NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
ARRIS Group, Inc. (together with its consolidated subsidiaries, except as the context otherwise indicates,
ARRIS or the Company) is a global media entertainment and data communications solutions provider, headquartered in Suwanee, Georgia. The Company operates in two business segments, Customer Premises Equipment and
Network & Cloud (See Note 11
Segment Information
for additional details.), specializing in enabling multichannel video programming distributors (MVPDs), including cable, telephone, and digital broadcast satellite
operators, and media programmers to deliver rich media, voice, and IP data services to end consumer subscribers. ARRIS is a leading developer, manufacturer and supplier of interactive set-top boxes, end-to-end digital video and Internet Protocol
Television (IPTV) distribution systems, broadband access infrastructure platforms, and associated data and voice Customer Premises Equipment (CPE). The Companys solutions are complemented by a broad array of services
and systems integration that bring localized expertise to every touchpoint in the delivery process. This lends a customized approach to serving each of ARRIS primary markets.
On April 17, 2013, the Company completed its acquisition of Motorola Home from General Instrument Holdings, Inc., a subsidiary of
Google, Inc. (See Note 4
Business Acquisitions
for additional details.)
The 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.
Note 2. Summary of Significant Accounting Policies
(a) Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned foreign and domestic
subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
Investments in companies in which
ARRIS has significant influence, or ownership between 20% and 50% of the investee are accounted for in the Consolidated Financial Statements under the equity method of accounting. Under the equity method, the investment is originally recorded at
cost and adjusted to recognize the Companys share of net earnings or losses and any basis differences of the investee. The adjustment is limited to the extent of the Companys investment in and advances to the investee. As such,
consolidated net income includes our equity portion in current earnings of such companies. Investments in which we do not exercise significant influence (generally less than a 20 percent ownership interest) are accounted for under the cost method.
For 2013, none of the Companys equity method investments exceeded the 10 percent threshold tests for a significant
subsidiary as defined in Rule 1-02(w) of Regulation S-X under the Securities Exchange Act of 1934.
(b) Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
(c) Cash, Cash Equivalents, and Investments
ARRIS cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) are
primarily held in money market funds that pay taxable interest. The Company holds investments consisting of mutual funds and debt securities classified as available-for-sale, which are stated at estimated fair value. The debt securities consist
primarily of commercial paper, certificates of deposits, short term corporate obligations and U.S. government agency financial instruments. These investments are on deposit with major financial institutions.
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From time to time, the Company has held certain investments in the common stock or preferred
stock of private companies, which were classified as cost-method investments.
In connection with the Acquisition, ARRIS
acquired certain investments in 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 is increased for the Companys proportionate share of net earnings or losses and any basis differences of the investees, or dividend received.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying
amount of such investments may not be recoverable. An equity method investment is written down to fair value if there is evidence of a loss in value which is other than temporary. The Company may estimate the fair value of its equity method
investments by considering recent investee equity transactions, discounted cash flow analysis, recent operating results, comparable public company operating cash flow multiples. If the fair value of the investment has dropped below the carrying
amount, the Company considers several factors when determining whether an other-than temporary decline has occurred, such as; the length of the time and the extent to which the estimated fair value or market value has been below the carrying value,
the financial condition and the near-term prospects of the investee, the intent and ability of the Company to retain its investment in the investee for a period of time sufficient to allow for any anticipated recovery in market value and general
market conditions.
The Company has two rabbi trusts that are used as funding vehicles for various deferred compensation plans
that were available to certain current and former officers and key executives. The Company also has a deferred retirement salary plan, which was limited to certain current or former officers of C-COR. The present value of the estimated future
retirement benefit payments is being accrued over the estimated service period from the date of signed agreements with the employees. ARRIS holds an investment to cover its liability. ARRIS also funds its nonqualified defined benefit plan for
certain executives in a rabbi trust.
(d) Inventories
Inventories are stated at the lower of average cost, approximating first-in, first-out, or market. The cost of work-in-process and
finished goods is comprised of material, labor, and overhead.
(e) Revenue recognition
ARRIS generates revenue as a result of varying activities, including the delivery of stand-alone equipment, custom design
and installation services, and bundled sales arrangements inclusive of equipment, software and services. The revenue from these activities is recognized in accordance with applicable accounting guidance and their related interpretations.
Revenue is recognized when all of the following criteria have been met:
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When persuasive evidence of an arrangement exists.
Contracts and customer purchase orders are used to determine the
existence of an arrangement. For professional services evidence that an agreement exists includes information documenting the scope of work to be performed, price, and customer acceptance. These are contained in the signed contract, purchase order,
or other documentation that shows scope, price and customer acceptance.
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Delivery has occurred
. Shipping documents, proof of delivery and customer acceptance (when applicable) are used to verify
delivery.
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The fee is fixed or determinable
. Pricing is considered fixed or determinable at the execution of a customer arrangement,
based on specific products and quantities to be delivered at specific prices. This determination includes a review of the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment or future
discounts.
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Collectability is reasonably assured
. The Company assesses the ability to collect from customers based on a number of
factors that include information supplied by credit agencies, analyzing customer accounts, reviewing payment history and consulting bank references. Should a circumstance arise where a customer is deemed not creditworthy, all revenue related to the
transaction will be deferred until such time that payment is received and all other criteria to allow the Company to recognize revenue have been met.
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Revenue is deferred if any of the above revenue recognition criteria is not met as well as when certain circumstances exist for any of our products or services, including, but not limited to:
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When undelivered products or services that are essential to the functionality of the delivered product exist, revenue is deferred until such
undelivered products or services are delivered as the customer would not have full use of the delivered elements.
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When required acceptance has not occurred.
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When trade-in rights are granted at the time of sale, that portion of the sale is deferred until the trade-in right is exercised or the right expires.
In determining the deferral amount, management estimates the expected trade-in rate and future value of the product upon trade-in. These factors are periodically reviewed and updated by management, and the updates may result in either an increase or
decrease in the deferral.
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Equipment
The Company provides operators with equipment that can be
placed within various stages of a broadband system that allows for the delivery of telephony, video and high-speed data as well as outside plant construction and maintenance equipment. For equipment sales, revenue recognition is generally
established when the products have been shipped, risk of loss has transferred, objective evidence exists that the product has been accepted, and no significant obligations remain relative to the transaction. Additionally, based on historical
experience, ARRIS has established reliable estimates related to sales returns and other allowances for discounts. These estimates are recorded as a reduction to revenue at the time the revenue is initially recorded.
Software Sold Without Tangible Equipment
ARRIS sells internally developed software as well as software developed by outside
third parties that does not require significant production, modification or customization. For arrangements that contain only software and the related post-contract support, the Company recognizes revenue in accordance with the applicable software
revenue recognition guidance. If the arrangement includes multiple elements that are software only, then the software revenue recognition guidance is applied and the fee is allocated to the various elements based on vendor-specific objective
evidence (VSOE) of fair value. If sufficient VSOE of fair value does not exist for the allocation of revenue to all the various elements in a multiple element software arrangement, all revenue from the arrangement is deferred until the
earlier of the point at which such sufficient VSOE of fair value is established or all elements within the arrangement are delivered. If VSOE of fair value exists for all undelivered elements, but does not exist for one or more delivered elements,
the arrangement consideration is allocated to the various elements of the arrangement using the residual method of accounting. Under the residual method, the amount of the arrangement consideration allocated to the delivered elements is equal to the
total arrangement consideration less the aggregate fair value of the undelivered elements. Under the residual method, if VSOE of fair value exists for the undelivered element, generally post contract support (PCS), the fair value of the
undelivered element is deferred and recognized ratably over the term of the PCS contract, and the remaining portion of the arrangement is recognized as revenue upon delivery. If sufficient VSOE of fair value does not exist for PCS, revenue for the
arrangement is recognized ratably over the term of support.
Standalone Services
Installation, training, and
professional services are generally recognized in service revenue when performed or upon completion of the service when the final act is significant in relation to the overall service transaction. The key element for Professional Services in
determining when service transaction revenue has been earned is determining the pattern of delivery or performance which determines the extent to which the earnings process is complete and the extent to which customers have received value from
services provided. The delivery or performance conditions of our service transactions are typically evaluated under the proportional performance or completed performance model.
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Incentives
Customer incentive programs that include consideration, primarily
rebates/credits to be used against future product purchases and certain volume discounts, have been recorded as a reduction of revenue when the shipment of the requisite equipment occurs.
Value Added Resellers
ARRIS typically employs the sell-in method of accounting for revenue when using a Value Added Reseller
(VAR) as our channel to market. Because product returns are restricted, revenue under this method is generally recognized at the time of shipment to the VAR provided all criteria for recognition are met. There are occasions, based on
facts and circumstances surrounding the VAR transaction, where ARRIS will employ the sell-through method of recognizing revenue and defer that revenue until payment occurs.
Multiple Element Arrangements
Certain customer transactions may include multiple deliverables based on the bundling of equipment, software and services. When a multiple element arrangement
exists, the fee from the arrangement is allocated to the various deliverables, to the extent appropriate, so that the proper amount can be recognized as revenue as each element is delivered. Based on the composition of the arrangement, the Company
analyzes the provisions of the accounting guidance to determine the appropriate model that is applied towards accounting for the multiple element arrangement. If the arrangement includes a combination of elements that fall within different
applicable guidance, ARRIS follows the provisions of the hierarchal literature to separate those elements from each other and apply the relevant guidance to each.
For multiple element arrangements that include software or have a software-related element that is more than incidental and does involve significant production, modification or customization, revenue is
recognized using the contract accounting guidelines by applying the percentage-of-completion or completed-contract method. The Company recognizes software license and associated professional services revenue for its mobile workforce management
software license product installations using the percentage of completion method of accounting as the Company believes that its estimates of costs to complete and extent of progress toward completion of such contracts are reliable. For certain
software license arrangements where professional services are being provided and are deemed to be essential to the functionality or are for significant production, modification, or customization of the software product, both the software and the
associated professional service revenue are recognized using the completed contract method. The completed-contract method is used for these particular arrangements because they are considered short-term arrangements and the financial position and
results of operations would not be materially different from those under the percentage-of-completion method. Under the completed-contract method, revenue is recognized when the contract is complete, and all direct costs and related revenues are
deferred until that time. The entire amount of an estimated loss on a contract is accrued at the time a loss on a contract is projected. Actual profits and losses may differ from these estimates.
For arrangements that fall within the software revenue recognition guidance, the fee is allocated to the various elements based on VSOE of
fair value. If sufficient VSOE of fair value does not exist for the allocation of revenue to all the various elements in a multiple element arrangement, all revenue from the arrangement is deferred until the earlier of the point at which such
sufficient VSOE of fair value is established or all elements within the arrangement are delivered. If VSOE of fair value exists for all undelivered elements, but does not exist for one or more delivered elements, the arrangement consideration is
allocated to the various elements of the arrangement using the residual method of accounting. Under the residual method, the amount of the arrangement consideration allocated to the delivered elements is equal to the total arrangement consideration
less the aggregate fair value of the undelivered elements. Using this method, any potential discount on the arrangement is allocated entirely to the delivered elements, which ensures that the amount of revenue recognized at any point in time is not
overstated. Under the residual method, if VSOE of fair value exists for the undelivered element, generally PCS, the fair value of the undelivered element is deferred and recognized ratably over the term of the PCS contract, and the remaining portion
of the arrangement is recognized as revenue upon delivery, which generally occurs upon delivery of the product or implementation of the system. Many of ARRIS products are sold in combination with customer support and maintenance services,
which consist of software updates and product support. Software updates provide customers with rights to unspecified software updates that ARRIS chooses to develop and to maintenance releases and patches that the Company chooses to release during
the period of the support period. Product support services include telephone support, remote diagnostics, email and web access, access to on-site technical support personnel and repair or replacement of hardware in the event of damage or
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failure during the term of the support period. Maintenance and support service fees are recognized ratably under the straight-line method over the term of the contract, which is generally one
year. The Company does not record receivables associated with maintenance revenues without a firm, non-cancelable order from the customer. VSOE of fair value is determined based on the price charged when the same element is sold separately and based
on the prices at which our customers have renewed their customer support and maintenance. For elements that are not yet being sold separately, the price established by management, if it is probable that the price, once established, will not change
before the separate introduction of the element into the marketplace is used to measure VSOE of fair value for that element.
(f) Shipping and Handling Fees
Shipping and handling costs for the years ended December 31, 2013, 2012, and 2011 were approximately $4.9 million, $3.6 million and $3.3 million, respectively, and are classified in net sales and
cost of sales.
(g) Taxes Collected from Customers and Remitted to Governmental Authorities
Taxes assessed by a government authority that are both imposed on and concurrent with specific revenue transactions
between us and our customers are presented on a net basis in our Consolidated Statements of Operations.
(h) Depreciation of Property, Plant and Equipment
The Company provides for depreciation of property, plant and equipment on the straight-line basis over estimated useful lives of 10 to 40
years for buildings and improvements, 2 to 10 years for machinery and equipment, and the shorter of the term of the lease or useful life for leasehold improvements. Included in depreciation expense is the amortization of landlord funded tenant
improvements which amounted to $0.2 million in 2013, $0.5 million in 2012 and $0.6 million in 2011. Depreciation expense, including amortization of capital leases, for the years ended December 31, 2013, 2012, and 2011 was approximately
$61.5 million, $28.0 million, and $24.1 million, respectively.
