ARRIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
(1)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
483,277
|
|
|
$
|
442,438
|
|
Short-term investments, at fair value
|
|
|
68,586
|
|
|
|
67,360
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short-term investments
|
|
|
551,863
|
|
|
|
509,798
|
|
Restricted cash
|
|
|
1,096
|
|
|
|
1,079
|
|
Accounts receivable (net of allowances for doubtful accounts of $2,255 in 2014 and $1,887 in 2013)
|
|
|
738,008
|
|
|
|
637,059
|
|
Other receivables
|
|
|
14,610
|
|
|
|
8,366
|
|
Inventories (net of reserves of $47,325 in 2014 and $42,408 in 2013)
|
|
|
297,848
|
|
|
|
330,129
|
|
Prepaid income taxes
|
|
|
32,802
|
|
|
|
13,034
|
|
Prepaids
|
|
|
33,715
|
|
|
|
61,482
|
|
Current deferred income taxes
|
|
|
79,070
|
|
|
|
77,167
|
|
Other current assets
|
|
|
57,588
|
|
|
|
39,930
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,806,600
|
|
|
|
1,678,044
|
|
Property, plant and equipment (net of accumulated depreciation of $234,534 in 2014 and $194,830 in 2013)
|
|
|
376,509
|
|
|
|
396,152
|
|
Goodwill
|
|
|
944,115
|
|
|
|
940,402
|
|
Intangible assets (net of accumulated amortization of $549,879 in 2014 and $427,143 in 2013)
|
|
|
1,057,557
|
|
|
|
1,176,192
|
|
Investments
|
|
|
68,852
|
|
|
|
71,176
|
|
Noncurrent deferred income taxes
|
|
|
20,468
|
|
|
|
7,678
|
|
Other assets
|
|
|
56,719
|
|
|
|
52,363
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,330,820
|
|
|
$
|
4,322,007
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
701,293
|
|
|
$
|
662,919
|
|
Accrued compensation, benefits and related taxes
|
|
|
101,644
|
|
|
|
116,262
|
|
Accrued warranty
|
|
|
54,546
|
|
|
|
48,755
|
|
Deferred revenue
|
|
|
114,489
|
|
|
|
69,071
|
|
Current portion of long-term debt
|
|
|
60,171
|
|
|
|
53,254
|
|
Current income taxes liability
|
|
|
19,672
|
|
|
|
3,068
|
|
Other accrued liabilities
|
|
|
127,335
|
|
|
|
141,698
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,179,150
|
|
|
|
1,095,027
|
|
Long-term debt, net of current portion
|
|
|
1,507,796
|
|
|
|
1,691,034
|
|
Accrued pension
|
|
|
59,552
|
|
|
|
58,657
|
|
Noncurrent income tax liability
|
|
|
22,597
|
|
|
|
21,048
|
|
Noncurrent deferred income taxes
|
|
|
74,297
|
|
|
|
74,791
|
|
Other noncurrent liabilities
|
|
|
68,512
|
|
|
|
62,463
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,911,904
|
|
|
|
3,003,020
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share, 5.0 million shares authorized; none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock, par value $0.01 per share, 320.0 million shares authorized; 144.3 million and 142.1 million shares
outstanding in 2014 and 2013, respectively
|
|
|
1,795
|
|
|
|
1,766
|
|
Capital in excess of par value
|
|
|
1,710,845
|
|
|
|
1,688,782
|
|
Treasury stock at cost, 34.2 million shares in 2014 and 2013
|
|
|
(306,330
|
)
|
|
|
(306,330
|
)
|
Retained earnings (deficit)
|
|
|
19,255
|
|
|
|
(60,569
|
)
|
Unrealized gain on marketable securities (net of accumulated tax effect of $64 in 2014 and $154 in 2013)
|
|
|
150
|
|
|
|
306
|
|
Unfunded pension liability (net of accumulated tax effect of $981 in 2014 and 2013)
|
|
|
(2,416
|
)
|
|
|
(2,416
|
)
|
Unrealized loss on derivative instruments (net of accumulated tax effect of $2,599 in 2014 and $1,467 in 2013)
|
|
|
(4,503
|
)
|
|
|
(2,541
|
)
|
Cumulative translation adjustments
|
|
|
120
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
1,418,916
|
|
|
|
1,318,987
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,330,820
|
|
|
$
|
4,322,007
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Certain amounts for December 31, 2013 have been recast to reflect results for business acquisitions.
|
See accompanying notes to the consolidated financial statements.
2
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(
in thousands, except per share data) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
(1)
|
|
|
2014
|
|
|
2013
(1)
|
|
Net sales
|
|
$
|
1,429,071
|
|
|
$
|
1,000,362
|
|
|
$
|
2,654,088
|
|
|
$
|
1,354,012
|
|
Cost of sales
|
|
|
1,009,659
|
|
|
|
769,405
|
|
|
|
1,887,901
|
|
|
|
1,014,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
419,412
|
|
|
|
230,957
|
|
|
|
766,187
|
|
|
|
339,483
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
112,362
|
|
|
|
87,899
|
|
|
|
211,494
|
|
|
|
128,025
|
|
Research and development expenses
|
|
|
144,121
|
|
|
|
123,557
|
|
|
|
278,274
|
|
|
|
167,639
|
|
Amortization of intangible assets
|
|
|
58,735
|
|
|
|
55,914
|
|
|
|
122,736
|
|
|
|
63,517
|
|
Integration, acquisition, restructuring and other costs
|
|
|
12,518
|
|
|
|
51,649
|
|
|
|
24,020
|
|
|
|
58,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
327,736
|
|
|
|
319,019
|
|
|
|
636,524
|
|
|
|
418,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
91,676
|
|
|
|
(88,062
|
)
|
|
|
129,663
|
|
|
|
(78,546
|
)
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
18,225
|
|
|
|
18,612
|
|
|
|
34,823
|
|
|
|
23,243
|
|
Loss (gain) on investments
|
|
|
3,236
|
|
|
|
(729
|
)
|
|
|
4,911
|
|
|
|
(1,293
|
)
|
Interest income
|
|
|
(701
|
)
|
|
|
(640
|
)
|
|
|
(1,284
|
)
|
|
|
(1,478
|
)
|
Loss on foreign currency
|
|
|
1,332
|
|
|
|
206
|
|
|
|
653
|
|
|
|
1,027
|
|
Other expense (income), net
|
|
|
4,422
|
|
|
|
(7,735
|
)
|
|
|
6,594
|
|
|
|
11,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
65,162
|
|
|
|
(97,776
|
)
|
|
|
83,966
|
|
|
|
(111,726
|
)
|
Income tax expense (benefit)
|
|
|
26,138
|
|
|
|
(49,313
|
)
|
|
|
4,142
|
|
|
|
(48,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
39,024
|
|
|
$
|
(48,463
|
)
|
|
$
|
79,824
|
|
|
$
|
(63,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
|
$
|
(0.36
|
)
|
|
$
|
0.56
|
|
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.26
|
|
|
$
|
(0.36
|
)
|
|
$
|
0.54
|
|
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
144,415
|
|
|
|
134,626
|
|
|
|
143,637
|
|
|
|
124,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
148,063
|
|
|
|
134,626
|
|
|
|
147,610
|
|
|
|
124,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Certain amounts for the three and six months ended June 30, 2013 have been recast to reflect results for business acquisitions.
|
See accompanying notes to the consolidated financial statements.
3
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(
in thousands) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
(1)
|
|
|
2014
|
|
|
2013
(1)
|
|
Net income (loss)
|
|
$
|
39,024
|
|
|
$
|
(48,463
|
)
|
|
$
|
79,824
|
|
|
$
|
(63,113
|
)
|
Unrealized gain (loss) on marketable securities, net of (expense) benefit of $(12) and $137 for the three months ended June 30,
2014 and 2013, and $90 and $103 for the six months ended June 30, 2014 and 2013, respectively
|
|
|
123
|
|
|
|
(273
|
)
|
|
|
(156
|
)
|
|
|
(225
|
)
|
Unrealized loss on derivative instruments, net of tax of $1,176 and $0 for the three months ended June 30, 2014 and 2013, and
$1,132 and $0 for the six months ended June 30, 2014 and 2013, respectively
|
|
|
(1,843
|
)
|
|
|
-
|
|
|
|
(1,962
|
)
|
|
|
-
|
|
Cumulative translation adjustment
|
|
|
207
|
|
|
|
487
|
|
|
|
131
|
|
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of tax
|
|
$
|
37,511
|
|
|
$
|
(48,249
|
)
|
|
$
|
77,837
|
|
|
$
|
(62,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Certain amounts for the three and six months ended June 30, 2013 have been recast to reflect results for business acquisitions.
|
See accompanying notes to the condensed consolidated financial statements.
4
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
(1)
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
79,824
|
|
|
$
|
(63,113
|
)
|
Depreciation
|
|
|
39,675
|
|
|
|
22,519
|
|
Amortization of intangible assets
|
|
|
122,736
|
|
|
|
63,517
|
|
Stock compensation expense
|
|
|
26,317
|
|
|
|
13,924
|
|
Deferred income tax benefit
|
|
|
(14,029
|
)
|
|
|
(41,199
|
)
|
Amortization of deferred finance fees and debt discount
|
|
|
7,194
|
|
|
|
2,237
|
|
Provision for doubtful accounts
|
|
|
1,244
|
|
|
|
|
|
Loss (gain) on investments
|
|
|
4,911
|
|
|
|
(1,293
|
)
|
Revenue reduction related to Comcasts investment in ARRIS
|
|
|
|
|
|
|
13,182
|
|
Mark-to-market fair value adjustment related to Comcasts investment in ARRIS
|
|
|
|
|
|
|
13,189
|
|
Loss (gain) on disposal and write down of fixed assets
|
|
|
3,186
|
|
|
|
(38
|
)
|
Excess income tax benefits from stock-based compensation plans
|
|
|
(11,325
|
)
|
|
|
(5,770
|
)
|
Non-cash interest expense
|
|
|
|
|
|
|
6,552
|
|
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(101,029
|
)
|
|
|
(16,514
|
)
|
Other receivables
|
|
|
(8,047
|
)
|
|
|
(7,127
|
)
|
Inventories
|
|
|
32,281
|
|
|
|
92,632
|
|
Accounts payable and accrued liabilities
|
|
|
62,295
|
|
|
|
251,299
|
|
Prepaids and other, net
|
|
|
9,923
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
255,156
|
|
|
|
344,009
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(26,292
|
)
|
|
|
(21,402
|
)
|
Purchases of investments
|
|
|
(31,015
|
)
|
|
|
(58,021
|
)
|
Sales of investments
|
|
|
24,681
|
|
|
|
358,021
|
|
Acquisitions, net of cash acquired
|
|
|
84
|
|
|
|
(2,159,762
|
)
|
Proceeds from sales of property, plant and equipment
|
|
|
19
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(32,523
|
)
|
|
|
(1,881,074
|
)
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Excess income tax benefits from stock-based compensation plans
|
|
|
11,325
|
|
|
|
5,770
|
|
Repurchase of shares to satisfy employee minimum tax withholdings
|
|
|
(22,412
|
)
|
|
|
(12,407
|
)
|
Proceeds from issuance of common stock
|
|
|
11,446
|
|
|
|
165,453
|
|
Proceeds from issuance of debt
|
|
|
|
|
|
|
1,925,000
|
|
Payment of debt obligations
|
|
|
(182,153
|
)
|
|
|
(15,813
|
)
|
Cash paid for debt discount
|
|
|
|
|
|
|
(9,853
|
)
|
Early redemption of convertible notes
|
|
|
|
|
|
|
(79
|
)
|
Deferred financing costs paid
|
|
|
|
|
|
|
(42,207
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by by financing activities
|
|
|
(181,794
|
)
|
|
|
2,015,864
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
40,839
|
|
|
|
478,799
|
|
Cash and cash equivalents at beginning of period
|
|
|
442,438
|
|
|
|
131,703
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
483,277
|
|
|
$
|
610,502
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Certain amounts for the six months ended June 30, 2013 have been recast to reflect results for business acquisitions.
|
See accompanying notes to the condensed consolidated financial statements.
