NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. 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.
This Annual Report on Form 10-K is being filed by the Registrant on behalf of, and as
successor, to ARRIS Group. 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 (CPE) and Network & Cloud (N&C) (See Note 10
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.
Note 2. Summary of Significant Accounting
Policies
(a) Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned foreign and domestic
subsidiaries and consolidated venture in which the Company owns more than 50% of the outstanding voting shares of the entity. Intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements are
prepared in accordance with accounting principles generally accepted in the United States (U.S GAAP), and our reporting currency is the United States Dollar (USD).
(b) Use of Estimates
The preparation of the
consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
(c) Cash, Cash Equivalents, and
Investments
ARRISs cash and cash equivalents (which are highly-liquid investments with a remaining maturity at the
date of purchase of three months or less) are primarily held in demand deposit accounts and money market accounts. The Company holds investments consisting of mutual funds and debt securities classified as available-for-sale, which are stated at
estimated fair value. The debt securities consist primarily of commercial paper,
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certificates of deposits, short term corporate obligations and U.S. government agency financial instruments. These investments are on deposit with major financial institutions.
The Company accounts for investments in companies in which it has significant influence, or ownership between 20% and 50% of the investee
under the equity method of accounting. Under the equity method, the investment is originally recorded at cost and adjusted to recognize the Companys share of net earnings or losses, any basis difference of the investee, and dividends received.
Investments in which we do not exercise significant influence (generally less than a 20 percent ownership interest) are
accounted for under the cost method.
The Company evaluates its investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of such investments may not be recoverable. An investment is written down to fair value if there is evidence of a loss in value which is other than temporary.
(d) Accounts Receivable and Allowance for Doubtful Accounts and Sales Returns
Accounts receivable are stated at amounts owed by the customers, net of allowance for doubtful accounts, sales returns and allowances.
ARRIS establishes a reserve for doubtful accounts based upon the historical experience and leading market indicators in collecting accounts receivable. A majority of the accounts receivable are from a few large cable system operators and
telecommunication companies, either with investment rated debt outstanding or with substantial financial resources, and have favorable payment histories. If ARRIS was to have a collection problem with one of its major customers, it is possible the
reserve will not be sufficient. ARRIS calculates the reserve for uncollectible accounts using a model that considers customer payment history, recent customer press releases, bankruptcy filings, if any, Dun & Bradstreet reports, and
financial statement reviews. The calculation is reviewed by management to assess whether there needs to be an adjustment to the reserve for uncollectible accounts. The reserve is established through a charge to the provision and represents amounts
of current and past due customer receivable balances of which management deems a loss to be both probable and estimable. Accounts receivable are charged to the allowance when determined to be no longer collectible.
ARRIS also establishes a reserve for sales returns and allowances. The reserve is an estimate of the impact of potential returns based
upon historic trends.
The following table represents a summary of the changes in the reserve for allowance for doubtful
accounts, and sales returns and allowances for fiscal 2016, 2015 and 2014 (in thousands):
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2016
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2015
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2014
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Balance at beginning of fiscal year
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$
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9,975
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$
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6,392
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$
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1,887
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Charges to expenses
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1,386
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2,997
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5,336
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Recoveries (deductions)
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3,892
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586
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(831
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)
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Balance at end of fiscal year
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$
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15,253
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$
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9,975
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$
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6,392
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(e) Inventories
Inventories are stated at the lower of cost or market. Inventory cost is determined on a first-in, first-out basis. The cost of
work-in-process and finished goods is comprised of material, labor, and overhead.
(f) Revenue
recognition
ARRIS generates revenue as a result of varying activities, including the delivery of stand-alone equipment,
custom design and installation services, and bundled sales arrangements inclusive of equipment, software and services. The revenue from these activities is recognized in accordance with applicable accounting guidance and their related
interpretations.
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Revenue is recognized when all of the following criteria have been met:
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When persuasive evidence of an arrangement exists
. Contracts and customer purchase orders are used to determine the
existence of an arrangement. For professional services evidence that an agreement exists includes information documenting the scope of work to be performed, price, and customer acceptance. These are contained in the signed contract, purchase order,
or other documentation that shows scope, price and customer acceptance.
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Delivery has occurred
. Shipping documents, proof of delivery and customer acceptance (when applicable) are used to verify
delivery.
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The fee is fixed or determinable
. Pricing is considered fixed or determinable at the execution of a customer arrangement,
based on specific products and quantities to be delivered at specific prices. This determination includes a review of the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment or future
discounts.
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Collectability is reasonably assured
. The Company assesses the ability to collect from customers based on a number of
factors that include information supplied by credit agencies, analyzing customer accounts, reviewing payment history and consulting bank references. Should a circumstance arise where a customer is deemed not creditworthy, all revenue related to the
transaction will be deferred until such time that payment is received and all other criteria to allow the Company to recognize revenue have been met.
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Revenue is deferred if any of the above revenue recognition criteria is not met as well as when certain circumstances exist for any of our products or services, including, but not limited to:
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When undelivered products or services that are essential to the functionality of the delivered product exist, revenue is deferred until such
undelivered products or services are delivered as the customer would not have full use of the delivered elements.
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When required acceptance has not occurred.
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When trade-in rights are granted at the time of sale, that portion of the sale is deferred until the trade-in right is exercised or the right expires.
In determining the deferral amount, management estimates the expected trade-in rate and future value of the product upon trade-in. These factors are periodically reviewed and updated by management, and the updates may result in either an increase or
decrease in the deferral.
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Equipment
The Company provides operators with equipment that can be
placed within various stages of a broadband system that allows for the delivery of telephony, video and high-speed data as well as outside plant construction and maintenance equipment. For equipment sales, revenue recognition is generally
established when the products have been shipped, risk of loss has transferred, objective evidence exists that the product has been accepted, and no significant obligations remain relative to the transaction. Additionally, based on historical
experience, ARRIS has established reliable estimates related to sales returns and other allowances for discounts. These estimates are recorded as a reduction to revenue at the time the revenue is initially recorded.
Multiple Element Arrangements -
Certain customer transactions may include multiple deliverables based on the bundling of
equipment, software and services. When a multiple element arrangement exists, the fee from the arrangement is allocated to the various deliverables, to the extent appropriate, so that the proper amount can be recognized as revenue as each element is
delivered. Based on the composition of the arrangement, the Company analyzes the provisions of the accounting guidance to determine the appropriate model that is applied towards accounting for the multiple element arrangement. If the arrangement
includes a combination of elements that fall within different applicable guidance, ARRIS follows the provisions of the hierarchal literature to separate those elements from each other and apply the relevant guidance to each.
