NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
)
Note 1. Organization and Basis of Presentation
On January 4, 2016, ARRIS Group, Inc. (ARRIS Group) completed its combination (the
Combination) with Pace plc, a company incorporated in England and Wales (Pace). In connection with the Combination, (i) ARRIS International plc (the Registrant), a company incorporated in England and Wales,
acquired all of the outstanding ordinary shares of Pace (the Pace Acquisition) and (ii) a wholly-owned subsidiary of the Registrant was merged with and into ARRIS Group (the Merger), with ARRIS Group surviving the Merger
as an indirect wholly-owned subsidiary of the Registrant. Under the terms of the Combination, (a) Pace shareholders received 132.5 pence in cash and 0.1455 ordinary shares of the Registrant for each Pace share they held, and (b) ARRIS
Group stockholders received one ordinary share of the Registrant for each share of ARRIS Group common stock they held (nominal value of £.01 per share). Equity incentive and compensation plans were assumed by the Registrant and amended to
provide that those plans will now provide for the award and issuance of ordinary shares instead of shares of common stock of ARRIS Group on a one-for-one basis. Shares of treasury stock of ARRIS Group were cancelled in the Combination. Following the
Combination, ARRIS Group became an indirect wholly-owned subsidiary of the Registrant and Pace became a direct wholly-owned subsidiary of the Registrant. The ordinary shares of the Registrant trade on the NASDAQ under the symbol ARRS.
The Registrant is deemed to be the successor to ARRIS Group pursuant to Rule 12g-3(a) under the Securities Exchange Act of
1934, as amended (the Exchange Act), and the ordinary shares of the Registrant are deemed to be registered under Section 12(b) of the Exchange Act.
ARRIS International plc (together with its consolidated subsidiaries and consolidated venture, 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
of Notes to
the Consolidated Financial Statements for additional details.), specializing in enabling service providers including cable, telephone, and digital broadcast satellite operators and media programmers to deliver media, voice, and IP data services to
their subscribers. ARRIS is a leader in set-tops, 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 including technical support, repair and refurbishment, and systems design and integration.
The consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary for a fair presentation of the consolidated
financial statements for the periods shown. Certain prior year amounts in the financial statements have been reclassified to conform to fiscal year 2016 presentation. Interim results of operations are not necessarily indicative of results to be
expected from a twelve-month period. These financial statements should be read in conjunction with the Companys most recent audited consolidated financial statements and notes thereto included in ARRIS Groups Annual Report on Form 10-K
for the year ended December 31, 2015, as filed with the United States Securities and Exchange Commission (SEC).
Note 2. Impact of Recently Adopted Accounting Standards
Adoption of new accounting standards
In June 2014, the Financial Accounting Standards Board
(FASB) issued an update to its accounting guidance related to share-based compensation. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period, be treated as a
performance condition, and therefore shall not be reflected in determining the fair value of the award at the grant date. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the
performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The guidance is effective for annual and interim periods beginning after December
15, 2015. This update was adopted by ARRIS beginning of the first quarter of 2016. The adoption of this guidance did not have a material impact on the Companys consolidated financial position and results of operations.
In January 2015, the FASB issued new guidance simplifying income statement presentation by eliminating the concept of extraordinary
items.
6
The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. ARRIS adopted this new guidance in the beginning of the first
quarter of 2016. The adoption of this guidance did not have a material impact on the Companys consolidated financial position and results of operations.
In February 2015, the FASB issued new guidance related to consolidations. The new guidance amends certain requirements for determining whether a variable interest entity must be consolidated. The
amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. ARRIS adopted this new guidance in the beginning of the first quarter of 2016. The adoption
of this guidance did not have a material impact on the Companys consolidated financial position and results of operations.
In April 2015, the FASB issued new guidance, in determining whether fees for purchasing cloud computing services (or hosted software solutions) are considered internal-use software or should be considered
a service contract. A cloud computing agreement that includes a software license should be accounted for in the same manner as internal-use software if the customer has contractual right to take possession of the software during the hosting period
without significant penalty and it is feasible to either run the software on the customers hardware or contract with another vendor to host the software. Arrangements that dont meet the requirements for internal-use software should be
accounted for as a service contract. As a result, all software licenses within the scope of this guidance will be accounted for consistently with other licenses of intangible assets. This guidance is effective for interim and annual periods
beginning after December 15, 2015. ARRIS adopted this guidance prospectively in the beginning of the first quarter of 2016 and it did not have a significant impact on our consolidated financial statements.
In March 2016, the FASB issued new guidance which eliminates the requirement that when an existing cost method investment qualifies for
use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Under the new guidance, at the point an investment qualifies for the equity method, any
unrealized gain or loss on available-for-sale securities in accumulated other comprehensive income (loss) will be recognized through earnings. The standard is effective for interim and annual reporting periods beginning after December 15, 2016,
although early adoption is permitted. We early adopted this standard during the three months ended March 31, 2016. None of our available-for-sale or cost investments qualified for use of the equity method during the quarter.
Accounting standards issued but not yet effective
In May 2014, the FASB issued an accounting standard update, Revenue from
Contracts with Customers. The standard requires 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. In August 2015, the FASB delayed the effective date of this standard by one year to reporting periods beginning after December 15, 2017, but permit companies the option to adopt the standard one year earlier (that is, as
of the original effective date). 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.
In July 2015, the FASB issued updated guidance related to the simplification
of the measurement of inventory. This standard update applies to inventory that is measured using first-in, first-out or average cost methods. The standard update requires entities to measure inventory at the lower of cost and net realizable value.
Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This standard update is effective for fiscal years beginning after
December 15, 2016. Early adoption is 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 August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around
managements responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entitys ability to continue as a going concern, and if those conditions exist to provide
related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a
material impact on the Companys consolidated financial statements.
In February 2016, the FASB issued new guidance that
will require lessees to recognize most leases on their balance sheets as a right-of-use asset with a corresponding lease liability, and lessors to recognize a net lease investment. Additional qualitative and quantitative disclosures will also be
required. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, although early adoption is permitted. The Company is currently assessing the potential impact of this update on its consolidated
financial statements.
7
In March 2016, the FASB issued new guidance which makes several modifications to Accounting
for share-based payments related to the accounting for forfeitures, employer tax withholding, the financial statement presentation of excess tax benefits or deficiencies, and the statement of cash flows presentation for certain components of
share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. We are currently assessing how the adoption of this standard will impact our Consolidated
Financial Statements.
Note 3. Business Acquisition
Acquisition of Pace
On January 4, 2016, ARRIS completed its previously announced acquisition of Pace, a leading international technology solutions provider, for approximately $2,074 million, including $638.8 million in cash
and issuance of 47.7 million shares of ARRIS International plc (formerly ARRIS International Limited) (New ARRIS) ordinary shares and $0.3 million of non-cash consideration.
