NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
)
Note 1. Organization and Basis of Presentation
ARRIS Group, Inc. (together with its consolidated subsidiaries, except as the context otherwise indicates, ARRIS or the
Company) is a 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 14
Segment Information
for additional details), specializing in enabling multichannel video programming distributors, 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 distribution systems, broadband access infrastructure
platforms, and associated data and voice Customer Premises Equipment. 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 3
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. Interim results of operations are not necessarily indicative of results to be expected from a twelve-month period. These financial statements should be read in conjunction with the Companys most
recently audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the United States Securities and Exchange Commission
(SEC).
Note 2. Impact of Recently Adopted Accounting Standards
Adoption of New Accounting Standards
- 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. This update was adopted by ARRIS beginning in the first quarter of 2014. The adoption of this guidance did not have a material impact on our consolidated financial position and results of operations.
Accounting pronouncements issued but not in effect until after March 31, 2014 are not expected to have a significant impact on our
consolidated financial position or results of operations.
Note 3. Business Acquisitions
Acquisition of Motorola Home
On April 17, 2013, ARRIS completed its acquisition of Motorola Home from General Instrument Holdings, Inc. (Seller), a subsidiary of Google, Inc. Consideration for the acquisition consisted of
approximately $2,208.1 million in cash, inclusive of working capital adjustments, and 10.6 million shares of ARRIS common stock (the Acquisition).
The Acquisition enhanced the Companys scale and product breadth in the telecom industry, 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 research and development capabilities, particularly in the video arena.
During the first quarter of 2014, the Company completed its acquisition accounting and made the following adjustments to the provisional amounts that
were previously recorded:
|
|
|
An increase in net operating loss (NOL) carryforward deferred tax assets of approximately $38 million with a full valuation allowance due
to uncertainty regarding the ultimate utilization resulting in no change in goodwill. The adjustment resulted from the finalization of the Companys detailed analysis of NOLs to be assumed in the acquisition.
|
6
|
|
|
A decrease in deferred tax assets of approximately $4.8 million related to the finalization of acquired tax basis in Motorola Home intangibles with a
corresponding increase to goodwill.
|
The Company recorded these amounts as measurement period adjustments because the
information was known as of the acquisition date but the interaction of the re-attribution rules required further study which was completed in the first quarter of 2014.
Acquisition of SeaWell Networks, Inc.
On April 17, 2014, a wholly owned subsidiary of
the Company acquired all of the issued and outstanding shares of SeaWell Networks, Inc. (SeaWell), a corporation organized under the laws of Canada, which is located in Mississauga, Ontario. Consideration for the acquisition consists of
approximately $5.7 million.
This acquisition is expected to further enhance the Companys IP video delivery capabilities, by integrating
SeaWells adaptive bit rate (ABR) streaming technologies and talent into its Network & Cloud business.
The Company is
expecting to recognize, but may not be limited to, customer and technology related intangible assets as a result of the acquisition.
The net
assets and results of operations of SeaWell will be included in the Companys consolidated financial statements from April 17, 2014. The Company is required to account for the transaction under the Business Combinations accounting guidance,
which generally requires the acquirer to fair value all the assets acquired and liabilities assumed. ARRIS expects to recognize goodwill as a result of the acquisition that will be measured as the difference between the fair value of the
consideration transferred and the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with accounting guidance. The primary factor resulting in goodwill is the expected synergies
from the business combination.
The Company is in the process of measuring the assets acquired and liabilities assumed, but as of May 9, 2014,
the initial accounting for the business combination has not been completed in order to determine the value of assets acquired and liabilities assumed. ARRIS had not yet received valuations from independent valuation specialists for the intangible
assets acquired. Additionally, the Company had not yet completed a review and valuation of other assets acquired and liabilities assumed, including income taxes and certain other assets and liabilities, in order to determine corresponding goodwill.
The required disclosures will be included in the Companys second quarter 2014 consolidated financial statements.