To determine the estimated selling price in multiple-element arrangements, the Company first looks to establish vendor specific objective
evidence (VSOE) of the selling price using the prices charged for a deliverable
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when sold separately. If VSOE of the selling price cannot be established for a deliverable, the Company looks to establish third-party evidence (TPE) of the selling price by
evaluating the pricing of similar and interchangeable competitor products or services in stand-alone arrangements. However, as ARRISs products typically contain a significant element of proprietary technology and may offer substantially
different features and functionality from its competitors, ARRIS has been unable to obtain comparable pricing information with respect to its competitors products. Therefore, the Company has not been able to obtain reliable evidence of TPE of
the selling price. If neither VSOE nor TPE of the selling price can be established for a deliverable, the Company establishes best estimate selling price (BESP) by reviewing historical transaction information and considering several
other internal factors, including discounting and margin objectives. The Company regularly reviews estimated selling price of the product offerings and maintain internal controls over the establishment and updates of these estimates.
ARRISs equipment deliverables typically include proprietary operating system software, which together deliver the
essential functionality of its products. Therefore, ARRISs equipment are considered non-software elements and are not subject to industry-specific software revenue recognition guidance. For equipment, revenue recognition is generally
established when the products have been shipped, risk of loss has transferred, objective evidence exists that the product has been accepted, and no significant obligations remain relative to the transaction.
For arrangements that fall within the software revenue recognition guidance, the fee is allocated to the various elements based on VSOE
of fair value. If sufficient VSOE of fair value does not exist for the allocation of revenue to all the various elements in a multiple element arrangement, all revenue from the arrangement is deferred until the earlier of the point at which such
sufficient VSOE of fair value is established or all elements within the arrangement are delivered. If VSOE of fair value exists for all undelivered elements, but does not exist for one or more delivered elements, the arrangement consideration is
allocated to the various elements of the arrangement using the residual method of accounting. Under the residual method, the amount of the arrangement consideration allocated to the delivered elements is equal to the total arrangement consideration
less the aggregate fair value of the undelivered elements. Using this method, any potential discount on the arrangement is allocated entirely to the delivered elements, which ensures that the amount of revenue recognized at any point in time is not
overstated. Under the residual method, if VSOE of fair value exists for the undelivered element, generally PCS, the fair value of the undelivered element is deferred and recognized ratably over the term of the PCS contract, and the remaining portion
of the arrangement is recognized as revenue upon delivery, which generally occurs upon delivery of the product or implementation of the system. Many of ARRISs products are sold in combination with customer support and maintenance services,
which consist of software updates and product support. Software updates provide customers with rights to unspecified software updates that ARRIS chooses to develop and to maintenance releases and patches that the Company chooses to release during
the period of the support period. Product support services include telephone support, remote diagnostics, email and web access, access to on-site technical support personnel and repair or replacement of hardware in the event of damage or failure
during the term of the support period. Maintenance and support service fees are recognized ratably under the straight-line method over the term of the contract, which is generally one year. The Company does not record receivables associated with
maintenance revenues without a firm, non-cancelable order from the customer. VSOE of fair value is determined based on the price charged when the same element is sold separately and based on the prices at which our customers have renewed their
customer support and maintenance. For elements that are not yet being sold separately, the price established by management, if it is probable that the price, once established, will not change before the separate introduction of the element into the
marketplace is used to measure VSOE of fair value for that element.
Software Sold Without Tangible Equipment
While not significant, ARRIS does sell internally developed software as well as software developed by outside third parties that does not require significant production, modification or customization. For arrangements that contain only software and
the related post-contract support, the Company recognizes revenue in accordance with the applicable software revenue recognition guidance. If the arrangement includes multiple elements that are software only, then the software revenue recognition
guidance is
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applied and the fee is allocated to the various elements based on vendor-specific objective evidence (VSOE) of fair value. If sufficient VSOE of fair value does not exist for the
allocation of revenue to all the various elements in a multiple element software arrangement, all revenue from the arrangement is deferred until the earlier of the point at which such sufficient VSOE of fair value is established or all elements
within the arrangement are delivered. If VSOE of fair value exists for all undelivered elements, but does not exist for one or more delivered elements, the arrangement consideration is allocated to the various elements of the arrangement using the
residual method of accounting. Under the residual method, the amount of the arrangement consideration allocated to the delivered elements is equal to the total arrangement consideration less the aggregate fair value of the undelivered elements.
Under the residual method, if VSOE of fair value exists for the undelivered element, generally post contract support (PCS), the fair value of the undelivered element is deferred and recognized ratably over the term of the PCS contract,
and the remaining portion of the arrangement is recognized as revenue upon delivery. If sufficient VSOE of fair value does not exist for PCS, revenue for the arrangement is recognized ratably over the term of support.
Standalone Services
Installation, training, and professional services are generally recognized in service revenue when
performed or upon completion of the service when the final act is significant in relation to the overall service transaction. The key element for Professional Services in determining when service transaction revenue has been earned is determining
the pattern of delivery or performance which determines the extent to which the earnings process is complete and the extent to which customers have received value from services provided. The delivery or performance conditions of our service
transactions are typically evaluated under the proportional performance or completed performance model.
Incentives
Customer incentive programs that include consideration, primarily rebates/credits to be used against future product purchases and certain volume discounts, are recorded as a reduction of revenue when the shipment of the requisite
equipment occurs.
Value Added Resellers
ARRIS typically employs the sell-in method of accounting for revenue
when using a Value Added Reseller (VAR) as our channel to market. Because product returns are restricted, revenue under this method is generally recognized at the time of shipment to the VAR provided all criteria for recognition are met.
There are occasions, based on facts and circumstances surrounding the VAR transaction, where ARRIS will employ the sell-through method of recognizing revenue and defer that revenue until payment occurs.
Retail
Some of ARRIS product is sold through retail channels, which may include provisions involving a right of
return. Upon shipment of the product, the Company reduces revenue for an estimate of potential future product returns related to the current period product revenue. Management analyzes historical returns, channel inventory levels, and
current economic trends related to the Companys products when evaluating the adequacy of the allowance for sales returns. When applicable, revenue on shipments is reduced for estimated price protection and sales incentives that are deemed
to be contra-revenue under the authoritative guidance for revenue recognition.
(g) Shipping and
Handling Fees
Shipping and handling costs for the years ended December 31, 2016, 2015, and 2014 were approximately
$4.3 million, $5.6 million and $6.9 million, respectively, and are classified in net sales and cost of sales.
(h) Taxes Collected from Customers and Remitted to Governmental Authorities
Taxes assessed by a government authority that are both imposed on and concurrent with specific revenue transactions between us and our
customers are presented on a net basis in our Consolidated Statements of Operations.
(i)
Depreciation of Property, Plant and Equipment
The Company provides for depreciation of property, plant and equipment on the straight-line
basis over estimated useful lives of 10 to 40 years for buildings and improvements, 2 to 10 years for machinery and equipment,
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and the shorter of the term of the lease or useful life for leasehold improvements. Included in depreciation expense is the amortization of landlord funded tenant improvements which amounted to
$6.6 million in 2016, $4.5 million in 2015 and $4.0 million in 2014. Depreciation expense, including amortization of capital leases, for the years ended December 31, 2016, 2015, and 2014 was approximately $90.6 million, $71.8 million, and $79.0
million, respectively.