5
ARRIS GROUP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
)
Note 1. Organization and Basis of Presentation
ARRIS Group, Inc. (together with its consolidated subsidiaries, except as the context otherwise indicates, ARRIS or the
Company) is a 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.)
In connection with the acquisition of Motorola Home, the consolidated financial statements as of June 30, 2013 and for the three months then ended have been recast to include retrospective
acquisition accounting and other adjustments. The following tables present the effect on the Companys affected financial statement line items for the period ended June 30, 2013 and three months ended June 30, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally
Reported
|
|
|
As Adjusted
|
|
|
Increase (Decrease)
|
|
Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
320,778
|
|
|
$
|
311,608
|
|
|
$
|
(9,170
|
)
|
Current deferred income tax assets
|
|
|
127,225
|
|
|
|
132,113
|
|
|
|
4,888
|
|
Other current assets
|
|
|
283,491
|
|
|
|
281,987
|
|
|
|
(1,504
|
)
|
Property, plant and equipment
|
|
|
404,157
|
|
|
|
393,594
|
|
|
|
(10,563
|
)
|
Goodwill
|
|
|
807,142
|
|
|
|
943,316
|
|
|
|
136,174
|
|
Intangible assets
|
|
|
1,372,196
|
|
|
|
1,270,211
|
|
|
|
(101,985
|
)
|
Investments
|
|
|
78,733
|
|
|
|
95,551
|
|
|
|
16,818
|
|
Noncurrent deferred income tax assets
|
|
|
12,340
|
|
|
|
6,368
|
|
|
|
(5,972
|
)
|
Other assets
|
|
|
55,476
|
|
|
|
54,847
|
|
|
|
(629
|
)
|
Accrued compensation, benefits and related taxes
|
|
|
88,382
|
|
|
|
88,494
|
|
|
|
112
|
|
Accrued warranty
|
|
|
40,206
|
|
|
|
57,532
|
|
|
|
17,326
|
|
Current income taxes liability
|
|
|
8,887
|
|
|
|
6,528
|
|
|
|
(2,359
|
)
|
Other accrued liabilities
|
|
|
498,788
|
|
|
|
549,995
|
|
|
|
51,207
|
|
Accrued pension
|
|
|
60,216
|
|
|
|
64,263
|
|
|
|
4,047
|
|
Noncurrent deferred income tax liabilities
|
|
|
190,176
|
|
|
|
146,086
|
|
|
|
(44,090
|
)
|
Accumulated deficit
|
|
|
(76,736
|
)
|
|
|
(74,922
|
)
|
|
|
1,814
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Originally
Reported
|
|
|
As
Adjusted
|
|
|
Increase (Decrease)
|
|
Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
$
|
15,609
|
|
|
$
|
16,011
|
|
|
$
|
402
|
|
Amortization expense
|
|
|
58,130
|
|
|
|
55,914
|
|
|
|
(2,216
|
)
|
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. Recent Accounting Pronouncements
Adoption of New Accounting Standards
In July 2013, the Financial Accounting Standards Board (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 its consolidated
financial position and results of operations.
Accounting Standards Issued But Not Yet Effective
In April 2014, the FASB issued
accounting standards update that change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity. A disposal of a component of an entity or a group of
components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entitys operations and financial results and when the component or group of
components meets the criteria to be classified as held for sale, is disposed of by sale or is disposed of by other than by sale. This update is effective prospectively for fiscal years, and interim reporting periods within those years, beginning
after December 15, 2014, with earlier adoption permitted. The adoption of this guidance is not expected to have a material impact on the Companys consolidated financial position and results of operations.
In May 2014, the FASB issued an Accounting Standards Update,
Revenue from Contracts with Customers
. The core principle of this amendment is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is
effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted. It can be adopted either retrospectively to each prior reporting period
presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently assessing the potential impact of this update on its consolidated financial statements.
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).
7
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 the accounting for the
aforementioned business combination.
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. Initial consideration for the acquisition was $5.9 million (net of assumed cash, and additional contingent consideration of up to $3.0 million could be paid based upon achievement of certain
financial targets, over 30 months from the date of acquisition.
Goodwill in the amount of $4.4 million was preliminarily recognized for this
acquisition and is calculated as the excess of consideration transferred over the net assets recognized and represents future economic benefits arising from assets acquired that could not be individually identified and separately recognized such as
assembled workforce. The goodwill is not deductible for tax purposes. The Company also identified certain customer, marketing and technology related intangible assets which have been preliminarily valued at $2.0 million, with estimated useful lives
ranging from 5 to 10 years.
This acquisition is expected to further enhance the Companys IP video delivery capabilities, by integrating
SeaWells adaptive bit rate streaming technologies and talent into its Network & Cloud business.
The Consolidated Financial
Statements include the operating results of the business combination from the date of acquisition. The effects of the acquisitions, individually and in the aggregate, were not material to the Companys financial results.
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 June 30, 2014, the Company has recorded goodwill of $944.1 million. The Company has recast goodwill as of December 31, 2013 to appropriately reflect the goodwill arising from the
Acquisition.
The changes in the carrying amount of goodwill for the year to date period ended June 30, 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
|
|
Goodwill acquired
|
|
|
|
|
|
|
4,448
|
|
|
|
|
|
|
|
4,448
|
|
Other
|
|
|
|
|
|
|
(735
|
)
|
|
|
|
|
|
|
(735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
688,658
|
|
|
|
501,454
|
|
|
|
132,659
|
|
|
|
1,322,771
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(257,053
|
)
|
|
|
(121,603
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2014
|
|
$
|
688,658
|
|
|
$
|
244,401
|
|
|
$
|
11,056
|
|
|
$
|
944,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
June 30, 2014 and December 31, 2013 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 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
|
|
$
|
904,065
|
|
|
$
|
316,380
|
|
|
$
|
587,685
|
|
|
|
6.5
|
|
|
$
|
903,409
|
|
|
$
|
266,323
|
|
|
$
|
637,086
|
|
|
|
7.0
|
|
Developed technology, patents & licenses
|
|
|
629,184
|
|
|
|
175,654
|
|
|
|
453,530
|
|
|
|
4.5
|
|
|
|
563,326
|
|
|
|
120,679
|
|
|
|
442,647
|
|
|
|
5.0
|
|
Trademark, trade and domain names
|
|
|
21,087
|
|
|
|
13,245
|
|
|
|
7,842
|
|
|
|
1.2
|
|
|
|
20,900
|
|
|
|
8,549
|
|
|
|
12,351
|
|
|
|
1.5
|
|
Order backlog
|
|
|
44,600
|
|
|
|
44,600
|
|
|
|
|
|
|
|
|
|
|
|
44,600
|
|
|
|
31,592
|
|
|
|
13,008
|
|
|
|
0.3
|
|
In-process R&D
|
|
|
8,500
|
|
|
|
|
|
|
|
8,500
|
|
|
|
|
|
|
|
71,100
|
|
|
|
|
|
|
|
71,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,607,436
|
|
|
$
|
549,879
|
|
|
$
|
1,057,557
|
|
|
|
|
|
|
$
|
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 six months)
|
|
$
|
113,776
|
|
2015
|
|
|
220,176
|
|
2016
|
|
|
189,447
|
|
2017
|
|
|
172,513
|
|
2018
|
|
|
121,821
|
|
2019
|
|
|
99,505
|
|
Thereafter
|
|
|
140,319
|
|
Amounts reflected in the above table exclude $8.5 million of amortization that would be incurred upon successful
completion of in-process research and development projects.
Note 5. Investments
ARRIS investments as of June 30, 2014 and December 31, 2013 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014
|
|
|
As of December 31, 2013
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
68,586
|
|
|
$
|
67,360
|
|
|
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
3,781
|
|
|
|
7,004
|
|
Equity method investments
|
|
|
26,126
|
|
|
|
23,803
|
|
Cost method investments
|
|
|
12,661
|
|
|
|
15,250
|
|
Other investments
|
|
|
26,284
|
|
|
|
25,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,852
|
|
|
|
71,176
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
137,438
|
|
|
$
|
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 the Consolidated Balance Sheets as a component of accumulated other comprehensive income (loss). The total losses included in the accumulated other comprehensive
9
income related to available-for-sale securities were $150 thousand and $306 thousand, net of tax, as of June 30, 2014 and December 31, 2013, respectively. Realized and unrealized gains
and losses in total and by individual investment as of June 30, 2014 and December 31, 2013 were not material. The amortized cost basis of the Companys investments approximates fair value.
The contractual maturities of the Companys available-for-sale securities as of June 30, 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):
|
|
|
|
|
|
|
June 30,
2014
|
|
Within one year
|
|
$
|
68,586
|
|
After one year through five years
|
|
|
26
|
|
After five years through ten years
|
|
|
|
|
After ten years
|
|
|
3,755
|
|
|
|
|
|
|
Total
|
|
|
72,367
|
|
|
|
|
|
|
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 $26.1 million and $23.8
million as of June 30, 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.
Cost method
investments
ARRIS holds cost method investments in private companies. These investments are recorded at $12.7 million and $15.3 million as of June 30, 2014 and December 31, 2013, respectively. Due to the fact the investments are
in private companies, ARRIS is exempt from estimating the fair value on an interim and annual basis. It is not practical to estimate the fair value since the quoted market price is not available. Furthermore, the cost of obtaining an independent
valuation appears excessive considering the 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 June 30, 2014 and December 31, 2013, ARRIS held
$26.3 million and $25.1 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.
Investment Other-Than-Temporary Impairments
During the second quarter of 2014, the Company performed an evaluation of its investments for
any other-than-temporary impairment, by reviewing the current revenues, bookings and long-term plan of the private companies. ARRIS concluded that one private company had indicators of impairment, and that its fair value had declined. This resulted
in other-than-temporary impairment charges of $3.0 million during the quarter ended June 30, 2014. 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.
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 defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (the exit price). The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In order
to increase consistency and comparability in fair value measurements, the FASB has established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. An asset or
liabilitys categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by the authoritative guidance are as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not
quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data
is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
The following table presents the Companys
investment assets (excluding equity and cost method investments) and derivatives measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
4,706
|
|
|
$
|
|
|
|
$
|
4,706
|
|
Commercial paper
|
|
|
|
|
|
|
2,999
|
|
|
|
|
|
|
|
2,999
|
|
Corporate bonds
|
|
|
|
|
|
|
31,196
|
|
|
|
|
|
|
|
31,196
|
|
Short-term bond fund
|
|
|
29,711
|
|
|
|
|
|
|
|
|
|
|
|
29,711
|
|
Cash surrender value of company owned life insurance
|
|
|
|
|
|
|
26,284
|
|
|
|
|
|
|
|
26,284
|
|
Corporate obligations
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
20
|
|
Money markets
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
214
|
|
Mutual funds
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Other investments
|
|
|
|
|
|
|
3,321
|
|
|
|
|
|
|
|
3,321
|
|
Interest rate derivatives asset derivatives
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
159
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(7,261
|
)
|
|
|
|
|
|
|
(7,261
|
)
|
|
|
|
|
December 31, 2013
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
3,814
|
|
|
$
|
|
|
|
$
|
3,814
|
|
Commercial paper
|
|
|
|
|
|
|
2,994
|
|
|
|
|
|
|
|
2,994
|
|
Corporate bonds
|
|
|
|
|
|
|
34,591
|
|
|
|
|
|
|
|
34,591
|
|
Short-term bond fund
|
|
|
29,565
|
|
|
|
|
|
|
|
|
|
|
|
29,565
|
|
Cash surrender value of company owned life insurance
|
|
|
|
|
|
|
25,119
|
|
|
|
|
|
|
|
25,119
|
|
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
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(7,018
|
)
|
|
|
|
|
|
|
(7,018
|
)
|
All of the Companys short-term and long-term investments at June 30, 2014 and 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
11
market funds, mutual funds, government agency bonds and municipal bonds. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued
based on other observable inputs include the Companys cash surrender value of company owned life insurance, corporate obligations and bonds, commercial paper and certificates of deposit. Such instruments are classified within Level 2 of the
fair value hierarchy.