In connection with the Combination, (i) ARRIS, a company incorporated in England and Wales and wholly-owned subsidiary of ARRIS Group,
agreed to acquire all of the outstanding ordinary shares of Pace by means of court-sanctioned scheme of arrangement (the Scheme) under English law and (ii) ARRIS Group entered into a Merger Agreement (the Merger Agreement),
dated April 22, 2015, among ARRIS Group, ARRIS, ARRIS US Holdings, Inc. (formerly Archie U.S. Holdings LLC), a Delaware corporation and wholly-owned subsidiary of ARRIS (US Holdco) and Archie U.S. Merger LLC, a Delaware limited liability
company and wholly-owned subsidiary of US Holdco (Merger Sub), whereby Merger Sub would be merged with and into ARRIS Group, with ARRIS Group surviving as an indirect wholly-owned subsidiary of ARRIS.
The Combination combines the strengths of both companies on a global scalebroadening ARRISs worldwide CPE leadership with a
competitive stake in satellite communications; and expanding its cable pay TV, cloud, network, home, and services portfolio.
The estimated goodwill of $1,054.0 million arising from the acquisition is attributable to the workforce of the acquired business,
strategic opportunities and synergies that are expected to arise from the acquisition of Pace. Goodwill will be assigned to our reporting units prior to the close of the measurement period. The goodwill is not expected to be deductible for
income tax purposes.
The following table summarizes the fair value of consideration transferred for Pace (in thousands):
|
|
|
|
|
Cash Consideration
(1)
|
|
$
|
638,789
|
|
Stock Consideration
(2)
|
|
|
1,434,690
|
|
Non-cash Consideration
(3)
|
|
|
323
|
|
|
|
|
|
|
Total consideration transferred
|
|
$
|
2,073,802
|
|
|
|
|
|
|
(1)
|
Cash consideration represents the cash payment of 132.5 pence (converted to $1.95 at an exchange rate of 1.4707 as of January 4, 2016) for each
of Paces shares and equity awards outstanding.
|
(2)
|
Stock consideration represents the conversion of each of Paces shares and equity awards outstanding at a conversion rate of 0.1455 with a
value of $30.08 at January 4, 2016, which represents the opening price of the Companys shares at the date of Combination.
|
(3)
|
Non-cash consideration represents $0.3 million settlement of preexisting payables and receivables between Pace and ARRIS.
|
8
The following is a summary of the preliminary estimated fair values of the net assets
acquired (in thousands):
|
|
|
|
|
Total estimated consideration transferred
|
|
$
|
2,073,802
|
|
Cash and cash equivalents
|
|
|
298,671
|
|
Accounts and other receivables
|
|
|
481,176
|
|
Inventories
|
|
|
426,871
|
|
Prepaids
|
|
|
38,197
|
|
Other current assets
|
|
|
53,618
|
|
Property, plant & equipment
|
|
|
71,816
|
|
Intangible assets
|
|
|
1,324,800
|
|
Noncurrent deferred income tax assets
|
|
|
74,171
|
|
Other assets
|
|
|
7,112
|
|
Accounts payable and other current liabilities
|
|
|
(800,538
|
)
|
Deferred revenue
|
|
|
(4,805
|
)
|
Short-term borrowings
|
|
|
(263,795
|
)
|
Other accrued liabilities
|
|
|
(122,919
|
)
|
Noncurrent deferred income tax liabilities
|
|
|
(465,166
|
)
|
Other noncurrent liabilities
|
|
|
(99,422
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
1,019,787
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,054,015
|
|
|
|
|
|
|
The Combination is being accounted for using the acquisition method of accounting in accordance with the
guidance in ASC 805,
Business Combinations
, which requires, among other things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair values, with any excess of the consideration transferred over the
estimated fair values of the identifiable net assets acquired recorded as goodwill. The accounting for the business combination is based on currently available information and is considered preliminary. The final accounting for the business
combination may differ materially from that presented in these unaudited consolidated financial statements.
The $1,324.8
million of acquired intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Estimated
Fair value
|
|
|
Estimated
Weighted Average
Life (years)
|
|
Customer contracts and relationships
|
|
$
|
645,000
|
|
|
|
10
|
|
Technology and patents
|
|
|
418,600
|
|
|
|
6.3
|
|
In-process research and development
|
|
|
123,100
|
|
|
|
indefinite
|
|
Trademarks and tradenames
|
|
|
121,000
|
|
|
|
5.0
|
|
Backlog
|
|
|
17,100
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
Total estimated preliminary fair value of intangible assets
|
|
$
|
1,324,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of trade accounts receivable is $452.3 million with the gross contractual amount being
$454.3 million. The Company expects $2.0 million to be uncollectible.
The Company incurred acquisition related costs of $27.8
million during the quarter ended March 31, 2016. This amount was expensed by the Company as incurred and is included in the Consolidated Statement of Operations in the line item titled Integration, acquisition and restructuring costs.
The Company also assumed $240.2 million of debt in conjunction with the Combination, and this debt was subsequently repaid in January 2016.
The Pace business contributed revenues of approximately $461.7 million to our consolidated results from the date of acquisition through March 31, 2016.
The following unaudited pro forma summary presents consolidated information of the Company as if the acquisition of Pace occurred on
January 1, 2015, the beginning of the annual period. The pro forma adjustments primarily relate to the additional depreciation expense on property, plant and equipment and amortization of acquired intangible assets,
9
interest expense related to new financing arrangements and the estimated impact on the Companys income tax provision. The unaudited pro forma combined results of operations are provided for
illustrative purposes only and are not indicative of the Companys actual consolidated results.
Unaudited pro forma net
loss for the three months ended March 31, 2016 and 2015 was adjusted to include (exclude) certain acquisition-related nonrecurring adjustments, including income tax related to stock transfer, retention bonus, executive severances, acceleration of
restricted stock, acquisition related costs, and fair value adjustments to acquisition date inventory, deferred revenue and deferred costs in the aggregate amount of ($125.3) million and $211.9 million, respectively. These additional
adjustments exclude the income tax impact.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
Net sales
|
|
$
|
1,614,706
|
|
|
$
|
1,647,935
|
|
|
|
|
Net loss
|
|
|
(97,648
|
)
|
|
|
(160,598
|
)
|
|
|
|
Basic
|
|
$
|
(0.51
|
)
|
|
$
|
(0.83
|
)
|
Diluted
|
|
$
|
(0.51
|
)
|
|
$
|
(0.83
|
)
|
These pro forma results are based on estimates and assumptions, which the Company believes are
reasonable.