Certain events or changes in circumstances may indicate that the recoverability of the carrying amount
of property, plant and equipment should be assessed, including, among others, a significant decrease in market value, a significant change in the business climate in a particular market, or a current period operating or cash flow loss combined with
historical losses or projected future losses. To test for recovery, we group assets (an asset group) in a manner that represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups
of assets and liabilities. When such events or changes in circumstances are present, we estimate the future cash flows expected to result from the use of the asset or asset group and its eventual disposition. These estimated future cash flows are
consistent with those we use in our internal planning. If the sum of the expected future cash flows (undiscounted and pre-tax based upon policy decision) is less than the carrying amount, we recognize an impairment loss. The impairment loss
recognized is the amount by which the carrying amount exceeds the fair value. We use a variety of methodologies to determine the fair value of property, plant and equipment, including appraisals and discounted cash flow models, which are consistent
with the assumptions we believe hypothetical marketplace participants would use. See Note 12
Property, Plant and Equipment
of Notes to the Consolidated Financial Statements for further information property, plant and equipment.
(j) Goodwill, and Other Intangible Assets
We classify intangible assets into three categories: (1) intangible assets with definite lives subject to amortization,
(2) intangible assets with indefinite lives not subject to amortization and (3) goodwill. We determine the useful lives of our identifiable intangible assets after considering the specific facts and circumstances related to each intangible
asset. Factors we consider when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, the Companys long-term strategy for using the asset, any laws or other local
regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are deemed to have definite lives are amortized, primarily on a straight-line
basis, over their useful lives, generally ranging from 1 to 13 years. Certain intangible assets are being amortized using an accelerated method, as an accelerated method best approximates the distribution of cash flows generated by the intangible
assets. See Note 5
Goodwill and Other Intangible Assets
of Notes to the Consolidated Financial Statements for further information on goodwill and other intangible assets.
Other Intangible Assets
When facts and circumstances indicate that
the carrying value of definite-lived intangible assets may not be recoverable, management assesses the recoverability of the carrying amount by preparing estimates of sales volume and the resulting profit and cash flows. These estimated future cash
flows are consistent with those we use in our internal planning. To test for recovery, we group assets (an asset group) in a manner that represents the lowest level for which identifiable cash flows are largely independent of the cash
flows of other groups of assets and liabilities. If the sum of the expected future cash flows (undiscounted and pre-tax based upon policy decision) is less than the carrying amount, we recognize an impairment loss. The impairment loss recognized is
the amount by which the carrying amount of the asset or asset group exceeds the fair value. We use a variety of methodologies to determine the fair value of these assets, including discounted cash flow models, which are consistent with the
assumptions we believe hypothetical marketplace participants would use.
We test intangible assets determined to have
indefinite useful lives, including certain trademarks, in-process research and development and goodwill, for impairment annually, or more frequently if events or circumstances indicate that assets might be impaired. Our Company performs these annual
impairment reviews as of the first day of our fourth fiscal quarter (October 1). We use a variety of methodologies in conducting impairment assessments of indefinite-lived intangible assets, including, but not limited to, discounted cash flow
models, which are based on the assumptions we believe hypothetical marketplace participants would use. For indefinite-
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lived intangible assets, other than goodwill, if the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to that excess. Acquired in-process research and
development assets are initially recognized and measured at fair value and classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly, during the development
period after acquisition, this asset is not amortized as charges to earnings. Completion of the associated research and development efforts cause the indefinite-lived in-process research and development assets to become a finite-lived asset. As
such, prior to commencing amortization the assets is tested for impairment.
The Company has the option to perform a
qualitative assessment of indefinite-lived intangible assets, prior to completing the impairment test described above. The Company must assess whether it is more likely than not that the fair value of the intangible asset is less than its carrying
amount. If the Company concludes that this is the case, it must perform the testing described above. Otherwise, the Company does not need to perform any further assessment.
During 2016, we wrote off $2.2 million of in-process R&D related to projects for which development efforts were abandoned subsequent to the Pace acquisition. There were no impairment charges related
to intangible assets (definite-lived and indefinite-lived) other than goodwill in 2015 and 2014.
Goodwill
The Company perform impairment tests of goodwill at the reporting unit level, which is at or one level below the operating segments. The
operating segments are primarily based on the nature of the products and services offered, which is consistent with the way management runs the business. The Customer Premises Equipment operating segment is the same as the reporting unit. The
Network & Cloud operating segment is subdivided into three reporting units which are Network Infrastructure, Cloud Services, and Cloud TV. Goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each
business combination.
The goodwill impairment test consists of a two-step process, if necessary. The first step is to compare
the fair value of a reporting unit to its carrying value, including goodwill. We typically use a weighting of income approach using discounted cash flow models and a market approach to determine the fair value of a reporting unit. The assumptions
used in these models are consistent with those we believe hypothetical marketplace participants would use. If the fair value of the reporting unit is less than its carrying value, the second step of the impairment test must be performed in order to
determine the amount of impairment loss, if any. The second step compares the implied fair value of the reporting units goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting units goodwill exceeds
its implied fair value, an impairment charge is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill.
The Company has the option to perform a qualitative assessment of goodwill prior to completing the two-step process described above to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, including goodwill and other intangible assets. If the Company concludes that this is the case, it must perform the two-step process. Otherwise, the Company will forego the two-step process and does
not need to perform any further testing.
There was no impairment of goodwill resulting from our annual impairment testing in
2016, 2015 and 2014. The Company continues to evaluate the anticipated discounted cash flows from the Cloud software portion of the Network & Cloud segment. If current long-term projections for this unit are not realized or materially decrease,
the Company may be required to write off all or a portion of the $81.1 million of goodwill and $42.9 million of associated intangible assets.
(k) Advertising and Sales Promotion
Advertising
and sales promotion costs are expensed as incurred. Advertising expense was approximately $19.6 million, $16.8 million, and $8.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.
(l) Research and Development
Research and development (R&D) costs are expensed as incurred. The expenditures include compensation costs, materials, other direct expenses, and an allocation of information technology,
telecommunications, and facilities costs.
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(m) Warranty
ARRIS provides warranties of various lengths to customers based on the specific product and the terms of individual agreements. For
further discussion, see Note 9
Guarantees
of the Notes to the Consolidated Financial Statements for further discussion.
(n) Income Taxes
ARRIS uses the liability method of accounting for income taxes, which requires recognition of temporary differences between financial statement and income tax bases of assets and liabilities, measured by
enacted tax rates.
If necessary, the measurement of deferred tax assets is reduced by a valuation allowance to the amount that
is more likely than not to be realized based on available evidence. ARRIS reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and
penalties, if any, related to unrecognized tax benefits in income tax expense. See Note 18
Income Taxes
of Notes to the Consolidated Financial Statements for further discussion.
(o) Foreign Currency Translation
A significant portion of the Companys products are manufactured or assembled in Brazil, China, Mexico and Taiwan, and we have research and development centers in Canada, China, England, France,
India, Northern Ireland and Sweden. Sales into international markets have been and are expected in the future to be an important part of the Companys business. These foreign operations are subject to the usual risks inherent in conducting
business abroad, including risks with respect to currency exchange rates, economic and political destabilization, restrictive actions and taxation by foreign governments, nationalization, the laws and policies of the United States affecting trade,
foreign investment and loans, and foreign tax laws.