7
Note 4. Goodwill and Intangible Assets
Goodwill
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 March 31, 2014, the Company has recorded goodwill of $940.1 million which includes the impact of measurement period adjustments for the Motorola Home acquisition. The Company has recast goodwill as
of December 31, 2013 to approximately reflect the goodwill arising from the Acquisition.
The changes in the carrying amount of goodwill for
the year to date period ended March 31, 2014 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
Network
Infrastructure
|
|
|
Cloud
Services
|
|
|
Total
|
|
Goodwill
|
|
|
688,658
|
|
|
|
497,741
|
|
|
|
132,659
|
|
|
|
1,319,058
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(257,053
|
)
|
|
|
(121,603
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
688,658
|
|
|
$
|
240,688
|
|
|
$
|
11,056
|
|
|
$
|
940,402
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(253
|
)
|
|
|
|
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
688,658
|
|
|
|
497,488
|
|
|
|
132,659
|
|
|
|
1,318,805
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(257,053
|
)
|
|
|
(121,603
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2014
|
|
|
$688,658
|
|
|
|
$240,435
|
|
|
|
$11,056
|
|
|
|
$940,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Intangibles
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
March 31, 2014 and December 31, 2013 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
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
|
|
|
$
|
291,345
|
|
|
$
|
612,064
|
|
|
|
6.7
|
|
|
$
|
903,409
|
|
|
$
|
266,323
|
|
|
$
|
637,086
|
|
|
|
7.0
|
|
Developed technology, patents & licenses
|
|
|
565,366
|
|
|
|
146,164
|
|
|
|
419,202
|
|
|
|
4.8
|
|
|
|
563,326
|
|
|
|
120,679
|
|
|
|
442,647
|
|
|
|
5.0
|
|
Trademarks / trade names
|
|
|
20,900
|
|
|
|
10,893
|
|
|
|
10,007
|
|
|
|
1.3
|
|
|
|
20,900
|
|
|
|
8,549
|
|
|
|
12,351
|
|
|
|
1.5
|
|
Order backlog
|
|
|
44,600
|
|
|
|
42,742
|
|
|
|
1,858
|
|
|
|
|
|
|
|
44,600
|
|
|
|
31,592
|
|
|
|
13,008
|
|
|
|
0.3
|
|
In-process R&D
|
|
|
71,100
|
|
|
|
|
|
|
|
71,100
|
|
|
|
|
|
|
|
71,100
|
|
|
|
|
|
|
|
71,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,605,375
|
|
|
$
|
491,144
|
|
|
$
|
1,114,231
|
|
|
|
|
|
|
$
|
1,603,335
|
|
|
$
|
427,143
|
|
|
$
|
1,176,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (for the remaining nine months)
|
|
$
|
160,593
|
|
2015
|
|
|
204,271
|
|
2016
|
|
|
173,542
|
|
2017
|
|
|
156,608
|
|
2018
|
|
|
117,653
|
|
2019
|
|
|
99,276
|
|
Thereafter
|
|
|
131,188
|
|
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 5. Investments
ARRIS investments as of March 31, 2014 and December 31, 2013 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
|
|
As of December 31, 2013
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
80,818
|
|
|
$
|
67,360
|
|
|
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
3,729
|
|
|
|
7,004
|
|
Equity method investments
|
|
|
27,557
|
|
|
|
23,803
|
|
Cost method investments
|
|
|
15,469
|
|
|
|
15,250
|
|
Other investments
|
|
|
25,617
|
|
|
|
25,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,372
|
|
|
|
71,176
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,190
|
|
|
$
|
138,536
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities -
ARRIS investments in debt and marketable equity securities are categorized
as available-for-sale and are carried at fair value. The Company currently does not hold any held-to-maturity securities. Realized gains and losses on available-for-sale securities are included in net income. Unrealized gains and losses on
available-for-sale securities are included in our Consolidated Balance Sheets as a component of accumulated other comprehensive income (loss). The total gains included in the accumulated other comprehensive income related to available-for-sale
securities were $27 thousand and $306 thousand, net of tax, as of March 31, 2014 and December 31, 2013, respectively. Realized and unrealized gains and losses in total and by individual investment as of March 31, 2014 and
December 31, 2013 were not material. The amortized cost basis of the Companys available-for-sale securities approximates fair value.
