARRIS of approximately 10.6 million shares of ARRIS common stock to a subsidiary of Comcast Corporation for $150 million in cash.
|
|
(2)
|
The fair value of the 10.6 million shares issued to Seller was determined based on the opening price of the Companys common stock at the Acquisition date.
|
The Acquisition has been accounted for using the acquisition method of accounting in accordance with the business combinations
guidance, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable
net assets acquired recorded as goodwill.
The following table summarizes the preliminary estimated fair values of the net assets acquired as
of the acquisition date, as well as measurement period and other adjustments made during 2013 to the amounts initially recorded. The measurement period adjustments have been retrospectively adjusted in our financial statements as if those
adjustments occurred on the acquisition date. Certain estimated fair values are not yet finalized (see below) and are subject to change, which could be significant. We will finalize the amounts recognized as we obtain the information necessary to
complete the analysis, but no later than one year from the acquisition date.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Amounts
Recognized as
of Acquisition
Date (a)
|
|
|
Adjustments
|
|
|
Amounts
Recognized as
of Acquisition
Date (as
adjusted)
|
|
Total consideration transferred, net of cash acquired (b)
|
|
$
|
2,336,172
|
|
|
$
|
48,352
|
|
|
$
|
2,384,524
|
|
Assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
462,162
|
|
|
|
|
|
|
|
462,162
|
|
Inventories
|
|
|
279,562
|
|
|
|
(2,146
|
)
|
|
|
277,416
|
|
Deferred income tax assets (c)
|
|
|
370,543
|
|
|
|
14,558
|
|
|
|
385,101
|
|
Other assets
|
|
|
153,094
|
|
|
|
(2,073
|
)
|
|
|
151,021
|
|
Property, plant & equipment
|
|
|
350,547
|
|
|
|
790
|
|
|
|
351,337
|
|
Intangible assets (d)
|
|
|
1,343,400
|
|
|
|
(107,100
|
)
|
|
|
1,236,300
|
|
Accounts payable
|
|
|
(349,235
|
)
|
|
|
|
|
|
|
(349,235
|
)
|
Deferred revenue
|
|
|
(27,797
|
)
|
|
|
|
|
|
|
(27,797
|
)
|
Other liabilities (e)
|
|
|
(324,852
|
)
|
|
|
(17,745
|
)
|
|
|
(342,597
|
)
|
Deferred tax liability (c)
|
|
|
(534,479
|
)
|
|
|
42,326
|
|
|
|
(492,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets acquired
|
|
|
1,722,945
|
|
|
|
(71,390
|
)
|
|
|
1,651,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill (f)
|
|
$
|
613,227
|
|
|
$
|
119,742
|
|
|
$
|
732,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
As previously reported as of June 30, 2013.
|
(b)
|
Amount represents adjustment for final working capital.
|
(c)
|
The measurement period and other adjustments for deferred tax assets and liabilities primarily reflect the tax impact of the pre-tax measurement period adjustments and
adjustments to certain uncertain tax positions following receipt of additional information about facts and circumstances existing as of the acquisition date.
|
(d)
|
The measurement period adjustments for identifiable intangible assets primarily consists of adjustments recorded to reflect changes in the estimated fair value of
certain acquired intangibles, principally customer relationships, developed technology and patents, and in-process research and development based upon facts and circumstances that existed as of the acquisition date. The Company continued to gather
further specific information on the Motorola Home intangible assets, such as the timing and risk of cash flows of the intangible assets, including those assets still in the research and development phase. Some of the more significant assumptions
inherent in the development of intangible asset values, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including revenue, cost of sales, research and development costs, sales and
marketing expenses); working capital; contributory asset charges; the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the assets life cycle and the competitive trends impacting the asset, as
well as other factors. These factors were refined in order to further complete the valuation work that impacted (i) the estimated total fair value assigned to intangible assets, (ii) the estimated assignment of fair value between
finite-lived and indefinite-lived intangible assets and/or (iii) the estimated weighted-average useful life of each category of intangible assets.
|
(e)
|
The change primarily relates to an increase in warranty accrual due to a change in estimate of the initial accrued warranty recorded at the acquisition date as a result
of additional information arising subsequent to the acquisition that existed as of the Acquisition date.
|
(f)
|
Goodwill recognized as of the acquisition date (as adjusted) totaled $733 million and is attributable to the workforce of the acquired business, strategic opportunities
and synergies that are expected to arise from the acquisition of Motorola Home. The preliminarily determined goodwill has been assigned to the Companys three reporting units (see Note 4
Goodwill and Intangible Assets
for additional
details). These amounts are not yet finalized and are subject to change. With the exception of $71.4 million of goodwill that retains its tax basis after the acquisition, the remaining portion of the $733.0 million of goodwill is not
expected to be deductible for income tax purposes. The amount of tax deductible goodwill remains subject to adjustment through the measurement period.
|
9
The Company recognizes an increase or decrease in the provisional amounts recognized for identifiable asset
(liability) by means of a decrease or increase in goodwill. We performed a careful evaluation of the adjustments made to the provisional amounts recognized to determine whether the potential adjustment is the result of information that existed as of
the acquisition date or whether the adjustment is the result of events occurring subsequent to the acquisition date. As such, the Company only adjusted the provisional amounts for facts and circumstances that existed at the acquisition date.
As of September 30, 2013, the initial accounting for certain items is incomplete. Specifically, the following items are subject to
change:
|
|
|
Amounts for intangible assets and property, plant and equipment, pending finalization of valuation efforts and receipt of final valuation report from
the third party valuation specialist.
|
|
|
|
Amounts for income tax assets, receivables and liabilities pending the filing of pre-acquisition tax returns, as well as the receipt of information
from taxing authorities, which may change certain estimates and assumptions used.
|
|
|
|
The final assignment of goodwill among reporting units.
|
During the measurement period, the Company will adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the
acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and ARRIS will record those adjustments to the financial statements.
Certain tax attributes will not likely be known until tax returns of acquired entities are filed. It is possible some tax returns may not be filed until after the measurement period. Therefore, there is
likelihood that certain deferred tax assets and/or liabilities related to tax attributes may be recorded outside the measurement period.
The
$1.2 billion of acquired intangible assets preliminarily was assigned to the following (in thousands):
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
Estimated Weighted
Average Life
(years)
|
Customer relationships
|
|
$
|
642,900
|
|
|
8
|
Developed technology and patents
|
|
|
436,800
|
|
|
6
|
In process R&D
|
|
|
93,200
|
|
|
indefinite
|
Backlog
|
|
|
44,600
|
|
|
1
|
Trademark / trade name
|
|
|
18,800
|
|
|
1
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,236,300
|
|
|
|
|
|
|
|
|
|
|
In connection with the Acquisition, the Seller agreed to indemnify ARRIS for a portion of certain potential liabilities
from certain intellectual property infringement litigation claims. As a result, the Company recorded at the date of acquisition a $70 million liability related to one of these litigation claims and an indemnification asset of $70 million related to
this liability. The litigation claim subsequently was settled for $85 million, for which ARRIS was fully indemnified. The Company also recorded a $13.9 million liability at the date of acquisition related to an infringement lawsuit included as part
of $50.0 million of potential liability retained by ARRIS pursuant to the acquisition agreement. This lawsuit settled subsequent to the date of acquisition. See Note 22
Contingencies
for additional details.
The fair value of accounts receivable was $462.2 million, with the gross contractual amount being $470.9 million. The Company expects $8.7 million to be
uncollectible.
10
The Company incurred acquisition related costs of $6.2 million and $32.8 million, during the three and nine
months ended September 30, 2013, respectively. These amounts were expensed by the Company as incurred and are included in the Consolidated Statement of Operations in the line item titled Acquisition and other costs.
The Motorola Home business contributed revenues of approximately $1,292 million to our consolidated results from the date of acquisition through
September 30, 2013.