(i) Goodwill and Long-Lived Assets
Goodwill relates to the excess of consideration transferred over the fair value of net assets resulting from an
acquisition. On an annual basis, the Companys goodwill is tested for impairment or more frequently if events or changes in circumstances indicate that the asset is more likely than not impaired, in which case a test would be performed sooner.
Our annual goodwill impairment test is performed in the fourth quarter, with a testing date of October 1. For goodwill, the Company performs a two-step quantitative goodwill impairment test. In the first step, the Company compares the fair
value of each reporting unit to its carrying amount. Fair value is determined for each reporting unit using a weighting of fair values derived from an income approach using discounted cash flows and a market approach. Under the income approach, fair
value of a reporting unit is calculated based on the present value of estimated future cash flows. The discounted cash flow analysis requires us to make various judgmental assumptions, including assumptions about future cash flows, growth rates and
weighted average cost of capital (discount rate). The assumptions about future cash flows and growth rates are based on the current and long-term business plans of each reporting unit. Discount rate assumptions are based on an assessment of the risk
inherent in the future cash flows of the respective reporting units. Under the market approach, fair value is estimated based upon Market multiples of revenue and earnings derived from publicly traded companies with similar operating and investment
characteristics as the reporting unit. In order to assess the reasonableness of the calculated fair values of our reporting units, the Company also compares the sum of the reporting units fair values to its market capitalization and calculates
an implied control premium (the excess of the sum of the reporting units fair values over the market capitalization). If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to that unit, goodwill is not
impaired, and no further testing is required. If the fair value of the reporting unit is less than the carrying value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. In the second step, the
reporting units fair value is assigned to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis
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that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting units
goodwill is less than the carrying amount, the difference is recorded as an impairment loss.
The annual goodwill impairment
tests were performed in the fourth quarters of 2011, 2012, and 2013 with an assessment date of October 1. There was no impairment of goodwill resulting from our annual impairment testing in 2013 and 2012. In 2011, a goodwill-impairment charge
of $41.2 million before tax ($33.9 million after tax) was recorded for the former MCS reporting unit (now included in the Cloud Services reporting unit.)
As of December 31, 2013, the Company had goodwill of $935.6 million, of which $685.0 million related to the CPE reporting unit, $239.7 million related to the Network Infrastructure reporting unit and
$10.9 million related to the Cloud Services reporting unit.
Long-lived assets, such as property, plant, and equipment and
purchased intangible assets subject to depreciation and amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by comparing the carrying amount of the asset or asset group, to the future undiscounted cash flows the asset is expected to generate. In determining future undiscounted cash flows, we have made a policy decision to
use pre-tax cash flows in our evaluation, which is consistently applied. To test for recovery, we group assets (an asset group) in a manner that represents the lowest level for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities.
Other intangible assets represent acquired intangible assets, which
include developed technology, in-process research and development, customer relationships, covenants not-to-compete, and order backlog. Amounts assigned to other identifiable intangible assets with finite useful lives are amortized on a
straight-line basis over their estimated useful lives as follows:
Intangibles with finite useful lives:
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Developed technology, patents and licenses
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2 - 10 years
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Customer relationships
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7 - 10 years
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Non-compete agreements
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2 years
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Trademarks and trade names
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2 - 10 years
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Order backlog
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1 - 2 years
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Intangibles with indefinite useful lives:
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In-process research and development
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Indefinite
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Acquired in-process research and development assets are initially recognized and measured at fair value
and classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition date, this asset will not be amortized as
charges to earnings; instead these assets will be subject to periodic impairment testing. Completion of the associated research and development efforts would cause the indefinite-lived in-process research and development assets to become a
finite-lived asset. As such, prior to commencing amortization the assets will be tested for impairment.
As of
December 31, 2013, the financial statements included intangible assets of $1,176.2 million, net of accumulated amortization of $427.1 million. As of December 31, 2012, the financial statements included intangible assets of $94.5 million,
net of accumulated amortization of $239.7 million.
Our intangible assets with finite lives are tested for impairment when
events or changes in circumstances indicate that impairment may exist. Our indefinite-lived assets for in-process research and development were tested for impairment as of October 1, 2013.
There were no impairment charges related to purchased intangible assets during 2013 and 2012. In 2011, indicators of impairment
existed for long-lived assets associated with the former MCS reporting unit (now
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included as part of the Cloud Services reporting unit) due to changes in projected operating results and cash flows. In the fourth quarter of 2011, an impairment loss of $47.4 million before tax
($29.1 million after tax) related to customer relationships was recorded.
See Note 5 of Notes to the Consolidated Financial
Statements for further information on goodwill and intangible assets.
(j) Advertising and Sales
Promotion
Advertising and sales promotion costs are expensed as incurred. Advertising expense was approximately $4.1
million, $0.2 million, and $0.6 million for the years ended December 31, 2013, 2012 and 2011, respectively.
(k) Research and Development
Research and development (R&D) costs are expensed as incurred. ARRIS research and development expenditures for the years ended December 31, 2013, 2012 and 2011 were
approximately $425.8 million, $170.7 million, and $146.5 million, respectively. The expenditures include compensation costs, materials, other direct expenses, and allocated costs of information technology, telecommunications, and facilities.
(l) Warranty
ARRIS provides warranties of various lengths to customers based on the specific product and the terms of individual agreements. For further discussion, see Note 10 of the Notes to the Consolidated
Financial Statements, Guarantees for further discussion.
(m) Income Taxes
ARRIS uses the liability method of accounting for income taxes, which requires recognition of temporary differences between financial
statement and income tax bases of assets and liabilities, measured by enacted tax rates.
If necessary, the measurement of
deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on available evidence. ARRIS reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be
taken in a tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
There is significant uncertainty surrounding how much deferred income tax assets will ultimately arise from the acquisition of Motorola Home and be available for utilization by ARRIS. As of December
31, 2013, the Seller has not completed the preparation and the related filing of the final income tax returns for the income tax year ending with the acquisition by ARRIS on April 16, 2013. At this time, the Company has recorded its best
estimate of the deferred income tax assets, given the information that is currently available.
See Note 17 of Notes to the
Consolidated Financial Statements for further discussion.
(n) Foreign Currency Translation
A significant portion of the Companys products are manufactured or assembled in China, Mexico and Taiwan, and we
have research and development centers in China, India, Ireland, Israel, Russia and Sweden. Sales into international markets have been and are expected in the future to be an important part of the Companys business. These foreign operations are
subject to the usual risks inherent in conducting business abroad, including risks with respect to currency exchange rates, economic and political destabilization, restrictive actions and taxation by foreign governments, nationalization, the laws
and policies of the United States affecting trade, foreign investment and loans, and foreign tax laws.
ARRIS has certain
international customers who are billed in their local currency and certain predictable expenditures for international operations in local currency. Additionally, certain intercompany transactions created in conjunction with the Motorola Home
acquisition are denominated in foreign currencies and subject to
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revaluation. The Company uses a hedging strategy and enters into forward or currency option contracts based on a percentage of expected foreign currency exposures. The percentage can vary, based
on the predictability of the exposures denominated in the foreign currency. Currently, the Company has no outstanding foreign currency hedges.
(o) Israeli Severance Pay
The Companys
wholly-owned subsidiary located in Israel is required to fund future severance liabilities determined in accordance with Israeli severance pay laws. Under these laws, employees are entitled upon termination to one months salary for each year
of employment or portion thereof. The Company records compensation expense to accrue for these costs over the employment period, based on the assumption that the benefits to which the employee is entitled, if the employee separates immediately. The
Company funds the liability by monthly deposits in insurance policies and severance funds. The value of the severance fund assets are primarily recorded in other non-current assets on the Companys consolidated balance sheets, which was $3.6
million as of December 31, 2013 and $3.8 million as of December 31, 2012. The liability for long-term severance accrued on the Companys consolidated balance sheets was $3.9 million as of December 31, 2013 and
$4.2 million as of December 31, 2012.
(p) Stock-Based Compensation
See Note 19 of Notes to the Consolidated Financial Statements for further discussion of the Companys significant accounting policies
related to stock based compensation.
(q) Concentrations of Credit Risk
Financial instruments that potentially subject ARRIS to concentrations of credit risk consist principally of cash, cash equivalents and
short-term investments, and accounts receivable. ARRIS places its temporary cash investments with high credit quality financial institutions. Concentrations with respect to accounts receivable occur as the Company sells primarily to large,
well-established companies including companies outside of the United States. The Companys credit policy generally does not require collateral from its customers. ARRIS closely monitors extensions of credit to other parties and, where
necessary, utilizes common financial instruments to mitigate risk or requires cash on delivery terms. Overall financial strategies and the effect of using a hedge are reviewed periodically. When deemed uncollectible, accounts receivable balances are
written off against the allowance for doubtful accounts.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
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Cash, cash equivalents, and short-term investments: The carrying amounts reported in the consolidated balance sheets for cash, cash equivalents, and
short-term investments approximate their fair values.
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Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate
their fair values. The Company establishes a reserve for doubtful accounts based upon its historical experience in collecting accounts receivable.
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Marketable securities: The fair values for trading and available-for-sale equity securities are based on quoted market prices or observable prices
based on inputs not in active markets but corroborated by market data.
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Non-marketable securities: Non-marketable equity securities are subject to a periodic impairment review; however, there are no open-market valuations,
and the impairment analysis requires significant judgment. This analysis includes assessment of the investees financial condition, the business outlook for its products and technology, its projected results and cash flow, recent rounds of
financing, and the likelihood of obtaining subsequent rounds of financing.
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Senior secured credit facilities: Comprised of term loans and revolving credit facility. The face value of the Companys term loans totaled
approximately $1,752.6 million at December 31, 2013.
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Derivative instruments: The carrying amounts reported in the balance sheet for derivative financial instruments approximate their fair values. The
Company has designated these instruments as cash flow hedges and the objective was to manage the variability of cash flows in the interest payments related to the portion of the variable-rate debt designated as being hedged.
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(r) Computer Software
The Company capitalizes costs associated with internally developed and/or purchased software systems for internal use that have reached
the application development stage and meet recoverability tests. Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software and payroll and payroll-related expenses for
employees who are directly associated with and devote time to the internal-use software project. Capitalization of such costs begins when the preliminary project stage is complete and ceases no later than the point at which the project is
substantially complete and ready for its intended purpose. These capitalized costs are amortized on a straight-line basis over periods of two to seven years, beginning when the asset is ready for its intended use. Capitalized costs are included in
property, plant, and equipment on the consolidated balance sheets. The carrying value of the software is reviewed regularly and impairment is recognized if the value of the estimated undiscounted cash flow benefits related to the asset is less than
the remaining unamortized costs.
Research and development costs are charged to expense as incurred. ARRIS generally has not
capitalized any such development costs because the costs incurred between the attainment of technological feasibility for the related software product through the date when the product is available for general release to customers has been
insignificant.
(s) Comprehensive Income (Loss)
The components of comprehensive income (loss) include net income (loss), unrealized gains (losses) on available-for-sale securities,
unrealized gains (losses) on derivative instruments, change in unfunded pension liability, net of tax, if applicable and change in cumulative translation adjustments. Comprehensive income (loss) is presented in the consolidated statements of
comprehensive income (loss).
Note 3. Impact of Recently Issued Accounting Standards
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.
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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 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.
In December 2013,
the FASB issued an accounting standard update which amends the Master Glossary of the FASB Accounting Standards Codification to provide entities with a single definition of a Public Business Entity for use in future financial accounting and
reporting guidance beginning in 2014.
Accounting pronouncements issued but not in effect until after December 31, 2013
are not expected to have a significant impact on our consolidated financial position or results of operations.
Note 4. 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, significantly 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.
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 15
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.
85
The following table summarizes the 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
|
|
(9,170
|
)
|
|
|
270,392
|
|
Deferred income tax assets
(c)
|
|
|
370,543
|
|
|
|
3,738
|
|
|
|
374,281
|
|
Other assets
|
|
|
153,094
|
|
|
|
14,684
|
|
|
|
167,778
|
|
Property, plant & equipment
(d)
|
|
|
350,547
|
|
|
|
(10,161
|
)
|
|
|
340,386
|
|
Intangible assets
(e)
|
|
|
1,343,400
|
|
|
|
(104,200
|
)
|
|
|
1,239,200
|
|
Accounts payable
|
|
|
(349,235
|
)
|
|
|
|
|
|
|
(349,235
|
)
|
Deferred revenue
|
|
|
(27,797
|
)
|
|
|
|
|
|
|
(27,797
|
)
|
Other liabilities
(f)
|
|
|
(324,852
|
)
|
|
|
(21,867
|
)
|
|
|
(346,719
|
)
|
Deferred tax liability
(c)
|
|
|
(534,479
|
)
|
|
|
43,977
|
|
|
|
(490,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets acquired
|
|
|
1,722,945
|
|
|
|
(82,999
|
)
|
|
|
1,639,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
(g)
|
|
$
|
613,227
|
|
|
$
|
131,351
|
|
|
$
|
744,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 property, plant & equipment costs to reflect updated fair values of acquired personal property that existed as of the
acquisition date.
|
(e)
|
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.
|
(f)
|
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, as well as adjustment for certain foreign pension obligations.
|
86
(g)
|
Goodwill recognized as of the Acquisition date (as adjusted) totaled $744.6 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 5
Goodwill and Intangible Assets
for
additional details). These amounts are not yet finalized and are subject to change. With the exception of $77.6 million of goodwill that retains its tax basis after the acquisition, the remaining portion of the $744.6 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.
|
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. ARRIS 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 December 31, 2013, the initial accounting the following item is subject to change:
|
|
|
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.
|
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 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. Additionally, significant uncertainty remains with regard to how much U.S. Federal and State deferred income tax assets will ultimately arise from the acquisition
of Motorola Home and be realized by ARRIS. Google, Inc. has not yet filed all income tax returns due for the tax period ending with this acquisition on April 16, 2013, and has yet to finalize certain very complex calculations that materially
impact the deferred tax assets that ARRIS could ultimately realize. At this time, the Company believes that it has recorded its best available estimate regarding these deferred income tax assets, given the information that is currently
available. However, it is possible that the amount of deferred income tax assets ultimately recorded by ARRIS will be materially different from the amounts recorded today.