ARRIS has certain international customers who are billed in their local
currency and certain international operations 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. The Company enters into forward or currency option contracts based on a percentage of expected foreign currency exposures. The percentage can vary, based on the predictability of the exposures denominated in
the foreign currency. See Note 8
Derivative Instruments and Hedging Activities
of Notes to the Consolidated Financial Statements for further discussion.
(p) Stock-Based Compensation
See Note 19
Stock-Based Compensation of Notes to the Consolidated Financial Statements for further discussion of the Companys significant accounting policies related to stock based compensation.
(q) Concentrations of Credit Risk
Financial instruments that potentially subject ARRIS to concentrations of credit risk consist principally of cash, cash equivalents and short-term investments, accounts receivable and derivatives. ARRIS
places its temporary cash investments with high credit quality financial institutions. Concentrations with respect to accounts receivable occur as the Company sells primarily to large, well- established companies including companies outside of the
United States. The Companys credit policy generally does not require collateral from its customers. ARRIS closely monitors extensions of credit to other parties and, where necessary, utilizes common financial instruments to mitigate risk or
requires cash on delivery terms. Overall financial strategies and the effect of using a hedge are reviewed periodically.
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(r) Fair Value
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
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Cash, cash equivalents, and short-term investments: The carrying amounts reported in the consolidated balance sheets for cash, cash equivalents, and
short-term investments approximate their fair values.
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Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate
their fair values.
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Marketable securities: The fair values for trading and available-for-sale equity securities are based on quoted market prices or observable prices
based on inputs not in active markets but corroborated by market data.
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Non-marketable securities: Non-marketable equity securities are subject to a periodic impairment review; however, there are no open-market valuations,
and the impairment analysis requires significant judgment. This analysis includes assessment of the investees financial condition, the business outlook for its products and technology, its projected results and cash flow, recent rounds of
financing, and the likelihood of obtaining subsequent rounds of financing.
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Senior secured credit facilities: Comprised of term loans and revolving credit facility of which the outstanding principal amount approximates fair
value
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Derivative instruments: The carrying amounts reported in the balance sheet for derivative financial instruments approximate their fair values. The
Company has designated interest rate derivatives as cash flow hedges and the objective is to manage the variability of cash flows in the interest payments related to the portion of the variable-rate debt designated as being hedged. The
Companys foreign currency derivative instruments economically hedge certain risk but are not designated as hedges. The objective of these derivatives instruments is to add stability to foreign currency gains and losses recorded as other
expense (income) and to manage its exposure to foreign currency movements.
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(s)
Computer Software
Internal-use software
The Company capitalizes costs associated with internally developed and/or purchased software systems for internal use that have reached the application development stage and meet recoverability tests.
Capitalized costs include external direct costs of materials and services utilized in developing or obtaining internal-use software and payroll and payroll-related expenses for employees who are directly associated with and devote time to the
internal-use software project. Capitalization of such costs begins when the preliminary project stage is complete and ceases no later than the point at which the project is substantially complete and ready for its intended purpose. These capitalized
costs are amortized on a straight-line basis over periods of two to seven years, beginning when the asset is ready for its intended use. Capitalized costs are included in property, plant, and equipment on the consolidated balance sheets.
External-use software
Research and development costs are charged to expense as incurred. ARRIS generally has not capitalized any such development costs because the costs incurred between the attainment of technological
feasibility for the related software product through the date when the product is available for general release to customers has been insignificant.
(t) Comprehensive Income (Loss)
The components of
comprehensive income (loss) include net income (loss), unrealized gains (losses) on available-for-sale securities, unrealized gains (losses) on derivative instruments, change in pension liability, net of tax, if applicable and change in foreign
currency translation adjustments.
95
(u) Warrants
The Company has outstanding warrants with certain customers to purchase ARRISs ordinary shares. Vesting of the warrants is subject
to certain purchase volume commitments by the customers. Under applicable accounting guidance, if the vesting of a tranche of the warrants is probable, the Company is required to mark-to-market the fair value of the warrant until it vests, and any
increase in the fair value is treated as a reduction in revenues from sales to the customers. See Note 17
Warrants
of Notes to the Consolidated Financial Statements for further discussion.
Note 3. Impact of Recently Issued 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. ARRIS adopted this update in 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 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 ending after December 15, 2016, and interim periods within those fiscal years beginning after December 15, 2016. ARRIS adopted this update in the fourth 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. 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 to determine 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.
96
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. The Company early adopted this standard during the three months ended March 31, 2016. None of the available-for-sale or cost investments qualified for use of
the equity method during the year.
Accounting standards issued but not yet effective
In May 2014, the FASB
issued accounting standard update, Revenue from Contracts with Customers. The standard requires an entity to recognize revenue to depict the transfer of control 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 addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The
FASB issued several amendments to the standard since their initial issuance, including delaying its effective date to reporting periods beginning after December 15, 2017, but permitting companies the option to adopt the standard one year
earlier, as well as clarifications on identifying performance obligations and accounting for licenses of intellectual property, among others.
There are two permitted transition methods under the new standard, the full retrospective method or the modified retrospective method. Under the full retrospective method, the standard would be applied to
each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown on the face of the financial statements being presented. Under the modified retrospective method, the
cumulative effect of applying the standard would be recognized at the date of the initial application of the standard and the effect of the prior periods would be calculated and shown through a change in retained earnings. ARRIS currently
anticipates adopting the standard using the modified retrospective method on January 1, 2018.
The Company has created a
cross-functional team to analyze the impact of the standard on our revenue streams and contract portfolio to identify potential differences that would arise from applying the requirements of the new standard. To date the Company has identified major
revenue streams and customers, performed an analysis of a sample of contracts to evaluate the impact of the standard, and begun the drafting of our accounting policies and evaluating the new disclosure requirements. ARRIS is in the process of
implementing changes to its systems, business processes and controls to support the adoption of the new standard.
At this
stage, the Company is currently evaluating the potential impact of this standard on its consolidated financial statements. The actual impact of adoption will be based on open contracts existing at December 31, 2017 and is subject to the
finalization of our transition method. While the Company has not finalized its evaluation, in certain instances, the Company will recognize revenue earlier under the new standard. For example, ARRIS will recognize revenue earlier for certain
software license contracts that the Company enter into with its customers. Likewise, the Company will recognize revenue earlier for certain arrangements with Value Added Resellers (VARs) currently accounted for utilizing the sell-through method.
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 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.