The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition of
Motorola Home occurred on January 1, 2012, the beginning of the comparable prior annual period. The pro forma adjustments primarily relate to the depreciation expense on stepped-up fixed assets, amortization of acquired intangibles, interest
expense related to new financing arrangements and the estimated impact on the Companys income tax provision. The unaudited pro forma combined results of operations are provided for illustrative purposes only and are not indicative of the
Companys actual consolidated results. The Motorola Home business was consolidated by ARRIS for the entire three month period ended September 30, 2013; therefore no pro forma financial information has been presented. In addition, unaudited
pro forma net loss for the nine months ended September 30, 2013 was adjusted to exclude $18.4 million of acquisition related costs and $55.4 million of expense related to the fair value adjustment to acquisition-date inventory. Unaudited pro
forma net loss for the nine months ended September 30, 2012 was adjusted to include these charges. In addition, unaudited pro forma net loss for the three and nine months ended September 30, 2012 includes $3.2 million and $10.3 million
reduction in revenue, respectively, related to the fair value adjustment to deferred revenue. These adjustments exclude the income tax impact.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Net sales
|
|
$
|
1,158,212
|
|
|
$
|
3,227,656
|
|
|
$
|
3,519,316
|
|
|
|
|
|
Net loss
|
|
|
(34,891
|
)
|
|
|
(100,054
|
)
|
|
|
(130,733
|
)
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.26
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(0.97
|
)
|
Diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(0.97
|
)
|
These pro forma results are based on estimates and assumptions that the Company believes are reasonable.
Note 4. Goodwill and Intangible Assets
Goodwill
As
of September 30, 2013, the Company has recorded goodwill of $926.8 million. Effective in the second quarter of 2013, the Company changed its operating segments due to a change in its underlying organizational model designed to support the
business following the Acquisition (see Note 16 -
Segment Information
). The Company did not operate under the realigned operating segment structure prior to the second quarter of 2013. This change in segments resulted in a
reassignment of goodwill amongst some of the Companys reporting units. Prior period information has been retrospectively adjusted to reflect this reassignment. For purposes of goodwill and impairment testing, the Company has determined that it
has three reporting units based on the organizational structure, the financial information that is provided to and reviewed by segment management and aggregation criteria applicable to component business that are economically similar. For the CPE
operating segment, the reporting unit is the same as the operating segment. The Network & Cloud operating segment is comprised of two reporting units, which are Network Infrastructure and Cloud Services.
11
The following is a summary of the Companys goodwill (in thousands), reflecting the retrospective
reassignment as of December 31, 2012:
|
|
|
|
|
CPE
|
|
$
|
31,850
|
|
Network Infrastructure
|
|
|
162,265
|
|
Cloud Services
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
194,115
|
|
|
|
|
|
|
During 2013, the Company recorded additional goodwill of $733.0 million related to the Acquisition. The Company has
preliminarily assigned the assets and liabilities acquired to each of its identified reporting units. The Company intends to finalize the assignment of the goodwill from the Acquisition during fiscal year 2013.
The changes in the carrying amount of goodwill for the year to date period ended September 30, 2013 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
Network
Infrastructure
|
|
|
Cloud
Services
|
|
|
Total
|
|
Goodwill
|
|
$
|
31,850
|
|
|
$
|
419,318
|
|
|
$
|
121,603
|
|
|
$
|
572,771
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(257,053
|
)
|
|
|
(121,603
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012:
|
|
$
|
31,850
|
|
|
$
|
162,265
|
|
|
$
|
|
|
|
$
|
194,115
|
|
|
|
|
|
|
Goodwill acquired during the year (preliminarily assigned)
|
|
|
646,360
|
|
|
|
83,917
|
|
|
|
2,692
|
|
|
|
732,969
|
|
Adjustment to deferred tax asset C-COR
|
|
|
|
|
|
|
(258
|
)
|
|
|
|
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
678,210
|
|
|
|
502,977
|
|
|
|
124,295
|
|
|
|
1,305,482
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(257,053
|
)
|
|
|
(121,603
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2013:
|
|
$
|
678,210
|
|
|
$
|
245,924
|
|
|
$
|
2,692
|
|
|
$
|
926,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
The gross carrying amount and accumulated amortization of the Companys intangible assets as of September 30, 2013 and December 31, 2012 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
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
|
|
$
|
892,909
|
|
|
$
|
240,693
|
|
|
$
|
652,216
|
|
|
|
7.2
|
|
|
$
|
250,009
|
|
|
$
|
190,285
|
|
|
$
|
59,724
|
|
|
|
4.0
|
|
Developed technology & patents
|
|
|
550,126
|
|
|
|
93,918
|
|
|
|
456,208
|
|
|
|
5.2
|
|
|
|
77,769
|
|
|
|
42,964
|
|
|
|
34,805
|
|
|
|
4.4
|
|
Trademarks
|
|
|
20,900
|
|
|
|
6,204
|
|
|
|
14,696
|
|
|
|
1.7
|
|
|
|
257
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
Order backlog
|
|
|
44,600
|
|
|
|
20,442
|
|
|
|
24,158
|
|
|
|
0.5
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,162
|
|
|
|
3,162
|
|
|
|
|
|
|
|
|
|
In-process R&D
|
|
|
91,900
|
|
|
|
|
|
|
|
91,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,600,435
|
|
|
$
|
361,257
|
|
|
$
|
1,239,178
|
|
|
|
|
|
|
$
|
334,197
|
|
|
$
|
239,668
|
|
|
$
|
94,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company preliminarily recorded approximately $1,236.3 million of identifiable intangible assets in conjunction with
the Acquisition.
The Company recognized acquired in-process research and development assets of $93.2 million associated with the Acquisition,
which initially is 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. During the quarter ended September 30, 2013, acquired in-process research and development projects of $1.3 million
were successfully completed. 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.
12
Amortization expense is reported in the consolidated statements of operations within operating expenses
under the caption Amortization of intangible assets. The estimated future amortization expense related to intangible assets with a finite life as of September 30, 2013, is as follows (in thousands):
|
|
|
|
|
2013 (for the remaining three months)
|
|
$
|
64,337
|
|
2014
|
|
|
220,365
|
|
2015
|
|
|
199,994
|
|
2016
|
|
|
169,363
|
|
2017
|
|
|
152,588
|
|
2018
|
|
|
114,055
|
|
Thereafter
|
|
|
226,577
|
|
Note 5. Comcast Investment in ARRIS
In connection with the Acquisition, Comcast Corporation (Comcast) was given an opportunity to invest in ARRIS. On
January 11, 2013, ARRIS entered into a separate agreement accounted for as a contingent equity forward with a subsidiary of Comcast providing for the purchase of approximately 10.6 million shares of the Companys common stock for $150
million, or $14.11 per share. The transaction with Comcast was contingent upon on the closing of the Acquisition.
As provided for in the
definitive agreement for the Acquisition, the shares issued to Comcast reduced, on a share-for-share basis, the number of shares of ARRIS stock issued to Google and simultaneously increased the cash consideration paid to Google by $150.0
million. As a result of the sale of common stock to Comcast, both Comcast and Google each own approximately 7.7% of ARRIS outstanding shares post-closing of the Acquisition. The Comcast transaction was consummated on the same day as the
Acquisition. Because the amount of shares issued to Comcast was not fixed when the agreement was executed, but prior thereto, the agreement with Comcast is classified as a liability in accordance with the accounting guidance for derivatives and
hedging.
At the time the agreement was executed with Comcast on January 11, 2013, the Companys stock price was $15.35 per share.
However, consistent with earlier negotiations, Comcast agreed to invest in ARRIS at the same price as Google, which was $14.11 per share. The revenue recognition accounting guidance requires that the Company recognize the intrinsic value of the
benefit received by Comcast - the entitlement to invest at a price below the market price ($14.11 per share as opposed to the then-market price of $15.35 per share) on the date the agreement with Comcast was executed - as a reduction of revenue. As
such, revenue and gross margin were reduced by approximately $13.2 million during the first quarter 2013.
Because the obligation under the
agreement was not indexed to the Companys stock and does not meet the definition of a derivative, the Company elected to subsequently account for the obligation at fair value by electing the fair value option. That is, the Company has
marked-to-market the obligation at each reporting period. This resulted in a mark-to-market income adjustment of $13.2 million expense in the first half of 2013. This mark-to-market adjustment is recorded as Other (Income).
Upon settlement of the contract in the second quarter of 2013, the Company recorded the issuance of its common stock to Comcast, which is included in
stockholders equity on the Consolidated Balance Sheets.