9
The contractual maturities of the Companys available-for-sale securities as of March 31, 2014 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):
|
|
|
|
|
|
|
March 31,
2014
|
|
Within one year
|
|
$
|
80,818
|
|
After one year through five years
|
|
|
|
|
After five years through ten years
|
|
|
|
|
After ten years
|
|
|
3,729
|
|
|
|
|
|
|
Total
|
|
$
|
84,547
|
|
|
|
|
|
|
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 $27.6 million and $23.8
million as of March 31, 2014 and December 31, 2013, respectively. The carrying amount of equity method investments is adjusted for the Companys proportionate share of net earnings or losses adjusted for any basis differences of the
investees, or dividends 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 March 31, 2014, 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 (CCAD)
|
|
Limited Liability Company
|
|
|
50.0
|
%
|
The Company and Comcast are parties to investments in two limited liability corporations. 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
a licensing and a research and development company. 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 the first quarter of 2014, the Company made funding contributions to the investment of $7.9 million.
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
|
Maximum Exposure
to Loss
|
|
Conditional Access Licensing
|
|
$
|
6,537
|
|
|
$
|
6,537
|
|
Combined Conditional Access Development
|
|
|
9,735
|
|
|
|
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.
Cost method investments
- ARRIS holds cost
method investments in private companies. These investments are recorded at $15.5 million and $15.3 million as of March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013, ARRIS held $25.6 million and $25.1
million, respectively, in certain life insurance contracts. This investment is classified as non-current investments in the Consolidated Balance Sheets. The Company determined the fair value to be the amount that could be realized under the
insurance contract as of each reporting period. The changes in the fair value of these contracts are included in net income.
Other-Than-Temporary Investment Impairments -
ARRIS concluded that no other-than-temporary impairment losses existed as of March 31, 2014 and
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.
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.
10
Note 6. Fair Value Measurement
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 March 31, 2014 and December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
Assets at fair value
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
5,236
|
|
|
$
|
|
|
|
$
|
5,236
|
|
Commercial paper
|
|
|
|
|
|
|
2,997
|
|
|
|
|
|
|
|
2,997
|
|
Corporate bonds
|
|
|
|
|
|
|
42,964
|
|
|
|
|
|
|
|
42,964
|
|
Short-term bond fund
|
|
|
29,621
|
|
|
|
|
|
|
|
|
|
|
|
29,621
|
|
Cash surrender value of company owned life insurance
|
|
|
|
|
|
|
25,617
|
|
|
|
|
|
|
|
25,617
|
|
Corporate obligations
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
20
|
|
Money markets
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
213
|
|
Mutual funds
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
196
|
|
Other investments
|
|
|
|
|
|
|
3,300
|
|
|
|
|
|
|
|
3,300
|
|
Interest rate derivatives asset derivatives
|
|
|
|
|
|
|
3,148
|
|
|
|
|
|
|
|
3,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
30,030
|
|
|
$
|
83,282
|
|
|
$
|
|
|
|
$
|
113,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
$
|
(7,275
|
)
|
|
|
|
|
|
$
|
(7,275
|
)
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
Assets at fair value
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
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
|
|
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
|
|
Interest rate derivatives asset derivatives
|
|
|
|
|
|
|
3,011
|
|
|
|
|
|
|
|
3,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
29,961
|
|
|
$
|
72,533
|
|
|
$
|
|
|
|
$
|
102,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
$
|
(7,018
|
)
|
|
|
|
|
|
$
|
(7,018
|
)
|
11
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, were $3.6 million as of March 31, 2014 and December 31, 2013.