97
On March 2016, the FASB issued guidance, Improvements to Employee Share-Based Payment
Accounting, which simplifies the accounting for share-based payment transactions. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, the new
standard includes provisions that impact the classification of awards as either equity or liabilities and the classification of excess tax benefits on the cash flow statements. We will adopt the standard effective January 1, 2017. Following
adoption, the primary impact on our Consolidated Financial Statements will be the recognition of excess tax benefits in the provision for income taxes rather than Additional paid-in capital, which will likely result in increased volatility in the
reported amounts of income tax expense and net income. The actual impact of adopting this standard on the effective tax rate will vary depending on our share price during fiscal 2017. We are continuing to evaluate the impacts of the adoption of this
guidance and our preliminary assessments are subject to change.
In August 2016, the FASB issued amended guidance on the
classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the amended guidance is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The
amended guidance adds or clarifies guidance on eight cash flow issues, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or certain other debt instruments, contingent consideration payments made after
a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization
transactions and separately identifiable cash flows and application of the predominance principle. The guidance is effective for the Company beginning January 1, 2018 for both interim and annual reporting periods, with early adoption permitted.
Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. The Company is currently assessing the potential impact
of the adoption of this guidance on our Consolidated Financial Statements.
In October 2016, the FASB issued new guidance for
intra-entity transfer of assets other than inventory that would require companies to immediately recognize income tax effects of intercompany transactions in their income statements, eliminating the current exception that allows companies to defer
the income tax effects of certain intercompany transactions. The new guidance will be effective for public business entities in fiscal years beginning after December 15, 2017. Early adoption is only permitted as of the beginning of an
annual reporting period. The Company is currently assessing the potential impact of this standard on its consolidated financial statements.
In November 2016, the FASB issued new guidance which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. The amendment should be adopted retrospectively. The
Company is currently evaluating how the adoption of this standard will have on its consolidated financial statements.
Note 4. Business
Acquisitions
Acquisition of Pace
On January 4, 2016, ARRIS completed the acquisition of Pace, an 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
98
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 scale broadening ARRISs worldwide CPE leadership with a
competitive stake in satellite communications; and expanding its cable pay TV, cloud, network, home, and services portfolio.
The goodwill of $989.5 million arising from the acquisition is attributable to the strategic opportunities and synergies that are expected
to arise from the acquisition of Pace and the workforce of the acquired business. The Company finalized the accounting for the business combination in the fourth quarter of 2016 and goodwill has been assigned to our reporting units. 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.
|
99
The following is a summary of the estimated fair values of the net assets acquired (in
thousands):
|
|
|
|
|
|
|
Amounts Recognized
as of
Acquisition
Date
|
|
Total estimated consideration transferred
|
|
$
|
2,073,802
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
298,671
|
|
Accounts and other receivables
|
|
|
480,815
|
|
Inventories
|
|
|
427,642
|
|
Prepaids
|
|
|
40,501
|
|
Other current assets
|
|
|
54,217
|
|
Property, plant & equipment
|
|
|
73,983
|
|
Intangible assets
|
|
|
1,258,660
|
|
Other assets
|
|
|
9,280
|
|
Accounts payable and other current liabilities
|
|
|
(795,283
|
)
|
Deferred revenue
|
|
|
(4,805
|
)
|
Short-term borrowings
|
|
|
(263,795
|
)
|
Other accrued liabilities
|
|
|
(136,789
|
)
|
Noncurrent deferred income tax liabilities
|
|
|
(285,937
|
)
|
Other noncurrent liabilities
|
|
|
(72,895
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
1,084,265
|
|
|
|
|
|
|
Goodwill
|
|
$
|
989,537
|
|
|
|
|
|
|
As a result of measurement period changes for intangible assets, the impact to previously recorded
amortization for the first, second and third quarters of 2016 was an increase of $6.4 million, a decrease of $6.6 million, and an increase of $5.6 million, respectively.
The Combination was 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. During the fourth
quarter of 2016, the Company completed the accounting for the aforementioned business combination.
The $1,258.7 million of
acquired intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Estimated
Fair value
|
|
|
Estimated Weighted
Average Life (years)
|
|
Customer contracts and relationships
|
|
$
|
634,400
|
|
|
|
9.8
|
|
Technology and patents
|
|
|
539,160
|
|
|
|
6.0
|
|
In-process research and development
|
|
|
6,300
|
|
|
|
indefinite
|
|
Trademarks and tradenames
|
|
|
62,400
|
|
|
|
3.0
|
|
Backlog
|
|
|
16,400
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Total estimated fair value of intangible assets
|
|
$
|
1,258,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
100
The Company incurred acquisition related costs of $29.0 million during 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 $263.8 million of debt in conjunction with
the Combination, and this debt was subsequently repaid in January 2016.
With regard to revenue and earnings of Pace since the
acquisition date, the Company has made significant progress in integrating the acquired Pace operations and has undergone a business transformation which impacts the ability to provide separate reporting for Pace. As a result, the Company believes
that disclosure related to amounts of revenues and earnings of Pace since the acquisition date is now impractical.
The
following unaudited pro forma summary presents consolidated information of the Company as if the acquisition of Pace occurred on January 1, 2015. The pro forma adjustments primarily relate to the additional depreciation expense on property,
plant and equipment and amortization of acquired intangibles assets, 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 income (loss) for the years ended December 31, 2016 and 2015 was adjusted to (exclude) include 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. These adjustments in the aggregate were $(147.4) million and $167.0 million for the years December 31, 2016 and 2015, respectively. These additional adjustments exclude the income tax
impact.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands) (unaudited)
|
|
Net sales
|
|
$
|
6,829,118
|
|
|
$
|
7,115,871
|
|
Net income (loss) attributable to ARRIS International plc
|
|
|
138,674
|
|
|
|
(79,414
|
)
|
Net income (loss) per share
(1)
|
|
|
|
|
Basic
|
|
$
|
0.73
|
|
|
$
|
(0.41
|
)
|
Diluted
|
|
$
|
0.72
|
|
|
$
|
(0.41
|
)
|
(1)
|
Calculated based on net income (loss) attributable to shareowners of ARRIS International plc.
|
These pro forma results are based on estimates and assumptions, which the Company believes are reasonable.
ActiveVideo acquisition
In April 2015, the Company and Charter Communications Inc. formed a venture, A-C Acquisition, LLC (A-C Venture) with ARRISs and Charters ownership percentage of the venture being
65% and 35%, respectively. On April 30, 2015, A-C Venture acquired 100% of the outstanding shares in ActiveVideo Networks, Inc. (ActiveVideo). The consideration for the acquisition was $98 million in cash. ActiveVideo, headquartered
in San Jose, California, is a software company that uses cloud-based technology to bring advanced user interfaces and services to cable and IPTV set-top boxes, as well as connected consumer electronic devices. Goodwill arising from the acquisition
is attributable to the workforce of the acquired business, future technology, future customer relationships, and strategic opportunities that are expected to arise from the acquisition. No tax deductible goodwill existed as of the acquisition date.
Subsequent to the acquisition date, ActiveVideo converted to a limited liability company creating tax basis in goodwill essentially equal to its book basis. The total goodwill was assigned to the Companys Cloud TV reporting unit, within the
Companys N&C reportable segment.