13
Note 6. Investments
ARRIS investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013
|
|
|
As of December 31, 2012
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
125,387
|
|
|
$
|
398,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
33,054
|
|
|
|
59,549
|
|
Equity method investments
|
|
|
17,489
|
|
|
|
|
|
Cost method investments
|
|
|
6,000
|
|
|
|
6,000
|
|
Other investments
|
|
|
23,351
|
|
|
|
20,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,894
|
|
|
|
86,164
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
205,281
|
|
|
$
|
484,578
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities -
ARRIS investments in debt and marketable equity securities are categorized
as available-for-sale and are carried at fair value. The Company currently does not hold any held-to-maturity securities. 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 the Consolidated Balance Sheets as a component of accumulated other comprehensive income (loss). The total gains included in the accumulated other comprehensive income related to available-for-sale
securities were $85 thousand and $0.2 million, net of tax, as of September 30, 2013 and December 31, 2012, respectively. Realized and unrealized gains and losses in total and by individual investment as of September 30, 2013 and
December 31, 2012 were not material. The amortized cost basis of the Companys investments approximates fair value.
Equity
method investments
In connection with the Acquisition, ARRIS acquired certain investments in joint ventures, limited liability companies, and partnerships that are accounted for using the equity method as the Company has significant
influence over operating and financial policies of the investee companies. The carrying amount of equity method investments are increased for the Companys proportionate share of the investees earnings and decreased for the Companys
proportionate share of the investees losses or for dividends received from the investees.
Cost method investments
- ARRIS holds
cost method investments in private companies. These investments are recorded at $6.0 million as of September 30, 2013 and December 31, 2012. Due to the fact the investments are in private companies, ARRIS 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 investments are not
material 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.
Other investments
At September 30, 2013 and December 31, 2012, ARRIS held $23.4 million and $20.6 million, respectively, in
certain life insurance contracts. This investment is classified as non-current investments in the Consolidated Balance Sheet. The Company determined the fair value to be the amount that could be realized under the insurance contract as of each
reporting period. The changes in the fair value of these contracts are included in net income.
Other-Than-Temporary Investment Impairments
-
ARRIS concluded that no other-than-temporary impairment losses existed as of September 30, 2013. In making this determination, ARRIS evaluates its investments for any other-than-temporary impairment on a quarterly basis considering all
available evidence, including changes in general market conditions, specific industry and individual entity data, the financial condition and the
near-term
prospects of the entity issuing the security, and the
Companys ability and intent to hold the investment until recovery. For the year ended December 31, 2012, ARRIS recognized other-than-temporary impairment charges of $1.5 million in the statements of consolidated income.
14
Classification of 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.
Maturity Information
- The contractual maturities of the Companys investments as of September 30, 2013 are shown below. Actual
maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. The amortized cost basis of the Companys investments approximates fair value (in
thousands):
|
|
|
|
|
|
|
September 30,
2013
|
|
Due in one year or less
|
|
$
|
153,298
|
|
Due after one year through five years
|
|
|
45,965
|
|
Due after five years
|
|
|
6,018
|
|
|
|
|
|
|
|
|
$
|
205,281
|
|
|
|
|
|
|
Note 7. Fair Value Measurement
Fair value is defined as the amount 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 exit price). The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgment 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.
The following table presents the Companys
investment assets and interest rate swap positions measured at fair value on a recurring basis as of September 30, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
3,759
|
|
|
$
|
|
|
|
$
|
3,759
|
|
Commercial paper
|
|
|
|
|
|
|
6,981
|
|
|
|
|
|
|
|
6,981
|
|
Corporate bonds
|
|
|
|
|
|
|
85,190
|
|
|
|
|
|
|
|
85,190
|
|
Short-term bond fund
|
|
|
29,457
|
|
|
|
|
|
|
|
|
|
|
|
29,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,457
|
|
|
|
95,930
|
|
|
|
|
|
|
|
125,387
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value of company owned life insurance
|
|
|
|
|
|
|
23,324
|
|
|
|
|
|
|
|
23,324
|
|
Corporate bonds
|
|
|
|
|
|
|
28,477
|
|
|
|
|
|
|
|
28,477
|
|
Corporate obligations
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
Money markets
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
226
|
|
Mutual funds
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
204
|
|
Other investments
|
|
|
|
|
|
|
4,156
|
|
|
|
|
|
|
|
4,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430
|
|
|
|
55,975
|
|
|
|
|
|
|
|
56,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
29,887
|
|
|
$
|
151,905
|
|
|
$
|
|
|
|
$
|
181,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
The following table presents the Companys investment assets measured at fair value on a recurring
basis as of December 31, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
5,416
|
|
|
$
|
|
|
|
$
|
5,416
|
|
Commercial paper
|
|
|
|
|
|
|
18,964
|
|
|
|
|
|
|
|
18,964
|
|
Corporate bonds
|
|
|
|
|
|
|
209,093
|
|
|
|
|
|
|
|
209,093
|
|
Municipal bonds
|
|
|
164,941
|
|
|
|
|
|
|
|
|
|
|
|
164,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164,941
|
|
|
|
233,473
|
|
|
|
|
|
|
|
398,414
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value of company owned life insurance
|
|
|
|
|
|
|
20,615
|
|
|
|
|
|
|
|
20,615
|
|
Corporate bonds
|
|
|
|
|
|
|
53,914
|
|
|
|
|
|
|
|
53,914
|
|
Corporate obligations
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
Money markets
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
226
|
|
Mutual funds
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
179
|
|
Other investments
|
|
|
|
|
|
|
5,215
|
|
|
|
|
|
|
|
5,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
405
|
|
|
|
79,759
|
|
|
|
|
|
|
|
80,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
165,346
|
|
|
$
|
313,232
|
|
|
$
|
|
|
|
$
|
478,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $4.0 million and $3.8 million as of September 30, 2013 and December 31, 2012, respectively.
All of the Companys short-term and long-term investments at September 30, 2013 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, government agency bonds 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, bond funds, 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 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 6
Investments
and Note 8
Derivative Instruments and Hedging Activities
for
further information on the Companys investments and derivative instruments and hedging activities.
In addition to the financial
instruments included in the above table, certain nonfinancial assets and liabilities are to be measured at fair value on a nonrecurring basis in accordance with applicable authoritative guidance. This includes items such as nonfinancial assets and
liabilities initially measured at fair value in a business combination
16
(but not measured at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. In general, nonfinancial assets including
goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized. As of September 30, 2013, the Company had
not recorded any impairment related to such assets and had no other material nonfinancial assets or liabilities requiring adjustments or write-downs to their current fair value.
The carrying value of debt as of September 30, 2013 approximated the fair value.
Note 8. Derivative Instruments and Hedging Activities
Risk Management Policies
ARRIS is exposed to financial market risk, primarily related to foreign currency and interest
rates. These exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, the Company enters into a variety of derivative financial instruments. Managements objective is to reduce, where it
is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency and interest rates. ARRIS policies and practices are to use derivative financial instruments only to the extent necessary to
manage exposures. ARRIS does not hold or issue derivative financial instruments for trading or speculative purposes.
Accounting Policy for
Derivative Instruments
The derivatives and hedging accounting standard provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of:
(a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Companys objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and
losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by
derivatives and hedging guidance, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to
designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to
changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in
expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives also may be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting
generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value
hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the
Company elects not to apply hedge accounting.
In accordance with the FASBs fair value measurement guidance, the Company made an
accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
ARRIS recognizes all derivative financial instruments as assets or liabilities in the Consolidated Balance Sheets at fair value. In April 2013, ARRIS entered into senior secured credit facilities having
variable interest rates with Bank of America, N.A. and various other institutions, which are comprised of (i) a Term Loan A Facility of $1.1 billion, (ii) a Term Loan B Facility of $825 million and (iii) a
Revolving Credit Facility of $250 million. In July 2013, ARRIS entered into six $100.0 million interest rate swap arrangements, which effectively converted $600.0 million of the Companys variable-rate debt based on one-month LIBOR
to an aggregate fixed rate of approximately 3.65%. This fixed rate could vary up by 25 basis points or down by 50 basis points based on future changes to the Companys net leverage ratio. Each of these swaps matures on December 29, 2017.