The $1.2 billion of acquired intangible assets were assigned to the following (in thousands):
|
|
|
|
|
|
|
|
|
Fair value
|
|
|
Estimated Weighted
Average Life (years)
|
Customer relationships
|
|
$
|
653,400
|
|
|
8
|
Developed technology and patents
|
|
|
439,300
|
|
|
6
|
In process R&D
|
|
|
83,100
|
|
|
indefinite
|
Backlog
|
|
|
44,600
|
|
|
1
|
Trademark / trade name
|
|
|
18,800
|
|
|
1
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,239,200
|
|
|
|
|
|
|
|
|
|
|
As part of the Acquisition, the Company acquired outright 991 technology patents or pending applications
(the Patents), the durations are adequate relative to the expected useful lives of our products.
The 991
patents acquired increased the number of patents owned by the Company to approximately 2,000. The Company determined that the acquired patents have estimated useful lives similar to the developed technology product lines to which they are
associated. As such, the Company has recognized and measured the Patents and developed technology together as one unit of account for each technology product line acquired. A separate
87
estimated useful life was determined for each technology product line, for which amortization will be recognized. It was determined that a small number of patents were associated with
discontinued or never deployed technologies for which no revenues are expected. These Patents were assigned a nominal value. ARRIS also obtained a license to certain patents. These patents included:
|
(i)
|
2,173 patents that are subject to a broad license that permits us to use the patents in any manner ARRIS deems appropriate with respect to new products developed by
ARRIS (the Broad Use Patents); and
|
|
(ii)
|
approximately 17,000 patents that are subject to a license that only permits us to use the technology in existing products and future products in the same field as the
existing business (collectively with the Broad Use Patents, the Licensed Patents).
|
The Company
determined there was no incremental value in the Licensed Patents apart from that already embedded in the value of the technology. As a result, the value of the Licensed Patents has been captured as part of the technology valuations similar to the
acquired patents.
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 23
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.
As a result of the Acquisition, ARRIS acquired investments in two limited liability corporations
in which the Company is a party to with Comcast. The investees were determined to be variable interest entities of which ARRIS is not the primary beneficiary, as ARRIS does not have the power to direct the activities of the investee that most
significantly impact its economic performance. The limited liability corporations are licensing and research and development companies. The Companys ownership percentages in the licensing and the research and development corporation are 49%
and 50%, respectively, which are accounted for as equity method investments. The purpose of the limited liability corporations are to license, develop, deploy, support, and to gain market acceptance for certain technologies that reside in a cable
plant or in a cable device. Subject to agreement on annual statements of work, the Company is providing to one of the ventures, engineering services per year approximating 20% to 30% of the approved venture budget, which is expected to be in the
range of approximately $6 million to $8 million per year. The Company is also required to make annual contributions for the purpose of funding development projects identified by the venture. During 2013, the Company made funding contributions to the
investment of $8.1 million.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Carrying Value
|
|
|
Maximum Exposure
to Loss
|
|
Conditional Access Licensing (CAL)
|
|
$
|
6,476
|
|
|
$
|
6,476
|
|
Combined Conditional Access Development (CCAD)
|
|
|
5,886
|
|
|
|
18,000
|
|
The Companys future total annual funding contributions to CCAD are expected to be in the range of
approximately $16 million to $18 million, and represent the Companys annual maximum exposure to loss.
The Company
incurred acquisition related costs of $18.6 million for the year ended December 31, 2013. These amounts were expensed by the Company as incurred and are included in the Consolidated Statement of Operations in the line item titled
Acquisition, integration and other costs.
The Motorola Home business contributed revenues of approximately $2,138
million to our consolidated results from the date of Acquisition through December 31, 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.
88
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
unaudited pro forma net loss for the year ended December 31, 2013 was adjusted to exclude $18.6 million of acquisition related costs and $48.4 million of expense related to the fair value adjustment to acquisition-date inventory. Unaudited pro
forma net loss for the year ended December 31, 2012 was adjusted to include these charges. In addition, unaudited pro forma net loss for the year ended December 31, 2012 includes $11.0 million reduction in revenue related to the fair value
adjustment to deferred revenue. These adjustments exclude the income tax impact.
Unaudited Supplemental Pro Forma
Information
For the years ended December 31,
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Net sales
|
|
$
|
4,426,576
|
|
|
$
|
4,685,648
|
|
Net income (loss)
|
|
|
(108,548
|
)
|
|
|
(142,489
|
)
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.79
|
)
|
|
$
|
(1.05
|
)
|
Diluted
|
|
$
|
(0.79
|
)
|
|
$
|
(1.05
|
)
|
These pro forma results are based on estimates and assumptions that the Company believes are reasonable.
Note 5. Goodwill and Intangible Assets
Goodwill relates to the excess of consideration transferred over the fair value of net assets resulting from an
acquisition. Our goodwill is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset is more likely than not impaired. Our annual goodwill impairment test is performed in the fourth
quarter, with a testing date of October 1.
As of December 31, 2013, the Company has recorded goodwill of $935.6
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 11
Segment
Information
). The Company did not operate under the realigned operating segment structure prior to the second quarter of 2013. This change in segments also resulted in a change in our reporting units resulting in a reassignment of
goodwill amongst some of the Companys reporting units. Prior period segment 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.
For goodwill, the Company performs a quantitative two-step impairment test. In the first step, the Company compares the fair value of each
reporting unit to its carrying amount. The Company determines the fair value of each reporting unit using a weighting of fair values derived from an income approach using discounted cash flows and a market approach. Under the income approach, the
Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. The discounted cash flow analysis requires us to make various judgmental assumptions, including assumptions about future cash flows,
growth rates and weighted average cost of capital (discount rate). The assumptions about future cash flows and growth rates are based on the current and long-term business plans of each reporting unit. Discount rate assumptions are based on an
assessment of the risk inherent in the future cash flows of the respective reporting units. Under the market approach, the Company estimates the fair value based upon Market multiples of revenue and earnings derived from publicly traded companies
with similar operating and investment characteristics as the reporting unit. The weighting
89
of the fair value derived from the market approach ranges from 0% to 50% depending on the level of comparability of these publicly-traded companies to the reporting unit. When market comparables
are not meaningful or not available, the Company may estimate the fair value of a reporting unit using only the income approach. The Company considers the relative strengths and weaknesses inherent in the valuation methodologies utilized in each
approach and consults with a third party valuation specialist to assist in determining the appropriate weighting.
In order to
assess the reasonableness of the calculated fair values of our reporting units, the Company also compares the sum of the reporting units fair values to its market capitalization and calculates an implied control premium (the excess of the sum
of the reporting units fair values over the market capitalization). The Company evaluates the control premium by comparing it to the fair value estimates of the reporting unit. If the implied control premium is not reasonable in light of the
analysis, the Company will reevaluate the fair value estimates of the reporting unit by adjusting the discount rates and/or other assumptions. If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to that
unit, goodwill is not impaired, and no further testing is required. If the fair value of the reporting unit is less than the carrying amount, we must perform the second step of the impairment test to measure the amount of impairment loss, if any. In
the second step, the reporting units fair value is assigned to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill
in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting units goodwill is less than the carrying amount, the difference is recorded as an impairment loss.
The valuation methodologies described above have been consistently applied for all years presented below. See Part II, Item 7
Critical Accounting Policies for further information regarding the Companys goodwill impairment testing.
There was no
impairment of goodwill resulting from our annual impairment testing in 2013 and 2012. In 2011, a goodwill-impairment charge of $41.2 million before tax ($33.9 million after tax) was recorded for the former MCS reporting unit (now included as part of
the Cloud Services reporting unit.) The Company performed a sensitivity analysis for goodwill impairment with respect to each of our respective reporting units and determined that neither a hypothetical 10% decline in the fair value, nor a 100 basis
point increase in the discount rate, nor a 100 basis point decrease in the terminal growth rate of each of reporting units as of October 1, 2013 would result in an impairment of goodwill for any reporting unit.
During 2013, the Company recorded additional goodwill of $744.6 million related to the Acquisition. The Company has assigned the assets
and liabilities acquired to each of its identified reporting units.
90
The changes in the carrying amount of goodwill for the year ended December 31, 2013 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
Network
Infrastructure
|
|
|
Cloud
Services
|
|
|
Total
|
|
Goodwill
|
|
$
|
31,850
|
|
|
$
|
419,745
|
|
|
$
|
121,603
|
|
|
$
|
573,198
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(257,053
|
)
|
|
|
(121,603
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2011
(1)
|
|
|
31,850
|
|
|
|
162,692
|
|
|
|
|
|
|
|
194,542
|
|
Adjustment to net deferred taxes C-COR
|
|
|
|
|
|
|
(1,188
|
)
|
|
|
|
|
|
|
(1,188
|
)
|
Adjustment to net deferred taxes BigBand
|
|
|
|
|
|
|
761
|
|
|
|
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
31,850
|
|
|
|
419,318
|
|
|
|
121,603
|
|
|
|
572,771
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(257,053
|
)
|
|
|
(121,603
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
(1)
|
|
|
31,850
|
|
|
|
162,265
|
|
|
|
|
|
|
|
194,115
|
|
Goodwill acquired
|
|
|
653,191
|
|
|
|
80,524
|
|
|
|
10,863
|
|
|
|
744,578
|
|
Adjustment to net deferred taxes C-COR
|
|
|
|
|
|
|
(380
|
)
|
|
|
|
|
|
|
(380
|
)
|
Adjustment to net deferred taxes BigBand
|
|
|
|
|
|
|
(2,734
|
)
|
|
|
|
|
|
|
(2,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
685,041
|
|
|
|
496,728
|
|
|
|
132,466
|
|
|
|
1,314,235
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(257,053
|
)
|
|
|
(121,603
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
685,041
|
|
|
$
|
239,675
|
|
|
$
|
10,863
|
|
|
$
|
935,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects retrospective reassignment of goodwill due to reorganization of segments and reporting unit structure.
|
Intangibles
The Company makes judgments about the recoverability of purchased intangible assets with finite lives whenever events or changes in circumstances indicate that impairment may exist. Examples of such
circumstances include, but are not limited to, operating or cash flow losses from the use of such assets or changes in our intended uses of such assets. Recoverability of purchased intangible assets with finite lives is measured by comparing the
carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. In determining future undiscounted cash flows, we have made a policy decision to use pre-tax cash flows in our evaluation, which is
consistently applied. To test for recovery, we group assets (an asset group) in a manner that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and
liabilities.
The Company reviews indefinite-lived assets for impairment annually or whenever events or changes in
circumstances indicate the carrying amount may not be recoverable. Recoverability of indefinite-lived intangible assets is measured by comparing the carrying amount of the asset to the future discounted cash flows the asset is expected to generate.
If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying amount and the fair value of the indefinite-lived intangible asset. As of December 31, 2013, the carrying amount of
in-process research and development was $71.1 million. Completion of the associated research and development efforts would cause the indefinite-lived in-process research and development asset to become a finite-lived asset. As such, prior to
commencing amortization the assets will be tested for impairment. Because indefinite-lived intangible assets are initially recognized at fair value, any decrease in the fair value of the intangible asset will result in an impairment charge. The
company uses discounted cash flows in the determination of the fair value of its indefinite-lived intangible assets. As such, a decrease in cash flows for the projects, as well as, an increase in interest rate changes affecting the discount
rate used in the test without any offsetting increase in cash flows, could cause the discounted cash flows to decrease, resulting in an impairment charge.
In 2013, the Company recognized acquired in-process research and development assets of $83.1 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,
91
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 2013,
acquired in-process research and development projects of $12 million were successfully completed. The Companys impairment testing of these projects determined no impairment existed with regard to the assets. The asset was then considered a
finite-lived intangible asset and reclassified as part of developed technology and amortization of the asset commenced.
In
2011, the Company recognized acquired in-process research and development assets of $7.8 million associated with the BigBand acquisition which was initially recognized at fair value and classified as indefinite-lived assets until the successful
completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition date, this asset was not amortized as a charge to earnings; instead these assets were subject to periodic
impairment testing. In 2012, upon successful completion of the development process for the acquired in-process research and development projects, the Company determined no impairment existed with regard to the asset. The asset was then considered a
finite-lived intangible asset and reclassified as part of developed technology and amortization of the asset commenced.
Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective.
They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts.
There was no impairment charges related to finite lived purchased intangible assets during 2013 and 2012, as no indicators of impairment
existed. In the fourth quarter of 2011, an impairment loss of $47.4 million before tax ($29.1 million after tax) related to customer relationships in the former MCS reporting unit (now included as part of the Cloud Services reporting unit) was
recorded. Our ongoing consideration of all the factors described previously could result in additional impairment charges in the future, which could adversely affect our net income.