101
Note 5. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the three years ended December 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
N & C
|
|
|
Total
|
|
Goodwill
|
|
$
|
688,658
|
|
|
$
|
630,400
|
|
|
$
|
1,319,058
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2013
|
|
$
|
688,658
|
|
|
$
|
251,744
|
|
|
$
|
940,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in year 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired
|
|
|
|
|
|
|
1,682
|
|
|
|
1,682
|
|
Other
|
|
|
(4,061
|
)
|
|
|
(1,956
|
)
|
|
|
(6,017
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
$
|
684,597
|
|
|
$
|
251,470
|
|
|
$
|
936,067
|
|
Goodwill
|
|
|
684,597
|
|
|
|
630,126
|
|
|
|
1,314,723
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
$
|
684,597
|
|
|
$
|
251,470
|
|
|
$
|
936,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in year 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired (disposed), net
|
|
|
|
|
|
|
78,053
|
|
|
|
78,053
|
|
Other
|
|
|
(2,015
|
)
|
|
|
1,858
|
|
|
|
(157
|
)
|
Balance as of December 31, 2015
|
|
$
|
682,582
|
|
|
$
|
331,381
|
|
|
$
|
1,013,963
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in year 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired (disposed), net
|
|
|
698,106
|
|
|
|
291,331
|
|
|
|
989,437
|
|
Currency translation
|
|
|
10,483
|
|
|
|
(60
|
)
|
|
|
10,423
|
|
Other
|
|
|
|
|
|
|
2,346
|
|
|
|
2,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
1,391,171
|
|
|
$
|
624,998
|
|
|
$
|
2,016,169
|
|
Goodwill
|
|
|
1,391,171
|
|
|
|
1,003,654
|
|
|
|
2,394,825
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
1,391,171
|
|
|
$
|
624,998
|
|
|
$
|
2,016,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2016, the Company recorded $989.5 million of goodwill related to the Pace acquisition, and disposed
of $(0.1) million of goodwill related to a business divestiture.
During 2015, the Company recorded $78.8 million of goodwill
related to the ActiveVideo acquisition and disposed of $(0.7) million of goodwill related to the sale of its Supplies business.
During 2014, the Company recorded $1.7 million of goodwill related to the SeaWell Network acquisition.
102
Intangible Assets
The gross carrying amount and accumulated amortization of the Companys intangible assets as of December 31, 2016 and
December 31, 2015 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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
|
|
$
|
1,572,947
|
|
|
$
|
624,719
|
|
|
$
|
948,228
|
|
|
$
|
930,212
|
|
|
$
|
468,414
|
|
|
$
|
461,798
|
|
Developed technology, patents & licenses
|
|
|
1,248,719
|
|
|
|
571,808
|
|
|
|
676,911
|
|
|
|
704,137
|
|
|
|
361,719
|
|
|
|
342,418
|
|
Trademarks, trade and domain names
|
|
|
83,472
|
|
|
|
41,433
|
|
|
|
42,039
|
|
|
|
21,072
|
|
|
|
20,740
|
|
|
|
332
|
|
Backlog
|
|
|
16,400
|
|
|
|
16,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
$
|
2,921,538
|
|
|
$
|
1,254,360
|
|
|
$
|
1,667,178
|
|
|
$
|
1,655,421
|
|
|
$
|
850,873
|
|
|
$
|
804,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
5,900
|
|
|
|
|
|
|
|
5,900
|
|
|
|
5,900
|
|
|
|
|
|
|
|
5,900
|
|
In-process research and development
|
|
|
4,100
|
|
|
|
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
10,000
|
|
|
|
|
|
|
|
10,000
|
|
|
|
5,900
|
|
|
|
|
|
|
|
5,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,931,538
|
|
|
$
|
1,254,360
|
|
|
$
|
1,677,178
|
|
|
$
|
1,661,321
|
|
|
$
|
850,873
|
|
|
$
|
810,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2016, the Company recorded $1,258.7 million of intangible assets (other than goodwill) associated
with the Pace acquisition, see Note 4
Business Acquisitions
of Notes to the Consolidated Financial Statements for further discussion, along with $5.4 million related to acquired technology licenses and $8.3 million for foreign currency
translation. In addition, in-process research and development of $2.2 million was written off related to projects for which development efforts were abandoned subsequent to the Pace acquisition. The write off related to the Companys CPE
segment and was included in Integration, acquisition, restructuring and other costs on the Consolidated Statements of Operations.
Amortization expense is reported in the consolidated statements of operations within cost of goods sold and operating expenses. The following table presents the amortization of intangible assets (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of sales
|
|
$
|
2,963
|
|
|
$
|
670
|
|
|
$
|
230
|
|
Selling, general & administrative expense
|
|
|
4,048
|
|
|
|
3,480
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
397,464
|
|
|
|
227,440
|
|
|
|
236,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
404,475
|
|
|
$
|
231,590
|
|
|
$
|
236,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated total amortization expense for finite-lived intangibles for each of the next five fiscal
years is as follows (in thousands):
|
|
|
|
|
2017
|
|
$
|
370,767
|
|
2018
|
|
|
315,942
|
|
2019
|
|
|
269,910
|
|
2020
|
|
|
258,905
|
|
2021
|
|
|
124,119
|
|
Thereafter
|
|
|
327,535
|
|
103
Note 6. Investments
ARRISs investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2016
|
|
|
As of December 31,
2015
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
115,553
|
|
|
$
|
15,470
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
15,391
|
|
|
|
4,036
|
|
Equity method investments
|
|
|
22,688
|
|
|
|
24,452
|
|
Cost method investments
|
|
|
6,841
|
|
|
|
16,646
|
|
Other investments
|
|
|
28,012
|
|
|
|
24,408
|
|
|
|
|
|
|
|
|
|
|
Total classified as non-current assets
|
|
|
72,932
|
|
|
|
69,542
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
188,485
|
|
|
$
|
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 Sheet as a component of accumulated other comprehensive income (loss).