ARRIS has designated these swaps as cash flow hedges, and the objective of these hedges is to manage the variability of cash flows in the interest payments related to the portion of the variable-rate debt designated as being hedged.
17
The Companys foreign currency derivative financials 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.
Cash Flow Hedges of Interest Rate Risk
The Companys objectives in using interest
rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate
swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other
Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2013, such derivatives were used to hedge the variable cash flows associated with existing lines of
credit. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2013, the Company did not have expenses related to hedge ineffectiveness in
earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as
interest payments are made on the Companys variable-rate debt. Over the next 12 months, the Company estimates that an additional $7.0 million may be reclassified as an increase to interest expense.
As of September 30, 2013, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest
rate risk:
|
|
|
|
|
|
|
Interest Rate Derivative
|
|
Number of Instruments
|
|
Notional
|
|
Interest Rate Swaps
|
|
6
|
|
$
|
600,000,000
|
|
The table below presents the pre-tax impact of the Companys derivative financial instruments had on the Accumulated
Other Comprehensive Income and Statement of Operations for the three and nine months ended September 30, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (Loss)
Recognized in OCI on
Derivative
(Effective
Portion)
|
|
|
Location of Gain or
(Loss) Reclassified from
Accumulated OCI into
Income
(Effective
Portion)
|
|
Gain or (Loss) Reclassified
from Accumulated OCI into
Income (Effective
Portion)
|
|
|
Gain or (Loss) Recognized
in Income on Derivative
(Ineffective Portion and
Amount
Excluded from
Effectiveness Testing)
|
|
Interest rate derivatives
|
|
$
|
(7,979
|
)
|
|
Interest expense
|
|
$
|
(1,253
|
)
|
|
$
|
-
|
|
Credit-risk-related Contingent Features
ARRIS has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the
underlying indebtedness is accelerated by the lender due to the Companys default on the indebtedness. As of September 30, 2013, the fair value of derivatives in a net liability position, which includes accrued interest but
excludes any adjustment for nonperformance risk, related to these agreements was $6.9 million. As of September 30, 2013 the Company has not posted any collateral related to these agreements.
Non-designated Hedges
Additionally,
the Company does not currently use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.
Balance Sheet Recognition and Fair Value Measurements -
The following table indicates the location on the Consolidated Balance Sheets in which the Companys derivative assets and liabilities
have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives (in thousands).
ARRIS has master netting arrangements with substantially all of ARRIS counterparties giving ARRIS the right of offset for ARRIS derivative positions. However, ARRIS has not elected to offset
the fair value positions of the derivative contracts recorded on ARRIS Consolidated Balance Sheets.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2013
|
|
|
As of December 31, 2012
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Derivatives Not Designated
as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
asset derivatives
|
|
Other current assets
|
|
$
|
|
|
|
Other current assets
|
|
$
|
590
|
|
|
|
|
|
|
Foreign exchange contracts
liability derivatives
|
|
Other accrued liabilities
|
|
$
|
|
|
|
Other accrued liabilities
|
|
$
|
513
|
|
|
|
|
|
|
Derivatives Designated as
Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
asset derivatives
|
|
Other assets
|
|
$
|
305
|
|
|
Other assets
|
|
$
|
|
|
|
|
|
|
|
Interest rate derivatives
liability derivatives
|
|
Other accrued liabilities
|
|
$
|
7,032
|
|
|
Other accrued liabilities
|
|
$
|
|
|
The assets and liabilities for the interest rate derivatives were considered as Level 2 under the fair value hierarchy.
The assets and liabilities for the foreign exchange contracts were considered as Level 1 under the fair value hierarchy.
The change in the
fair values of ARRIS derivative financial instruments recorded in the Consolidated Statements of Operations during the three and nine months ended September 30, 2013 and 2012 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
|
|
|
|
|
|
Statement of Operations Location
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Derivatives Not Designated
as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Loss (gain) on foreign currency
|
|
$
|
|
|
|
$
|
142
|
|
|
$
|
428
|
|
|
$
|
(66
|
)
|
|
|
|
|
|
|
Derivatives Designated
as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates derivatives
|
|
Interest Expense
|
|
$
|
1,253
|
|
|
$
|
|
|
|
$
|
1,253
|
|
|
$
|
|
|
Note 9. Pension Benefits
Components of Net Periodic Pension Cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Service cost
|
|
$
|
310
|
|
|
$
|
84
|
|
|
$
|
637
|
|
|
$
|
251
|
|
Interest cost
|
|
|
562
|
|
|
|
521
|
|
|
|
1,479
|
|
|
|
1,563
|
|
Expected gain on plan assets
|
|
|
(259
|
)
|
|
|
(315
|
)
|
|
|
(730
|
)
|
|
|
(944
|
)
|
Amortization of net loss
|
|
|
355
|
|
|
|
210
|
|
|
|
829
|
|
|
|
630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
968
|
|
|
$
|
500
|
|
|
$
|
2,215
|
|
|
$
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
The Company assumed $32.2 million of pension liability related to a defined benefit plan in Taiwan in
connection with the Acquisition. Net period pension cost for the three and nine month periods ended September 30, 2013, includes pension costs of $0.6 million and $1.1 million related to this Taiwan pension plan, respectively.
Employer Contributions
No minimum
funding contributions are required in 2013 under the Companys defined benefit plan. However, the Company made voluntary contributions to the plan of approximately $39 thousand and $145 thousand for the three and nine months ended
September 30, 2013. Additionally, the Company made a voluntary contribution to the plan of $0.2 million in April 2013. The Company has established two rabbi trusts to fund the Companys pension obligations under the non-qualified plan of
the Chief Executive Officer and certain executive officers. The balance of these rabbi trust assets as of September 30, 2013 was approximately $18.9 million and is included in Investments on the Consolidated Balance Sheets.
Note 10. 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 to 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.
The Company initially recorded $65.5 million of warranty obligations as a result of the
Acquisition, which included $10.2 million of known product defects. During the third quarter of 2013, the Company recorded an increase of $19.4 million in the warranty accrual due to a change in estimate of the initial accrued warranty
recorded at the Acquisition date as a result of additional information that arose subsequent to the Acquisition that existed as of the Acquisition date.
Information regarding the changes in ARRIS aggregate product warranty liabilities for the nine months ended September 30, 2013 was as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
6,069
|
|
Motorola Home warranty reserve at Acquisition
|
|
|
84,888
|
|
Accruals related to warranties (including changes in estimates)
|
|
|
10,133
|
|
Settlements made (in cash or in kind)
|
|
|
(22,851
|
)
|
|
|
|
|
|
Balance at September 30, 2013
|
|
$
|
78,239
|
|
|
|
|
|
|
20
Note 11. Restructuring Charges
The following table represents a summary of and changes to the restructuring accrual, which is primarily composed of accrued severance
and other employee costs, contractual obligations that related to excess leased facilities and equipment and write off of property, plant and equipment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
severance &
termination
benefits
|
|
|
Contractual
obligations and
other
|
|
|
Write-off of
property, plant
and equipment
|
|
|
Total
|
|
Balance at December 31, 2012
|
|
$
|
|
|
|
$
|
1,163
|
|
|
$
|
|
|
|
$
|
1,163
|
|
Balance acquired at Acquisition
|
|
|
|
|
|
|
155
|
|
|
|
|
|
|
|
155
|
|
Restructuring charges
|
|
|
31,536
|
|
|
|
26
|
|
|
|
6,761
|
|
|
|
38,323
|
|
Cash payments
|
|
|
(23,602
|
)
|
|
|
(464
|
)
|
|
|
|
|
|
|
(24,066
|
)
|
Non-cash expense
|
|
|
|
|
|
|
|
|
|
|
(6,761
|
)
|
|
|
(6,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2013
|
|
$
|
7,934
|
|
|
$
|
880
|
|
|
$
|
|
|
|
$
|
8,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and termination benefits
In the second quarter of 2013, ARRIS completed its acquisition
of Motorola Home. ARRIS initiated restructuring plans as a result of the Acquisition that focuses on the rationalization of personnel, facilities and systems across multiple segments in the ARRIS organization.