The Company believes the face value of the debt as of June 30, 2014 approximated the fair value based on recent market
conditions, prevailing interest rates, and other Company specific factors. The Company has classified the debt as Level 2 item within the fair value hierarchy.
Note 7. Derivative Instruments and Hedging Activities
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% as of June 30, 2014. 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 and six months ended June 30, 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.
The table below presents the pre-tax impact of the
Companys derivative financial instruments had on the Accumulated Other Comprehensive Income and Statement of Operations for the three and six months ended June 30, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
|
|
$
|
(4,864
|
)
|
|
$
|
|
|
|
$
|
(6,836
|
)
|
|
$
|
|
|
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
|
Interest expense
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
|
(1,889
|
)
|
|
|
|
|
|
|
(3,742
|
)
|
|
|
|
|
12
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 June 30, 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 $7.3 million. As of June 30, 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 June 30, 2014 and December 31, 2013 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 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
|
|
$
|
159
|
|
|
Other assets
|
|
$
|
3,011
|
|
|
|
|
|
|
Interest rate derivatives
liability derivatives
|
|
Other accrued liabilities
|
|
$
|
7,261
|
|
|
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
and six months ended June 30, 2014 and 2013 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
|
|
Statement of Operations Location
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Derivatives Not Designated
as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Loss (gain) on foreign currency
|
|
$
|
|
|
|
$
|
384
|
|
|
$
|
|
|
|
$
|
428
|
|
|
|
|
|
|
|
Derivatives Designated
as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates derivatives
|
|
Interest expense
|
|
$
|
1,889
|
|
|
$
|
|
|
|
$
|
3,742
|
|
|
$
|
|
|
13
Note 8. Pension Benefits
Components of Net Periodic Pension Cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Service cost
|
|
$
|
|
|
|
$
|
266
|
|
|
$
|
|
|
|
$
|
327
|
|
Interest cost
|
|
|
446
|
|
|
|
531
|
|
|
|
892
|
|
|
|
918
|
|
Expected gain on plan assets
|
|
|
(219
|
)
|
|
|
(252
|
)
|
|
|
(438
|
)
|
|
|
(471
|
)
|
Amortization of net loss
|
|
|
76
|
|
|
|
319
|
|
|
|
152
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
303
|
|
|
$
|
864
|
|
|
$
|
606
|
|
|
$
|
1,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the Acquisition, the Company assumed a pension liability related to a defined benefit plan in Taiwan,
which had a balance of $28.3 million as of June 30, 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 June 30, 2014 was approximately $20.3 million and is included in
Investments on the Consolidated Balance Sheets.
Note 9. Guarantees
Warranty
ARRIS
provides warranties of various lengths to customers based on the specific product and the terms of individual agreements. The Company provides for the estimated cost of product warranties based on historical trends, the embedded base of product in
the field, failure rates, and repair costs at the time revenue is recognized. Expenses related to product defects and unusual product warranty problems are recorded in the period that the problem is identified. While the Company engages in extensive
product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers, the estimated warranty obligation could be affected by changes in ongoing product failure rates, material usage and service delivery
costs incurred in correcting a product failure, as well as specific product failures outside of ARRIS baseline experience. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions (which could
be material) would be recorded 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 six months ended June 30, 2014 was as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
81,500
|
|
Accruals related to warranties (including changes in estimates)
|
|
|
20,861
|
|
Settlements made (in cash or in kind)
|
|
|
(19,548
|
)
|
|
|
|
|
|
Balance at June 30, 2014
|
|
$
|
82,813
|
|
|
|
|
|
|
14
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 and contractual obligations that related to excess leased facilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
severance &
termination
benefits
|
|
|
Contractual
obligations and
other
|
|
|
Total
|
|
Balance at December 31, 2013
|
|
$
|
2,674
|
|
|
$
|
673
|
|
|
$
|
3,347
|
|
Restructuring charges
|
|
|
(423
|
)
|
|
|
29
|
|
|
|
(394
|
)
|
Cash payments
|
|
|
(1,909
|
)
|
|
|
(272
|
)
|
|
|
(2,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2014
|
|
$
|
342
|
|
|
$
|
430
|
|
|
$
|
772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30,
2014, the total liability remaining for this restructuring plan was approximately $0.3 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):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Raw material
|
|
$
|
65,096
|
|
|
$
|
60,520
|
|
Work in process
|
|
|
9,659
|
|
|
|
6,010
|
|
Finished goods
|
|
|
223,093
|
|
|
|
263,599
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
297,848
|
|
|
$
|
330,129
|
|
|
|
|
|
|
|
|
|
|
Note 12. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Land
|
|
$
|
87,952
|
|
|
$
|
88,742
|
|
Building and leasehold improvements
|
|
|
133,094
|
|
|
|
133,668
|
|
Machinery and equipment
|
|
|
389,997
|
|
|
|
368,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
611,043
|
|
|
|
590,982
|
|
Less: Accumulated depreciation
|
|
|
(234,534
|
)
|
|
|
(194,830
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
376,509
|
|
|
$
|
396,152
|
|
|
|
|
|
|
|
|
|
|
During the quarter ended June 30, 2014, the Company entered into a binding letter of intent with a potential buyer
for the sale of land and building for $2.9 million which is lower than its carrying amount of $4.8 million. The asset has been reclassified as held for sale and was measured at the lower of its carrying amount or fair value less cost to sell. Total
asset held for sale at June 30, 2014 was $2.7 million, which is reported in the Consolidated Balance Sheet as a component of Other current assets. The Company has recorded an impairment charge of $2.1 million to reduce the assets
carrying amount to its estimated fair value less cost to sell during the quarter ended June 30, 2014, which is reported in the Consolidated Statements of Operations under the caption other income (expense), net. The sale is expected
to close during the third quarter of 2014.
15
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 June 30, 2014, ARRIS had $1,575.1 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 June 30, 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 (with scheduled decreases to 3.5:1). As of June 30, 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 and six months ended June 30, 2014, the Company made mandatory repayments of approximately $13.8
million and $27.5 million, respectively, and optional prepayments of $150.0 million related to the senior secured credit facilities.
Following is a summary of our contractual debt obligations at face value as of June 30, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Less than 1 Year
|
|
|
1-3 Years
|
|
|
3-5
Years
|
|
|
More than 5 Years
|
|
|
Total
|
|
Credit facilities
|
|
$
|
61,875
|
|
|
$
|
199,375
|
|
|
$
|
770,000
|
|
|
$
|
543,813
|
|
|
$
|
1,575,063
|
|
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.
16
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 and Cloud (N&C)
The N&C segments product lines cover all components required by
facility-based Service Providers to construct a state-of-the-art residential and metro distribution network. For Cable providers this includes Hybrid Fiber Coax 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 represents information about the Companys reporting segments for the three and six
months ended June 30, 2014 and 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
N&C
|
|
|
CPE
|
|
|
Other
|
|
|
Consolidated
|
|
For the three months ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
409,699
|
|
|
$
|
343,643
|
|
|
$
|
1,022,925
|
|
|
$
|
659,331
|
|
|
$
|
(3,553
|
)
|
|
|
(2,612
|
)
|
|
$
|
1,429,071
|
|
|
$
|
1,000,362
|
|
Direct Contribution
|
|
|
104,552
|
|
|
|
67,251
|
|
|
|
224,783
|
|
|
|
127,970
|
|
|
|
(166,406
|
)
|
|
|
(175,720
|
)
|
|
|
162,929
|
|
|
|
19,501
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,734
|
|
|
|
55,914
|
|
|
|
58,735
|
|
|
|
55,914
|
|
Integration, acquisition,
restructuring & other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,518
|
|
|
|
51,649
|
|
|
|
12,518
|
|
|
|
51,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,676
|
|
|
|
(88,062
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,514
|
|
|
|
9,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65,162
|
|
|
$
|
(97,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
|
|
N&C
|
|
|
CPE
|
|
|
Other
|
|
|
Consolidated
|
|
For the six months ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
741,268
|
|
|
$
|
523,911
|
|
|
$
|
1,916,526
|
|
|
$
|
845,895
|
|
|
$
|
(3,706
|
)
|
|
|
(15,794
|
)
|
|
$
|
2,654,088
|
|
|
$
|
1,354,012
|
|
|
|
|
|
|
|
|
|
|
Direct Contribution
|
|
|
169,916
|
|
|
|
124,307
|
|
|
|
416,570
|
|
|
|
153,980
|
|
|
|
(310,067
|
)
|
|
|
(234,468
|
)
|
|
|
276,419
|
|
|
|
43,819
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,736
|
|
|
|
63,517
|
|
|
|
122,736
|
|
|
|
63,517
|
|
Integration, acquisition,
restructuring & other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,020
|
|
|
|
58,848
|
|
|
|
24,020
|
|
|
|
58,848
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,663
|
|
|
|
(78,546
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,697
|
|
|
|
33,180
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83,966
|
|
|
$
|
(111,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
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. For the three months ended June 30, 2014 and 2013, sales to international customers were approximately 21.8% and 34.2%, respectively, of total sales. For the six months ended June 30, 2014 and 2013, sales
to international customers were 23.6% and 33.6%, respectively, of total sales.
International sales by region for the three and six months
ended June 30, 2014 and 2013 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Americas, excluding U.S.
(1)
|
|
$
|
200,111
|
|
|
$
|
201,483
|
|
|
$
|
414,083
|
|
|
$
|
283,208
|
|
Asia Pacific
|
|
|
42,138
|
|
|
|
49,062
|
|
|
|
75,090
|
|
|
|
59,233
|
|
EMEA
|
|
|
68,681
|
|
|
|
91,556
|
|
|
|
136,126
|
|
|
|
111,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international sales
|
|
$
|
310,930
|
|
|
$
|
342,101
|
|
|
$
|
625,299
|
|
|
$
|
454,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes U.S. sales of $1,118.2 million and $2,028.8 million for the three and six months ended June 30, 2014, respectively. Excludes U.S. sales of $658.3 million
and $899.6 million for the three and six months ended June 30, 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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
39,024
|
|
|
$
|
(48,463
|
)
|
|
$
|
79,824
|
|
|
$
|
(63,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
144,415
|
|
|
|
134,626
|
|
|
|
143,637
|
|
|
|
124,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
0.27
|
|
|
$
|
(0.36
|
)
|
|
$
|
0.56
|
|
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
39,024
|
|
|
$
|
(48,463
|
)
|
|
$
|
79,824
|
|
|
$
|
(63,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
144,415
|
|
|
|
134,626
|
|
|
|
143,637
|
|
|
|
124,940
|
|
Net effect of dilutive equity awards
|
|
|
3,648
|
|
|
|
|
|
|
|
3,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
148,063
|
|
|
|
134,626
|
|
|
|
147,610
|
|
|
|
124,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
0.26
|
|
|
$
|
(0.36
|
)
|
|
$
|
0.54
|
|
|
$
|
(0.51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2014, approximately 3.7 thousand and 6.7 thousand 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. During the same periods in 2013, approximately 1.5 million and 0.8 million of
the equity-based awards, respectively, were excluded from the dilutive securities above. These exclusions are made if the exercise price of these equity-based awards is in excess of the average market price of the common stock for the period, or if
the Company has net losses, both of which have an anti-dilutive effect.