The operations of the acquired business were extensive and complex and the initial accounting for the business
combination is incomplete at the end of the reporting period. Provisional amounts are reported for those items which are incomplete. At the time the financial statements were issued, the Company has not received a final valuation report
from the independent valuation expert for acquired property, plant and equipment and intangible assets. In addition, the Company is still gathering information about income taxes and deferred income tax assets and liabilities, warranty
obligations and other accrued liabilities based on facts that existed as of the date of the acquisition. During the measurement period, the Company will adjust the provisional amounts recognized at the acquisition date to reflect new
information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and ARRIS will record those adjustments to the financial
statements. The Company will recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount are determined.
Note 4. Goodwill and Intangible Assets
Goodwill
In the quarter ended March 31, 2016, the Company has preliminarily recorded additional goodwill of $1,054.0 million related to the Pace acquisition. The Company is in the process of assigning the assets
and liabilities acquired to each of its identified reporting units and as such, the determination of this incremental goodwill by reporting unit is incomplete as of March 31, 2016. The Company intends to finalize the assignment of the goodwill
from the Pace acquisition during fiscal year 2016.
The changes in the carrying amount of goodwill for the year to date period
ended March 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
N & C
|
|
|
Unassigned
|
|
|
Total
|
|
Goodwill
|
|
$
|
682,582
|
|
|
$
|
710,037
|
|
|
$
|
|
|
|
$
|
1,392,619
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
682,582
|
|
|
$
|
331,381
|
|
|
$
|
|
|
|
$
|
1,013,963
|
|
Goodwill acquired
|
|
|
|
|
|
|
255
|
|
|
|
1,054,029
|
|
|
|
1,054,284
|
|
Other
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
682,582
|
|
|
|
710,319
|
|
|
|
1,054,029
|
|
|
|
2,446,930
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
$
|
682,582
|
|
|
$
|
331,663
|
|
|
$
|
1,054,029
|
|
|
$
|
2,068,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Intangible Assets
The gross carrying amount and accumulated amortization of the Companys intangible assets as of March 31, 2016 and December 31, 2015 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,575,212
|
|
|
$
|
505,909
|
|
|
$
|
1,069,303
|
|
|
$
|
930,212
|
|
|
$
|
468,414
|
|
|
$
|
461,798
|
|
Developed technology, patents & licenses
|
|
|
1,124,047
|
|
|
|
409,856
|
|
|
|
714,191
|
|
|
|
704,137
|
|
|
|
361,719
|
|
|
|
342,418
|
|
Trademarks, trade and domain names
|
|
|
142,072
|
|
|
|
26,607
|
|
|
|
115,465
|
|
|
|
21,072
|
|
|
|
20,740
|
|
|
|
332
|
|
Backlog
|
|
|
17,100
|
|
|
|
8,268
|
|
|
|
8,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
$
|
2,858,431
|
|
|
$
|
950,640
|
|
|
$
|
1,907,791
|
|
|
$
|
1,655,421
|
|
|
$
|
850,873
|
|
|
$
|
804,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
5,900
|
|
|
|
|
|
|
$
|
5,900
|
|
|
$
|
5,900
|
|
|
|
|
|
|
$
|
5,900
|
|
In-process R&D
|
|
|
123,100
|
|
|
|
|
|
|
|
123,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
$
|
129,000
|
|
|
|
|
|
|
$
|
129,000
|
|
|
$
|
5,900
|
|
|
|
|
|
|
$
|
5,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,987,431
|
|
|
$
|
950,640
|
|
|
$
|
2,036,791
|
|
|
$
|
1,661,321
|
|
|
$
|
850,873
|
|
|
$
|
810,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 each of the next five fiscal years is as follows (in thousands):
|
|
|
|
|
2016 (for the remaining nine months)
|
|
$
|
275,038
|
|
2017
|
|
|
342,332
|
|
2018
|
|
|
291,770
|
|
2019
|
|
|
269,220
|
|
2020
|
|
|
260,443
|
|
Thereafter
|
|
|
468,988
|
|
Note 5. Investments
ARRISs investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
|
As of December 31, 2015
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
17,069
|
|
|
$
|
15,470
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
4,017
|
|
|
|
4,036
|
|
Equity method investments
|
|
|
25,745
|
|
|
|
24,452
|
|
Cost method investments
|
|
|
17,798
|
|
|
|
16,646
|
|
Other investments
|
|
|
24,555
|
|
|
|
24,408
|
|
|
|
|
|
|
|
|
|
|
Total classified as non-current assets
|
|
|
72,115
|
|
|
|
69,542
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89,184
|
|
|
$
|
85,012
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
ARRISs investments in debt and marketable equity
securities are categorized as available-for-sale and are carried at fair value. Realized gains and losses on available-for-sale securities are included in net income. Unrealized gains and losses on available-for-sale securities are included in our
Consolidated Balance Sheets as a component of accumulated other comprehensive income (loss). Realized and unrealized gains and losses in total and by individual investment as of March 31, 2016 and December 31, 2015 were not material. The
amortized cost basis of the Companys investments approximates fair value.
11
The contractual maturities of the Companys available-for-sale securities as of March
31, 2016 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 (in thousands):
|
|
|
|
|
|
|
March 31, 2016
|
|
Within one year
|
|
$
|
17,069
|
|
After one year through five years
|
|
|
|
|
After five years through ten years
|
|
|
|
|
After ten years
|
|
|
4,017
|
|
|
|
|
|
|
Total
|
|
$
|
21,086
|
|
|
|
|
|
|
Other-than-temporary investment impairments
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. ARRIS concluded that no other-than-temporary impairment losses existed for the
periods ended March 31, 2016. For the year ended December 31, 2015, ARRIS concluded that one private company had indicators of impairment that resulted in other-than-temporary impairment charge of $0.2 million.
Classification of securities as current or non-current is dependent upon managements intended holding period, the securitys
maturity date and liquidity consideration based on market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current.
Note 6. Fair Value Measurement
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. U.S GAAP 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 U.S GAAP are as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or
liabilities.