The total estimated cost of the restructuring plan was approximately $31.5 million and was recorded as severance expense during 2013. As of
September 30, 2013, the total liability remaining for this restructuring plan was approximately $7.9 million. The remaining liability is expected to be paid by the end of Q1 2014.
Contractual obligations
- ARRIS has restructuring accruals representing contractual obligations that relate to excess leased facilities and equipment.
In the fourth quarter of 2007, ARRIS acquired remaining restructuring accruals of approximately $0.7 million from C-COR. In the fourth quarter of 2009,
an adjustment of $1.5 million was made related to the sublease assumption for 2010-2014 given the real estate market conditions. As of September 30, 2013, the total liability remaining for this restructuring plan was approximately $0.5 million.
Payments will be made over their remaining lease terms through 2014, unless terminated earlier. This restructuring plan was related to the Network and Cloud segment.
In the fourth quarter of 2011, the acquisition of BigBand Networks resulted in 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
September 30, 2013, the total liability remaining for this restructuring plan was approximately $0.3 million and is related to facilities. This remaining liability will be paid over the remaining lease terms through 2016, unless terminated
earlier. This restructuring plan was related to the Network and Cloud segment.
Additionally, in the second quarter of 2013 as part of the
Acquisition, ARRIS acquired remaining restructuring accruals of approximately $0.2 million from Motorola Home. As of September 30, 2013, the total liability remaining for this restructuring plan was approximately $0.1 million. These payments
will be paid over their remaining lease terms through 2018, unless terminated earlier. This restructuring plan was related to the Customer Premises Equipment segment.
Write-off of property, plant & equipment
As part of the restructuring plan initiated as a result of the Acquisition, during the third quarter of 2013 the Company recorded
restructuring charges of $6.8 million related to the write-off of property, plant and equipment associated with rationalization of product lines and enterprise resource planning system integration activities. This restructuring plan was related to
the Network and Cloud segment and Corporate.
21
Note 12. Inventories
Inventories are stated at the lower of average cost, approximating first-in, first-out, or market. The components of inventory were as
follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Raw material
|
|
$
|
55,514
|
|
|
$
|
24,798
|
|
Work in process
|
|
|
14,030
|
|
|
|
2,800
|
|
Finished goods
|
|
|
281,375
|
|
|
|
106,250
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
350,919
|
|
|
$
|
133,848
|
|
|
|
|
|
|
|
|
|
|
Note 13. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Land
|
|
$
|
88,742
|
|
|
$
|
2,562
|
|
Building and leasehold improvements
|
|
|
127,665
|
|
|
|
25,995
|
|
Machinery and equipment
|
|
|
363,949
|
|
|
|
177,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
580,356
|
|
|
|
206,214
|
|
Less: Accumulated depreciation
|
|
|
(170,309
|
)
|
|
|
(151,836
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
410,047
|
|
|
$
|
54,378
|
|
|
|
|
|
|
|
|
|
|
Note 14. Long-Term Indebtedness
Convertible Senior Notes
In 2006, ARRIS issued $276.0 million of 2% convertible senior notes due 2026 (the Notes). The notes may be converted only upon the occurrence of specified events and during specified periods,
including (i) from October 15, 2013 to November 15, 2013 and (ii) during any calendar quarter in which the closing price of the Companys 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). The
conversion rate for the Notes, subject to adjustment, is 62.1504 shares per $1,000 principal amount (which represents an initial conversion price of approximately $16.09 per share of the Companys common stock). Upon conversion, the holder will
receive up to the principal amount in cash and may receive, depending on the price of the Companys common stock, an additional payment, in cash, the Companys common stock or a combination thereof, at the option of the Company. Each
component of the conversion consideration is based on a formula that includes the conversion rate and the market price of the Companys common stock during a period following the date of the conversion.
As a result of the holding company reorganization undertaken in connection with the Acquisition, holders of the Notes had the right, (i) to require
ARRIS to repurchase the senior notes for 100% of the principal amount of the senior notes, plus accrued and unpaid interest to, but not including the repurchase date or (ii) to convert the senior notes for the consideration described above. In
the second quarter of 2013, Notes in the aggregate principal amount
22
of $68 thousand were tendered pursuant to the repurchase right, and $11 thousand were surrendered pursuant to the conversion right. As a result, approximately $232.0 million aggregate principal
amount of the Notes were outstanding as of September 30, 2013.
On October 17, 2013, the Company announced that it would redeem the
Notes for par value on November 15, 2013. On October 15, 2013 the Company also announced that the Notes are convertible at the option of the holders from October 15, 2013 until 11:59 p.m. E.T. on November 15, 2013 for the
consideration specified in the indenture (the Conversion Option). The Company also announced October 17, 2013 holders of the Notes have an option to require the Company to purchase the Notes for par value on November 15,
2013 (the Put Option). None of the Company, its Board of Directors, or its employees or the Trustee has made or is making any representation or recommendation to any holder of Notes as to whether to exercise or refrain from exercising
the Conversion Option, the Put Option or Repurchase Option. Any Notes not surrendered pursuant to the Put Option of the Conversion Option will be redeemed on November 15, 2013.
The Notes are unsecured senior obligations of ARRIS and are effectively subordinated to all liabilities, including trade payables and lease obligations of ARRIS 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 September 30, 2013, the carrying amount of the Notes was $232.0 million and was recorded in current liabilities on the
Companys Consolidated Balance Sheets.
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 Notes, which represents the first redemption date of November 15, 2013 when ARRIS Enterprises may redeem the
Notes at its election or the Note holders may require their redemption. The equity and liability components related to the Notes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
Carrying amount of the equity component
|
|
$
|
48,209
|
|
|
$
|
48,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount of the liability component
|
|
$
|
231,972
|
|
|
$
|
232,050
|
|
Unamortized discount
|
|
|
|
|
|
|
(9,926
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount of the liability component
|
|
$
|
231,972
|
|
|
$
|
222,124
|
|
|
|
|
|
|
|
|
|
|
The following table presents the contractual interest coupon and the amortization of the discount on the equity component
related to the notes during the three and nine months ended September 30, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Contractual interest recognized
|
|
$
|
1,160
|
|
|
$
|
1,160
|
|
|
$
|
3,480
|
|
|
$
|
3,481
|
|
Amortization of discount
|
|
|
3,374
|
|
|
|
3,119
|
|
|
|
9,926
|
|
|
|
9,177
|
|
The effective annual interest rate on the debt component is 7.93%.
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 finance costs from these notes were fully
amortized as of September 30, 2013. The remaining balance of unamortized financing costs as of December 31, 2012 was $0.6 million. (See Note 23
Subsequent Events
for additional details.)
The Company has not paid cash dividends on its common stock since its inception.
23
Senior Secured Credit Facilities
In April 2013, ARRIS entered into senior secured credit facilities with Bank of America, N.A. and various other institutions, which are comprised of (i) a Term Loan A Facility of $1.1
billion, (ii) a Term Loan B Facility of $825 million and (iii) a Revolving Credit Facility of $250 million. The Term Loan A Facility and the Revolving Credit Facility have terms of five years. The Term Loan B
Facility has a term of seven years. Interest rates on borrowings under the senior credit facilities are set forth in the table below. As of September 30, 2013, ARRIS had no amounts drawn under the Revolving Credit Facility.
|
|
|
|
|
|
|
Rate
|
|
As of September 30, 2013
|
Term Loan A
|
|
LIBOR + 2.25 %
|
|
2.43%
|
Term Loan B
|
|
LIBOR
(1)
+ 2.75 %
|
|
3.50%
|
Revolving Credit Facility
(2)
|
|
LIBOR + 2.25 %
|
|
Not Applicable
|
|
(1)
|
Includes LIBOR floor of 0.75%
|
|
(2)
|
Includes unused commitment fee of 50 basis points not reflected in interest rate above.
|
Borrowings under the senior secured credit facilities are secured by first priority liens on substantially all of the assets of ARRIS and certain of its present and future subsidiaries who are or become
parties to, or guarantors under, the credit agreement governing the senior secured credit facilities (the Credit Agreement). The Credit Agreement contains usual and customary limitations on indebtedness, liens, restricted payments,
acquisitions and asset sales in the form of affirmative, negative and financial covenants, which are customary for financings of this type, including the maintenance of a minimum consolidated interest coverage ratio of not less than 3.5:1 and a
maximum consolidated net leverage ratio of 4.25:1 (which decreases to 3.5:1 throughout the first two years of the Credit Agreement). As of September 30, 2013, ARRIS was in compliance with all covenants under the Credit Agreement.