During the six months ended June 30, 2014, the Company issued
2.2 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.
In 2013, in connection with the Acquisition, the Seller was issued approximately 10.6 million shares of ARRIS common stock as part of the
purchase consideration. Furthermore, Comcast was given an opportunity to invest in ARRIS, and 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.
18
The Company has not paid cash dividends on its common stock since its inception.
Note 17. Income Taxes
For the six months ended June 30, 2014 and 2013, the Company recorded income tax expense (benefit) of $4.1 million and $(48.6)
million, respectively. Below is a summary of the components of the tax expense (benefit) for the three and six month periods ended June 30, 2014 and 2013 (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Income
(Loss)
Before
Tax
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Effective
Tax Rate
|
|
|
Income
(Loss)
Before
Tax
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Effective
Tax Rate
|
|
Non-discrete items
|
|
$
|
82,805
|
|
|
$
|
29,614
|
|
|
|
35.8
|
%
|
|
$
|
(47,981
|
)
|
|
$
|
(32,404
|
)
|
|
|
67.5
|
%
|
Discrete tax events
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on real estate held for sale
|
|
$
|
(2,125
|
)
|
|
$
|
(758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book write down in cost method investment
|
|
$
|
(3,000
|
)
|
|
$
|
(1,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs
|
|
$
|
(12,518
|
)
|
|
$
|
(4,170
|
)
|
|
|
|
|
|
$
|
(51,659
|
)
|
|
$
|
(17,109
|
)
|
|
|
|
|
Comcasts investment in ARRIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,159
|
|
|
|
|
|
|
|
|
|
Change in state deferred rates
|
|
|
|
|
|
$
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) from certain foreign entities acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,295
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
$
|
2,017
|
|
|
|
|
|
|
|
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,162
|
|
|
$
|
26,138
|
|
|
|
40.1
|
%
|
|
$
|
(97,776
|
)
|
|
$
|
(49,313
|
)
|
|
|
50.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Income(Loss)
Before Tax
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Effective
Tax Rate
|
|
|
Income
(Loss)
Before Tax
|
|
|
Income
Tax
Expense
(Benefit)
|
|
|
Effective
Tax Rate
|
|
Non-discrete items
|
|
$
|
113,111
|
|
|
$
|
40,440
|
|
|
|
35.8
|
%
|
|
$
|
(22,212
|
)
|
|
$
|
(24,188
|
)
|
|
|
108.9
|
%
|
Discrete tax events
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 R&D Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,875
|
)
|
|
|
|
|
Loss on real estate held for sale
|
|
$
|
(2,125
|
)
|
|
$
|
(758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book write down in cost method investment
|
|
$
|
(3,000
|
)
|
|
$
|
(1,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs
|
|
$
|
(24,020
|
)
|
|
$
|
(8,563
|
)
|
|
|
|
|
|
$
|
(58,848
|
)
|
|
$
|
(19,750
|
)
|
|
|
|
|
Comcasts investment in ARRIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(26,371
|
)
|
|
|
|
|
|
|
|
|
Change in state deferred rates
|
|
|
|
|
|
$
|
(5,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowances
|
|
|
|
|
|
$
|
(18,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) from certain foreign entities acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,295
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
$
|
(2,505
|
)
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
83,966
|
|
|
$
|
4,142
|
|
|
|
4.9
|
%
|
|
$
|
(111,726
|
)
|
|
$
|
(48,613
|
)
|
|
|
43.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the income tax expense (benefit) for the three and six month periods ended June 30, 2014 compared to the three and six months period
ended June 30, 2013, was due to the change in earnings from continuing operations, as a result of the Motorola Home acquisition that occurred on April 17, 2013 and its related significant, infrequent and unusual book charges. In addition,
there were significant and unusual tax charges relating to an estimated increase in the expected utilization of net operating losses from the Motorola Home acquisition, less associated valuation allowances, a change in state deferred tax rates due
to the acquisition and a favorable release of uncertain tax positions from a resolution of the U.S. federal income tax audit for 2010.
|
19
|
|
|
For the six month periods ended June 30, 2014 and 2013, our estimated effective tax rates were 4.9% and 43.5%, respectively. The rate of 4.9% is
based on the Companys pre-tax book income of approximately $84.0 million and a tax expense of approximately $4.1 million, for the six months period ending June 30, 2014. The change in the estimated effective tax rate for the six month
period ended June 30, 2014, compared to the six month period ended June 30, 2013 was due to an increase in earnings from continuing operations, in addition to benefits from an increase in the expected utilization of net operating losses
from the Motorola Home acquisition, a release of uncertain tax liability, as well as significant, unusual and infrequent book charges related to the acquisition of Motorola Home and losses on available for sale assets.
|
|
|
|
For the six month period ended June 30, 2014, the Company recorded a tax benefit of approximately $18.2 million related to additional net
operating losses arising from the Motorola Home acquisition from Google, less associated valuation allowances. 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 period, it is possible that the actual amount provided will be significantly different. As of
June 30, 2014, ARRIS has recorded net operating losses of $545.4 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 later this year after Google files its corporate income tax return.
|
|
|
|
For the three month period ended March 31, 2014, the Company recorded a benefit of $5.7 million from changes in state deferred income tax rates,
relating to the integration of the Motorola Home business. For the three month period ended June 30, 2014, this benefit was reduced by $.5 million, for a total benefit of $5.2 million for the six month period ended June 30, 2014
|
|
|
|
For the six month period ended June 30, 2014, included in other, are additional benefits of $4.4 million that were recognized from return to
provision adjustments, valuation allowance releases and releases of uncertain tax liabilities due to audit resolutions. Additional tax expense of $1.9 million was booked for increases to valuation allowances during this same period.
|
|
|
|
For the six month period ended June 30, 2014, the Company recorded significant book expenses of an infrequent and unusual nature of approximately
$24.0 million relating to the acquisition of the Home business of Motorola, generating a tax benefit of $8.6 million, and $5.1 million of book loss was recorded as losses on investments and available for sale assets, which generated income tax
benefits of $1.8 million.
|
|
|
|
For the six month period ended June 30, 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 six months
ended June 30, 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
|
|
|
(156
|
)
|
|
|
-
|
|
|
|
(4,335
|
)
|
|
|
131
|
|
|
|
(4,360
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,373
|
|
|
|
-
|
|
|
|
2,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
(156
|
)
|
|
|
-
|
|
|
|
(1,962
|
)
|
|
|
131
|
|
|
|
(1,987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2014
|
|
$
|
150
|
|
|
$
|
(2,416
|
)
|
|
$
|
(4,503
|
)
|
|
$
|
120
|
|
|
$
|
(6,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Note 19. 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
Item 2.
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Overview
On April 17, 2013 we acquired the Motorola Home business from General Instrument Holdings, Inc., a subsidiary of Google, Inc. for $2.4 billion in cash and equity, subject to certain adjustments as
provided for in the acquisition agreement (the Acquisition). For more detail, see Note 3
Business Acquisitions
to Notes to our Consolidated Financial Statements. We more than doubled in size as a result of the Acquisition, which
had significant effects on virtually every aspect of our business and operations and which make comparisons in this discussion to our historical results difficult.
In addition, we have revised our segment disclosures to reflect changes in operating responsibilities that occurred during the first quarter of 2014. For more detail, see Note 14
Segment
Information
to Notes to our Consolidated Financial Statements. Readers should consider the size and transformative nature of the Acquisition when reviewing this Managements Discussion and Analysis of Financial Condition and Results
of Operations.
Business and Financial Highlights
Business Highlights
|
|
|
Year-over-year revenue growth as a result of the Motorola Home acquisition
|
|
|
|
Sequential revenue growth (approximately 17% from the first quarter of 2014)
|
|
|
Continued industry momentum for advanced CPE solutions and strong telco video CPE and broadband CPE shipments
|
|
|
Demand for CCAP and Video Systems products
|
|
|
|
Strong earnings and cash generation
|
CPE Segment
|
|
|
Sales up 14% as compared to first quarter of 2014; direct contribution dollars up 17%
|
|
|
Set top unit volumes increased 8% from the first quarter of 2014 excluding Digital Terminal Adapters
|
|
|
Announced availability of new high-definition set-top targeting Latin American service providers
|
|
|
Broadband device and accessory unit volumes up 11% from the first quarter of 2014; strong DOCSIS & DSL unit sales
|
|
|
Announced new EuroDOCSIS 3.0 wireless data and EMTA gateway products offering superior wireless performance
|
|
|
Approximately 65% of DOCSIS units were Wi-Fi enabled gateway devices in the second quarter of 2014
|
N&C Segment
|
|
|
Sales up 23% as compared to first quarter of 2014; direct contribution dollars up 60%
|
|
|
Strong E6000 momentum, as operators expand broadband capacity and re-fresh their infrastructure with new converged platform
|
|
|
Increased Access and Transport business (Headend Optics and Fiber Nodes)
|
|
|
Expanded Network DVR deployments and Programmer MPEG4 upgrades
|
|
|
Launched new SaaS-based WorkForce Management solution
|
|
|
Launched new Sling-powered TV Everywhere solution and new ARRIS Market OTT Video solution
|
22
Financial Highlights
|
|
|
Sales in the second quarter and first half of 2014 were $1,429.1 million and $2,654.1 million, respectively, as compared to $1,000.4 million and
$1,354.0 million in the same periods in 2013, reflecting the acquisition of Motorola Home and strong demand.
|
|
|
|
Gross margin percentage was 29.3% in the second quarter of 2014, which compares to 23.1% in the second quarter of 2013. The second quarter 2013 gross
margin includes a $57.6 million impact associated with writing up the historic cost of the Motorola Home inventory to fair value at the date of acquisition (subsequently increasing cost of goods sold) as well as $13.6 million of costs associated
with the rationalization of certain products after the acquisition date.
|
|
|
|
Total operating expenses (excluding amortization of intangible assets, integration, acquisition, restructuring and other costs) in the second quarter
of 2014 were $256.5 million, as compared to $211.5 million in the same period last year.
|
|
|
|
We ended the second quarter of 2014 with $551.9 million of cash, cash equivalents, and short-term marketable security investments. The Company
generated $255.2 million of cash from operating activities through the first six months of 2014, which compares to $344.0 million generated during the same period in 2013.
|
|
|
|
We ended the second quarter 2014 with long-term debt of $1,575.1 million, at face value, the current portion of which is $61.9 million. We repaid
$177.5 million of our Term Loans in the first six months of 2014, including a $150 million optional prepayment.
|
|
|
|
We ended the second quarter 2014 with an order backlog of $787.6 million and had a book-to-bill ratio of 0.85 in the quarter.