The Companys intangible assets have an amortization period of six months to ten years. The gross carrying amount and accumulated
amortization of the Companys intangible assets as of December 31, 2013 and December 31, 2012 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
$
|
903,409
|
|
|
$
|
266,323
|
|
|
$
|
637,086
|
|
|
|
7.0
|
|
|
$
|
250,009
|
|
|
$
|
190,285
|
|
|
$
|
59,724
|
|
|
|
4.0
|
|
Developed technology, patents & licenses
|
|
|
563,326
|
|
|
|
120,679
|
|
|
|
442,647
|
|
|
|
5.0
|
|
|
|
77,769
|
|
|
|
42,964
|
|
|
|
34,805
|
|
|
|
4.4
|
|
Trademarks/trade names
|
|
|
20,900
|
|
|
|
8,549
|
|
|
|
12,351
|
|
|
|
1.5
|
|
|
|
257
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
Order backlog
|
|
|
44,600
|
|
|
|
31,592
|
|
|
|
13,008
|
|
|
|
0.3
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,162
|
|
|
|
3,162
|
|
|
|
|
|
|
|
|
|
In-process R&D
|
|
|
71,100
|
|
|
|
|
|
|
|
71,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,603,335
|
|
|
$
|
427,143
|
|
|
$
|
1,176,192
|
|
|
|
|
|
|
$
|
334,197
|
|
|
$
|
239,668
|
|
|
$
|
94,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on the intangible assets listed in the above table for the years ended
December 31, 2013, 2012 and 2011 was $193.6 million, $30.3 million, and $33.6 million, respectively. Amortization expense is reported in the consolidated statements of operations within operating expenses under the caption Amortization of
intangible assets. The estimated total amortization expense for finite-lived intangibles for each of the next five fiscal years is as follows (in thousands):
|
|
|
|
|
2014
|
|
$
|
224,363
|
|
2015
|
|
|
203,979
|
|
2016
|
|
|
173,251
|
|
2017
|
|
|
156,316
|
|
2018
|
|
|
117,362
|
|
Thereafter
|
|
|
229,821
|
|
92
Amounts reflected in the above table exclude $71.1 million of amortization that would be
incurred upon successful completion of in-process research and development projects.
Note 6. 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 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. 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 in Other expense (income), net in the Consolidated Statements of Operations.
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.
Note 7. Investments
ARRIS investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2013
|
|
|
As of December 31,
2012
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
67,360
|
|
|
$
|
398,414
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
7,004
|
|
|
|
59,549
|
|
Equity method investments
|
|
|
23,803
|
|
|
|
|
|
Cost method investments
|
|
|
15,250
|
|
|
|
6,000
|
|
Other investments
|
|
|
25,119
|
|
|
|
20,615
|
|
|
|
|
|
|
|
|
|
|
Total classified as non-current assets
|
|
|
71,176
|
|
|
|
86,164
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
138,536
|
|
|
$
|
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.
93
Unrealized gains and losses on available-for-sale securities are included in our Consolidated Balance Sheet as a component of accumulated other comprehensive income (loss). The total gains
included in the accumulated other comprehensive income related to available-for-sale securities were $0.3 million and $0.2 million, net of tax, as of December 31, 2013 and December 31, 2012, respectively. Realized and unrealized gains and
losses in total and by individual investment as of December 31, 2013 and 2012 were not material. The amortized cost basis of the Companys available-for-sale securities approximates fair value.
The contractual maturities of the Companys available-for-sale securities as of December 31, 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):
|
|
|
|
|
|
|
December 31, 2013
|
|
Within one year
|
|
$
|
67,360
|
|
After one year through five years
|
|
|
3,604
|
|
After five years through ten years
|
|
|
|
|
After ten years
|
|
|
3,400
|
|
|
|
|
|
|
Total
|
|
$
|
74,364
|
|
|
|
|
|
|
Equity method investments
In connection with the Acquisition, ARRIS acquired certain
investments in 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. These investments are recorded at
$23.8 million and $0 as of December 31, 2013 and 2012, respectively. The carrying amount of equity method investments is increased for the Companys proportionate share of net earnings or losses and any basis differences of the investees, or
dividend received. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of such investments may not be recoverable. An equity method investment is written
down to fair value if there is evidence of a loss in value which is other than temporary.
The following table summarizes the
ownership structure and ownership percentage of the non-consolidated investments as of December 31, 2013, which are accounted for using the equity method.
|
|
|
|
|
Name of Investee
|
|
Ownership Structure
|
|
% Ownership
|
MPEG LA
|
|
Limited Liability Company
|
|
8.4%
|
Music Choice
|
|
Limited Liability Partnership
|
|
18.2%
|
Conditional Access Licensing
|
|
Limited Liability Company
|
|
49.0%
|
Combined Conditional Access Development
|
|
Limited Liability Company
|
|
50.0%
|
Cost method investments
ARRIS holds cost method investments in private companies. These
investments are recorded at $15.3 million and $6.0 million as of December 31, 2013 and 2012, respectively. Due to the fact the investments are in private companies, the Company is exempt from estimating the fair value on an interim and annual
basis. It is impractical to estimate the fair value since the quoted market price is not available. Furthermore, the cost of obtaining an independent valuation appears excessive considering the materiality of the investments to the Company. However,
ARRIS is required to estimate the fair value if there has been an identifiable event or change in circumstance that may have a significant adverse effect on the fair value of the investment.
Other investments
At December 31, 2013 and December 31, 2012, ARRIS held $25.1 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.
94
Other-Than-Temporary Investment Impairments
ARRIS concluded that no
other-than-temporary impairment losses existed as of December 31, 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.
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.
Note 8. Fair Value Measurements
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of 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 (excluding equity and cost method investments) measured at fair value on a recurring basis as of December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
3,814
|
|
|
$
|
|
|
|
$
|
3,814
|
|
Commercial paper
|
|
|
|
|
|
|
2,994
|
|
|
|
|
|
|
|
2,994
|
|
Corporate bonds
|
|
|
|
|
|
|
30,987
|
|
|
|
|
|
|
|
30,987
|
|
Short-term bond fund
|
|
|
29,565
|
|
|
|
|
|
|
|
|
|
|
|
29,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,565
|
|
|
|
37,795
|
|
|
|
|
|
|
|
67,360
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash surrender value of company owned life insurance
|
|
|
|
|
|
|
25,119
|
|
|
|
|
|
|
|
25,119
|
|
Corporate bonds
|
|
|
|
|
|
|
3,604
|
|
|
|
|
|
|
|
3,604
|
|
Corporate obligations
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
Money markets
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
212
|
|
Mutual funds
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
184
|
|
Other investments
|
|
|
|
|
|
|
2,986
|
|
|
|
|
|
|
|
2,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396
|
|
|
|
31,727
|
|
|
|
|
|
|
|
32,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
29,961
|
|
|
$
|
69,522
|
|
|
$
|
|
|
|
$
|
99,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
The following table presents the Companys investment assets (excluding equity and lost
method investments) 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 $3.6 million and $3.8 million as of December 31, 2013 and December 31, 2012, respectively.
All of the Companys short-term and long-term investments at December 31, 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 and municipal bonds. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other
observable inputs include the Companys cash surrender value of company owned life insurance, corporate obligations and bonds, commercial paper and certificates of deposit. Such instruments are classified within Level 2 of the fair value
hierarchy.
In determining the value of certain Level 1 and Level 2 instruments, ARRIS has performed steps to verify the
accuracy of the valuations provided by ARRIS brokerage firms. ARRIS has reviewed the most recent Statement on Standards for Attestation Engagements No. 16 (SSAE report) for each brokerage firm holding investments for ARRIS. The SSAE
report for each did not identify any control weakness in the brokerages policies and procedures, in particular as they relate to the pricing and valuation of financial instruments. ARRIS has determined the third party pricing source used by
each firm to be a reliable recognized source of financial valuations. In addition ARRIS has performed further testing on a large sample of its corporate obligations and commercial paper investments. These tests did not show any material
discrepancies in the valuations provided by the brokerage firms. It is the Companys intent to continue to verify valuations on a quarterly basis, using one or more reliable recognized third party pricing providers. See Note 7 and Note 9 for
further information on the Companys investments and derivative instruments.
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 (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 December 31, 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.
96
The face value of debt as of December 31, 2013 approximated the fair value.
Note 9. 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.
The Companys foreign currency derivative financial 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.
97
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 year ended December 31, 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 December 31, 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 year ended December 31, 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
|
|
$
|
(7,140
|
)
|
|
|
Interest expense
|
|
|
$
|
(3,132
|
)
|
|
$
|
|
|
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 December 31, 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 $4.1 million. As of December 31, 2013, the Company has not posted any collateral related to these agreements nor has it required any of its counterparties to post
collateral related to these or any other 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).
98
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. Although the derivative
contracts that the Company has entered into are subject to master netting arrangements, there are no possible offsets as only a single derivative contract has been entered into with each of ARRIS counterparties.
The fair values of ARRIS derivative instruments recorded in the Consolidated Balance Sheet as of December 31, 2013 and 2012
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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
|
|
$
|
3,011
|
|
|
Other assets
|
|
$
|
|
|
Interest rate derivatives liability derivatives
|
|
Other accrued liabilities
|
|
$
|
7,018
|
|
|
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 2 under the fair value hierarchy.
The change in the fair values of ARRIS derivative instruments recorded in the Consolidated Statements of Operations during the years ended December 31, 2013, 2012, and 2011 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
Statement of Operations Location
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Derivatives not designated as hedging instruments
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Gain on foreign currency
|
|
$
|
428
|
|
|
$
|
268
|
|
|
$
|
809
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates derivatives
|
|
Interest expense
|
|
$
|
3,132
|
|
|
$
|
|
|
|
$
|
|
|
ARRIS performs additional testing, on a quarterly basis, of the valuations provided by the financial
institutions who are counter-parties to the derivative positions. This testing, to date, has not shown any material or significant differences to the valuations reported by the counter-party financial institutions.
Note 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
99
problem is identified. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers, the estimated
warranty obligation could be affected by changes in ongoing product failure rates, material usage and service delivery costs incurred in correcting a product failure, as well as specific product failures outside of ARRIS baseline experience.
If actual product failure rates, material usage or service delivery costs differ from estimates, revisions (which could be material) would be recorded against the warranty liability.
The Company offers extended warranties and support service agreements on certain products. Revenue from these agreements is deferred at
the time of the sale and recognized on a straight-line basis over the contract period. Costs of services performed under these types of contracts are charged to expense as incurred, which approximates the timing of the revenue stream.
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 and fourth quarter of 2013, the Company recorded an increase of $19.4 million and a decrease of $2.1 million, respectively, 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 years ending December 31, 2013 and 2012 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
January 1,
|
|
$
|
6,069
|
|
|
$
|
6,387
|
|
Motorola Home warranty reserve at acquisition,
|
|
|
82,804
|
|
|
|
|
|
Accruals related to warranties (including changes in assumptions)
|
|
|
20,911
|
|
|
|
3,125
|
|
Settlements made (in cash or in kind)
|
|
|
(28,284
|
)
|
|
|
(3,443
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
81,500
|
|
|
$
|
6,069
|
|
|
|
|
|
|
|
|
|
|
Note 11. 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 & 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
|
100
|
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 home office 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 presents information about the
Companys reportable segments for the years ended December 31, 2013, 2012 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
Network &
Cloud
|
|
|
CPE
|
|
|
Other
|
|
|
Consolidated
|
|
Year ended December 31, 2013,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
1,174,757
|
|
|
$
|
2,466,618
|
|
|
$
|
(20,473
|
)
|
|
$
|
3,620,902
|
|
Direct Contribution
|
|
|
258,336
|
|
|
|
482,519
|
|
|
|
(482,184
|
)
|
|
|
258,671
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
37,576
|
|
|
|
37,576
|
|
Acquisition, integration & other costs
|
|
|
|
|
|
|
|
|
|
|
45,471
|
|
|
|
45,471
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
193,637
|
|
|
|
193,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,013
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(96,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
Network &
Cloud
|
|
|
CPE
|
|
|
Other
|
|
|
Consolidated
|
|
Year ended December 31, 2012,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
742,255
|
|
|
$
|
611,408
|
|
|
$
|
|
|
|
$
|
1,353,663
|
|
Direct Contribution
|
|
|
228,798
|
|
|
|
66,788
|
|
|
|
(165,053
|
)
|
|
|
130,533
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
6,761
|
|
|
|
6,761
|
|
Acquisition, integration & other costs
|
|
|
|
|
|
|
|
|
|
|
6,207
|
|
|
|
6,207
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
30,294
|
|
|
|
30,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,271
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
Network &
Cloud
|
|
|
CPE
|
|
|
Other
|
|
|
Consolidated
|
|
Year ended December 31, 2011,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
702,997
|
|
|
$
|
382,424
|
|
|
$
|
3,264
|
|
|
$
|
1,088,685
|
|
Direct Contribution
|
|
|
244,540
|
|
|
|
12,973
|
|
|
|
(142,274
|
)
|
|
|
115,239
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
4,360
|
|
|
|
4,360
|
|
Acquisition, integration & other costs
|
|
|
|
|
|
|
|
|
|
|
3,205
|
|
|
|
3,205
|
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
88,633
|
|
|
|
88,633
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
33,649
|
|
|
|
33,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,608
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(28,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys net intangible assets and goodwill by reportable segment
as of December 31, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network &
Cloud
|
|
|
CPE
|
|
|
Total
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
250,538
|
|
|
$
|
685,041
|
|
|
$
|
935,579
|
|
Intangible assets, net
|
|
|
366,844
|
|
|
|
809,348
|
|
|
|
1,176,192
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
162,265
|
|
|
$
|
31,850
|
|
|
$
|
194,115
|
|
Intangible assets, net
|
|
|
94,529
|
|
|
|
|
|
|
|
94,529
|
|
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 the
affiliates under common control. The significant changes in the percentages of the total sales primarily result from the greater customer diversification as a result of the Acquisition. A summary of sales to these customers for 2013, 2012 and 2011
is set forth below (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Comcast and affiliates
|
|
$
|
674,964
|
|
|
$
|
421,173
|
|
|
$
|
286,139
|
|
% of sales
|
|
|
18.6
|
%
|
|
|
31.1
|
%
|
|
|
26.4
|
%
|
|
|
|
|
Time Warner Cable and affiliates
|
|
$
|
359,484
|
|
|
$
|
243,151
|
|
|
$
|
180,740
|
|
% of sales
|
|
|
9.9
|
%
|
|
|
18.0
|
%
|
|
|
16.7
|
%
|
|
|
|
|
Verizon
|
|
$
|
358,653
|
|
|
$
|
5,219
|
|
|
$
|
454
|
|
% of sales
|
|
|
9.9
|
%
|
|
|
0.4
|
%
|
|
|
|
%
|
102
ARRIS sells its products primarily in the United States. The Companys international
revenue is generated from Asia Pacific, Canada, Europe and Latin America. Sales to international customers were approximately 32.1%, 24.6% and 31.3% of total sales for the years ended December 31, 2013, 2012 and 2011, respectively.