The Credit Agreement provides terms for mandatory prepayments and optional prepayments and commitment reductions. The Credit Agreement also includes
events of default, which are customary for facilities of this type (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all amounts outstanding under the credit facilities may
be accelerated.
The Credit Agreement also provides that ARRIS should hold Unrestricted Cash in an amount at least equal to the aggregate
principal amount outstanding under the Convertible Notes at such time. The Unrestricted Cash balance recorded in the Companys Consolidated Balance Sheet as of September 30, 2013 was in excess of the principal amount outstanding under the
Convertible Notes.
During the three and nine months ended September 30, 2013, the Company made mandatory prepayments related to the
senior secured credit facilities of approximately $15.8 million and $31.6 million, respectively. As of September 30, 2013, the balance for the senior secured credit facilities was $1,893.4 million.
Note 15. Supplemental Financial Information
Consolidated Balance Sheets Information
Other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Miscellaneous receivables
|
|
$
|
1,977
|
|
|
$
|
3,652
|
|
Deferred cost of sales
|
|
|
12,687
|
|
|
|
9,537
|
|
Sales and other tax receivables
|
|
|
13,437
|
|
|
|
1,565
|
|
Deferred financing fees
|
|
|
8,012
|
|
|
|
559
|
|
Dividend receivable equity investment
|
|
|
14,568
|
|
|
|
|
|
Landlord funded tenant improvements
|
|
|
1,450
|
|
|
|
|
|
Other
|
|
|
8,040
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
60,171
|
|
|
$
|
16,413
|
|
|
|
|
|
|
|
|
|
|
24
Other non-current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred financing fees
|
|
$
|
30,749
|
|
|
$
|
400
|
|
Trade receivables
|
|
|
9,025
|
|
|
|
|
|
Deposits
|
|
|
2,854
|
|
|
|
1,204
|
|
Long-term severance funds
|
|
|
3,512
|
|
|
|
3,739
|
|
Other
|
|
|
6,160
|
|
|
|
4,042
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,300
|
|
|
$
|
9,385
|
|
|
|
|
|
|
|
|
|
|
Other accrued current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Accrued restructuring
|
|
$
|
8,513
|
|
|
$
|
527
|
|
Accrued volume rebates
|
|
|
31,670
|
|
|
|
3,434
|
|
Accrued royalties
|
|
|
3,805
|
|
|
|
1,253
|
|
Accrued sales, property and other taxes
|
|
|
15,706
|
|
|
|
1,534
|
|
Accrued interest and interest rate swap liability
|
|
|
11,370
|
|
|
|
581
|
|
Google (net cash payments made on our behalf)
|
|
|
16,253
|
|
|
|
|
|
Supplier liabilities
|
|
|
12,847
|
|
|
|
|
|
Accrued software licenses liabilities
|
|
|
5,881
|
|
|
|
|
|
Accrued acquisition costs
|
|
|
1,423
|
|
|
|
4,361
|
|
Accrued legal and professional fees
|
|
|
5,052
|
|
|
|
4,277
|
|
Accrued freight
|
|
|
1,782
|
|
|
|
1,778
|
|
Other liabilities
|
|
|
32,893
|
|
|
|
7,197
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
147,195
|
|
|
$
|
24,942
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Long-term deferred revenue
|
|
$
|
4,908
|
|
|
$
|
4,288
|
|
Long-term warranty
|
|
|
29,619
|
|
|
|
3,187
|
|
Long-term severance liability
|
|
|
3,870
|
|
|
|
4,119
|
|
Deferred compensation liabilities
|
|
|
7,049
|
|
|
|
6,668
|
|
Long-term accrued rent
|
|
|
1,476
|
|
|
|
1,413
|
|
Long-term tenant improvement obligations
|
|
|
1,086
|
|
|
|
1,140
|
|
Other
|
|
|
9,327
|
|
|
|
2,347
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,335
|
|
|
$
|
23,162
|
|
|
|
|
|
|
|
|
|
|
25
Note 16. 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.
Prior to the second quarter of 2013, the CODM managed the operating results of the Company as three segments, including Broadband Communications Systems (BCS), Access, Transport and Supplies
(ATS) and Media & Communications Systems (MCS). In connection with the Acquisition, the Company changed its operating segments to align with how the CODM expected to evaluate financial information used to allocate
resources and assess performance of the Company. As a result, the segment information presented in these financial statements has been conformed to present segments on this revised basis for all prior periods. Under the new organizational structure,
the CODM manages the Company under two segments:
|
|
|
Customer Premises Equipment (CPE)
The CPE segments product solutions include set-top boxes, gateways, and
Subscriber Premises equipment that enable service providers to offer Voice, Video and high-speed data services to residential and business subscribers.
|
|
|
|
Network and Cloud (N&C)
The N&C segments product lines cover all components required by
facility-based Service Providers to construct a state-of-the-art residential and metro distribution network. For Cable providers this includes Hybrid Fiber Coax (HFC) equipment, edge routers, metro WiFi, video management, storage, and
distribution equipment. For Telco providers this includes fiber-based and copper-based broadband transmission equipment. In addition, the portfolio includes an advanced video headend management system for both legacy MPEG/DVB systems as well as full
IP Video systems. Finally, the portfolio also includes full support for advanced multi-screen video management, protection, monetization and delivery, and a suite of products for performance management, configuration, and surveillance.
|
These operating segments were determined based on the nature of the products and services offered. The measures that are
used to assess the reportable segments operating performance are sales and direct contribution. A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating
resources.
In addition, in conjunction with changing operating segments, the Company has changed its measure of assessing segments
operating performance from gross margin to direct contribution, which is defined as gross margin less direct operating expense. Corporate and other expenses, such as selling and central G&A, not included in the measure of segment direct
contribution are reported in Other and are reconciled to income (loss) before income taxes. As a result, the segment information presented in these financial statements has been conformed to present the Companys segments on this
revised basis for all prior periods presented.
The table below represents information about the Companys reporting segments for the
three and nine months ended September 30, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network & Cloud
|
|
|
CPE
|
|
|
Other
|
|
|
Consolidated
|
|
For the three months ended September 30,
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
320,484
|
|
|
$
|
174,858
|
|
|
$
|
748,895
|
|
|
$
|
182,574
|
|
|
$
|
(1,556
|
)
|
|
|
|
|
|
$
|
1,067,823
|
|
|
$
|
357,432
|
|
Direct Contribution
|
|
|
59,566
|
|
|
|
44,857
|
|
|
|
150,383
|
|
|
|
25,017
|
|
|
|
(121,093
|
)
|
|
|
(38,766
|
)
|
|
|
88,856
|
|
|
|
31,108
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,057
|
|
|
|
213
|
|
|
|
6,057
|
|
|
|
213
|
|
Acquisition & other costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,221
|
|
|
|
30
|
|
|
|
6,221
|
|
|
|
30
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,606
|
|
|
|
7,742
|
|
|
|
64,606
|
|
|
|
7,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,972
|
|
|
|
23,123
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,029
|
|
|
|
2,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,057
|
)
|
|
$
|
20,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
Network & Cloud
|
|
|
CPE
|
|
|
Other
|
|
|
Consolidated
|
|
September 30,
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
837,731
|
|
|
$
|
560,056
|
|
|
$
|
1,601,259
|
|
|
$
|
449,604
|
|
|
$
|
(17,155
|
)
|
|
|
|
|
|
$
|
2,421,835
|
|
|
$
|
1,009,660
|
|
Direct Contribution
|
|
|
183,220
|
|
|
|
167,638
|
|
|
|
295,018
|
|
|
|
45,369
|
|
|
|
(345,162
|
)
|
|
|
(121,171
|
)
|
|
|
133,076
|
|
|
|
91,836
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,323
|
|
|
|
6,455
|
|
|
|
38,323
|
|
|
|
6,455
|
|
Acquisition & other costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,803
|
|
|
|
1,076
|
|
|
|
32,803
|
|
|
|
1,076
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,751
|
|
|
|
22,565
|
|
|
|
127,751
|
|
|
|
22,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,801
|
)
|
|
|
61,740
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,208
|
|
|
|
9,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(121,009
|
)
|
|
$
|
52,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 17. Sales Information
The Companys three largest customers (including their affiliates, as applicable) are Comcast, Time Warner Cable and Verizon. 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 their affiliates under common
control. A summary of sales to these customers for the three and nine months ended September 30, 2013 and 2012 are set forth below (in thousands): The significant changes in the percentages of the total sales primarily result from the greater
customer diversification as a result of the Acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Comcast and affiliates
|
|
$
|
204,039
|
|
|
$
|
117,557
|
|
|
$
|
452,285
|
|
|
$
|
295,207
|
|
% of sales
|
|
|
19.1
|
%
|
|
|
32.9
|
%
|
|
|
18.7
|
%
|
|
|
29.2
|
%
|
|
|
|
|
|
Time Warner Cable and affiliates
|
|
$
|
85,569
|
|
|
$
|
68,966
|
|
|
$
|
276,841
|
|
|
$
|
191,388
|
|
% of sales
|
|
|
8.0
|
%
|
|
|
19.3
|
%
|
|
|
11.4
|
%
|
|
|
19.0
|
%
|
|
|
|
|
|
Verizon and affiliates
|
|
$
|
118,220
|
|
|
|
|
|
|
$
|
208,612
|
|
|
|
|
|
% of sales
|
|
|
11.1
|
%
|
|
|
|
|
|
|
8.6
|
%
|
|
|
|
|
ARRIS sells its products primarily in the United States. The Companys international revenue is generated from Asia
Pacific, Canada, Europe, and Latin America. For the three months ended September 30, 2013 and 2012, sales to international customers were approximately 31.5% and 22.0%, respectively, of total sales. For the nine months ended September 30,
2013 and 2012, sales to international customers were 32.7% and 24.3%, respectively, of total sales.