|
Non-GAAP Measures
As part of our ongoing review of financial information related to our business, we regularly use non-GAAP measures, in particular non-GAAP earnings per share, as we believe they provide a meaningful
insight into our business and trends. We also believe that these non-GAAP measures provide readers of our financial statements with useful information and insight with respect to the results of our business. However, the presentation of non-GAAP
information is not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. Below are tables for the three and six months ended June 30, 2014 and 2013 which detail and reconcile GAAP and non-GAAP
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
For the Three Months Ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
Gross
Margin
|
|
|
Operating
Expense
|
|
|
Operating
Income
|
|
|
Other
(Income)
Expense
|
|
|
Income
Tax Expense
(Benefit)
|
|
|
Net
Income
(Loss)
|
|
|
|
|
|
|
|
|
|
Amounts in accordance with GAAP
|
|
$
|
1,429,071
|
|
|
$
|
419,412
|
|
|
$
|
327,736
|
|
|
|
91,676
|
|
|
$
|
26,514
|
|
|
$
|
26,138
|
|
|
$
|
39,024
|
|
Acquisition accounting impacts related to deferred revenue
|
|
|
3,489
|
|
|
|
2,802
|
|
|
|
-
|
|
|
|
2,802
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,802
|
|
Stock compensation expense
|
|
|
-
|
|
|
|
1,835
|
|
|
|
(13,449
|
)
|
|
|
15,284
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,284
|
|
Amortization of intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(58,735
|
)
|
|
|
58,735
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58,735
|
|
Integration, acquisition, restructuring and other costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,518
|
)
|
|
|
12,518
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,518
|
|
Impairment of investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,000
|
)
|
|
|
-
|
|
|
|
3,000
|
|
Asset held for sale impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,125
|
)
|
|
|
-
|
|
|
|
2,125
|
|
Net tax items
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,204
|
|
|
|
(29,204
|
)
|
|
|
|
|
|
Non-GAAP amounts
|
|
$
|
1,432,560
|
|
|
$
|
424,049
|
|
|
$
|
243,034
|
|
|
$
|
181,015
|
|
|
$
|
21,389
|
|
|
$
|
55,342
|
|
|
$
|
104,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
For the Six Months Ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
Gross Margin
|
|
|
Operating
Expense
|
|
|
Operating
Income
|
|
|
Other
(Income)
Expense
|
|
|
Income
Tax Expense
(Benefit)
|
|
|
Net Income
(Loss)
|
|
|
|
|
|
|
|
|
|
Amounts in accordance with GAAP
|
|
$
|
2,654,088
|
|
|
$
|
766,187
|
|
|
$
|
636,524
|
|
|
|
129,663
|
|
|
$
|
45,697
|
|
|
$
|
4,142
|
|
|
$
|
79,824
|
|
Acquisition accounting impacts related to deferred revenue
|
|
|
3,695
|
|
|
|
3,001
|
|
|
|
-
|
|
|
|
3,001
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,001
|
|
Stock compensation expense
|
|
|
-
|
|
|
|
3,110
|
|
|
|
(23,207
|
)
|
|
|
26,317
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,317
|
|
Amortization of intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(122,736
|
)
|
|
|
122,736
|
|
|
|
-
|
|
|
|
-
|
|
|
|
122,736
|
|
Integration, acquisition, restructuring and other costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(24,020
|
)
|
|
|
24,020
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,020
|
|
Impairment of investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,000
|
)
|
|
|
-
|
|
|
|
3,000
|
|
Asset held for sale impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,125
|
)
|
|
|
-
|
|
|
|
2,125
|
|
Net tax items
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88,054
|
|
|
|
(88,054
|
)
|
|
|
|
|
|
Non-GAAP amounts
|
|
$
|
2,657,783
|
|
|
$
|
772,298
|
|
|
$
|
466,561
|
|
|
$
|
305,737
|
|
|
$
|
40,572
|
|
|
$
|
92,196
|
|
|
$
|
172,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
For the Three Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
Gross Margin
|
|
|
Operating
Expense
|
|
|
Operating
Income
|
|
|
Other
(Income)
Expense
|
|
|
Income
Tax Expense
(Benefit)
|
|
|
Net Income
(Loss)
|
|
|
|
|
|
|
|
|
|
Amounts in accordance with GAAP
|
|
$
|
1,000,362
|
|
|
$
|
230,957
|
|
|
$
|
319,019
|
|
|
$
|
(88,062
|
)
|
|
$
|
9,715
|
|
|
$
|
(49,314
|
)
|
|
$
|
(48,463
|
)
|
Reduction in revenue related to Comcasts investment in ARRIS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Acquisition accounting impacts related to fair value of inventory
|
|
|
-
|
|
|
|
57,600
|
|
|
|
-
|
|
|
|
57,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,600
|
|
Acquisition accounting impacts related to deferred revenue
|
|
|
2,417
|
|
|
|
1,472
|
|
|
|
-
|
|
|
|
1,472
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,472
|
|
Product Rationalization
|
|
|
-
|
|
|
|
13,582
|
|
|
|
-
|
|
|
|
13,582
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,582
|
|
Stock compensation expense
|
|
|
-
|
|
|
|
866
|
|
|
|
(6,314
|
)
|
|
|
7,180
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,180
|
|
Amortization of intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(55,915
|
)
|
|
|
55,915
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,915
|
|
Integration, acquisition, restructuring and other costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(51,649
|
)
|
|
|
51,649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,649
|
|
Credit facility - ticking fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(477
|
)
|
|
|
-
|
|
|
|
477
|
|
Mark-to-market FV adjustment related to Comcasts investment in ARRIS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,159
|
|
|
|
-
|
|
|
|
(6,159
|
)
|
Non-cash interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,308
|
)
|
|
|
-
|
|
|
|
3,308
|
|
Tax related to items above
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74,784
|
|
|
|
(74,784
|
)
|
|
|
|
|
|
Non-GAAP amounts
|
|
$
|
1,002,779
|
|
|
$
|
304,477
|
|
|
$
|
205,141
|
|
|
$
|
99,336
|
|
|
$
|
12,089
|
|
|
$
|
25,470
|
|
|
$
|
61,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.36
|
)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Basic shares used as losses were reported for those periods and the inclusion of
dilutive shares would be anti-dilutive
|
|
|
|
(in thousands, except per share data)
|
|
For the Six Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
Gross Margin
|
|
|
Operating
Expense
|
|
|
Operating
Income
|
|
|
Other
(Income)
Expense
|
|
|
Income
Tax Expense
(Benefit)
|
|
|
Net Income
(Loss)
|
|
Amounts in accordance with GAAP
|
|
$
|
1,354,012
|
|
|
$
|
339,483
|
|
|
$
|
418,029
|
|
|
$
|
(78,546
|
)
|
|
$
|
33,180
|
|
|
$
|
(48,613
|
)
|
|
$
|
(63,113
|
)
|
Reduction in revenue related to Comcasts investment in ARRIS
|
|
|
13,182
|
|
|
|
13,182
|
|
|
|
-
|
|
|
|
13,182
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,182
|
|
Acquisition accounting impacts related to fair value of inventory
|
|
|
-
|
|
|
|
57,600
|
|
|
|
-
|
|
|
|
57,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
57,600
|
|
Acquisition accounting impacts related to deferred revenue
|
|
|
2,417
|
|
|
|
1,472
|
|
|
|
-
|
|
|
|
1,472
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,472
|
|
Product Rationalization
|
|
|
-
|
|
|
|
13,582
|
|
|
|
-
|
|
|
|
13,582
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,582
|
|
Stock compensation expense
|
|
|
-
|
|
|
|
1,697
|
|
|
|
(12,227
|
)
|
|
|
13,924
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,924
|
|
Amortization of intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(63,518
|
)
|
|
|
63,518
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63,518
|
|
Integration, acquisition, restructuring and other costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(58,848
|
)
|
|
|
58,848
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58,848
|
|
Credit facility - ticking fees
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
(865
|
)
|
|
|
-
|
|
|
|
865
|
|
Mark-to-market FV adjustment related to Comcasts investment in ARRIS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,189
|
)
|
|
|
-
|
|
|
|
13,189
|
|
Non-cash interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
(6,552
|
)
|
|
|
-
|
|
|
|
6,552
|
|
Tax related to items above
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
88,035
|
|
|
|
(88,035
|
)
|
|
|
|
|
|
Non-GAAP amounts
|
|
$
|
1,369,611
|
|
|
$
|
427,016
|
|
|
$
|
283,436
|
|
|
$
|
143,580
|
|
|
$
|
12,574
|
|
|
$
|
39,422
|
|
|
$
|
91,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.51
|
)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income per share - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares - diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Basic shares used as losses were reported for those periods and the inclusion of
dilutive shares would be anti-dilutive
|
|
24
In managing and reviewing our business performance, we exclude a number of items required by GAAP.
Management believes that excluding these items is useful in understanding the trends and managing our operations. We provide these supplemental non-GAAP measures in order to assist the investment community to see ARRIS through the eyes of
management, and therefore enhance understanding of ARRIS operating performance. Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, the Companys reported results prepared in accordance with
GAAP. Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:
Reduction in Revenue Related to Comcast Investment in ARRIS
: In connection with our acquisition of Motorola Home, Comcast was given an opportunity
to invest in ARRIS. The accounting guidance requires that we record the implied fair value of benefit received by Comcast as a reduction in revenue. Until the closing of the deal, changes in the value of the investment were marked to market and
flowed through other expense (income). We have excluded the effect of the implied fair value in calculating our non-GAAP financial measures. We believe it is useful to understand the effects of these items on our total revenues and other expense
(income).
Acquisition Accounting Impacts Related to Deferred Revenue
: In connection with the accounting related to our acquisitions,
business combination rules require us to account for the fair values of deferred revenue arrangements for which acceptance has not been obtained, and post contract support in our purchase accounting. The non-GAAP adjustment to our sales and cost of
sales is intended to include the full amounts of such revenues as if these purchase accounting adjustments had not been applied. We believe the adjustment to these revenues is useful as a measure of the ongoing performance of our business. We
historically have experienced high renewal rates related to our support agreements, and our objective is to increase the renewal rates on acquired post contract support agreements. However, we cannot be certain that our customers will renew their
contracts.
Acquisition Accounting Impacts Related to Inventory Valuation:
In connection with our acquisition of Motorola Home,
business combinations rules require the inventory be recorded at fair value on the opening balance sheet. This is different from historical cost. Essentially we were required to write the inventory up to end customer price less a
reasonable margin as a distributor. This resulted in an increase in the value of inventory and resulted in higher cost of goods sold as it was sold.
Product Rationalization:
In conjunction with the integration of Motorola Home, we identified certain product lines which overlap. In the second quarter of 2013, we made the decision to eliminate
certain products. As a result, we recorded expenses related to the elimination of inventory and certain vendor liabilities. We believe it is useful to understand the effects of this item on our total cost of goods sold.
Stock-Based Compensation Expense
: We have excluded the effect of stock-based compensation expenses in calculating our non-GAAP operating expenses
and net income (loss) measures. Although stock-based compensation is a key incentive offered to our employees, we continue to evaluate our business performance excluding stock-based compensation expenses. We record non-cash compensation expense
related to grants of options and restricted stock. Depending upon the size, timing and the terms of the grants, the non-cash compensation expense may vary significantly but will recur in future periods.
Amortization of Intangible Assets
: We have excluded the effect of amortization of intangible assets in calculating our non-GAAP operating expenses
and net income (loss) measures. Amortization of intangible assets is non-cash, and is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Investors should note that the use of intangible
assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.
Integration, Acquisition, Restructuring and Other Costs:
We have excluded the effect of integration, acquisition, restructuring and other costs
and the effect of restructuring expenses in calculating our non-GAAP operating expenses and net income measures. We will incur significant expenses in connection with our recent acquisition of Motorola Home, which we generally would not otherwise
incur in the periods presented as part of our continuing operations. Acquisition related expenses consist of transaction costs, costs for transitional employees, other acquired employee related costs, and integration related outside services.