All of the Companys short-term and long-term investments at March 31, 2014 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 fair 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 5 and Note 7 for further information on the Companys investments and derivative instruments, respectively.
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 March 31, 2014, the Company had not recorded any impairment related to such assets and had no other material nonfinancial assets
or liabilities requiring adjustments or write-downs to their current fair value.
The face value of debt as of March 31, 2014
approximated the fair value.
Note 7. 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 periodically 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 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.
12
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 million interest rate swap arrangements, which effectively converted $600 million of the Companys variable-rate debt based on one-month LIBOR to
an aggregate fixed rate of approximately 3.40%. This fixed rate could vary up by 50 basis points or down by 25 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.
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 debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During
the three months ended March 31, 2014, 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 $7.3
million may be reclassified as an increase to interest expense.
13
The table below presents the pre-tax impact of the Companys derivative financial instruments had on
the Accumulated Other Comprehensive Income and Statement of Operations for the three months ended March 31, 2014 (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
|
|
$
|
(1,973
|
)
|
|
|
Interest expense
|
|
|
$
|
(1,853
|
)
|
|
$
|
-
|
|
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 March 31, 2014, 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 $4.2 million. As of March 31, 2014, 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.
ARRIS has master netting arrangements with substantially all of its counterparties giving ARRIS the right of offset for its derivative positions. However, ARRIS has not elected to offset the fair value
positions of the derivative contracts recorded in the 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 Sheets as of March 31, 2014 and December 31, 2013 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
|
|
As of December 31, 2013
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Derivatives designated
as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
asset derivatives
|
|
Other assets
|
|
$
|
3,148
|
|
|
Other assets
|
|
$
|
3,011
|
|
|
|
|
|
|
Interest rate derivatives
liability derivatives
|
|
Other accrued liabilities
|
|
$
|
7,275
|
|
|
Other accrued liabilities
|
|
$
|
7,018
|
|
The assets and liabilities for the interest rate derivatives 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 three
months ended March 31, 2014 and 2013 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
Statement of Operations Location
|
|
2014
|
|
|
2013
|
|
Derivatives not designated
as hedging instruments
:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Loss on foreign currency
|
|
$
|
|
|
|
$
|
44
|
|
|
|
|
|
Derivatives designated
as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Interest rates derivatives
|
|
Interest expense
|
|
$
|
1,853
|
|
|
$
|
|
|
14
Note 8. Pension Benefits
Components of Net Periodic Pension Cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
Service cost
|
|
$
|
|
|
|
$
|
61
|
|
Interest cost
|
|
|
446
|
|
|
|
387
|
|
Expected return on plan assets
|
|
|
(219
|
)
|
|
|
(219
|
)
|
Amortization of net loss
|
|
|
76
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
303
|
|
|
$
|
383
|
|
|
|
|
|
|
|
|
|
|
In connection with the Acquisition, the Company assumed a pension liability related to a defined benefit plan in Taiwan,
which had a balance of $27.6 million as of March 31, 2014.
Employer Contributions
No minimum funding contributions are required in 2014 under the Companys defined benefit plan. The Company has established two rabbi trusts to fund
the Companys pension obligations under the non-qualified plan of the Chief Executive Officer and certain executive officers. The balance of these rabbi trust assets as of March 31, 2014 was approximately $19.7 million and is included in
Investments on the Consolidated Balance Sheets.
Note 9. Guarantees
ARRIS provides warranties of various lengths to customers based on the specific product and the terms of individual agreements. The
Company provides for the estimated cost of product warranties based on historical trends, the embedded base of product in the field, failure rates, and repair costs at the time revenue is recognized. Expenses related to product defects and unusual
product warranty problems are recorded in the period that the problem is identified. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers, the
estimated warranty obligation could be affected by changes in ongoing product failure rates, material usage and service delivery costs incurred in correcting a product failure, as well as specific product failures outside of ARRIS baseline
experience. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions (which could be material) would be recorded to the warranty liability.