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 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 March 31, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
2,729
|
|
|
$
|
|
|
|
$
|
2,729
|
|
Corporate bonds
|
|
|
|
|
|
|
9,302
|
|
|
|
|
|
|
|
9,302
|
|
Short-term bond fund
|
|
|
5,037
|
|
|
|
|
|
|
|
|
|
|
|
5,037
|
|
Corporate obligations
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Money markets
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
Mutual funds
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
Other investments
|
|
|
|
|
|
|
3,688
|
|
|
|
|
|
|
|
3,688
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(24,192
|
)
|
|
|
|
|
|
|
(24,192
|
)
|
Foreign currency contracts asset position
|
|
|
|
|
|
|
1,332
|
|
|
|
|
|
|
|
1,332
|
|
Foreign currency contracts liability position
|
|
|
|
|
|
|
(13,871
|
)
|
|
|
|
|
|
|
(13,871
|
)
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
4,208
|
|
|
$
|
|
|
|
$
|
4,208
|
|
Corporate bonds
|
|
|
|
|
|
|
6,257
|
|
|
|
|
|
|
|
6,257
|
|
Short-term bond fund
|
|
|
5,005
|
|
|
|
|
|
|
|
|
|
|
|
5,005
|
|
Corporate obligations
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Money markets
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
Mutual funds
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
Other investments
|
|
|
|
|
|
|
3,695
|
|
|
|
|
|
|
|
3,695
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(10,759
|
)
|
|
|
|
|
|
|
(10,759
|
)
|
Foreign currency contracts asset position
|
|
|
|
|
|
|
7,064
|
|
|
|
|
|
|
|
7,064
|
|
Foreign currency contracts liability position
|
|
|
|
|
|
|
(24,371
|
)
|
|
|
|
|
|
|
(24,371
|
)
|
In addition to the financial instruments included in the above table, certain nonfinancial assets and
liabilities are measured at fair value on a nonrecurring basis in accordance with applicable authoritative guidance. This includes items such as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not
measured at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are
measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized. As of March 31, 2016, the Company had not recorded any impairment related to such assets and had no other
material nonfinancial assets or liabilities requiring adjustments or write-downs to their current fair value.
The Company
believes the face value of the debt as of March 31, 2016 approximated the fair value because of interest-bearing rates that are adjusted periodically, analysis of recent market conditions, prevailing interest rates, and other Company specific
factors. The Company has classified the debt as a Level 2 item within the fair value hierarchy.
Note 7. Derivative Instruments and Hedging Activities
Overview
ARRIS is exposed to financial market risk, primarily related to foreign currency and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of
these exposures, the Company enters into a variety of derivative financial instruments. Managements objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign
currency and interest rates. ARRISs policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures. ARRIS does not hold or issue derivative financial instruments for trading or speculative
purposes.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair
value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria
necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are
considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives also may be
designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the
changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative
contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. In accordance with the FASBs fair value measurement guidance, the Company
made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
13
Cash Flow Hedges of Interest Rate Risk
In April 2013, ARRIS Group 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 June 2015, ARRIS
Group amended and restated its existing credit agreement to improve the terms and conditions of the credit agreement, extend the maturities of certain loan facilities, increase the amount of the revolving credit facility, and add a new Term
Loan A-1 Facility to fund the acquisition of Pace. As a result of exposure to interest rate movements, ARRIS Group entered into various interest rate swap arrangements, which effectively converted $625 million of its variable-rate debt based
on one-month LIBOR to an aggregate fixed rate. The aggregated fixed rate changes as certain swaps mature and other swaps begin and could vary up by 50 basis points or down by 25 basis points based on future changes to the Companys net leverage
ratio. Based on the Companys interest rates as of March 31, 2016, the aggregate fixed rate for swaps in effect and outstanding through December 29, 2017 is 3.15% per annum, and the aggregate fixed rate for swaps in effect and outstanding from
December 29, 2017 through March 31, 2020 is 4.00% per annum. ARRIS Group 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.
In the first quarter of 2016, ARRIS entered into six $50
million interest rate swap arrangements as a result of the additional exposure from the new Term Loan A-1 Facility. These arrangements effectively converted $300 million of the Companys variable-rate debt based on one-month LIBOR to an
aggregate fixed rate of 2.74% per annum based on the Companys interest rates as of March 31, 2016. This fixed rate could vary by up 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 March 31, 2020. ARRIS has designated these swaps as cash flow hedges, and the objective of these hedges is to manage the variability of cash flows in the interest payments related to the portion of the variable-rate
debt designated as being hedged.
The Companys 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 2016, such derivatives were used to hedge the variable cash flows associated with
debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2016, 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 $6.5 million may be reclassified as an increase to interest expense.
The table below presents the pre-tax impact the Companys derivative financial instruments had on the Accumulated Other
Comprehensive Income and Statement of Operations for the three months ended March 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Loss Recognized in OCI on Derivative (Effective Portion)
|
|
$
|
(15,175
|
)
|
|
$
|
(4,944
|
)
|
Location of Loss Reclassified from Accumulated OCI into Income
(Effective Portion)
|
|
|
Interest
expense
|
|
|
|
Interest
expense
|
|
Amounts Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
$
|
1,741
|
|
|
$
|
1,838
|
|
14
The following table indicates the location on the Consolidated Balance Sheets in which the
Companys derivative assets and liabilities designated as hedging instruments have been recognized, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives of March 31, 2016 and
December 31, 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
|
As of December 31, 2015
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Derivatives designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
liability derivatives
|
|
Other accrued liabilities
|
|
|
(6,489
|
)
|
|
Other accrued liabilities
|
|
|
(4,489
|
)
|
|
|
|
|
|
Interest rate derivatives
liability derivatives
|
|
Other noncurrent liabilities
|
|
|
(17,703
|
)
|
|
Other noncurrent liabilities
|
|
|
(6,270
|
)
|
Credit-risk-related Contingent Features
ARRIS has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the
underlying indebtedness is accelerated by the lender due to the Companys default on the indebtedness. As of March 31, 2016 and 2015, 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 $25.1 million and $8.3 million, respectively. As of March 31, 2016, 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 of foreign currency risk
The Company has U.S. dollar functional currency entities that bill certain international customers in their local currency and foreign
functional currency entities that procure in U.S. dollars. ARRIS also has certain predictable expenditures for international operations in local currency. Additionally, certain intercompany transactions are denominated in foreign currencies and
subject to revaluation. To mitigate the volatility related to fluctuations in the foreign exchange rates for certain exposures, ARRIS has entered into various foreign currency contracts. As of March 31, 2016, the Company had option collars with
notional amounts totaling 70 million euros which mature throughout 2016 and 2017, forward contracts with notional amounts totaling 70 million euros which mature throughout 2016 and 2017, forward contracts with a total notional amount of 116 million
Australian dollars which mature throughout 2016 and 2017, forward contracts with notional amounts totaling 80 million Canadian dollars which mature throughout 2016 and forward contracts with notional amounts totaling 188.5 million South African rand
which mature throughout 2016.
As part of the Pace acquisition, the Company paid the former Pace shareholders 132.5 pence per
share in cash consideration, which is approximately 434.3 million British pounds, in the aggregate, as of January 4, 2016. As such, the Company entered into foreign currency forward contracts to purchase British pounds and sell U.S. Dollars to
mitigate the volatility related to fluctuations in the foreign exchange rate prior to the closing period. As of December 31, 2015, the Company had forward contracts with notional amounts totaling 385 million British pounds which matured on March 31,
2016. The contracts fixed the British pound to U.S. dollar forward exchange rate at various rates. During the three months ended March 31, 2016, losses of $1.6 million were recorded related to the British pound forward
contracts. These contracts were effectively closed upon the close of the Pace acquisition in January 2016.