The amortized costs and fair value
of available-for-sale securities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Amortized
Costs
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Amortized
Costs
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Certificates of deposit (foreign)
|
|
$
|
87,372
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
87,372
|
|
|
$
|
4,208
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,208
|
|
Corporate bonds
|
|
|
34,175
|
|
|
|
35
|
|
|
|
(77
|
)
|
|
|
34,133
|
|
|
|
6,198
|
|
|
|
78
|
|
|
|
(19
|
)
|
|
|
6,257
|
|
Short-term bond fund
|
|
|
5,046
|
|
|
|
69
|
|
|
|
(69
|
)
|
|
|
5,046
|
|
|
|
4,711
|
|
|
|
370
|
|
|
|
(76
|
)
|
|
|
5,005
|
|
Corporate obligations
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
Mutual funds
|
|
|
94
|
|
|
|
28
|
|
|
|
(21
|
)
|
|
|
101
|
|
|
|
146
|
|
|
|
1
|
|
|
|
(16
|
)
|
|
|
131
|
|
Other investments
|
|
|
4,192
|
|
|
|
530
|
|
|
|
(487
|
)
|
|
|
4,235
|
|
|
|
3,712
|
|
|
|
214
|
|
|
|
(231
|
)
|
|
|
3,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
130,936
|
|
|
$
|
662
|
|
|
$
|
(654
|
)
|
|
$
|
130,944
|
|
|
$
|
19,185
|
|
|
$
|
663
|
|
|
$
|
(342
|
)
|
|
$
|
19,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents the breakdown of the available-for-sale investments with gross realized
losses and the duration that those losses had been unrealized as of December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Certificates of deposit (foreign)
|
|
$
|
87,372
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
87,372
|
|
|
$
|
|
|
Corporate bonds
|
|
|
34,133
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
34,133
|
|
|
|
(77
|
)
|
Short-term bond fund
|
|
|
5,046
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
5,046
|
|
|
|
(69
|
)
|
Corporate obligations
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
Mutual funds
|
|
|
101
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
(21
|
)
|
Other investments
|
|
|
4,235
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
4,235
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
130,944
|
|
|
$
|
(654
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
130,944
|
|
|
$
|
(654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair
value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Certificates of deposit (foreign)
|
|
$
|
4,208
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,208
|
|
|
$
|
|
|
Corporate bonds
|
|
|
6,257
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
6,257
|
|
|
|
(19
|
)
|
Short-term bond fund
|
|
|
5,005
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
5,005
|
|
|
|
(76
|
)
|
Corporate obligations
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Money markets
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
|
|
|
|
Mutual funds
|
|
|
131
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
(16
|
)
|
Other investments
|
|
|
3,695
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
3,695
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,506
|
|
|
$
|
(342
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,506
|
|
|
$
|
(342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, for fixed income securities that were in unrealized loss positions, the Company
has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis.
The sale and/or maturity of available-for-sale securities resulted in the following activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Proceeds from sales
|
|
$
|
25,932
|
|
|
$
|
157,965
|
|
|
$
|
54,057
|
|
Gross gains
|
|
|
33
|
|
|
|
305
|
|
|
|
1
|
|
Gross losses
|
|
|
|
|
|
|
(452
|
)
|
|
|
(83
|
)
|
The contractual maturities of the Companys available-for-sale securities as of December 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):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Within 1 year
|
|
$
|
115,559
|
|
|
$
|
115,553
|
|
After 1 year through 5 years
|
|
|
11,034
|
|
|
|
10,998
|
|
After 5 year through 10 years
|
|
|
|
|
|
|
|
|
After 10 years
|
|
|
4,343
|
|
|
|
4,393
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
130,936
|
|
|
$
|
130,944
|
|
|
|
|
|
|
|
|
|
|
Equity method investments
ARRIS owns 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 $22.7 million and $24.5 million as of
December 31, 2016 and 2015, respectively.
The following table summarizes the ownership structure and ownership percentage
of the non-consolidated investments as of December 31, 2016, accounted for using the equity method.
|
|
|
|
|
Name of Investee
|
|
Ownership Structure
|
|
% Ownership
|
MPEG LA
|
|
Limited Liability Company
|
|
8.4%
|
Music Choice
|
|
Limited Liability Partnership
|
|
18.2%
|
Conditional Access Licensing (CAL)
|
|
Limited Liability Company
|
|
49.0%
|
Combined Conditional Access Development (CCAD)
|
|
Limited Liability Company
|
|
50.0%
|
105
ARRIS owns investments in two limited liability corporations. The investees were determined
to be variable interest entities and ARRIS is not the primary beneficiary, as ARRIS does not have the power to direct the activities of the investee that most significantly impact its economic performance. The limited liability corporations are a
licensing and a research and development company. The purpose of the limited liability corporations are to develop, deploy, license, support, and to gain market acceptance for certain technologies that reside in a cable plant or in a cable device.
Subject to agreement on annual statements of work, the Company is providing to one of the ventures, engineering services per year approximating 20% to 30% of the approved venture budget, which is expected to be in the range of approximately $6
million to $8 million per year. The Company is also required to make annual contributions for the purpose of funding development projects identified by the venture. During 2016, the Company made funding contributions to the investment of $15.9
million.
The following table summarizes the carrying amount and maximum exposure to loss for the investments accounted for
using the equity method as of December 31, 2016 (in thousands)
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
Maximum Exposure
to Loss
|
|
Conditional Access Licensing
|
|
$
|
12,751
|
|
|
$
|
12,751
|
|
Combined Conditional Access Development
|
|
|
2,113
|
|
|
|
18,000
|
|
The Companys future total annual funding contributions to CCAD are expected to be in the range of
approximately $16 million to $18 million, and represent the Companys annual maximum exposure to loss.
During the quarter
ended December 31, 2015, the Company recorded a gain of $2.5 million resulting from the transfer of certain technology to CCAD. An additional $2.5 million of unrecognized gain is being treated as a basis difference in the investment, and
will be recognized over an expected period of four years.
Cost method investments
ARRIS holds cost method
investments in certain private companies. Due to the fact the investments are in private companies, the Company is exempt from estimating the fair value on an interim and annual basis. It is impractical to estimate the fair value since the quoted
market price is not available. Furthermore, the cost of obtaining an independent valuation appears excessive considering the materiality of the investments to the Company. However, ARRIS is required to estimate the fair value if there has been an
identifiable event or change in circumstance that may have a significant adverse effect on the fair value of the investment.
Other investments
ARRIS holds investments in certain life insurance contracts. The Company determined the fair value to be
the amount that could be realized under the insurance contract as of each reporting period. The changes in the fair value of these contracts are included in net income.
Other-Than-Temporary Investment Impairments
ARRIS evaluates its investments for any other-than-temporary impairment on a quarterly basis considering all available evidence, including changes
in general market conditions, specific industry and individual entity data, the financial condition and the
near-term
prospects of the entity issuing the security, and the Companys ability and intent to
hold the investment until recovery.
For the year ended December 31, 2016, the Company concluded that two private companies had
indicators of impairment, as the cost basis exceeded the fair value of the investments, resulting in other-than-temporary impairment charges of $12.3 million. For the year ended December 31, 2015, ARRIS concluded that one private company had
indicators of impairment, as the cost basis exceeded the fair value of the investment, resulting in other-than-temporary impairment charge of $0.2 million. These charges are reflected in the Consolidated Statements of Operations.
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.