The Company offers extended warranties and support service agreements on certain products. Revenue from these agreements is deferred at the time of the sale and recognized on a straight-line basis over
the contract period. Costs of services performed under these types of contracts are charged to expense as incurred, which approximates the timing of the revenue stream.
Information regarding the changes in ARRIS aggregate product warranty liabilities for the three months ended March 31, 2014 was as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
81,500
|
|
Accruals related to warranties (including changes in assumptions)
|
|
|
9,637
|
|
Settlements made (in cash or in kind)
|
|
|
(10,800
|
)
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
80,337
|
|
|
|
|
|
|
15
Note 10. 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
|
|
|
Total
|
|
Balance at December 31, 2013
|
|
$
|
2,674
|
|
|
$
|
673
|
|
|
$
|
3,347
|
|
Restructuring charges
|
|
|
(404
|
)
|
|
|
25
|
|
|
|
(379
|
)
|
Cash payments
|
|
|
(1,882
|
)
|
|
|
(149
|
)
|
|
|
(2,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
388
|
|
|
$
|
549
|
|
|
$
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
March 31, 2014, the total liability remaining for this restructuring plan was approximately $0.4 million. The remaining liability is expected to be paid by the end of third quarter 2014.
Contractual obligations
- Represent contractual obligations that relate primarily to excess leased facilities.
Note 11. Inventories
Inventories are stated at the lower of average cost, approximating first-in, first-out, or market. The components of inventory were as
follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Raw material
|
|
$
|
72,460
|
|
|
$
|
60,520
|
|
Work in process
|
|
|
9,062
|
|
|
|
6,010
|
|
Finished goods
|
|
|
204,536
|
|
|
|
263,599
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
286,058
|
|
|
$
|
330,129
|
|
|
|
|
|
|
|
|
|
|
Note 12. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Land
|
|
$
|
88,742
|
|
|
$
|
88,742
|
|
Building and leasehold improvements
|
|
|
136,708
|
|
|
|
133,668
|
|
Machinery and equipment
|
|
|
378,205
|
|
|
|
368,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
603,655
|
|
|
|
590,982
|
|
Less: Accumulated depreciation
|
|
|
(215,002
|
)
|
|
|
(194,830
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
388,653
|
|
|
$
|
396,152
|
|
|
|
|
|
|
|
|
|
|
16
Note 13. Long-Term Indebtedness
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 March 31, 2014, ARRIS had $1,738.8 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 March 31, 2014
|
Term Loan A
|
|
LIBOR + 2.00 %
|
|
2.15%
|
Term Loan B
|
|
LIBOR
(1)
+ 2.75 %
|
|
3.50%
|
Revolving Credit Facility
(2)
|
|
LIBOR + 2.00 %
|
|
Not Applicable
|
|
(1)
|
Includes LIBOR floor of 0.75%
|
|
(2)
|
Includes unused commitment fee of 0.40% and letter of credit fee of 2.00% 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 4.0:1 (which decreases to 3.5:1 throughout the next year). As of March 31, 2014, 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 three months ended March 31, 2014, the Company made mandatory prepayments of approximately
$13.8 million related to the senior secured credit facilities.
Following is a summary of our contractual debt obligations as of
March 31, 2014 (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
|
|
|
$
|
165,000
|
|
|
$
|
825,000
|
|
|
$
|
693,813
|
|
|
$
|
1,738,813
|
|
Note 14. 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.
17
Our 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 equipment, edge routers, metro WiFi, video management, storage, and
distribution equipment. For Telco providers this includes fiber-based and copper-based broadband transmission equipment. In addition, the portfolio includes an advanced video headend management system for both legacy MPEG/DVB systems as well as full
IP Video systems. Finally, the portfolio also includes full support for advanced multi-screen video management, protection, monetization and delivery, and a suite of products for performance management, configuration, and surveillance.
|
These operating segments were determined based on the nature of the products and services offered. The measures that are
used to assess the reportable segments operating performance are sales and direct contribution. A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating
resources.