International sales for the years ended December 31, 2013, 2012 and 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Americas, excluding U.S
(1)
|
|
$
|
746,146
|
|
|
$
|
202,887
|
|
|
$
|
195,500
|
|
Asia Pacific
|
|
|
153,674
|
|
|
|
65,554
|
|
|
|
59,194
|
|
EMEA
|
|
|
263,910
|
|
|
|
65,162
|
|
|
|
85,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international sales
|
|
$
|
1,163,730
|
|
|
$
|
333,603
|
|
|
$
|
340,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes U.S. sales of $2,457.2 million, $1,020.1 million and $748.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.
|
The following table summarizes ARRIS international long-lived assets by geographic region as of
December 31, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Americas, excluding U.S.
|
|
$
|
7,467
|
|
|
$
|
354
|
|
Asia Pacific
|
|
|
82,495
|
|
|
|
1,847
|
|
EMEA
|
|
|
10,115
|
|
|
|
2,549
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,077
|
|
|
$
|
4,750
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes U.S. long-lived assets of $296.1 million and $49.6 million for the years ended December 31, 2013 and 2012, respectively.
|
Note 12. 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
|
|
|
30,774
|
|
|
|
41
|
|
|
|
6,761
|
|
|
|
37,576
|
|
Cash payments
|
|
|
(28,100
|
)
|
|
|
(686
|
)
|
|
|
|
|
|
|
(28,786
|
)
|
Non-cash expense
|
|
|
|
|
|
|
|
|
|
|
(6,761
|
)
|
|
|
(6,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
2,674
|
|
|
$
|
673
|
|
|
$
|
|
|
|
$
|
3,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $30.8 million and was recorded as severance expense during 2013. As
of December 31, 2013, the total liability remaining for this restructuring plan was approximately $2.7 million. The remaining liability is expected to be paid by the end of third quarter 2014.
Contractual obligations
ARRIS has restructuring accruals representing contractual obligations that relate to excess leased
facilities and equipment.
103
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 December 31, 2013, the total liability
remaining for this restructuring plan was approximately $0.4 million. Payments will be made over their remaining lease terms through 2014, unless terminated earlier. This restructuring plan was related to the Network & 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 December 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 & 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. This restructuring plan was
completed in the fourth quarter of 2013. 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 & Cloud segment and Corporate.
Note 13. Inventories
Inventories are stated at the lower of average cost, approximating first-in, first-out, or market. The components of
inventory are as follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Raw material
|
|
$
|
60,520
|
|
|
$
|
24,798
|
|
Work in process
|
|
|
6,010
|
|
|
|
2,800
|
|
Finished goods
|
|
|
263,599
|
|
|
|
106,250
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
330,129
|
|
|
$
|
133,848
|
|
|
|
|
|
|
|
|
|
|
Note 14. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Land
|
|
$
|
88,742
|
|
|
$
|
2,562
|
|
Buildings and leasehold improvements
|
|
|
133,668
|
|
|
|
25,995
|
|
Machinery and equipment
|
|
|
368,572
|
|
|
|
177,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
590,982
|
|
|
|
206,214
|
|
Less: Accumulated depreciation
|
|
|
(194,830
|
)
|
|
|
(151,836
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
396,152
|
|
|
$
|
54,378
|
|
|
|
|
|
|
|
|
|
|
104
Note 15. 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 Motorola Home acquisition, holders of the senior 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 and (ii) to convert the senior notes for the
consideration provided for in the indenture governing the senior notes.
In the second quarter of 2013, senior notes in the
aggregate principal amount of $68 thousand were tendered in connection with this repurchase right, and $68 thousand of cash-on-hand was used to repurchase these notes. Also in the second quarter of 2013, eleven notes were submitted for conversion,
and $11 thousand of cash-on-hand was used to satisfy ARRIS obligations on these notes. Following the repurchases and conversions, $232.0 million in aggregate principal amount of the senior notes remain outstanding.
In October 2013, ARRIS notified holders of the senior notes that it would redeem all outstanding notes (the Redemption) on
November 15, 2013 (the Redemption Date) for cash at a price equal to 100% of the outstanding aggregate principal amount of the notes (the Redemption Price). The Redemption Price did not include the interest accrued
up to November 15, 2013, which was paid to the holders of the notes of record as of November 1, 2013.
The Notes were
convertible at the option of the holders from October 15, 2013 until November 15, 2013 for the consideration specified in the Indenture (the Conversion Option). Holders of the Notes had an option to require the Company to
purchase the Notes for par value on November 15, 2013 (the Put Option). Any Notes not surrendered pursuant to the Put Option or the Conversion Option would be redeemed on November 15, 2013 (Redemption Option).
During the fourth quarter of 2013, pursuant to the Put Option the Company repurchased $30 thousand of the Notes.
Pursuant to the Conversion Option, the Notes were convertible at the option of the holders from October 15, 2013 to November 15, 2013. Upon conversion, the holders of the converted Notes received the consideration as specified
in the Indenture. As of November 15, 2013, Notes of $231.2 million were surrendered for conversion. Pursuant to the Net Share Settlement provision of the Indenture, we redeemed the Notes for $231.2 million in cash consideration and issued
3.1 million shares of common stock to the Note holders. The Company redeemed the remaining Notes pursuant to the Redemption Option for $744 thousand.
The Company has not paid cash dividends on its common stock since its inception.
105
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 December 31, 2013, ARRIS had $1,752.6 million
face value outstanding under the Term Loan A and Term Loan B Facilities, no borrowings under the Revolving Credit Facility and letters of credit totaling $2.5 million issued under the Revolving Credit Facility.
|
|
|
|
|
|
|
|
|
Rate
|
|
As of December 31, 2013
|
|
Term Loan A
|
|
LIBOR + 2.25%
|
|
|
2.42
|
%
|
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 0.50% and letter of credit fee of 2.25% 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 December 31, 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.
During the year
ended December 31, 2013, the Company made mandatory prepayments of approximately $47.4 million and optional prepayments of approximately $125.0 million related to the senior secured credit facilities. As of December 31, 2013, the balance
for the senior secured credit facilities was $1,752.6 million.
Following is a summary of our contractual debt obligations as
of December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Less than
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More than
5 Years
|
|
|
Total
|
|
Credit facilities
|
|
$
|
55,000
|
|
|
$
|
178,750
|
|
|
$
|
825,000
|
|
|
$
|
693,813
|
|
|
$
|
1,752,563
|
|
106
Note 16. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share
computations for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(48,760
|
)
|
|
$
|
53,459
|
|
|
$
|
(17,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
131,980
|
|
|
|
114,161
|
|
|
|
120,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.37
|
)
|
|
$
|
0.47
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(48,760
|
)
|
|
$
|
53,459
|
|
|
$
|
(17,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
131,980
|
|
|
|
114,161
|
|
|
|
120,157
|
|
Net effect of dilutive shares
|
|
|
|
|
|
|
2,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
131,980
|
|
|
|
116,514
|
|
|
|
120,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.37
|
)
|
|
$
|
0.46
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 15
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 in 2012 and 2011 was less than the conversion price, and consequently, did not result in dilution. During the first quarter of 2013 and pre-conversion period during
the fourth quarter of 2013, the average share price was greater than the conversion price. The impact of the dilutive effect of the convertible debt in diluted EPS should be included when the average stock price exceeds the conversion price, even
though the market price trigger has not been met. However, the basic shares were used for the year ended December 31, 2013 as a net loss was reported and the inclusion of dilutive shares would be antidilutive.
For the year ended December 31, 2013, 2012 and 2011, approximately 1.1 million, 1.7 million and 3.6 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. 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 twelve months ended December 31, 2013, the Company issued 3.6 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. The Comcast transaction was consummated on the same day as the
Acquisition. (See Note 4 Business Acquisitions and Note 6 Comcast Investment in ARRIS for additional details)
107
The Company issued 3.1 million shares of its common stock in the fourth quarter of 2013
in conjunction with redeeming its 2% Convertible Notes. (See Note 15,
Long-Term Indebtedness
)
Note 17. Income Taxes
Income before income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Domestic
|
|
$
|
(128,588
|
)
|
|
$
|
67,620
|
|
|
$
|
(32,759
|
)
|
Foreign
|
|
|
32,438
|
|
|
|
6,676
|
|
|
|
4,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(96,150
|
)
|
|
$
|
74,296
|
|
|
$
|
(28,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current Federal
|
|
$
|
(5,133
|
)
|
|
$
|
26,196
|
|
|
$
|
20,901
|
|
State
|
|
|
(40
|
)
|
|
|
3,440
|
|
|
|
2,223
|
|
Foreign
|
|
|
10,624
|
|
|
|
4,855
|
|
|
|
2,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,451
|
|
|
|
34,491
|
|
|
|
25,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Federal
|
|
|
(50,485
|
)
|
|
|
(10,522
|
)
|
|
|
(31,084
|
)
|
State
|
|
|
(2,189
|
)
|
|
|
(2,238
|
)
|
|
|
(6,358
|
)
|
Foreign
|
|
|
(167
|
)
|
|
|
(894
|
)
|
|
|
1,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,841
|
)
|
|
|
(13,654
|
)
|
|
|
(36,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(47,390
|
)
|
|
$
|
20,837
|
|
|
$
|
(10,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax rate of 35% and the effective income tax rates is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Statutory federal income tax expense (benefit)
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
Effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
(2.2
|
)
|
|
|
1.4
|
|
|
|
(6.5
|
)
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
27.4
|
|
Domestic manufacturing deduction
|
|
|
(1.1
|
)
|
|
|
(4.0
|
)
|
|
|
(9.6
|
)
|
Changes in valuation allowance
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
(8.0
|
)
|
Comcast Revenue Recognition
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
Non-deductible officer compensation
|
|
|
0.5
|
|
|
|
1.0
|
|
|
|
2.4
|
|
Foreign taxes on U.S. entities less foreign tax credits
|
|
|
(1.3
|
)
|
|
|
(0.4
|
)
|
|
|
2.5
|
|
Facilitative acquisition costs
|
|
|
3.5
|
|
|
|
|
|
|
|
4.1
|
|
Research and development tax credits
|
|
|
(26.8
|
)
|
|
|
(4.8
|
)
|
|
|
(20.0
|
)
|
Other, net
|
|
|
3.5
|
|
|
|
0.6
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49.3
|
)%
|
|
|
28.1
|
%
|
|
|
(38.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
Deferred income taxes reflect the net tax effects of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of ARRIS net deferred income tax assets (liabilities) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
|
Inventory costs
|
|
$
|
31,068
|
|
|
$
|
6,407
|
|
Federal research and development credits
|
|
|
5,472
|
|
|
|
806
|
|
Federal/state net operating loss carryforwards
|
|
|
3,336
|
|
|
|
3,876
|
|
Foreign net operating loss carryforwards
|
|
|
1,593
|
|
|
|
205
|
|
Accrued vacation
|
|
|
7,175
|
|
|
|
1,592
|
|
Warranty reserve
|
|
|
18,292
|
|
|
|
781
|
|
Deferred revenue
|
|
|
19,988
|
|
|
|
14,938
|
|
Equity Compensation
|
|
|
10,243
|
|
|
|
|
|
Other, principally operating expenses
|
|
|
24,939
|
|
|
|
3,978
|
|
|
|
|
|
|
|
|
|
|
Total current deferred income tax assets
|
|
|
122,106
|
|
|
|
32,583
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred income tax assets:
|
|
|
|
|
|
|
|
|
Federal/state net operating loss carryforwards
|
|
|
159,219
|
|
|
|
21,245
|
|
Federal capital loss carryforwards
|
|
|
5,152
|
|
|
|
5,678
|
|
Investments
|
|
|
|
|
|
|
|
|
Foreign net operating loss carryforwards
|
|
|
8,212
|
|
|
|
7,969
|
|
Federal research and development credits
|
|
|
19,409
|
|
|
|
13,041
|
|
Pension and deferred compensation
|
|
|
16,187
|
|
|
|
11,440
|
|
Equity compensation
|
|
|
|
|
|
|
10,623
|
|
Warranty reserve
|
|
|
12,503
|
|
|
|
1,224
|
|
Capitalized research and development
|
|
|
281,434
|
|
|
|
9,174
|
|
Other, principally operating expenses
|
|
|
8,126
|
|
|
|
5,719
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred income tax assets
|
|
|
510,242
|
|
|
|
86,113
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
632,348
|
|
|
|
118,696
|
|
|
|
|
|
|
|
|
|
|
Current deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Other, principally operating expenses
|
|
|
(2,856
|
)
|
|
|
(1,742
|
)
|
|
|
|
|
|
|
|
|
|
Total current deferred income tax liabilities
|
|
|
(2,856
|
)
|
|
|
(1,742
|
)
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, depreciation and
basis differences
|
|
|
(39,782
|
)
|
|
|
(1,833
|
)
|
Excess tax on future repatriation of foreign earnings
|
|
|
(1,184
|
)
|
|
|
(1,954
|
)
|
Section 481(a) Adjustment Deferred Revenue
|
|
|
|
|
|
|
(1,021
|
)
|
Other noncurrent liabilities
|
|
|
(9,192
|
)
|
|
|
(7,243
|
)
|
Convertible debt
|
|
|
|
|
|
|
(3,639
|
)
|
Goodwill and Intangibles
|
|
|
(401,060
|
)
|
|
|
(11,266
|
)
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred income tax liabilities
|
|
|
(451,218
|
)
|
|
|
(26,956
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(454,074
|
)
|
|
|
(28,698
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
178,274
|
|
|
|
89,998
|
|
Valuation allowance
|
|
|
(163,745
|
)
|
|
|
(17,974
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets (liabilities)
|
|
$
|
14,529
|
|
|
$
|
72,024
|
|
|
|
|
|
|
|
|
|
|
109
The valuation allowance for deferred income tax assets of $163.7 million and $18.0 million
at December 31, 2013 and 2012, respectively, relates to the uncertainty surrounding the realization of certain deferred income tax assets in various jurisdictions. The $145.7 million net increase in valuation allowances for the year was due
primarily to the acquisition of Motorola Home net operating losses which are fully offset by valuation allowances. A valuation allowance should be established and maintained when it is more-likely-than-not that all or a portion of deferred income
tax assets will not be realized. The Company continually reviews the adequacy of its valuation allowances by reassessing whether it is more-likely-than-not to realize its various deferred income tax assets.