Restructuring expenses consist of employee severance, abandoned facilities, and other exit costs. We believe it is useful to understand the effects of these items on our total operating expenses.
25
Credit FacilityTicking Fees
: In connection with our acquisition of Motorola Home, the cash
portion of the consideration was funded through debt financing commitments. A ticking fee is a fee paid to our banks to compensate for the time lag between the commitment to make the loan and the actual funding. We have excluded the effect of the
ticking fee in calculating our non-GAAP financial measures. We believe it is useful to understand the effect of these items in our other (income) expense.
Mark To Market Fair Value Adjustment Related To Comcast Investment in ARRIS:
In connection with our acquisition of Motorola Home, Comcast was given an opportunity to invest in ARRIS. The accounting
guidance requires we mark to market the changes in the value of the investment and flow through other expense (income). We have excluded the effect of the implied fair value in calculating our non-GAAP financial measures. We believe it is useful to
understand the effects of these items on our total other expense (income).
Non-Cash Interest on Convertible Debt
: We have excluded the
effect of non-cash interest in calculating our non-GAAP operating expenses and net income (loss) measures. We record the accretion of the debt discount related to the equity component non-cash interest expense. We believe it is useful to understand
the component of interest expense that will not be paid out in cash.
Impairment of Investment
: We have excluded the effect of an
other-than-temporary impairment of a cost method investment in calculating our non-GAAP financial measures. We believe it is useful to understand the effect of this non-cash item in our other expense (income).
Asset Held for Sale Impairment
: In the second quarter of 2014, we entered into a contract to facilitate the sale of a building at less than
its carrying value. The asset has been reclassified as held for sale and was measured at the lower of its carrying amount or fair value less cost to sell. We have recorded an impairment charge to reduce the assets carrying amount to its
estimated fair value less costs to sell in the period the held for sale criteria were met. We have excluded the effect of the asset held for sale impairment in calculating our non-GAAP financial measures. We believe it is useful to understand
the effect of this non-cash item in our other expense (income).
Net Tax Items
: We have excluded the tax effect of the non-GAAP items
mentioned above. Additionally, we have excluded the effects of certain tax adjustments related to state valuation allowances, research and development tax credits and provision to return differences.
Comparison of Operations for the Three and Six Months Ended June 30, 2014 and 2013
Net Sales
The table below sets forth our net sales for the three and six months
ended June 30, 2014 and 2013, for each of our segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Increase (Decrease) Between 2014 and 2013
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
For the Three Months Ended
June 30
|
|
|
For the Six Months Ended
June 30
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
Business Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
$
|
1,022,925
|
|
|
$
|
659,331
|
|
|
$
|
1,916,526
|
|
|
$
|
845,895
|
|
|
$
|
363,594
|
|
|
|
55.1
|
%
|
|
$
|
1,070,631
|
|
|
|
126.6
|
%
|
N&C
|
|
|
409,699
|
|
|
|
343,643
|
|
|
|
741,268
|
|
|
|
523,911
|
|
|
|
66,056
|
|
|
|
19.2
|
%
|
|
|
217,357
|
|
|
|
41.5
|
%
|
Other
|
|
|
(3,553
|
)
|
|
|
(2,612
|
)
|
|
|
(3,706
|
)
|
|
|
(15,794
|
)
|
|
|
(941
|
)
|
|
|
(36.0
|
)%
|
|
|
12,088
|
|
|
|
76.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
1,429,071
|
|
|
$
|
1,000,362
|
|
|
$
|
2,654,088
|
|
|
$
|
1,354,012
|
|
|
$
|
428,709
|
|
|
|
42.9
|
%
|
|
$
|
1,300,076
|
|
|
|
96.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
The table below sets forth our domestic and international sales for the three and six months ended
June 30, 2014 and 2013 (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Increase (Decrease) Between 2014 and 2013
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
For the Three Months Ended
June 30
|
|
|
For the Six Months Ended
June 30
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Domestic
|
|
$
|
1,118,141
|
|
|
$
|
658,261
|
|
|
$
|
2,028,789
|
|
|
$
|
899,645
|
|
|
$
|
459,880
|
|
|
|
69.9
|
%
|
|
$
|
1,129,144
|
|
|
|
125.5
|
%
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas, excluding U.S.
|
|
|
200,111
|
|
|
|
201,483
|
|
|
|
414,083
|
|
|
|
283,208
|
|
|
|
(1,372
|
)
|
|
|
(0.7
|
)%
|
|
|
130,875
|
|
|
|
46.2
|
%
|
Asia Pacific
|
|
|
42,138
|
|
|
|
49,062
|
|
|
|
75,090
|
|
|
|
59,233
|
|
|
|
(6,924
|
)
|
|
|
(14.1
|
)%
|
|
|
15,857
|
|
|
|
26.8
|
%
|
EMEA
|
|
|
68,681
|
|
|
|
91,556
|
|
|
|
136,126
|
|
|
|
111,926
|
|
|
|
(22,875
|
)
|
|
|
(25.0
|
)%
|
|
|
24,200
|
|
|
|
21.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
310,930
|
|
|
|
342,101
|
|
|
|
625,299
|
|
|
|
454,367
|
|
|
|
(31,171
|
)
|
|
|
(9.1
|
)%
|
|
|
170,932
|
|
|
|
37.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
1,429,071
|
|
|
$
|
1,000,362
|
|
|
$
|
2,654,088
|
|
|
$
|
1,354,012
|
|
|
$
|
428,709
|
|
|
|
42.9
|
%
|
|
$
|
1,300,076
|
|
|
|
96.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Premises Equipment Net Sales 2014 vs. 2013
During the three and six months ended June 30, 2014 sales in our CPE segment increased by approximately 55.1% and 126.6%, respectively, as compared to the same period in 2013. The sales increase
reflects the introduction of new products, in particular the XG1 and Verizon Media Server (VMS) video gateways and a variety of new advanced broadband gateway devices in the second part of 2013 and the inclusion of sales associated with our
acquisition of Motorola Home.
Network and Cloud Net Sales 2014 vs. 2013
During the three and six months ended June 30, 2014, sales in N&C segment increased by approximately 19.2% and 41.5%, respectively, as compared to the same period in 2013. The increase reflects
sales of our new CMTS platform, the E6000, which was introduced during 2013 and the inclusion of sales associated with our acquisition of Motorola Home.
Both segments were up quarter-over-quarter. In the aggregate, sales were up $204.1 million or 16.7% from the first quarter of 2014.
Gross Margin
The table below sets forth our gross margin for the three and six
months ended June 30, 2014 and 2013 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
Increase (Decrease) Between 2014 and 2013
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
For the Three Months Ended
June 30
|
|
|
For the Six Months Ended
June 30
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Gross margin dollars
|
|
$
|
419,412
|
|
|
$
|
230,957
|
|
|
$
|
766,187
|
|
|
$
|
339,483
|
|
|
$
|
188,455
|
|
|
|
81.6
|
%
|
|
$
|
426,704
|
|
|
|
125.7
|
%
|
Gross margin percentage
|
|
|
29.3
|
%
|
|
|
23.1
|
%
|
|
|
28.9
|
%
|
|
|
25.1
|
%
|
|
|
|
|
|
|
6.2
|
|
|
|
|
|
|
|
3.8
|
|
During the three and six months ended June 30, 2014, gross margin dollars and gross margin percentage increased as
compared to the same period in 2013. The increase in gross margin dollars is primarily the result of the inclusion of sales associated with our acquisition of Motorola Home. The increase in gross margin is the result of product mix. In addition, the
second quarter 2013 gross margin includes a $57.6 million impact associated with writing up the historic cost of the Motorola Home inventory to fair value at the date of acquisition (subsequently increasing cost of goods sold) as well as $13.6
million of costs associated with the rationalization of certain products after the acquisition date.
27
Operating Expenses
The table below provides detail regarding our operating expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
Increase (Decrease) Between 2014 and 2013
|
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Selling, general and administrative
|
|
$
|
112,362
|
|
|
$
|
87,899
|
|
|
$
|
211,494
|
|
|
$
|
128,025
|
|
|
$
|
24,463
|
|
|
|
27.8
|
%
|
|
$
|
83,469
|
|
|
|
65.2
|
%
|
Research & development
|
|
|
144,121
|
|
|
|
123,557
|
|
|
|
278,274
|
|
|
|
167,639
|
|
|
|
20,564
|
|
|
|
16.6
|
%
|
|
|
110,635
|
|
|
|
66.0
|
%
|
Amortization of intangibles
|
|
|
58,735
|
|
|
|
55,914
|
|
|
|
122,736
|
|
|
|
63,517
|
|
|
|
2,821
|
|
|
|
5.0
|
%
|
|
|
59,219
|
|
|
|
93.2
|
%
|
Integration, acquisition, restructuring & other
|
|
|
12,518
|
|
|
|
51,649
|
|
|
|
24,020
|
|
|
|
58,848
|
|
|
|
(39,131
|
)
|
|
|
(75.8
|
)%
|
|
|
(34,828
|
)
|
|
|
(59.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
327,736
|
|
|
$
|
319,019
|
|
|
$
|
636,524
|
|
|
$
|
418,029
|
|
|
$
|
8,717
|
|
|
|
2.7
|
%
|
|
$
|
218,495
|
|
|
|
52.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As anticipated, operating expenses were higher in the second quarter than the first quarter of 2014. Annual raises began
on April 1 and equity compensation increased as former Home employees now have two years of grants included in stock compensation expense. With the higher sales and direct operating income, we experienced higher variable compensation. We also
incurred higher trade show costs and other one-time expenses in the quarter. We anticipate operating expense will decline in the second half of 2014.
Selling, General, and Administrative, or SG&A, Expenses
The year over year increase
in SG&A expenses primarily reflects the inclusion of expenses associated with the Motorola Home acquisition. The increase was partially offset as a result of certain information technology and other costs, formerly allocated to SG&A, which
have been reclassified effective January 1, 2014 to cost of sales and research and development as a result of the way we review the business.
Research & Development, or R&D, Expenses
Included in our R&D expenses
are costs directly associated with our development efforts (people, facilities, materials, etc.) and reasonable allocations of our information technology and corporate facility costs. R&D expenses for the three and six months ended June 30,
2014 increased as compared to the same period in 2013 due to the inclusion of expenses associated with the Motorola Home acquisition, as well as higher allocations of information technology and other costs.
Integration, Acquisition, Restructuring and Other Costs
During the first half of 2014 and 2013, we recorded acquisition-related expenses and integration expenses of $24.4 million and $26.6 million, respectively. These expenses related to the acquisition of
Motorola Home and consisted primarily of integration related outside services and legal fees.
During the six months ended June 30, 2014
and 2013, we recorded restructuring (recovery) charges of approximately $(0.4) million and $32.3 million, respectively. The recovery recorded in 2014 was related to a change in estimate of previously recorded expenses and the charges in 2013 were
related to severance, termination benefits and facilities.
Amortization of Intangible Assets
Our intangible amortization expense relates to finite-lived intangible assets acquired in business combinations or acquired individually. Intangibles
amortization expense for the three months ended June 30, 2014 and 2013 was $58.7 million and $55.9 million, respectively. For the six months ended June 30, 2014 and 2013, intangible amortization expense was $122.7 million and $63.5
million, respectively.