27
International sales by region for the three and nine months ended September 30, 2013 and 2012 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Americas, excluding U.S.
(1)
|
|
$
|
217,843
|
|
|
$
|
44,418
|
|
|
$
|
501,052
|
|
|
$
|
148,245
|
|
Asia Pacific
|
|
|
48,869
|
|
|
|
21,194
|
|
|
|
108,102
|
|
|
|
45,942
|
|
EMEA
|
|
|
69,673
|
|
|
|
13,106
|
|
|
|
181,598
|
|
|
|
51,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international sales
|
|
$
|
336,385
|
|
|
$
|
78,718
|
|
|
$
|
790,752
|
|
|
$
|
245,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes U.S. sales of $731.4 million and $1,631.0 million for the three and nine months ended September 30, 2013, respectively. Excludes U.S. sales of $278.7
million and $764.0 million for the three and nine months ended September 30, 2012, respectively.
|
Note 18. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS)
computations for the periods indicated (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
17,959
|
|
|
$
|
17,864
|
|
|
$
|
(44,380
|
)
|
|
$
|
38,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
138,478
|
|
|
|
113,709
|
|
|
|
129,502
|
|
|
|
114,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
0.13
|
|
|
$
|
0.16
|
|
|
$
|
(0.34
|
)
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
17,959
|
|
|
$
|
17,864
|
|
|
$
|
(44,380
|
)
|
|
$
|
38,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
138,478
|
|
|
|
113,709
|
|
|
|
129,502
|
|
|
|
114,206
|
|
Net effect of dilutive equity awards
|
|
|
2,127
|
|
|
|
2,637
|
|
|
|
|
|
|
|
2,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
140,605
|
|
|
|
116,346
|
|
|
|
129,502
|
|
|
|
116,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
(0.34
|
)
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 14
Long-Term Indebtedness
, in November 2006, the Company issued $276.0
million of convertible senior notes. Upon conversion, ARRIS is required to satisfy the primary component of the conversion consideration in cash, rather than common stock. The secondary component of the conversion consideration, which is only paid
if the trading price of the Companys common stock is above the conversion price specified in the indenture, is comprised of cash, shares of the Companys common stock or a combination of both, at the Companys election. Thus, the
potential earnings dilution only relates to the secondary component. The average share price during the three and nine months ended September 30, 2013 and 2012 was less than the conversion price, and consequently, did not result in dilution.
However, basic shares were used for the nine months ended September 30, 2013 as a net loss was reported for the quarter and the inclusion of dilutive shares would be antidilutive.
For the three and nine months ended September 30, 2013, approximately 2.8 million and 1.4 million of the equity-based awards, respectively, were excluded from the computation of diluted
earnings per share shares because their effect would have been anti-dilutive. For the three months ended September 30, 2012, all outstanding equity-based
28
awards were dilutive. For the nine months ended September 30, 2012, approximately 2.2 million of the equity-based awards were excluded from the dilutive securities above. These
exclusions are made if the exercise price of these equity-based awards is in excess of the average market price of the common stock for the period, or if the Company has net losses, both of which have an anti-dilutive effect.
During the nine months ended September 30, 2013, the Company issued 2.8 million shares of its common stock related to stock option exercises
and the vesting of restricted shares, as compared to 1.7 million shares for the twelve months ended December 31, 2012.
In
connection with the Acquisition, the Seller was issued approximately 10.6 million shares of ARRIS common stock as part of the purchase consideration. The fair value of the 10.6 million shares issued, $150 million, was determined
based on the 20 trading day trailing average closing price of the Companys common stock at signing of the definitive agreement. Furthermore, Comcast was given an opportunity to invest in ARRIS, and on January 11, 2013, the Company entered
into a separate agreement accounted for as a contingent equity forward with a subsidiary of Comcast providing for the purchase by it from the Company of approximately 10.6 million shares of common stock for $150 million. As a result of the
sale of common stock to Comcast, both Comcast and Google each own approximately 7.7% of the outstanding ARRIS shares post-closing based on ARRIS current capitalization. The Comcast transaction was consummated on the same day as the
Acquisition. (See Note 3
Business Acquisitions
and Note 5
Comcast Investment in ARRIS
for additional details)
Note 19. Income Taxes
For the nine month periods ended September 30, 2013 and 2012, the Company recorded income tax expense (benefit) of $(76.6)
million and $13.4 million, respectively. Below is a summary of the components of the tax expense (benefit) for the three and nine month periods ended September 30, 2013 and 2012 (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Income
Before
Tax
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Effective
Tax Rate
|
|
|
Income
Before
Tax
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Effective
Tax Rate
|
|
Non-discrete items
|
|
$
|
9,481
|
|
|
$
|
(14,547
|
)
|
|
|
(120.5
|
)%
|
|
$
|
20,846
|
|
|
$
|
7,165
|
|
|
|
34.4
|
%
|
Discrete events
Acquisition-related costs
|
|
|
(12,277
|
)
|
|
|
(3,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return to provision adjustments
|
|
|
|
|
|
|
(2,052
|
)
|
|
|
|
|
|
|
|
|
|
|
(841
|
)
|
|
|
|
|
Loss from certain foreign entities acquired
|
|
|
(7,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowances, uncertain tax position
|
|
|
|
|
|
|
(7,599
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(10,057
|
)
|
|
$
|
(28,016
|
)
|
|
|
375.1
|
%
|
|
$
|
20,846
|
|
|
$
|
2,982
|
|
|
|
14.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(Loss)
Income
Before
Tax
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Effective
Tax
Rate
|
|
|
Income
Before
Tax
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Effective
Tax
Rate
|
|
|
|
|
|
|
|
|
Non-discrete items
|
|
$
|
(11,957
|
)
|
|
$
|
(38,735
|
)
|
|
|
324.0
|
%
|
|
$
|
52,094
|
|
|
$
|
17,613
|
|
|
|
33.8
|
%
|
Discrete events
Acquisition-related costs
|
|
|
(71,126
|
)
|
|
|
(23,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return to provision adjustments (including R&D credits)
|
|
|
|
|
|
|
(8,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comcasts investment in ARRIS
|
|
|
(26,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(841
|
)
|
|
|
|
|
Loss from certain foreign entities acquired
|
|
|
(11,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowances, uncertain tax position
|
|
|
|
|
|
|
(5,774
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(121,009
|
)
|
|
$
|
(76,629
|
)
|
|
|
63.3
|
%
|
|
$
|
52,094
|
|
|
$
|
13,430
|
|
|
|
25.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
The reduction in the income tax expense (benefit) for the three and nine month periods ended September 30, 2013, compared to the three and nine
months ended September 30, 2012, was due to the change in earnings from continuing operations, as a result of the Acquisition that occurred on April 17, 2013 and its related significant, infrequent and unusual book charges. In addition,
there were significant and unusual tax charges relating to 2012 return to provision changes and releases of uncertain tax positions, due to expirations of periods during which certain returns could be audited by the applicable taxing authorities.