As of December 31, 2013 and December 31, 2012, ARRIS had $435.6 million and $47.0 million, respectively, of U.S. federal net
operating losses available to offset against future ARRIS taxable income. During 2013, ARRIS utilized approximately $3.3 million of U.S. federal net operating losses against taxable income. The U.S. Federal net operating losses may be carried
forward for twenty years. The available acquired U.S. Federal net operating losses as of December 31, 2013, will expire between the years 2014 and 2031.
As of December 31, 2013, ARRIS also had $174.5 million of U.S. state net operating loss carryforwards in various states. The amounts available for utilization vary by state due to the apportionment
of the Companys taxable income and state law governing the expiration of these net operating losses. U.S. state net operating loss carryforwards of approximately $29.4 million relate to the exercise of employee stock options and restricted
stock (equity compensation). Any future cash benefit resulting from the utilization of these U.S. state net operating losses attributable to this portion of equity compensation will be credited directly to paid in capital during the year
in which the cash benefit is realized.
Additionally, ARRIS has foreign net operating loss carryforwards available, as of
December 31, 2013, of approximately $47.9 million with varying expiration dates. Approximately $20.9 million of the total foreign net operating loss carryforwards relate to ARRIS Irish subsidiary and have an indefinite life. Approximately
$7.6 million of the foreign net operating loss carryforwards relate to the Israeli subsidiary and have an indefinite life.
ARRIS ability to use U.S. federal and state net operating loss carryforwards to reduce future taxable income, or to use research and
development tax credit carryforwards to reduce future income tax liabilities, is subject to restrictions attributable to equity transactions that resulted in a change of ownership during prior tax years, as defined in Internal Revenue Code Sections
382 and 383. All of the tax attributes (net operating losses carried forward and tax credits carried forward) acquired from the C-COR Incorporated transaction, the BigBand Networks, Inc. transaction and the Motorola Home transaction are subject to
restrictions arising from equity transactions, including transactions that created ownership changes within C-COR, BigBand and Motorola Home prior to their acquisitions by ARRIS. With the exception of $386.5 million federal net operating loss
carryforwards, $73.8 million of post-apportioned and $78.7 million of its pre-apportioned U.S. state net operating loss carryforwards and $5.2 million of R&D credit carryforwards, ARRIS does not expect that the limitations placed on its net
operating losses and research and development tax credits as a result of applying these and other rules will result in the expiration of its net operating loss and research and development tax credit carryforwards. However, future equity
transactions could further limit the utilization of these tax attributes.
During the past several years, ARRIS has identified
and reported U.S. federal research and development tax credits in the amount of $90.6 million, and domestic state research and development tax credits in the amount of $25.7 million. During the tax years ending December 31, 2013, and 2012, we
utilized $5.5 million and $9.4 million, respectively, to offset against U.S. federal and state income tax liabilities. As of December 31, 2013, ARRIS has $17.7 million of available domestic federal research and development tax credits and $20.9
million of available domestic state research and development tax credits to carry forward to subsequent years. The remaining unutilized domestic federal research and development tax credits can be carried back one year and carried forward twenty
years. The domestic state research and development tax credits carry forward and will expire pursuant to the various applicable domestic state rules.
The federal research and development credit expired on December 31, 2011. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law. Under this act, the federal research
and development credit was retroactively extended for amounts paid or incurred after December 31, 2011 and before January 1, 2014.
110
The effects of these changes in the tax law resulted in a tax benefit which was recognized in the first quarter of 2013, which was the quarter in which the law was enacted. The legislation
allowing the tax credit expired on December 31, 2013, and has yet to be extended for future years.
As of
December 31, 2013, the Company reported $793.7 million of capitalized research and experimentation costs, arising from the acquisition of the Motorola Home business from Google, Inc. These capitalized expenditures are amortized over a ten-year
life and can be utilized to offset against U.S. Federal and State taxable income arising in future years
For the years ended
December 31, 2013, 2012, and 2011, ARRIS reported $32.4 million, $6.7 million, and $4.2 million, respectively, of pre-tax net income from non-U.S. entities operating in foreign jurisdictions. Pre-tax net income (loss) from the worldwide
operations of U.S. entities was $(128.6) million, $67.6 million, and $(32.7) million for years ended December 31, 2013, 2012, and 2011.
In general, ARRIS intends to indefinitely reinvest the earnings of its non-U.S. subsidiaries. Accounting rules generally require that the Company record U.S. deferred taxes on any anticipated repatriation
of a foreign entitys earnings as the earnings are recognized for financial reporting purposes. An exception under certain accounting guidance permits the Company to not record a U.S. deferred tax liability for foreign earnings that the Company
expects to reinvest in its foreign operations and for which remittance will be postponed indefinitely. If it becomes apparent that some or all undistributed earnings will be remitted in the foreseeable future, the related deferred taxes are recorded
in that period. In determining indefinite reinvestment, ARRIS regularly evaluates the capital needs of its foreign operations considering all available information, including operating and capital plans, regulatory capital requirements, debt
requirements and cash flow needs, as well as, the applicable tax laws to which its foreign subsidiaries are subject. ARRIS expects the cash balances of its existing U.S. entities and the availability of U.S. financing sources to be sufficient to
fund the operations of its U.S. entities for the foreseeable future. With the exception of approximately $6.0 million (21 million shekels) of earnings associated with its Israeli subsidiary, ARRIS has not recorded any U.S. deferred taxes on the
undistributed earnings of its foreign subsidiaries. ARRIS has recorded approximately $1.2 million of deferred tax liability relating to $6.0 million of distributable earnings of the Israeli subsidiary. If the earnings of the other foreign
subsidiaries were distributed to the U.S. in the form of dividends, or otherwise, ARRIS would have additional U.S. taxable income and, depending on the companys tax posture in the year of repatriation, may have to pay additional U.S. income
taxes. Withholding taxes may also apply to the repatriation of foreign earnings. Determination of the amount of unrecognized income tax liability related to these permanently reinvested and undistributed foreign subsidiary earnings is currently not
practicable. However, we expect that the income tax liability from a repatriation of these earnings would not be material because the amount of undistributed earnings held by non-U.S. legal entities is not material.
Tabular Reconciliation of Unrecognized Tax Benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Beginning balance
|
|
$
|
25,704
|
|
|
$
|
26,232
|
|
|
$
|
20,495
|
|
Gross increases tax positions in prior period
|
|
|
2,442
|
|
|
|
|
|
|
|
374
|
|
Gross decreases tax positions in prior period
|
|
|
(21
|
)
|
|
|
|
|
|
|
(105
|
)
|
Gross increases current-period tax positions
|
|
|
6,999
|
|
|
|
2,684
|
|
|
|
5,922
|
|
Increases from acquired businesses
|
|
|
2,014
|
|
|
|
|
|
|
|
1,719
|
|
Other
|
|
|
(1,098
|
)
|
|
|
100
|
|
|
|
|
|
Decreases due to lapse of statute of limitations
|
|
|
(7,696
|
)
|
|
|
(3,312
|
)
|
|
|
(2,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
28,344
|
|
|
$
|
25,704
|
|
|
$
|
26,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various
state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2009. As of December 31, 2013, the
111
Company and its subsidiaries were under income tax audit in only eight jurisdictions (the state of Georgia, the state of California, the state of New York, the state of Michigan, the United
States, Sweden, Belgium and Israel) and they have not received notices of any planned or proposed income tax audits. In January of 2014, the Israeli income tax audit was settled for an amount less than the accrual for uncertain tax positions. The
Company has no outstanding unpaid income tax assessments for prior income tax audits.
The Company is currently being audited
by the Internal Revenue Service in the United States for the year ended December 31, 2010, and expects the audit to conclude during 2014. ARRIS does not anticipate any audit adjustments in excess of its current accrual for uncertain tax
positions.
At the end of 2013, the Companys total tax liability related to uncertain net tax positions totaled
approximately $27.5 million, all of which would cause the effective income tax rate to change upon the recognition. The difference between the $28.3 million of unrecognized tax benefits reported in the tabular reconciliation above and the $27.5
million of total tax liability relating to uncertain net tax positions are attributable to interest, penalties and the federal benefit of state deductions. Based on information currently available, the Company anticipates that over the next twelve
month period, statutes of limitations may close and audit settlements will occur relating to existing unrecognized tax benefits of approximately $1.8 million primarily arising from U.S. Federal and state tax related items. The Company reported
approximately $2.1 million and $2.3 million, respectively, of interest and penalty accrual related to the anticipated payment of these potential tax liabilities as of December 31, 2013 and 2012. The Company classifies interest and penalties
recognized on the liability for uncertain tax positions as income tax expense.
Note 18. Commitments
ARRIS leases office, distribution, and warehouse facilities as well as equipment under long-term leases expiring at
various dates through 2023. Included in these operating leases are certain amounts related to restructuring activities; these lease payments and related sublease income are included in restructuring accruals on the consolidated balance sheets.
Future minimum operating lease payments under non-cancelable leases at December 31, 2013 were as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
|
2014
|
|
$
|
22,803
|
|
2015
|
|
|
20,451
|
|
2016
|
|
|
17,041
|
|
2017
|
|
|
12,595
|
|
2018
|
|
|
9,143
|
|
Thereafter
|
|
|
26,194
|
|
Less sublease income
|
|
|
(6,311
|
)
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
101,916
|
|
|
|
|
|
|
Total rental expense for all operating leases amounted to approximately $22.5 million, $12.4 million and
$10.7 million for the years ended December 31, 2013, 2012 and 2011, respectively.
As of December 31, 2013, the
Company had approximately $1.1 million of restricted cash. The restricted cash balances are held as cash collateral security for certain bank guarantees. Additionally, the Company had contractual obligations of approximately $691.4 million under
agreements with non-cancelable terms to purchase goods or services over the next year. All contractual obligations outstanding at the end of prior years were satisfied within a 12 month period, and the obligations outstanding as of December 31,
2013 are expected to be satisfied in 2014.
112
Note 19. Stock-Based Compensation
ARRIS grants stock options under its 2011 Stock Incentive Plan (SIP). Upon approval of the 2011 SIP, all
shares available for grant under existing stock incentive plans were no longer available. However, all outstanding options granted under the previous plans are still exercisable. The Board of Directors approved the SIP and the prior plans to
facilitate the retention and continued motivation of key employees, consultants and directors, and to align more closely their interests with those of the Company and its stockholders.
Awards under the SIP may be in the form of stock options, stock grants, stock units, restricted stock, stock appreciation rights,
performance shares and units, and dividend equivalent rights. A total of 17,500,000 shares of the Companys common stock may be issued pursuant to the SIP. The SIP has been designed to allow for flexibility in the form of awards; however,
awards denominated in shares of common stock other than stock options and stock appreciation rights will be counted against the SIP limit as 1.87 shares for every one share covered by such an award. The vesting requirements for issuance under the
SIP may vary; however, awards generally are required to have a minimum three-year vesting period or term.