The
Companys objectives in using foreign currency derivatives are to add stability to foreign currency gains and losses recorded as other expense (income) and to manage its exposure to foreign currency movements. To accomplish this objective, the
Company uses foreign currency option and foreign currency forward contracts as part of its foreign currency risk management strategy. The Companys foreign currency derivative instruments
15
economically hedge certain risk but are not designated as hedges, and accordingly, all changes in the fair value of the instruments are recognized as a loss (gain) on foreign currency in the
Consolidated Statements of Operations. The maximum time frame for ARRISs derivatives is currently less than 18 months.
The following table indicates the location on the Consolidated Balance Sheets in which the Companys derivative assets and
liabilities not designated as hedging instruments have been recognized and the related fair values of those derivatives as of March 31, 2016 and December 31, 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
|
As of December 31, 2015
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Derivatives not designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
asset derivatives
|
|
Other current assets
|
|
$
|
865
|
|
|
Other current assets
|
|
$
|
6,495
|
|
|
|
|
|
|
Foreign exchange contracts
asset derivatives
|
|
Other assets
|
|
|
467
|
|
|
Other assets
|
|
|
569
|
|
|
|
|
|
|
Foreign exchange contracts
liability derivatives
|
|
Other accrued liabilities
|
|
|
(12,200
|
)
|
|
Other accrued liabilities
|
|
|
(23,632
|
)
|
|
|
|
|
|
Foreign exchange contracts
liability derivatives
|
|
Other noncurrent liabilities
|
|
|
(1,671
|
)
|
|
Other noncurrent liabilities
|
|
|
(739
|
)
|
The change in the fair values of ARRISs derivatives not designated as hedging instruments recorded
in the Consolidated Statements of Operations during the three months ended March 31, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March
31,
|
|
|
|
Statement of Operations Location
|
|
2016
|
|
|
2015
|
|
Derivatives not designated
as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Loss (gain) on foreign currency
|
|
$
|
17,455
|
|
|
$
|
(10,309
|
)
|
Note 8. Pension Benefits
Components of Net Periodic Pension Cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
U.S
|
|
|
Taiwan
|
|
|
U.S
|
|
|
Taiwan
|
|
Service cost
|
|
$
|
|
|
|
$
|
173
|
|
|
$
|
|
|
|
$
|
185
|
|
Interest cost
|
|
|
438
|
|
|
$
|
151
|
|
|
|
429
|
|
|
$
|
165
|
|
Expected gain on plan assets
|
|
|
(199
|
)
|
|
|
(68
|
)
|
|
|
(210
|
)
|
|
|
(44
|
)
|
Amortization of net loss (gain)
|
|
|
194
|
|
|
|
(1,897
|
)
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
433
|
|
|
$
|
(1,641
|
)
|
|
$
|
428
|
|
|
$
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer Contributions
No minimum funding contributions are required in 2016 under the Companys U.S. defined benefit plan. During the quarter ended March 31, 2016, the Company made a minimum funding contribution of $9.6
million related to its Taiwan pension plan.
The Company has established two rabbi trusts to fund the Companys pension
obligations under the non-qualified plan of the Chief Executive Officer and certain executive officers. The balance of these rabbi trust assets as of March 31, 2016 was approximately $18.3 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.
16
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 ARRISs 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 ARRISs aggregate product
warranty liabilities for the three months ended March 31, 2016 was as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
49,027
|
|
Warranty reserve at acquisition
|
|
|
62,317
|
|
Accruals related to warranties (including changes in assumptions)
|
|
|
14,682
|
|
Settlements made (in cash or in-kind)
|
|
|
(12,416
|
)
|
|
|
|
|
|
Balance at March 31, 2016
|
|
$
|
113,610
|
|
|
|
|
|
|
Note 10. Inventories
The components of inventory were as follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw material
|
|
$
|
86,437
|
|
|
$
|
60,287
|
|
Work in process
|
|
|
2,453
|
|
|
|
3,076
|
|
Finished goods
|
|
|
573,397
|
|
|
|
338,229
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
662,287
|
|
|
$
|
401,592
|
|
|
|
|
|
|
|
|
|
|
Note 11. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
68,562
|
|
|
$
|
68,562
|
|
Building and leasehold improvements
|
|
|
151,801
|
|
|
|
141,171
|
|
Machinery and equipment
|
|
|
475,207
|
|
|
|
407,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
695,570
|
|
|
|
616,843
|
|
Less: Accumulated depreciation
|
|
|
(326,315
|
)
|
|
|
(304,532
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
369,255
|
|
|
$
|
312,311
|
|
|
|
|
|
|
|
|
|
|
17
Note 12. Restructuring and Integration
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, 2015
|
|
$
|
3
|
|
|
$
|
87
|
|
|
$
|
90
|
|
Restructuring charges
|
|
|
50,984
|
|
|
|
3
|
|
|
|
50,987
|
|
Cash payments / adjustments
|
|
|
(37,411
|
)
|
|
|
(38
|
)
|
|
|
(37,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2016
|
|
$
|
13,576
|
|
|
$
|
52
|
|
|
$
|
13,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and termination benefits
In first quarter of 2016, ARRIS completed its
acquisition of Pace. ARRIS initiated restructuring plans as a result of the Acquisition that focuses on the rationalization of personnel, facilities and systems across the ARRIS organization.
The total estimated cost of the restructuring plan was approximately $51.0 million and was recorded as severance expense during 2016.
This amount is included in the Consolidated Statement of Operations in the line item titled Integration, acquisition and restructuring costs The restructuring plan affected approximately 900 employees across the company and within each
of the Companys two reportable segments. The remaining liability is expected to be paid by the end of fourth quarter of 2016.
Contractual obligations
- ARRIS has restructuring accruals representing contractual obligations that relate to excess leased facilities and equipment.
Integration expenses of $12.1 million were recorded during the three months ended March 31, 2016, related to outside services and other
integration related activities.