|
|
|
|
For the nine month periods ended September 30, 2013 and 2012, our estimated effective tax rates were 63.3% and 25.8%, respectively. The rate of
63.3% is based on the Companys pre-tax book loss of approximately $(121.0) million and a tax benefit of approximately $(76.6) million, for the nine month period ended September 30, 2013. The change in the estimated effective tax rate for
the nine month periods ended September 30, 2013, compared to the nine months ended September 30, 2012, was due to a benefit from the research and development tax credit legislation reenacted retroactively to January 2012, which is included
in the return to provision adjustments. Further benefits arose from the release of uncertain tax liabilities, as well as significant, unusual and infrequent book charges related to the Acquisition.
|
|
|
|
For the nine month period ended September 30, 2013, the Company recorded a benefit of approximately $(5.9) million related to 2012 research and
development tax credits. The U.S. research and development credit was reenacted in January 2013 retroactive to the beginning of 2012. The full year 2012 impact of the research and development tax credits was recognized in the three month period
ended March 31, 2013. That amount was trued-up with a provision to return adjustment of approximately $(1) million. For the nine month period ended September 30, 2012, the Company did not record any benefits attributed to research and
development tax credits, as the tax credit was not reenacted until January 2013.
|
|
|
|
For the nine month period ended September 30, 2013, the Company recorded additional benefits of $(2.7) million and $(5.8) million from return to
provision adjustments and releases of uncertain tax liabilities due to expiration of periods during which certain returns could be audited by applicable taxing authorities, respectively.
|
|
|
|
For the nine month period ended September 30, 2013, the Company recorded significant book expenses of an infrequent and unusual nature of
approximately $(71.1) million relating to the Acquisition, generating a tax benefit of $(23.6) million. These unusual expenses include the restructuring charges that were identified and arose from the synergy and integration plans of the Company.
Additionally, for the nine month period ended September 30, 2013, the Company recorded a pre-tax book loss of approximately $(26.4) million on the investment in the Company by Comcast and a pre-tax book loss of approximately $(11.6) million on
certain foreign entities from Acquisition, on which no tax benefit was recorded.
|
|
|
|
For the nine month period ended September 30, 2012, the Company recorded a benefit of $(4.2) million from the release of liabilities related to
uncertain tax positions and return to provision adjustments.
|
The earnings from the Companys non-U.S. subsidiaries are
considered to be permanently invested outside of the United States. Accordingly, no provision for U.S. federal and state income taxes on those non-U.S. earnings has been made in the accompanying consolidated financial statements. Any future
distribution of these non-U.S. earnings may subject the Company to both U.S. federal and state income taxes, after reduction for foreign taxes credited.
30
Note 20. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of taxes, for the nine
months ended September 30, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
on marketable
securities
|
|
|
Unrealized
loss on
derivative
instruments
|
|
|
Unfunded
pension
liability
|
|
|
Cumulative
translation
adjustments
|
|
|
Total
|
|
Balance as of December 31, 2012
|
|
$
|
206
|
|
|
$
|
-
|
|
|
$
|
(8,558
|
)
|
|
$
|
(184
|
)
|
|
$
|
(8,536
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
(205
|
)
|
|
|
(5,530
|
)
|
|
|
-
|
|
|
|
156
|
|
|
|
(5,579
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
84
|
|
|
|
1,253
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,337
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
(121
|
)
|
|
|
(4,277
|
)
|
|
|
-
|
|
|
|
156
|
|
|
|
(4,242
|
)
|
|
|
|
|
|
Balance as of September 30, 2013
|
|
$
|
85
|
|
|
$
|
(4,277
|
)
|
|
$
|
(8,558
|
)
|
|
$
|
(28
|
)
|
|
$
|
(12,778
|
)
|
|
|
|
|
|
Note 21. 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 September 30, 2013 were as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
|
2013 (remaining three months)
|
|
$
|
6,229
|
|
2014
|
|
|
20,934
|
|
2015
|
|
|
16,365
|
|
2016
|
|
|
12,894
|
|
2017
|
|
|
8,903
|
|
2018
|
|
|
5,513
|
|
Thereafter
|
|
|
4,542
|
|
Less sublease income
|
|
|
(6,801
|
)
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
68,579
|
|
|
|
|
|
|
Total rental expense for all operating leases amounted to approximately $15.4 million and $12.4 million for the nine
months ended September 30, 2013 and twelve months ended December 31, 2012, respectively.
As of September 30, 2013, the Company
had approximately $1.8 million of restricted cash. The restricted cash balances are held as cash collateral security for certain letters of credit and bank guarantees. Additionally, the Company had contractual obligations of approximately $585.6
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
September 30, 2013 are expected to be satisfied in 2014.
Note 22. Contingencies
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred
and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new
information is obtained and the Companys views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Companys accrued liabilities would be recorded in the period in which such
determinations are made. Unless noted otherwise, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made.
Due to the nature of the Companys business, it is subject to patent infringement claims, including current suits against it or one or more of its wholly-owned subsidiaries, or one or more of our
customers who may seek indemnification from us, alleging infringement by various Company products and services. The Company believes that it has meritorious defenses to the allegation made in its pending cases and intends to vigorously defend these
lawsuits; however, it is currently unable to determine the ultimate outcome of these or similar matters. Accordingly, with respect to these proceedings, we are currently unable to reasonably estimate the possible loss or range of possible losses. In
addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business.
31
As part of the Acquisition, a subsidiary of Google Inc., has agreed to indemnify the Company for any losses
suffered by the Company related to certain specified retained litigation matters, subject to the Company being responsible for 50% of the first $50 million in respect of past infringement and 50% of the first $50 million in respect of certain future
royalty payments related to the specified retained litigation matters, for a total obligation of $50 million.
During the third quarter ended
September 30, 2013, the Company settled certain of these specified retained litigation matters as follows:
TiVo
:
The Company, Google, Inc. and TiVo settled all claims associated with certain patent infringement litigation for $196 million, which included
non-exclusive, worldwide, non-transferable and perpetual license to the patents subject to the litigation. On the date the Settlement Agreement and Release was executed, the Company was legally responsible to TiVo for the liability arising from
the litigation, if any. Payment was made in the quarter ended September 30, 2013. Google indemnified the Company for the amount of the payment except for $50 million for which the Company is responsible as described above.
Verizon
:
The Company, Google, Inc. and
Verizon Sourcing LLC reached a settlement agreement, whereby the Company paid $85 million to Verizon to settle patent infringement litigation in the quarter ended September 30, 2013. In consideration for this cash payment, the Company will
have no further obligation for any indemnification of any claim arising from the Verizon claim. Google indemnified the Company for the full amount of the Companys payment.
Note 23. Subsequent Events
On October 17, 2013, the Company announced that it would redeem the Notes (See Note 14.
Long-Term Indebtedness
for
additional details) for par value on November 15, 2013. On October 15, 2013 the Company also announced that the Notes are convertible at the option of the holders from October 15, 2013 until 11:59 p.m. E.T. on November 15, 2013
for the consideration specified in the indenture (the Conversion Option). The Company also announced October 17, 2013 holders of the Notes have an option to require the Company to purchase the Notes for par value on
November 15, 2013 (the Put Option). None of the Company, its Board of Directors, or its employees or the Trustee has made or is making any representation or recommendation to any holder of Notes as to whether to exercise or refrain
from exercising the Conversion Option, the Put Option or Repurchase Option. Any Notes not surrendered pursuant to the Put Option of the Conversion Option will be redeemed on November 15, 2013.
32