In connection with
the 2011 acquisition of BigBand Networks, Inc., ARRIS assumed the BigBand Networks, Inc. 2007 Equity Incentive Plan (the Assumed BigBand Plan), including the restricted stock units outstanding under the Assumed BigBand Plan at the time
of the acquisition. ARRIS may continue to grant awards under the Assumed BigBand Plan in certain circumstances so long as the grants comply with the applicable requirements of NASDAQ. A total of 97,997 shares of the Companys common stock
remain available for issuance under the Assumed BigBand Plan.
Stock Options
ARRIS grants stock options to certain employees. Upon stock option exercise the Company issues new shares. Stock options generally vest
over three or four years of service and have either seven or ten year contractual terms. The exercise price of an option is equal to the fair market value of ARRIS stock on the date of grant. ARRIS uses the Black-Scholes model and engages an
independent third party to assist the Company in determining the Black-Scholes valuation of its equity awards. The volatility factors are based upon a combination of historical volatility over a period of time and estimates of implied volatility
based on traded option contracts on ARRIS common stock. The expected term of the awards granted are based upon a weighted average life of exercise activity of the grantee population. The risk-free interest rate is based upon the U.S. treasury strip
yield at the grant date, using a remaining term equal to the expected life. The expected dividend yield is 0%, as the Company has not paid cash dividends on its common stock since its inception. In calculating the stock compensation expense, ARRIS
applies an estimated pre-vesting forfeiture rate based upon historical rates. The stock compensation expense is amortized over the vesting period using the straight-line method.
A summary of activity of ARRIS options granted under its stock incentive plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Term
(in years)
|
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
|
Beginning balance, January 1, 2013
|
|
|
2,376,449
|
|
|
$
|
12.24
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,869,956
|
)
|
|
|
12.41
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(33,802
|
)
|
|
|
11.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2013
|
|
|
472,691
|
|
|
|
11.60
|
|
|
|
0.86
|
|
|
$
|
6,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2013
|
|
|
472,691
|
|
|
|
11.60
|
|
|
|
0.86
|
|
|
$
|
6,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no new options granted in 2013, 2012 and 2011. The total intrinsic value of options exercised
during 2013, 2012 and 2011 was approximately $9.6 million, $10.2 million and $9.6 million, respectively.
113
The following table summarizes ARRIS options outstanding as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
$5.00 to $6.99
|
|
|
16,243
|
|
|
0.90 years
|
|
$
|
6.86
|
|
|
|
16,243
|
|
|
$
|
6.86
|
|
$7.00 to $8.99
|
|
|
15,188
|
|
|
0.52 years
|
|
$
|
8.42
|
|
|
|
15,188
|
|
|
$
|
8.42
|
|
$9.00 to $10.99
|
|
|
128,388
|
|
|
0.65 years
|
|
$
|
9.32
|
|
|
|
128,388
|
|
|
$
|
9.32
|
|
$11.00 to $13.99
|
|
|
312,872
|
|
|
0.96 years
|
|
$
|
12.93
|
|
|
|
312,872
|
|
|
$
|
12.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.00 to $13.99
|
|
|
472,691
|
|
|
0.86 years
|
|
$
|
11.60
|
|
|
|
472,691
|
|
|
$
|
11.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock (Non-Performance) and Stock Units
ARRIS grants restricted stock and stock units to certain employees and its non-employee directors. The Company records a fixed
compensation expense equal to the fair market value of the shares of restricted stock granted on a straight-line basis over the requisite services period for the restricted shares. The Company applies an estimated forfeiture rate based upon
historical rates.
The following table summarizes ARRIS unvested restricted stock (excluding performance-related) and
stock unit transactions during the year ending December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested at January 1, 2013
|
|
|
5,129,080
|
|
|
$
|
11.13
|
|
Granted
|
|
|
4,567,885
|
|
|
|
16.13
|
|
Vested
|
|
|
(2,088,781
|
)
|
|
|
10.73
|
|
Forfeited
|
|
|
(559,494
|
)
|
|
|
13.67
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2013
|
|
|
7,048,690
|
|
|
|
14.29
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares Subject to Comparative Market Performance
ARRIS grants to certain employees restricted shares, in which the number of shares is dependent upon the Companys total shareholder
return as compared to the shareholder return of the NASDAQ composite over a three year period. The number of shares which could potentially be issued ranges from zero to 200% of the target award. For the shares granted in 2011, the three-year
measurement period ended on December 31, 2013. This resulted in an achievement of 200.0% of the target award, or 517,780 shares. The remaining grants outstanding that are subject to market performance are 583,175 shares at target; at 200%
performance 1,166,350 would be issued. Compensation expense is recognized on a straight-line basis over the three year measurement period and is based upon the fair market value of the shares estimated to be earned. The fair value of the restricted
shares is estimated on the date of grant using a lattice model.
The total intrinsic value of restricted shares, including both
non-performance and performance-related shares, vested and issued during 2013, 2012 and 2011 was $36.3 million, $27.1 million and $24.1 million, respectively.
Employee Stock Purchase Plan (ESPP)
ARRIS offers an ESPP to
certain employees. The plan complies with Section 423 of the U.S. Internal Revenue Code, which provides that employees will not be immediately taxed on the difference between the market price of the stock and a discounted purchase price if it
meets certain requirements. Participants can request that
114
up to 10% of their base compensation be applied toward the purchase of ARRIS common stock under ARRIS ESPP. Purchases by any one participant are limited to $25,000 (based upon the fair
market value) in any one year. The exercise price is the lower of 85% of the fair market value of the ARRIS common stock on either the first day of the purchase period or the last day of the purchase period. A plan provision which allows for the
more favorable of two exercise prices is commonly referred to as a look-back feature. Any discount offered in excess of five percent generally will be considered compensatory and appropriately is recognized as compensation expense.
Additionally, any ESPP offering a look-back feature is considered compensatory. ARRIS uses the Black-Scholes option valuation model to value shares issued under the ESPP. The valuation is comprised of two components; the 15% discount of a share of
common stock and 85% of a six month option held (related to the look-back feature). The weighted average assumptions used to estimate the fair value of purchase rights granted under the ESPP for 2013, 2012 and 2011, were as follows: risk-free
interest rates of 0.1%; a dividend yield of 0%; volatility factor of the expected market price of ARRIS common stock of 0.26, 0.33, and 0.41, respectively; and a weighted average expected life of 0.5 year for each. The Company recorded stock
compensation expense related to the ESPP of approximately $1.5 million, $0.9 million and $0.8 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Unrecognized Compensation Cost
As of December 31, 2013, there was
approximately $81.2 million of total unrecognized compensation cost related to unvested share-based awards granted under the Companys incentive plans. This compensation cost is expected to be recognized over a weighted-average period of 4.2
years.
Treasury Stock
In 2013, ARRIS did not repurchase any shares under the previously adopted share repurchase plan.
In 2012, ARRIS repurchased 4.5 million shares of the Companys common stock at an average price of $11.55 per share for an aggregate consideration of approximately $51.9 million.
In 2011, ARRIS repurchased 10.0 million shares of the Companys common stock at an average price of $10.95 per share for an
aggregate consideration of approximately $109.1 million.
The repurchased shares are held as treasury stock on the Consolidated
Balance Sheet as of December 31, 2013.
Note 20. Employee Benefit Plans
The Company sponsors a qualified and a non-qualified non-contributory defined benefit pension plan that cover certain
U.S. employees. As of January 1, 2000, the Company froze the qualified defined pension plan benefits for its participants. These participants elected to enroll in ARRIS enhanced 401(k) plan. Due to the cessation of plan accruals for such
a large group of participants, a curtailment was considered to have occurred.
The U.S. pension plan benefit formulas generally
provide for payments to retired employees based upon their length of service and compensation as defined in the plans. ARRIS investment policy is to fund the qualified plan as required by the Employee Retirement Income Security Act of 1974
(ERISA) and to the extent that such contributions are tax deductible.
115
The investment strategies of the plans place a high priority on benefit security. The plans
invest conservatively so as not to expose assets to depreciation in adverse markets. The plans strategy also places a high priority on earning a rate of return greater than the annual inflation rate along with maintaining average market
results. The plan has targeted asset diversification across different asset classes and markets to take advantage of economic environments and to also act as a risk minimizer by dampening the portfolios volatility. The following table
summarizes the weighted average pension asset allocations as December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Allocation
|
|
|
|
Target
|
|
|
Actual
|
|
|
|
2013
|
|
|
2013
|
|
|
2012
|
|
Equity securities
|
|
|
39
|
%
|
|
|
43
|
%
|
|
|
61
|
%
|
Debt securities
|
|
|
18
|
|
|
|
3
|
|
|
|
39
|
|
Cash and cash equivalents
|
|
|
43
|
|
|
|
54
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys pension plan assets by category and by level (as
described in Note 8 of the Notes to the Consolidated Financial Statements) as of December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
(1)
|
|
$
|
|
|
|
$
|
8,285
|
|
|
$
|
|
|
|
$
|
8,285
|
|
Equity securities
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
1,435
|
|
|
|
|
|
|
|
|
|
|
|
1,435
|
|
U.S. mid cap
|
|
|
1,435
|
|
|
|
|
|
|
|
|
|
|
|
1,435
|
|
U.S. small cap
|
|
|
1,435
|
|
|
|
|
|
|
|
|
|
|
|
1,435
|
|
International
|
|
|
2,102
|
|
|
|
|
|
|
|
|
|
|
|
2,102
|
|
Fixed income securities
(3)
:
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,877
|
|
|
$
|
8,285
|
|
|
$
|
|
|
|
$
|
15,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash and cash equivalents, which are used to pay benefits and administrative expenses, are held in a stable value fund.
|
(2)
|
Equity securities consist of mutual funds and the underlying investments are indexes. Investments in mutual funds are valued at the net asset value per share multiplied
by the number of shares held.
|
(3)
|
Fixed income securities consist of bonds securities in mutual funds, and are valued at the net asset value per share multiplied by the number of shares held.
|
The Company has established a rabbi trust to fund the pension obligations of the Chief Executive Officer under
his Supplemental Retirement Plan including the benefit under the Companys non-qualified defined benefit plan. In addition, the Company has established a rabbi trust for certain executive officers to fund the Companys pension liability to
those officers under the non-qualified plan. Effective June 30, 2013, the Company amended the Supplemental Retirement Plan. This amendment effectively froze entry of any new participants into the Supplemental Plan and, for existing
participants, a freeze on any additional benefit accrual after June 30, 2013. The participants benefit will continue to be distributed in accordance with the provisions of the Supplemental Plan but the final benefit accrual was frozen as
of June 30, 2013. A curtailment gain of approximately $0.3 million, which represents the difference in the projected benefit obligation and the accumulated benefit obligation at June 30, 2013, offsets the existing plan loss and lowers
future pension expense.
During the fourth quarter of 2012, in an effort to reduce the volatility and administration expense in
connection with the Companys pension obligation, the Company notified eligible employees of a limited opportunity to voluntarily elect an early payout of their pension benefits. These payouts were approximately $7.7 million and was funded from
existing pension assets. The Company accounted for the lump-sum payments as a settlement and recorded a noncash pension settlement charge of approximately $3.1 million in the fourth quarter of 2012.
116
Summary data for the non-contributory defined benefit pension plans is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Change in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
42,082
|
|
|
$
|
46,912
|
|
Service cost
|
|
|
122
|
|
|
|
335
|
|
Interest cost
|
|
|
1,619
|
|
|
|
2,085
|
|
Actuarial loss
|
|
|
(1,813
|
)
|
|
|
1,625
|
|
Benefit payments
|
|
|
(1,309
|
)
|
|
|
(1,167
|
)
|
Other
|
|
|
(319
|
)
|
|
|
(7,708
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
40,382
|
|
|
$
|
42,082
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
14,866
|
|
|
$
|
21,491
|
|
Actual return on plan assets
|
|
|
1,421
|
|
|
|
1,637
|
|
Company contributions
|
|
|
184
|
|
|
|
613
|
|
Expenses and benefits paid from plan assets
|
|
|
(1,309
|
)
|
|
|
(1,167
|
)
|
Other
|
|
|
|
|
|
|
(7,708
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
(1)
|
|
$
|
15,162
|
|
|
$
|
14,866
|
|
|
|
|
|
|
|
|
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
$
|
(25,220
|
)
|
|
$
|
(27,216
|
)
|
Unrecognized actuarial loss
|
|
|
7,546
|
|
|
|
10,830
|
|
Unamortized prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(17,674
|
)
|
|
$
|
(16,386
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
In addition to the pension plan assets, ARRIS has established two rabbi trusts to further fund the pension obligations of the Chief Executive and certain executive
officers of $19.3 million as of December 31, 2013 and $17.8 million as of December 31, 2012, and are included in Investments on the Consolidated Balance Sheets.
|
Amounts recognized in the statement of financial position consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Current liabilities
|
|
$
|
(364
|
)
|
|
$
|
(333
|
)
|
Noncurrent liabilities
|
|
|
(24,856
|
)
|
|
|
(26,883
|
)
|
Accumulated other comprehensive income
(1)
|
|
|
7,546
|
|
|
|
10,830
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(17,674
|
)
|
|
$
|
(16,386
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
The total unfunded pension liability on the Consolidated Balance Sheets as of December 31, 2013 and 2012 included the Taiwan plan and total income tax effect of
$1.0 million and $2.3 million, respectively.