Effective with the acquisition of Motorola Home in 2013, the Company made certain changes to its operating segments. In addition,
effective January 1, 2014, the Company changed management responsibility for certain product lines. 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 Company assesses its segments operating performance based on 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.
The table below presents information about the Companys reportable segments for the three months
ended March 31, 2014 and 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
Network & Cloud
|
|
|
CPE
|
|
|
Other
|
|
|
Consolidated
|
|
For the three months ended March 31,
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
331,570
|
|
|
$
|
180,267
|
|
|
$
|
893,601
|
|
|
$
|
186,565
|
|
|
$
|
(154
|
)
|
|
|
(13,182
|
)
|
|
$
|
1,225,017
|
|
|
$
|
353,650
|
|
Direct Contribution
|
|
|
65,364
|
|
|
|
57,057
|
|
|
|
191,787
|
|
|
|
26,008
|
|
|
|
(143,662
|
)
|
|
|
(58,747
|
)
|
|
|
113,489
|
|
|
|
24,318
|
|
|
|
|
|
|
|
|
|
Integration, acquisition,
restructuring & other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,502
|
|
|
|
7,199
|
|
|
|
11,502
|
|
|
|
7,199
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,001
|
|
|
|
7,603
|
|
|
|
64,001
|
|
|
|
7,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,986
|
|
|
|
9,516
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,182
|
|
|
|
23,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,804
|
|
|
$
|
(13,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Note 15. Sales Information
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 25.7% and 31.7% of total sales for the three months ended March 31, 2014 and 2013, respectively. International sales by region for the three months ended
March 31, 2014 and 2013 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Americas, excluding U.S.
(1)
|
|
$
|
213,972
|
|
|
$
|
81,725
|
|
Asia Pacific
|
|
|
32,952
|
|
|
|
10,172
|
|
EMEA
|
|
|
67,445
|
|
|
|
20,370
|
|
|
|
|
|
|
|
|
|
|
Total international sales
|
|
$
|
314,369
|
|
|
$
|
112,267
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes U.S. sales of $910.6 million and $241.4 million for the three months ended March 31, 2014 and 2013, respectively.
|
Note 16. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS)
computations for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
40,800
|
|
|
$
|
(14,650
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
142,854
|
|
|
|
115,150
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.29
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
Net income (loss)
|
|
$
|
40,800
|
|
|
$
|
(14,650
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
142,854
|
|
|
|
115,150
|
|
Net effect of dilutive equity awards
|
|
|
4,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
147,152
|
|
|
|
115,150
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.28
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2014, 10 thousand of the equity-based awards were excluded from the
computation of diluted earnings per share shares because their effect would have been anti-dilutive. For the three months ended March 31, 2013, all outstanding equity-based awards were 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.
19
During the three months ended March 31, 2014, the Company issued 1.2 million shares of its common
stock related to stock option exercises and the vesting of restricted shares, as compared to 3.6 million shares for the twelve months ended December 31, 2013.
The Company has not paid cash dividends on its common stock since its inception.