Note 13. Indebtedness
The following is a summary of indebtedness and lease financing obligations as of March 31, 2016 and December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
|
As of December 31, 2015
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Term loan A
|
|
$
|
49,500
|
|
|
$
|
49,500
|
|
Term loan A-1
|
|
|
40,000
|
|
|
|
|
|
Account receivable financing program
|
|
|
11,503
|
|
|
|
|
|
Lease finance obligation
|
|
|
799
|
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
Current obligations
|
|
|
101,802
|
|
|
|
50,258
|
|
Current deferred financing fees and debt discount
|
|
|
(7,683
|
)
|
|
|
(6,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
94,119
|
|
|
|
43,591
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Term loan A
|
|
|
903,375
|
|
|
|
915,750
|
|
Term loan A-1
|
|
|
760,000
|
|
|
|
|
|
Term loan B
|
|
|
543,813
|
|
|
|
543,812
|
|
Revolver
|
|
|
|
|
|
|
|
|
Lease finance obligation
|
|
|
58,472
|
|
|
|
58,676
|
|
|
|
|
|
|
|
|
|
|
Noncurrent obligations
|
|
|
2,265,660
|
|
|
|
1,518,238
|
|
Noncurrent deferred financing fees and debt discount
|
|
|
(23,589
|
)
|
|
|
(21,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,242,071
|
|
|
|
1,496,243
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,336,190
|
|
|
$
|
1,539,834
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities
On June 18, 2015, ARRIS Group amended and restated its existing credit agreement dated March 27, 2013 (the Existing Credit Agreement) to improve the terms and conditions of the credit
agreement, extend the maturities of certain loan facilities, increase the amount of the revolving credit facility, and add a new term A-1 loan facility to fund the acquisition of Pace. The credit facility under the amended credit agreement (the
Amended Credit Agreement) is comprised of (i) a Term Loan A Facility of $990 million, (ii) a Term Loan B Facility of $543.8 million, (iii) a Revolving Credit Facility of $500 million and (iv) a
Term Loan A-1 Facility of $800
18
million, was funded upon the closing of the acquisition of Pace in 2016. Under the Amended Credit Agreement, the Term Loan A Facility, Term Loan A-1 Facility and the Revolving Credit Facility
will mature on June 18, 2020. The Term Loan B Facility will mature on April 17, 2020. Interest rates on borrowings under the senior secured credit facilities are set forth in the table below.
|
|
|
|
|
|
|
Rate
|
|
As of March 31, 2016
|
Term Loan A
|
|
LIBOR + 1.75 %
|
|
2.18%
|
Term Loan A-1
|
|
LIBOR + 1.75 %
|
|
2.18%
|
Term Loan B
|
|
LIBOR
(1)
+ 2.50 %
|
|
3.25%
|
Revolving Credit Facility
(2)
|
|
LIBOR + 1.75 %
|
|
Not Applicable
|
|
(1)
|
Includes LIBOR floor of 0.75%
|
|
(2)
|
Includes unused commitment fee of 0.35% and letter of credit fee of 1.75% not reflected in interest rate above.
|
The Amended Credit Agreement provides for adjustments to the interest rates paid on the Term Loan A, Term Loan A-1, Term Loan B and
Revolving Credit Facility based upon the achievement of certain leverage ratios.
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 Amended Credit Agreement governing the senior
secured credit facilities. The Amended Credit Agreement provides terms for mandatory prepayments, optional prepayments and commitment reductions. The Amended Credit Agreement also includes events of default, which are customary for facilities of
this type (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all amounts outstanding under the credit facilities may be accelerated. The Amended 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 interest coverage ratio of 3.50:1 and a maximum leverage ratio of 3.75:1 (with a scheduled decrease to 3.50:1 in the first quarter of 2017). As of March 31, 2016, ARRIS was in compliance with all covenants under the Amended Credit Agreement.
During the three months ended March 31, 2016, the Company made mandatory prepayments of approximately $12.4 million related
to the senior secured credit facilities. In addition, the Company repaid $240.2 million of debt assumed in the Pace acquisition.
Account
Receivable Financing Program
In connection with the Combination on January 4, 2016, ARRIS assumed an accounts receivable
financing program (the AR Financing Program or the Program) which was entered into by Pace on June 30, 2015. Under this Program, the Company assigns trade receivables on a revolving basis of up to $50 million to the lender
and the lender advances 95% of the receivable value to the Company. The remaining 5% is remitted to ARRIS upon receipt of cash from the customer.
The AR Financing Program is accounted for as secured borrowings and amounts outstanding are included in the current portion of long-term debt on the consolidated balance sheet. The Company pays certain
transaction fees and interest of 1.23% on the outstanding balance in connection with this Program.
Other
As of March 31, 2016, the scheduled maturities of the contractual debt obligations for the next five years are as follows (in thousands):
|
|
|
|
|
2016 (for the remaining nine months)
|
|
$
|
67,125
|
|
2017
|
|
|
89,500
|
|
2018
|
|
|
89,500
|
|
2019
|
|
|
89,500
|
|
2020
|
|
|
1,961,063
|
|
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
19
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.
Our CODM manages the Company under two segments:
|
|
|
Customer Premises Equipment (CPE)
The CPE segments product solutions include set-top boxes, gateways,
and subscriber premises equipment that enable service providers to offer Voice, Video and high-speed data services to residential and business subscribers.
|
|
|
|
Network & Cloud (N&C)
The N&C
segments product solutions include cable modem
termination system, video infrastructure, distribution and transmission equipment and cloud solutions that enable facility-based service providers to construct a state-of-the-art residential and metro distribution network. The portfolio also
includes a full suite of global services that offer technical support, professional services and system integration offerings to enable solutions sales of ARRISs end-to-end product portfolio.
|
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. Direct contribution is defined as gross margin less direct operating expense. The Corporate and Unallocated Costs category of expenses include
corporate sales and marketing, home office general and administrative expenses, annual bonus and equity compensation. These expenses are not included in the measure of segment direct contribution and as such are reported as Corporate and
Unallocated Costs and are included in the reconciliation to income (loss) before income taxes. A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating
resources.
The table below represents information about the Companys reportable segments for the three months ended
March 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
CPE
|
|
$
|
1,090,828
|
|
|
$
|
821,674
|
|
N&C
|
|
|
524,237
|
|
|
|
393,500
|
|
Other
|
|
|
(359
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,614,706
|
|
|
|
1,215,158
|
|
|
|
|
|
|
|
|
|
|
Direct contribution:
|
|
|
|
|
|
|
|
|
CPE
|
|
|
131,965
|
|
|
|
151,452
|
|
N&C
|
|
|
156,984
|
|
|
|
94,203
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
|
288,949
|
|
|
|
245,655
|
|
|
|
|
|
|
|
|
|
|
Corporate and unallocated costs
|
|
|
(186,027
|
)
|
|
|
(141,892
|
)
|
Amortization of intangible assets
|
|
|
(98,493
|
)
|
|
|
(57,147
|
)
|
Integration, acquisition, restructuring and other
|
|
|
(90,919
|
)
|
|
|
(898
|
)
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(86,490
|
)
|
|
|
45,718
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
19,626
|
|
|
|
13,367
|
|
Loss on investments
|
|
|
1,959
|
|
|
|
1,709
|
|
Loss on foreign currency
|
|
|
12,241
|
|
|
|
20
|
|
Interest income
|
|
|
(783
|
)
|
|
|
(721
|
)
|
Other expense (income), net
|
|
|
(350
|
)
|
|
|
7,063
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
(119,183
|
)
|
|
$
|
24,280
|
|
|
|
|
|
|
|
|
|
|
20
For the three month period ended March 31, 2016 and 2015, the compositions of our corporate
and unallocated costs that are reflected in the consolidated statement of operations were as follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Corporate and unallocated costs:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
47,388
|
|
|
$
|
14,741
|
|
Selling, general and administrative expenses
|
|
|
95,373
|
|
|
|
86,108
|
|
Research and development expenses
|
|
|
43,266
|
|
|
|
41,043
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
186,027
|
|
|
|
141,892
|
|
|
|
|
|
|
|
|
|
|
Note 15. Sales Information
ARRIS sells its products primarily in the United States. The Companys international revenue is generated from
Asia Pacific, Canada, Europe and Latin America. Sales to customers outside of United States were approximately 24.4% and 26.7% of total sales for the three months ended March 31, 2016 and 2015, respectively.