|
117
Other changes in plan assets and benefit obligations recognized in other comprehensive
income (loss) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Net loss
|
|
$
|
(2,359
|
)
|
|
$
|
1,247
|
|
Amortization of net loss
|
|
|
(607
|
)
|
|
|
(840
|
)
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
Settlement charge
|
|
|
(318
|
)
|
|
|
(3,064
|
)
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income (loss)
|
|
$
|
(3,284
|
)
|
|
$
|
(2,657
|
)
|
|
|
|
|
|
|
|
|
|
The following table summarizes the amounts in other comprehensive income (loss) expected to be amortized
and recognized as a component of net periodic benefit cost in 2014 (in thousands):
|
|
|
|
|
Amortization of net loss
|
|
$
|
305
|
|
Information for defined benefit plans with accumulated benefit obligations in excess of plan assets is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Accumulated benefit obligation
|
|
$
|
40,382
|
|
|
$
|
41,764
|
|
Projected benefit obligation
|
|
$
|
40,382
|
|
|
$
|
42,082
|
|
Plan assets
|
|
$
|
15,162
|
|
|
$
|
14,866
|
|
Net periodic pension cost for 2013, 2012 and 2011 for pension and supplemental benefit plans includes the
following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Service cost
|
|
$
|
122
|
|
|
$
|
335
|
|
|
$
|
312
|
|
Interest cost
|
|
|
1,619
|
|
|
|
2,085
|
|
|
|
2,142
|
|
Return on assets (expected)
|
|
|
(876
|
)
|
|
|
(1,260
|
)
|
|
|
(1,624
|
)
|
Amortization of net actuarial loss
|
|
|
607
|
|
|
|
840
|
|
|
|
288
|
|
Settlement charge
|
|
|
|
|
|
|
3,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
1,472
|
|
|
$
|
5,064
|
|
|
$
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan.
|
The weighted-average actuarial assumptions used to determine the benefit obligations for the three years
presented are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Assumed discount rate for plan participants
|
|
|
4.50
|
%
|
|
|
3.75
|
%
|
|
|
4.50
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
The weighted-average actuarial assumptions used to determine the net periodic benefit costs are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Assumed discount rate for plan participants
|
|
|
3.75
|
%
|
|
|
4.50
|
%
|
|
|
5.50
|
%
|
Rate of compensation increase
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
Expected long-term rate of return on plan assets
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
7.50
|
%
|
118
The expected long-term rate of return on assets is derived using the building block approach
which includes assumptions for the long term inflation rate, real return, and equity risk premiums.
No minimum funding
contributions are required in 2014 for the plan; however, the Company may make a voluntary contribution.
As of
December 31, 2013, the expected benefit payments related to the Companys defined benefit pension plans during the next ten years are as follows (in thousands):
|
|
|
|
|
2014
|
|
$
|
1,544
|
|
2015
|
|
|
15,129
|
|
2016
|
|
|
1,538
|
|
2017
|
|
|
1,538
|
|
2018
|
|
|
1,556
|
|
2019 2023
|
|
|
8,923
|
|
Other U.S. Benefit Plans
ARRIS has established defined contribution plans pursuant to the Internal Revenue Code Section 401(k) that cover all eligible U.S. employees. ARRIS contributes to these plans based upon the dollar
amount of each participants contribution. ARRIS made matching contributions to these plans of approximately $10.9 million, $5.7 million and $5.0 million in 2013, 2012 and 2011, respectively.
The Company has a deferred compensation plan that does not qualify under Section 401(k) of the Internal Revenue Code, and is
available to key executives of the Company and certain other employees. Employee compensation deferrals and matching contributions are held in a rabbi trust. The total of net employee deferrals and matching contributions, which is reflected in other
long-term liabilities, was $2.9 million and $2.7 million at December 31, 2013 and 2012, respectively. Total expenses included in continuing operations for the matching contributions were approximately $0.1 million in both 2013 and 2012.
The Company previously offered a deferred compensation arrangement, which allowed certain employees to defer a portion of
their earnings and defer the related income taxes. As of December 31, 2004, the plan was frozen and no further contributions are allowed. The deferred earnings are invested in a rabbi trust. The total of net employee deferral and matching
contributions, which is reflected in other long-term liabilities, was $2.6 million and $2.1 million at December 31, 2013 and 2012, respectively.
The Company also has a deferred retirement salary plan, which was limited to certain current or former officers of C-COR. The present value of the estimated future retirement benefit payments is being
accrued over the estimated service period from the date of signed agreements with the employees. The accrued balance of this plan, the majority of which is included in other long-term liabilities, was $1.8 million and $2.0 million at
December 31, 2013 and 2012, respectively. Total expenses (income) included in continuing operations for the deferred retirement salary plan were approximately $(0.3) million and $(0.2) million for 2013 and 2012, respectively.
Other Benefit Plans Outside of the U.S.
In connection with the Acquisition, the Company assumed a pension liability related to a defined benefit plans in Taiwan, which had a balance of $28.1 million as of December 31, 2013.
The Companys wholly-owned subsidiary located in Israel is required to fund future severance liabilities determined in accordance
with Israeli severance pay laws. Under these laws, employees are entitled upon termination to one months salary for each year of employment or portion thereof. The Company records compensation expense to accrue for these costs over the
employment period, based on the assumption that the benefits to which the employee is entitled, if the employee separates immediately. The Company funds the liability by monthly deposits in insurance policies and severance funds.
119
Note 21. Supplemental Financial Information
Consolidated Balance Sheets Information
Prepaids consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Prefunding of accounts payable
|
|
$
|
44,975
|
|
|
$
|
|
|
Software licenses and maintenance support
|
|
|
10,717
|
|
|
|
4,540
|
|
Other
|
|
|
5,791
|
|
|
|
7,142
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61,482
|
|
|
$
|
11,682
|
|
|
|
|
|
|
|
|
|
|
Other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Deferred cost of sales
|
|
$
|
10,100
|
|
|
$
|
9,537
|
|
Miscellaneous receivables
|
|
|
8,712
|
|
|
|
4,095
|
|
Deferred financing fees
|
|
|
7,480
|
|
|
|
559
|
|
Sales and other tax receivables
|
|
|
5,609
|
|
|
|
1,565
|
|
Indemnification asset
|
|
|
1,500
|
|
|
|
|
|
Landlord funded tenant improvements
|
|
|
1,497
|
|
|
|
|
|
Other
|
|
|
5,032
|
|
|
|
657
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,930
|
|
|
$
|
16,413
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Deferred financing fees
|
|
$
|
27,398
|
|
|
$
|
400
|
|
Trade receivables
|
|
|
10,191
|
|
|
|
|
|
Deposits
|
|
|
4,296
|
|
|
|
1,204
|
|
Long-term severance funds
|
|
|
3,564
|
|
|
|
3,739
|
|
Interest rate swap asset
|
|
|
3,010
|
|
|
|
|
|
Other
|
|
|
3,904
|
|
|
|
4,042
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,363
|
|
|
$
|
9,385
|
|
|
|
|
|
|
|
|
|
|
120
Other accrued current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Accrued volume rebates
|
|
$
|
26,879
|
|
|
$
|
3,434
|
|
Due to Google
|
|
|
23,273
|
|
|
|
|
|
Accrued legal and professional fees
|
|
|
21,982
|
|
|
|
4,277
|
|
Accrued sales, property, payroll and other taxes
|
|
|
14,613
|
|
|
|
1,540
|
|
Supplier liabilities
|
|
|
11,362
|
|
|
|
|
|
Accrued interest and interest rate swap liability
|
|
|
7,541
|
|
|
|
581
|
|
Accrued software licenses liabilities
|
|
|
6,114
|
|
|
|
|
|
Accrued royalties
|
|
|
4,466
|
|
|
|
1,253
|
|
Accrued acquisition and integration costs
|
|
|
3,980
|
|
|
|
4,361
|
|
Accrued restructuring
|
|
|
3,161
|
|
|
|
527
|
|
Accrued commissions
|
|
|
1,804
|
|
|
|
|
|
Other liabilities
|
|
|
16,523
|
|
|
|
8,969
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
141,698
|
|
|
$
|
24,942
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
Long-term warranty
|
|
$
|
32,745
|
|
|
$
|
3,187
|
|
Long-term deferred revenue
|
|
|
8,155
|
|
|
|
4,288
|
|
Deferred compensation liabilities
|
|
|
7,213
|
|
|
|
6,668
|
|
Long-term severance liability
|
|
|
3,814
|
|
|
|
4,119
|
|
Long-term accrued rent
|
|
|
1,584
|
|
|
|
1,413
|
|
Long-term tenant improvement obligations
|
|
|
1,323
|
|
|
|
1,140
|
|
Other
|
|
|
7,629
|
|
|
|
2,347
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,463
|
|
|
$
|
23,162
|
|
|
|
|
|
|
|
|
|
|
121
Note 22. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of taxes,
for the year ended December 31, 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
|
|
|
55
|
|
|
|
(4,527
|
)
|
|
|
|
|
|
|
173
|
|
|
|
(4,299
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
45
|
|
|
|
1,986
|
|
|
|
6,142
|
|
|
|
|
|
|
|
8,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
100
|
|
|
|
(2,541
|
)
|
|
|
6,142
|
|
|
|
173
|
|
|
|
3,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
306
|
|
|
$
|
(2,541
|
)
|
|
$
|
(2,416
|
)
|
|
$
|
(11
|
)
|
|
$
|
(4,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 23. Related Party
As noted in Note 4
Business Acquisitions,
the Company is a party to a research and development venture with
Comcast. The Company provides engineering services to the venture through a development services arrangement. Subject to agreement on annual statements of work, the venture is required to purchase from the Company, and ARRIS is required to provide
to the venture, engineering services per year approximating between 20% and 30% of the approved venture budget. In addition, we are required to provide certain funding to the venture on an annual basis. Funding provided to the venture during 2013
approximated $8.1 million.
As a result of the Acquisition, we acquired an investment in MPEG LA, L.L.C. (MPEG),
which operates primarily as a patent pool licensing administrator for several patent pool programs. As such, MPEG identifies potential licensees, markets and completes licensing agreements and collects, allocates and distributes license
royalties. The Companys ownership percentage in MPEG is 8.4%, and is being accounted for as an equity method investment. The Company paid license fees to MPEG in the amount of $779 thousand during 2013.
Note 24. 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.
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
122
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.
During the fourth quarter ended December 31, 2013, the Company accrued approximately
$8.0 million for settlements related to certain litigation matters as follows:
British Telecom:
The Company, Google, Comcast, Cox and British Telecom reached a settlement agreement related to British Telecoms
litigation with Comcast and Charter, whereby the Parties agreed to settle patent claims against Comcast and Cox and provide a cross-license to the Company. In consideration for payment by the parties in accordance with the settlement agreement and
cross-license, the Company will have no further obligation for indemnification of any amount arising from the British Telecom litigation.
Video Streaming Solutions:
The Company settled all claims
associated with certain patent infringement assertions made by Video Streaming Solutions. The settlement included a non-exclusive, worldwide, non-transferable license to the patents in suit in the litigation and related patents for the
remaining term of such patents, as well as a license to any other patents Video Streaming Solutions acquires or controls in the future.
C-Cation:
The Company and Comcast reached a settlement
agreement related to Comcasts litigation with
C-Cation,
whereby the Company agreed to pay Comcast to settle indemnification claims against the Company in the quarter ended December 31, 2013. In
consideration for this cash payment, the Company will have no further obligation for any indemnification of any amount arising from the Comcast litigation with C-Cation.
Note 25. Summary Quarterly Consolidated Financial Information (unaudited)
Certain amounts for the quarters ended June 30, 2013 and September 30, 2013 have been recasted based on the business
combination guidance. That guidance requires us to recognize adjustments to the provisional amounts as if the accounting for the business combinations had been completed at the acquisition date. As a result, the Company revised the comparative
information in prior quarters as needed, including making any change in depreciation, amortization, or other income effects recognized in the completing the initial accounting for the Motorola Home acquisition.
123
The following table summarizes ARRIS quarterly consolidated financial information (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2013 Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Net sales
|
|
$
|
353,650
|
|
|
$
|
1,000,362
|
|
|
$
|
1,067,823
|
|
|
$
|
1,199,067
|
|
Gross margin
|
|
|
108,526
|
|
|
|
230,957
|
|
|
|
316,895
|
|
|
|
366,370
|
|
Operating income (loss)
|
|
|
9,516
|
|
|
|
(88,062
|
)
|
|
|
11,182
|
|
|
|
49,351
|
|
Net income (loss)
|
|
$
|
(14,650
|
)
|
|
$
|
(48,463
|
)
|
|
$
|
17,170
|
|
|
$
|
(2,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per basic share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.02
|
)
|
Net income (loss) per diluted share
|
|
$
|
(0.13
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2012 Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Net sales
|
|
$
|
302,901
|
|
|
$
|
349,327
|
|
|
$
|
357,432
|
|
|
$
|
344,003
|
|
Gross margin
|
|
|
108,908
|
|
|
|
118,526
|
|
|
|
111,952
|
|
|
|
123,191
|
|
Operating income
|
|
|
11,691
|
|
|
|
26,925
|
|
|
|
23,123
|
|
|
|
25,531
|
|
Net income
|
|
$
|
5,799
|
|
|
$
|
15,001
|
|
|
$
|
17,864
|
|
|
$
|
14,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share
|
|
$
|
0.05
|
|
|
$
|
0.13
|
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
Net income per diluted share
|
|
$
|
0.05
|
|
|
$
|
0.13
|
|
|
$
|
0.15
|
|
|
$
|
0.13
|
|
124