28
Direct Contribution
The table below sets forth our direct contribution for the three and six months ended June 30, 2014 and 2013, for each of our segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Contribution
|
|
|
Increase (Decrease) Between 2014 and 2013
|
|
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
For the Three Months Ended
June 30
|
|
|
For the Six Months Ended
June 30
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Business Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
$
|
224,783
|
|
|
$
|
127,970
|
|
|
$
|
416,570
|
|
|
$
|
153,980
|
|
|
$
|
96,813
|
|
|
|
75.7
|
%
|
|
$
|
262,590
|
|
|
|
170.5
|
%
|
N&C
|
|
|
104,552
|
|
|
|
67,251
|
|
|
|
169,916
|
|
|
|
124,307
|
|
|
|
37,301
|
|
|
|
55.5
|
%
|
|
|
45,609
|
|
|
|
36.7
|
%
|
Other
|
|
|
(166,406
|
)
|
|
|
(175,720
|
)
|
|
|
(310,067
|
)
|
|
|
(234,468
|
)
|
|
|
9,314
|
|
|
|
5.3
|
%
|
|
|
(75,599
|
)
|
|
|
(32.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
162,929
|
|
|
$
|
19,501
|
|
|
$
|
276,419
|
|
|
$
|
43,819
|
|
|
$
|
143,428
|
|
|
|
735.5
|
%
|
|
$
|
232,600
|
|
|
|
530.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Premises Equipment Direct Contribution 2014 vs. 2013
During the three and six months ended June 30, 2014 direct contribution in our CPE segment increased by approximately 75.7% and 170.5%,
respectively, as compared to the same period in 2013. The increase is primarily attributable to the inclusion of direct contribution associated with our acquisition of Motorola Home. Further, the direct contribution is favorably impacted by mix,
given, that in the aggregate the contribution margin of former Motorola Home products is greater than that of former ARRIS products.
Network and Cloud Direct Contribution 2014 vs. 2013
During the three and six months ended June 30, 2014, direct contribution in our N&C segment increased by approximately 55.5% and 36.7%, respectively, as compared to the same period in 2013. The
increase is primarily attributable to the inclusion of direct contribution associated with our acquisition of Motorola Home.
Other
Expense (Income)
Interest Expense
Interest expense for the three months ended June 30, 2014 and 2013 was $18.2 million and $18.6 million respectively. For the six months ended June 30, 2014 and 2013, interest expense was $34.8
million and $23.2 million respectively. During the three and six months ended June 30, 2014, optional debt pre-payments were made resulting in the accelerated write-off of deferred financing fees and debt discount of $2.7 million. In addition,
interest expense reflects the amortization of deferred finance fees, the debt discount for the term loans and interest paid on term loans and other debt obligations. The three and six months ended June 30, 2013, interest expense also included
the non-cash interest component of our convertible subordinated notes which were fully redeemed during the fourth quarter of 2013.
Interest Income
Interest income during
the three months ended June 30, 2014 and 2013 was $0.7 million and $0.6 million, respectively. During the six months ended June 30, 2014 and 2013, interest income was $1.3 million and $1.5 million, respectively. The income reflects
interest earned on cash, cash equivalents, short-term and long-term investments.
29
Loss on Foreign Currency
During the three and six months ended June 30, 2014, we recorded a foreign currency loss of approximately $1.3 million and $0.7 million, respectively. During the three and six months ended
June 30, 2013, we recorded a foreign currency loss of approximately $0.2 million and $1.0 million, respectively. We have US dollar functional currency entities that bill certain international customers in their local currency. Additionally,
certain intercompany transactions created in conjunction with the Motorola Home acquisition are denominated in foreign currencies and subject to revaluation. To mitigate the volatility related to fluctuations in the foreign exchange rates, we may
enter into various foreign currency contracts. The loss on foreign currency is driven by the fluctuations in the foreign currency exchange rates.
Loss (Gain) on Investments
From time to time, we hold certain investments in the common
stock of private and publicly-traded companies, a number of non-marketable equity securities, and investments in rabbi trusts associated with our deferred compensation plans. In connection with the Acquisition, we also acquired certain investments
in limited liability companies and partnerships that are accounted for using the equity method of accounting. As such our equity portion in current earnings of such companies is included in the loss (gain) on investments.
During the second quarter of 2014, the Company performed an evaluation of its investments and concluded that one private company had indicators of
impairment, and that its fair value had declined. This resulted in other-than-temporary impairment charges of $3.0 million during the quarter ended June 30, 2014.
During the three months ended June 30, 2014 and 2013, we recorded net loss (gain) related to these investments of $3.2 million, and $(0.7) million, respectively. During the six months ended
June 30, 2014 and 2013, we recorded a net loss (gain), including the impairment charge in 2014, related to these investments of $4.9 million, and $(1.3) million, respectively.
Other Expense (Income), net
Other expense (income), net for the three months ended
June 30, 2014 and 2013 was $4.4 million and $(7.7) million, respectively. For the six months ended June 30, 2014 and 2013, other expense was $6.6 million and $11.7 million, respectively.
For the three months ended June 30, 2014, we recorded a $2.1 million write-down in the carrying value of land and building reclassified as held for
sale as a result of obtaining a letter of intent for its sale and is included in other expense (income), net.
In connection with
Comcasts agreement in January 2013 to invest in ARRIS upon the acquisition of Motorola Home, accounting guidance requires that, since the agreed-upon purchase price was less than the market price on the date of agreement, the resulting forward
arrangement be marked to market for the difference in fair value. This resulted in a mark-to-market adjustment of $(6.2) million for the three months ended June 30, 2013 and $13.2 million in the six months ended June 30, 2013 and is
recorded as Other expense (income), net.
Income Tax Expense
For the three and six month periods ended June 30, 2014, we recorded income tax expense of $26.1 million and $4.1 million, respectively as compared to a tax benefit of $(49.3) million and $(48.6)
million, respectively in the same periods in 2013. The increase in the income tax expense for the six month period ended June 30, 2014, compared to the six month period ended June 30, 2013, was primarily due to the change in earnings from
continuing operations, as a result of the Motorola Home acquisition that occurred on April 17, 2013 and its related significant, infrequent and unusual book charges. Further benefits were recognized related to significant and unusual tax
charges for an estimated increase in acquired net operating losses from the Motorola Home acquisition, less associated valuation allowances, a change in state deferred tax rates due to the acquisition and a favorable release of uncertain tax
positions from a resolution of the U.S. federal income tax audit for 2010. Additionally, valuation allowances were recorded on deferred tax assets related to unusual and infrequent book charges for investments and other items.
For the six month period ended June 30, 2014, the Company recorded a pre-tax book loss of approximately $24.0 million relating to acquisition costs
incurred on the Motorola Home acquisition, on which a tax benefit of $8.6 million was recorded. The Company also recorded pre-tax book losses of $5.1 million on investments and available
30
for sale assets, generating a tax benefit of $1.8 million during the six month period ended June 30, 2014. Also during the six month period ended June 30, 2014, the Company recorded a
tax benefit of approximately $18.2 million relating to an estimated increase in the expected utilization of net operating losses from the Motorola Home acquisition, a tax benefit of approximately $3.6 million on releases of liability for uncertain
tax positions, a $5.2 million benefit on changes in state deferred income tax rates, a $1.3 million benefit on changes to valuation allowances and an unfavorable charge of $2.4 million for provision to return adjustments. The Company has not yet
recorded the favorable impact, which would result from research and development credits, as the credit has not yet been reenacted for the 2014 tax year.
Financial Liquidity and Capital Resources
Overview
Following completion of the Motorola Home acquisition, one of our key strategies remains maintaining and improving our capital structure. The key metrics
we focus on are summarized in the table below:
Liquidity & Capital Resources Data
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands, except DSO and turns)
|
|
Key Working Capital Items
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
255,156
|
|
|
$
|
344,009
|
|
Cash, cash equivalents, and short-term investments
|
|
$
|
551,863
|
|
|
$
|
741,225
|
|
Long-term U.S. corporate & government agency bonds
|
|
$
|
|
|
|
$
|
22,903
|
|
Accounts receivable, net
|
|
$
|
738,008
|
|
|
$
|
662,156
|
|
Days Sales Outstanding (DSOs)
|
|
|
44
|
|
|
|
57
|
(1)
|
Inventory
|
|
$
|
297,848
|
|
|
$
|
320,778
|
|
Inventory turns
|
|
|
12.9
|
|
|
|
9.6
|
(1)
|
|
|
|
Key Financing Items
|
|
|
|
|
|
|
|
|
Convertible notes at face value
|
|
$
|
|
|
|
$
|
231,971
|
|
Term loans at face value
|
|
$
|
1,575,063
|
|
|
$
|
1,909,188
|
|
Cash used for debt repayment
|
|
$
|
182,153
|
|
|
$
|
|
|
|
|
|
Capital Expenditures
|
|
$
|
26,292
|
|
|
$
|
21,402
|
|
(1)
|
Using single point average for these calculations for six months ended June 30, 2013 due to the Motorola Home acquisition
|
In managing our liquidity and capital structure, we have been and are focused on key goals, and we have and will continue
in the future to implement actions to achieve them. They include:
|
|
|
Liquidity ensure that we have sufficient cash resources or other short-term liquidity to manage day to day operations.
|
|
|
|
Growth implement a plan to ensure that we have adequate capital resources, or access thereto, fund internal growth and execute acquisitions.
|
|
|
|
Deleverage reduce our debt obligation.
|
Accounts Receivable & Inventory
We use the number of times per year that
inventory turns over (based upon sales for the most recent period, or turns) to evaluate inventory management, and days sales outstanding, or DSOs, to evaluate accounts receivable management.
31
Accounts receivable increased during the first six months of 2014 as compared to 2013, primarily as a result
of higher sales. Looking forward, it is possible that DSOs may increase dependent upon our customer mix and payment patterns, particularly if international sales increase as customers internationally typically have longer payment terms.
Inventory decreased in 2014 as compared to 2013. Inventory turns during the first six months of 2013 were 12.9 as compared to 9.6 in the same period of
2013.
Term Debt Repayments
In the first half of 2014, we repaid $182.2 million of debt, of which $177.5 million is of our term debt, including a $150 million of optional prepayment
and $4.7 million of debt assumed and settled in conjunction with the closing of the Seawell acquisition in April 2014.
Summary of Current
Liquidity Position and Potential for Future Capital Raising
We believe our current liquidity position, where we have approximately $551.9
million of cash, cash equivalents, and short-term investments on hand as of June 30, 2014, together with approximately $247.5 million in availability under our new Revolving Credit Facility, together with the prospects for continued generation
of cash from operations are adequate for our short- and medium-term business needs. Our cash, cash-equivalents and short-term investments as of June 30, 2014 include approximately $124.6 million held by foreign subsidiaries whose earnings we
expect to reinvest indefinitely outside of the United States. We do not expect to need the cash generated by those foreign subsidiaries to fund our domestic operations. However, in the unforeseen event that we repatriate cash from those foreign
subsidiaries, in excess of what is owed to the United States parent, we may be required to provide for and pay U.S. taxes on permanently repatriated funds.
We have subsidiaries in countries that maintain restrictions, such as legal reserves, with respect to the amount of dividends that the subsidiaries can distribute. Additionally, some countries impose
restrictions or controls over how and when dividends can be paid by these subsidiaries. While we do not currently intend to repatriate earnings from entities in these countries, if we were to be required to distribute earnings from such
countries, the timing of the distribution and the funds available to distribute, would be adversely impacted by these restrictions.
We expect
to be able to generate sufficient cash on a consolidated basis to make all of the principal and interest payments under our senior secured credit facilities. Should our available funds be insufficient to support these initiatives or our operations,
it is possible that we will raise capital through private or public, share or debt offerings.