International sales by region for the three months ended March 31, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Americas, excluding U.S.
(1)
|
|
$
|
236,639
|
|
|
$
|
204,858
|
|
Asia Pacific
|
|
|
37,369
|
|
|
|
33,984
|
|
EMEA
|
|
|
119,732
|
|
|
|
85,561
|
|
|
|
|
|
|
|
|
|
|
Total international sales
|
|
$
|
393,740
|
|
|
$
|
324,403
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes U.S. sales of $1,221.0 million and $890.8 million for the three months ended March 31, 2016 and 2015, respectively.
|
Note 16. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share
(EPS) computations for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to ARRIS International plc
|
|
$
|
(202,573
|
)
|
|
$
|
19,126
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
191,743
|
|
|
|
145,350
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
(1.06
|
)
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to ARRIS International plc
|
|
$
|
(202,573
|
)
|
|
$
|
19,126
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
191,743
|
|
|
|
145,350
|
|
Net effect of dilutive equity awards
|
|
|
|
|
|
|
3,636
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
191,743
|
|
|
|
148,986
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
(1.06
|
)
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2016, all of the equity-based awards were excluded from the
computation of diluted earnings per share shares because their effect would have been anti-dilutive. For the three months ended March 31, 2015, no outstanding equity-based awards were anti-dilutive. These exclusions are made if the exercise
price of these equity-based awards is in excess of the average market price of the shares for the period, or if the Company has net losses, both of which have an anti-dilutive effect.
21
During the three months ended March 31, 2016, the Company issued 0.8 million shares of its
ordinary shares related to the vesting of restricted shares, as compared to 3.2 million shares for the twelve months ended December 31, 2015.
In connection with the Acquisition, ARRIS issued approximately 47.7 million shares of ARRIS International plc ordinary shares as part of the purchase consideration. The fair value of the 47.7 million
shares issued, $1,434.7 million, was determined based on the conversion of each of Paces shares and equity awards outstanding at a conversion rate of 0.1455 with a value of $30.08 at January 4, 2016, which represents the opening price of the
Companys shares at the date of Combination. (See Note 3
Business Acquisition
for additional details)
The Company
has not paid cash dividends on its shares since its inception.
Note 17. Shareholders Equity
The following table provides a reconciliation of the beginning and ending carrying amounts of total equity, equity
attributable to shareholders of ARRIS International plc. and equity attributable to noncontrolling interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Ordinary
Shares
|
|
|
Capital in
Excess of
Par Value
|
|
|
Treasury
Stock
|
|
|
Retained
Earnings
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Total
ARRIS
International
plc
stockholders
equity
|
|
|
Non-
controlling
Interest
|
|
|
Total
stockholders
equity
|
|
Balance, December 31, 2015
|
|
$
|
1,790
|
|
|
$
|
|
|
|
$
|
1,777,276
|
|
|
$
|
(331,329
|
)
|
|
$
|
358,823
|
|
|
$
|
(12,646
|
)
|
|
$
|
1,793,914
|
|
|
$
|
47,047
|
|
|
$
|
1,840,961
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(202,573
|
)
|
|
|
|
|
|
|
(202,573
|
)
|
|
|
(2,623
|
)
|
|
|
(205,196
|
)
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,830
|
)
|
|
|
(7,830
|
)
|
|
|
(3
|
)
|
|
|
(7,833
|
)
|
Compensation under stock award plans
|
|
|
|
|
|
|
|
|
|
|
14,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,276
|
|
|
|
|
|
|
|
14,276
|
|
Effect of combination on ARRIS Group
|
|
|
(1,439
|
)
|
|
|
2,173
|
|
|
|
(734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of treasury stock
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
331,329
|
|
|
|
(330,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares for Pace acquisition
|
|
|
|
|
|
|
703
|
|
|
|
1,433,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,434,690
|
|
|
|
|
|
|
|
1,434,690
|
|
Issuance of ordinary shares and other
|
|
|
|
|
|
|
12
|
|
|
|
(13,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,929
|
)
|
|
|
|
|
|
|
(13,929
|
)
|
Repurchase of ordinary shares, net
|
|
|
|
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
(149,939
|
)
|
|
|
|
|
|
|
(150,003
|
)
|
|
|
|
|
|
|
(150,003
|
)
|
Income tax expense related to exercise of restricted share units
|
|
|
|
|
|
|
|
|
|
|
(3,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,294
|
)
|
|
|
|
|
|
|
(3,294
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
(2,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,717
|
)
|
|
|
|
|
|
|
(2,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2016
|
|
$
|
|
|
|
$
|
2,824
|
|
|
$
|
3,204,853
|
|
|
$
|
|
|
|
$
|
(324,667
|
)
|
|
$
|
(20,476
|
)
|
|
$
|
2,862,534
|
|
|
$
|
44,421
|
|
|
$
|
2,906,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combination
Prior to the Combination, the Company accounted for purchases of its outstanding common stock using the treasury share method permitted under U.S. GAAP. Under this method, the Company recorded
purchases of its own outstanding common stock separately as a reduction to shareholders equity based on the cost of the shares acquired. Under U.K. law, when the Company repurchases its outstanding shares, those shares are
cancelled. In the quarter ended March 31, 2016 as part of the Combination, the Company constructively cancelled 35.1 million shares of treasury stock. The impact of the cancellation of all outstanding treasury shares was a decrease in
common stock and retained earnings of $351 thousand and $331.0 million, respectively and the balance of treasury stock at cost of $331.3 million was eliminated.
Additionally, effective upon the completion of the Combination, the par value of ARRIS Group outstanding equity shares changed from $0.01 par value to a nominal value of £0.01. The impact of this
change was an increase in Ordinary shares of $0.7 million, and decrease in additional paid-in capital of $0.7 million.