Note 17. Income Taxes
For the three months ended March 31, 2014 and 2013, the Company recorded income tax benefit of $22.0 million and income tax
expense of $0.7 million, respectively. Below is a summary of the components of the tax expense in each period (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Income
Before
Tax
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Effective
Tax Rate
|
|
|
Income
Before
Tax
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Effective
Tax Rate
|
|
Non-discrete items
|
|
$
|
30,306
|
|
|
$
|
10,826
|
|
|
|
35.7
|
%
|
|
$
|
25,770
|
|
|
$
|
8,216
|
|
|
|
31.9
|
%
|
Discrete tax events -
2012 R&D credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,875
|
)
|
|
|
|
|
Integration and acquisition costs
|
|
|
(11,502
|
)
|
|
|
(4,393
|
)
|
|
|
|
|
|
|
(7,190
|
)
|
|
|
(2,641
|
)
|
|
|
|
|
Comcasts investment in ARRIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,530
|
)
|
|
|
|
|
|
|
|
|
Change in state deferred rates
|
|
|
|
|
|
|
(5,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowances
|
|
|
|
|
|
|
(18,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(4,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,804
|
|
|
$
|
(21,996
|
)
|
|
|
(117.0
|
%)
|
|
$
|
(13,950
|
)
|
|
$
|
700
|
|
|
|
(5.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In conjunction with an agreement executed with Google in January 2014, the Company released certain valuation allowances resulting in the Company
recognizing a tax benefit of approximately $18.2 million related to additional net operating losses arising from Motorola Home acquisition. There remains considerable uncertainty surrounding the amount of realizable net operating losses that will
ultimately be transferred from Google to ARRIS. While the Company recorded its best estimate of the amount of realizable net operating losses it expects to receive during this quarter, it is possible that the actual amount provided will be
significantly different. As of March 31, 2014, ARRIS has recorded net operating losses of $545.5 million; however, the Company currently estimates that $493.5 million of that amount will not be realizable and is subject to a valuation
allowance. The ultimate realization of the net operating losses is dependent upon Google completing complex tax calculations. It is expected that ARRIS will obtain the amount of available net operating losses and all of the items necessary to
properly calculate the Companys ability to utilize the losses after Google files its corporate income tax return.
|
|
|
|
The Company recorded a benefit of $5.7 million from changes in state deferred income tax rates.
|
20
|
|
|
Additional benefits of $4.5 million were recognized from return to provision adjustments, valuation allowance releases and releases of uncertain tax
liabilities due to audit resolutions.
|
|
|
|
For the three month period ended March 31, 2014, the Company recorded significant book expenses of an infrequent and unusual nature of
approximately $11.5 million relating to the acquisition of the Home business of Motorola, generating a tax benefit of $4.4 million.
|
|
|
|
For the three month period ended March 31, 2014, the Company did not record any benefits attributed to research and development tax credits, as
the tax credit was not reenacted.
|
The earnings from the Companys non-U.S. subsidiaries are considered to be
permanently invested outside of the United States. Accordingly, no provision for U.S. federal and state income taxes on those non-U.S. earnings has been made in the accompanying consolidated financial statements. Any future distribution of these
non-U.S. earnings may subject the Company to both U.S. federal and state income taxes, after reduction for foreign taxes credited.
Note 18. Accumulated Other Comprehensive Income
The following table summarizes the changes in accumulated other comprehensive income by component, net of taxes, for the three months
ended March 31, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
on marketable
securities
|
|
|
Unfunded
pension
liability
|
|
|
Unrealized
loss on
derivative
instruments
|
|
|
Cumulative
translation
adjustments
|
|
|
Total
|
|
Balance as of December 31, 2013
|
|
$
|
306
|
|
|
$
|
(2,416
|
)
|
|
$
|
(2,541
|
)
|
|
$
|
(11
|
)
|
|
$
|
(4,662
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
(279
|
)
|
|
|
-
|
|
|
|
(119
|
)
|
|
|
(76
|
)
|
|
|
(474
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
(279
|
)
|
|
|
-
|
|
|
|
(119
|
)
|
|
|
(76
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
Balance as of March 31, 2014
|
|
$
|
27
|
|
|
$
|
(2,416
|
)
|
|
$
|
(2,660
|
)
|
|
$
|
(87
|
)
|
|
$
|
(5,136
|
)
|
|
|
|
|
|
Note 19. Related Party
As noted in Note 3
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 in the first quarter
2014 approximated $7.9 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 $15.4 million in the first quarter 2014.
Note 20. 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. (See Part II, Item 1, Legal Proceedings for additional details)
21
Note 21. Subsequent Event
SeaWell Networks, Inc.
On April 17, 2014, the Company completed its acquisition of SeaWell Networks, Inc. (See Note 3
Business Acquisitions
for additional details.)
22