Senior Secured Credit Facilities
In April 2013 we 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 June 30, 2014, we had $1,575.1 million face
value outstanding under the Term Loan A and Term Loan B Facilities and no amounts drawn under the Revolving Credit Facility and letters of credit totaling $2.5 million issued under the Revolving Credit Facility.
|
|
|
|
|
|
|
|
|
Rate
|
|
As of June 30, 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.
|
32
Borrowings under the senior secured credit facilities are secured by first priority liens on substantially
all of our assets and certain of our 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 (with scheduled decreases to 3.5:1). As of June 30, 2014, we were in compliance with all covenants
under the Credit Agreement.
The Credit Agreement provides terms for mandatory repayments 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.
Commitments
Our contractual obligations are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013. There has been no material change to our contractual obligations during the first six
months of 2014.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
Cash Flow
Below is a table setting forth the key line items of our Consolidated
Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Cash provided by
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
255,156
|
|
|
$
|
344,009
|
|
Investing activities
|
|
|
(32,523
|
)
|
|
|
(1,881,074
|
)
|
Financing activities
|
|
|
(181,794
|
)
|
|
|
2,015,864
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
40,839
|
|
|
$
|
478,799
|
|
|
|
|
|
|
Operating Activities:
Below are the key line items affecting cash provided by operating activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Net income (loss)
|
|
$
|
79,824
|
|
|
$
|
(63,113
|
)
|
Adjustments to reconcile net income to cash provided by operating activities
|
|
|
179,909
|
|
|
|
86,821
|
|
|
|
|
|
|
Net income including adjustments
|
|
|
259,733
|
|
|
|
23,708
|
|
Increase in accounts receivable
|
|
|
(101,029
|
)
|
|
|
(16,514
|
)
|
Decrease in inventory
|
|
|
32,281
|
|
|
|
92,632
|
|
Increase in accounts payable and accrued liabilities
|
|
|
62,295
|
|
|
|
251,299
|
|
All other net
|
|
|
1,876
|
|
|
|
(7,116
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
255,156
|
|
|
$
|
344,009
|
|
|
|
|
|
|
|
|
|
|
Net income including adjustments, increased $236.0 million during the first six months of 2014 as compared to 2013.
33
Accounts receivable increased by $101.0 million during the first six months of 2014. This increase was
primarily a result of higher sales and payment patterns of our customers. In 2013, the increases were primarily as a result of higher sales associated with acquisition of Motorola Home and payment patterns of our customers.
Inventory decreased by $32.3 million during the first six months of 2014, reflecting robust demand for certain products. In the second quarter of 2013,
there was a $56.0 million reduction related to turnaround effect of inventory markup in purchase accounting.
Accounts payable and accrued
liabilities increased by $62.3 million during the first six months of 2014. The significant component of this change was an increase in accounts payable reflecting timing of payments and an increase in deferred revenue, offset by a decrease in
accrued liabilities reflecting the payment of annual bonuses in the first quarter. We anticipate account payable declining in the third quarter of 2014. The increase of $251.3 million during the first six months of 2013 was largely related to a
liability to Google for $150.0 million for accounts payable that they paid on our behalf post close which we paid in the third quarter 2013. In addition, included in accrued liabilities are unpaid restructuring and deal related costs.
All other accounts, net, includes the changes in other receivables, income taxes payable (recoverable), and prepaids. The other receivables represent
amounts due from our contract manufacturers for material used in the assembly of our finished goods. The change in our income taxes recoverable account is a result of the timing of the actual estimated tax payments during the year as compared to the
actual tax liability for the year. The net change during the first six months of 2014 was approximately $1.9 million.
Investing
Activities:
Below are the key line items affecting investing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Purchases of property, plant and equipment
|
|
$
|
(26,292
|
)
|
|
$
|
(21,402
|
)
|
Sale of property, plant and equipment
|
|
|
19
|
|
|
|
90
|
|
Purchases of investments
|
|
|
(31,015
|
)
|
|
|
(58,021
|
)
|
Sales of investments
|
|
|
24,681
|
|
|
|
358,021
|
|
Acquisitions, net of cash acquired
|
|
|
84
|
|
|
|
(2,159,762
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
$
|
(32,523
|
)
|
|
$
|
(1,881,074
|
)
|
|
|
|
|
|
|
|
|
|
Purchases of Property, Plant and Equipment
This represents capital expenditures which are mainly for test
equipment, laboratory equipment, and computing equipment.
Sale of Property, Plant and Equipment
This represents the cash proceeds
we received from the sale of property, plant and equipment.
Purchases and Sales of Investments
This represents purchases and
sales of securities
Acquisitions, Net of Cash Acquired
This represents cash investments we have made in our acquisitions.
Financing Activities:
Below are the key line items affecting our financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Proceeds from issuance of debt
|
|
$
|
|
|
|
$
|
1,925,000
|
|
Cash paid for debt discount
|
|
|
|
|
|
|
(9,853
|
)
|
Payment of debt obligations
|
|
|
(182,153
|
)
|
|
|
(15,813
|
)
|
Early redemption of convertible notes
|
|
|
|
|
|
|
(79
|
)
|
Deferred financing costs paid
|
|
|
|
|
|
|
(42,207
|
)
|
Excess income tax benefits from stock-based compensation plans
|
|
|
11,325
|
|
|
|
5,770
|
|
Repurchase of shares to satisfy minimum tax withholdings
|
|
|
(22,412
|
)
|
|
|
(12,407
|
)
|
Proceeds from issuance of common stock
|
|
|
11,446
|
|
|
|
165,453
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
$
|
(181,794
|
)
|
|
$
|
2,015,864
|
|
|
|
|
|
|
|
|
|
|
34
Proceeds From Issuance of Debt
As part of the Motorola Home acquisition, we entered into
senior secured credit facilities which include Term Loan A facilities of $1.1 billion with a term of five years and Term Loan B facilities of $0.8 billion with a term of seven years.
Cash Paid for Debt Discount
- This represents amounts paid to lenders in the form of upfront fees which have been treated as a reduction in the proceeds received by the Company and are considered a
component of the discount on the Term Loans A and B.
Payment of Debt Obligations
This represents the payment of the term loans
under the senior secured credit facilities plus the payment of debt assumed and settled in conjunction with the closing of the SeaWell acquisition in April 2014.
Early Redemption of Convertible Notes
As a result of the holding company reorganization undertaken in connection with the Motorola Home acquisition, holders of the senior notes had the right
to require us to repurchase the convertible senior notes for 100% of the principal amount plus accrued and unpaid interest or to convert the convertible senior notes for the consideration. This represents the portion of the convertible senior notes
that were tendered pursuant to the repurchase right and surrendered pursuant to the conversion right.
Deferred Financing Costs Paid
This represents the finance fees related to the issuance of the senior secured credit facilities. These costs will be amortized over the life of the term loans and revolving credit facility or written-off on an accelerated basis if optional
prepayments are made on the debt.
Excess Income Tax Benefits from Stock-Based Compensation Plans
This represents the cash
that otherwise would have been paid for income taxes if increases in the value of equity instruments also had not been deductible in determining taxable income.
Repurchase of Shares to Satisfy Minimum Tax Withholdings
This represents the shares withheld to satisfy the minimum tax withholding when restricted stock vests.
Proceeds from Issuance of Common Stock
This represents cash proceeds related to the exercise of employee stock options, offset by expenses
paid related to issuance of common stock. It also represents cash proceeds from shares issued to Comcast in relation to the Acquisition.
Interest Rates
As described above, all
indebtedness under our senior secured credit facilities bears interest at variable rates based on LIBOR plus an applicable spread. We entered into interest rate swap arrangements to convert a notional amount of $600.0 million of our variable rate
debt based on one-month LIBOR to a fixed rate. The objective of these swaps 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.
35
Foreign Currency
A significant portion of our products are manufactured or assembled in China, Mexico and Taiwan, and we have research and development centers in Argentina, China, India, Ireland, Israel, Russia and
Sweden. Our sales into international markets have been and are expected in the future to be an important part of our 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.
We have certain international customers who are billed in their local currency. In addition, we have certain predicable
expenditures for international operations in local currency. We use a hedging strategy and enter into forward or currency option contracts based on a percentage of expected foreign currency revenues and expenses. The percentage can vary, based on
the predictability of the revenues denominated in the foreign currency.
Financial Instruments
In the ordinary course of business, we, from time to time, will enter into financing arrangements with customers. These financial arrangements include
letters of credit, commitments to extend credit and guarantees of debt. These agreements could include the granting of extended payment terms that result in longer collection periods for accounts receivable and slower cash inflows from operations
and/or could result in the deferral of revenue.
We execute letters of credit and bank guarantees in favor of certain landlords and vendors to
guarantee performance on contracts. Certain financial instruments require cash collateral, and these amounts are reported as restricted cash. As of June 30, 2014 and December 31, 2013, we had approximately $1.1 million outstanding of
restricted cash.
Cash, Cash Equivalents, and Short-Term Investments
Our cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) are primarily held in demand deposit and money market deposit accounts that pay
taxable interest. We hold short-term investments consisting of debt securities classified as available-for-sale, which are stated at estimated fair value. These debt securities consist primarily of commercial paper, certificates of deposits, and
U.S. government agency financial instruments.
We hold cost method investments in private companies. These investments are recorded at $12.7
million and $15.3 million as of June 30, 2014 and December 31, 2013, respectively. See Note 5 of Notes to the Consolidated Financial Statements for disclosures related to the fair value of our investments.
We have 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. We also have deferred retirement salary plans, which were limited to certain current or former officers of a business acquired in 2007. We hold investments to cover the liability.
ARRIS also funds its nonqualified defined benefit plan for certain executives in a rabbi trust.
Capital Expenditures
Capital expenditures are made at a level designed to support the
strategic and operating needs of the business. ARRIS capital expenditures were $26.3 million in the first six months of 2014 as compared to $21.4 million in the first six months of 2013. Management expects to invest approximately $50 million
in capital expenditures for the fiscal year 2014.
Critical Accounting Policies and Estimates
The accounting and financial reporting policies of ARRIS are in conformity with U.S. generally accepted accounting principles, which requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the
36
reported amounts of revenues and expenses during the reporting period. Management has discussed the development and selection of the Companys critical accounting estimates with the audit
committee of the Companys Board of Directors and the audit committee has reviewed the Companys related disclosures.
Our critical
accounting policies and estimates are disclosed in our Form 10-K for the year ended December 31, 2013, as filed with the SEC. Our critical accounting estimates have not changed in any material respect during the six months ended June 30,
2014.
Forward-Looking Statements
Certain information and statements contained in this Managements Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report, including statements
using terms such as may, expect, anticipate, intend, estimate, believe, plan, continue, could be, or similar variations or the negative
thereof, constitute forward-looking statements with respect to the financial condition, results of operations, and business of ARRIS, including statements that are based on current expectations, estimates, forecasts, and projections about the
markets in which we operate and managements beliefs and assumptions regarding these markets. These and any other statements in this document that are not statements about historical facts are forward-looking statements. We caution
investors that forward-looking statements made by us are not guarantees of future performance and that a variety of factors could cause our actual results to differ materially from the anticipated results or other expectations expressed in our
forward-looking statements. Important factors that could cause results or events to differ from current expectations are described in the risk factors set forth in Item 1A, Part II, Risk Factors. These factors are not intended to be
an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of our business. In providing forward-looking statements, ARRIS expressly disclaims any obligation to update publicly or
otherwise these statements, whether as a result of new information, future events or otherwise except to the extent required by law.