22
Note 18. Income Taxes
On January 4, 2016, ARRIS Group completed the Combination transaction with Pace, a company incorporated in England and
Wales. In connection with the Combination, (i) ARRIS International plc (ARRIS), a company incorporated in England and Wales, acquired all of the outstanding ordinary shares of Pace (the Pace Acquisition) and (ii) a
wholly-owned subsidiary of ARRIS was merged with and into ARRIS Group (the Merger), with ARRIS Group surviving the Merger as an indirect wholly-owned subsidiary of ARRIS. As a result of the Merger, ARRIS incurred withholding taxes of
$55.0 million. Subsequent to the Merger, ARRIS is subject to the United Kingdom statutory tax rate of 20% and a territorial corporate tax system. Prior to the Merger, ARRIS was subject to the U.S. statutory tax rate of 35% and a worldwide corporate
tax system.
The Companys estimated annualized effective tax rate calculated separately from the effect of significant,
infrequent or unusual items for 2016 is (25.1%). The estimated annualized effective tax rate differs from the UK statutory rate of 20% primarily as a result of the favorable impact of intragroup financing and 2016 U.S. federal research and
development credits. For the three months ended March 31, 2016 and 2015, the Company recorded income tax expense of $86.0 million and $5.2 million, respectively. The change in income tax expense for the three month period ended March 31, 2016
compared to the three month period ended March 31, 2015, was due to a book loss in 2016, to which the estimated annualized effective tax rate of (25.1%) was applied. In addition, during the quarter the Company recorded $55 million of withholding tax
expense in connection with the Combination, as well as $2.1 million of expense on expiring net operating losses, both of which are one-time items.
During the three month period ended March 31, 2016, the Company changed its permanent reinvestment assertion as it relates to earnings of certain foreign subsidiaries. As a result of this change, the
Company recognized a deferred tax liability of $0.8 million in the three month period ending March 31, 2016.
Note 19. Accumulated Other Comprehensive Income
The following table summarizes the changes in accumulated other comprehensive income by component, net of taxes, for
the three months ended March 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-
sale securities
|
|
|
Derivative
instruments
|
|
|
Change
related to
pension
liability
|
|
|
Cumulative
translation
adjustments
|
|
|
Total
|
|
Balance as of December 31, 2015
|
|
$
|
133
|
|
|
$
|
(6,781
|
)
|
|
$
|
(4,195
|
)
|
|
$
|
(1,803
|
)
|
|
$
|
(12,646
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
(232
|
)
|
|
|
(9,933
|
)
|
|
|
|
|
|
|
3,080
|
|
|
|
(7,085
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
12
|
|
|
|
1,140
|
|
|
|
(1,897
|
)
|
|
|
|
|
|
|
(745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
(220
|
)
|
|
|
(8,793
|
)
|
|
|
(1,897
|
)
|
|
|
3,080
|
|
|
|
(7,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
$
|
(87
|
)
|
|
$
|
(15,574
|
)
|
|
$
|
(6,092
|
)
|
|
$
|
1,277
|
|
|
$
|
(20,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-
sale securities
|
|
|
Derivative
instruments
|
|
|
Change
related to
pension
liability
|
|
|
Cumulative
translation
adjustments
|
|
|
Total
|
|
Balance as of December 31, 2014
|
|
$
|
25
|
|
|
$
|
(3,166
|
)
|
|
$
|
(7,181
|
)
|
|
$
|
(725
|
)
|
|
$
|
(11,047
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
9
|
|
|
|
(3,142
|
)
|
|
|
|
|
|
|
(59
|
)
|
|
|
(3,192
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
1,168
|
|
|
|
105
|
|
|
|
|
|
|
|
1,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
9
|
|
|
|
(1,974
|
)
|
|
|
105
|
|
|
|
(59
|
)
|
|
|
(1,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2015
|
|
$
|
34
|
|
|
$
|
(5,140
|
)
|
|
$
|
(7,076
|
)
|
|
$
|
(784
|
)
|
|
$
|
(12,966
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Note 20. Repurchases of ARRIS Shares
The table below sets forth the purchases of ARRIS shares for the quarter ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number of
Shares
Purchased
(1)
|
|
|
Average
Price Paid
Per Share
|
|
|
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or
Programs
|
|
|
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under
the Plans
or Programs
(in thousands)
|
|
January 2016
|
|
|
29,119
|
|
|
$
|
25.85
|
|
|
|
|
|
|
$
|
300,000
|
|
February 2016
|
|
|
2,369,945
|
|
|
$
|
23.01
|
|
|
|
2,369,945
|
|
|
$
|
245,465
|
|
March 2016
|
|
|
4,599,690
|
|
|
$
|
23.64
|
|
|
|
4,021,594
|
|
|
$
|
149,997
|
|
|
(1)
|
Includes approximately 607,215 shares subject to equity awards that were cancelled for cash to satisfy minimum tax withholding obligations that arose on the vesting of
shares of restricted stock units.
|
Upon completing the Combination, ARRIS International plc conducted a
court-approved process in accordance with section 641(1)(b) of the UK Companies Act 2006, pursuant to which the Company reduced its stated share capital and thereby increased its distributable reserves or excess capital out of which ARRIS may
legally pay dividends or repurchase shares. Distributable reserves are not linked to a U.S. GAAP reported amount. In early 2016, the Companys Board of Directors approved a $300 million share repurchase authorization replacing all prior
programs of ARRIS Group. Unless terminated earlier by a Board resolution, this new plan will expire when ARRIS has used all authorized funds for repurchase.
Note 21. Commitments and Contingencies
Leases:
ARRIS leases office, distribution, and warehouse facilities as well as equipment under long-term leases expiring at various dates through 2023. Included in these operating leases are certain amounts
related to restructuring activities; these lease payments and related sublease income are included in restructuring accruals on the consolidated balance sheets. Future minimum operating lease payments under non-cancelable leases at March 31,
2016 were as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
|
2016 (for the remaining nine months)
|
|
$
|
25,718
|
|
2017
|
|
|
27,883
|
|
2018
|
|
|
21,618
|
|
2019
|
|
|
16,872
|
|
2020
|
|
|
13,495
|
|
Thereafter
|
|
|
40,811
|
|
Less sublease income
|
|
|
(1,076
|
)
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
145,321
|
|
|
|
|
|
|
Total rental expense for all operating leases amounted to approximately $9.0 million and $6.5 million for
the three months ended March 31, 2016 and 2015, respectively.
Additionally, the Company had contractual obligations of
approximately $708.0 million under agreements with non-cancelable terms to purchase goods or services over the next year. All contractual obligations outstanding at the end of prior years were satisfied within a 12 month period, and the
obligations outstanding as of March 31, 2016 are expected to be satisfied by 2017.
Bank Guarantees:
The Company has outstanding bank guarantees, of which certain amounts are collateralized by restricted cash. As of March 31, 2016,
the restricted cash associated with the outstanding bank guarantee was $1.6 million which is reflected in Other Assets on the Consolidated Balance Sheets.
24
Legal Proceedings:
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)
25