106
Note 7. Fair Value Measurements
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. 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 December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit (foreign)
|
|
$
|
|
|
|
$
|
87,372
|
|
|
$
|
|
|
|
$
|
87,372
|
|
Corporate bonds
|
|
|
|
|
|
|
34,133
|
|
|
|
|
|
|
|
34,133
|
|
Short-term bond fund
|
|
|
5,046
|
|
|
|
|
|
|
|
|
|
|
|
5,046
|
|
Corporate obligations
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Mutual funds
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Other investments
|
|
|
|
|
|
|
4,235
|
|
|
|
|
|
|
|
4,235
|
|
Interest rate derivatives asset derivatives
|
|
|
|
|
|
|
7,860
|
|
|
|
|
|
|
|
7,860
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(9,006
|
)
|
|
|
|
|
|
|
(9,006
|
)
|
Foreign currency contracts asset position
|
|
|
|
|
|
|
7,369
|
|
|
|
|
|
|
|
7,369
|
|
Foreign currency contracts liability position
|
|
|
|
|
|
|
(3,671
|
)
|
|
|
|
|
|
|
(3,671
|
)
|
|
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit (foreign)
|
|
$
|
|
|
|
$
|
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
|
)
|
All of the Companys short-term and long-term investments at December 31, 2016 are classified
within Level 1 or Level 2 of the fair value hierarchy as they are valued using quoted market prices, market prices for
107
similar securities, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include the
Companys investment in money market funds, mutual funds and municipal bonds. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include
corporate obligations and bonds, commercial paper and certificates of deposit. Such instruments are classified within Level 2 of the fair value hierarchy.
In addition to the financial instruments included in the above table, certain nonfinancial assets and liabilities are to be measured at fair value on a nonrecurring basis in accordance with applicable
authoritative guidance. This includes items such as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent periods) and nonfinancial long-lived asset groups
measured at fair value for an impairment assessment. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair
value only when any impairment is recognized. As of December 31, 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 principal amount of the debt as of December 31, 2016 approximated the fair
value because it bears interest at 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 8. 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.
Cash flow hedges of interest rate risk
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
bil-
108
lion, (ii) a Term Loan B Facility of $825 million and (iii) a Revolving Credit Facility of $250 million. In June 2015, ARRIS 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 this exposure to interest rate movements, ARRIS entered into various interest rate swap arrangements, which effectively converted $625 million of the Companys 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 December 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 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.
During 2016, ARRIS entered into nine $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 $450 million of the Companys variable-rate debt based on one-month LIBOR to an aggregate fixed rate of
2.73% per annum based on the Companys interest rates as of December 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 years ended December 31, 2016 and 2015, 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 $2.8 million may be reclassified as an increase to interest expense.
The table below presents the impact of the Companys derivative financial instruments had on the Accumulated Other Comprehensive
Income and Statement of Operations for the years ended December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
Gain(Loss)
Reclassified from
AOCI into Income
|
|
|
Years
Ended
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Gain (loss) Recognized in OCI on Derivatives (Effective Portion)
|
|
|
Interest expense
|
|
|
$
|
2,103
|
|
|
$
|
(13,256
|
)
|
|
$
|
(8,541
|
)
|
Amounts Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
|
Interest expense
|
|
|
|
7,510
|
|
|
|
7,495
|
|
|
|
7,550
|
|
109
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 and the related fair values of those derivatives as of December 31, 2016 and December 31, 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives asset derivatives
|
|
|
Other current assets
|
|
|
|
222
|
|
|
|
|
|
Interest rate derivatives asset derivatives
|
|
|
Other assets
|
|
|
|
8,043
|
|
|
|
|
|
Interest rate derivatives liability derivatives
|
|
|
Other accrued liabilities
|
|
|
|
(2,989
|
)
|
|
|
(4,489
|
)
|
Interest rate derivatives liability derivatives
|
|
|
Other noncurrent liabilities
|
|
|
|
(6,421
|
)
|
|
|
(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 December 31, 2016, 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 $1.4 million. As of December 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 December 31, 2016, the Company had option collars
with notional amounts totaling 35 million euros which mature throughout 2017, forward contracts with notional amounts totaling 55 million euros which mature throughout 2017, forward contracts with a total notional amount of 70 million
Australian dollars which mature throughout 2017, forward contracts with notional amounts totaling 45 million Canadian dollars which mature throughout 2017, forward contracts with notional amounts totaling 100.0 million British pounds which
mature throughout 2017, forward contracts with notional amounts totaling 374.3 million South African rand which mature throughout 2017 and a swap with notional amount totaling 69 million South African rand which mature in 2017 .
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 date. As of December 31, 2015, the Company had forward contracts with notional amounts totaling 385 million British pounds which mature on March 31, 2016. The
contracts fixed the British pound to U.S. dollar forward exchange rate at various rates. These foreign currency forward contracts were effectively terminated upon the close of the Pace acquisition in January 2016 and cash settled upon maturity on
March 31, 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
110
as part of its foreign currency risk management strategy. The Companys foreign currency derivative instruments 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 12 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 December 31, 2016 and December 31, 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange contracts asset derivatives
|
|
Other current assets
|
|
$
|
7,369
|
|
|
$
|
6,495
|
|
Foreign exchange contracts asset derivatives
|
|
Other assets
|
|
|
|
|
|
|
569
|
|
Foreign exchange contracts liability derivatives
|
|
Other accrued liabilities
|
|
|
(3,671
|
)
|
|
|
(23,632
|
)
|
Foreign exchange contracts liability derivatives
|
|
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 years ended December 31, 2016, 2015, and 2014 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
Statement of Operations Location
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Derivatives not designated as hedging instruments
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Loss (gain) on foreign currency
|
|
$
|
5,909
|
|
|
$
|
7,597
|
|
|
$
|
(4,527
|
)
|
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 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 against the
warranty liability.
The Company offers extended warranties and support service agreements on certain products. Revenue from
these agreements is deferred at the time of the sale and recognized on a straight-line basis over the contract period. Costs of services performed under these types of contracts are charged to expense as incurred, which approximates the timing of
the revenue stream.
111
Information regarding the changes in ARRISs aggregate product warranty liabilities for
the years ending December 31, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
49,027
|
|
|
$
|
74,320
|
|
Warranty reserve at acquisition
|
|
|
43,723
|
|
|
|
|
|
Accruals related to warranties (including changes in assumptions)
|
|
|
51,947
|
|
|
|
19,111
|
|
Settlements made (in cash or in kind)
|
|
|
(56,510
|
)
|
|
|
(44,404
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
88,187
|
|
|
$
|
49,027
|
|
|
|
|
|
|
|
|
|
|
Note 10. 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 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.
The CODM manages the Company under two
segments:
|
|
|
Customer Premises Equipment (CPE)
The CPE segments product solutions include set-tops, 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 are 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.
112
The tables below present information about the Companys reportable segments for the
years ended December 31, 2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
CPE
|
|
$
|
4,747,445
|
|
|
$
|
3,136,585
|
|
|
$
|
3,690,454
|
|
N&C
|
|
|
2,111,708
|
|
|
|
1,661,594
|
|
|
|
1,637,544
|
|
Other
|
|
|
(30,035
|
)
|
|
|
153
|
|
|
|
(5,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,829,118
|
|
|
|
4,798,332
|
|
|
|
5,322,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution:
|
|
|
|
|
|
|
|
|
CPE
|
|
|
684,744
|
|
|
|
548,840
|
|
|
|
791,244
|
|
N&C
|
|
|
681,608
|
|
|
|
487,166
|
|
|
|
430,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
|
1,366,352
|
|
|
|
1,036,006
|
|
|
|
1,222,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and unallocated costs
|
|
|
(697,834
|
)
|
|
|
(568,336
|
)
|
|
|
(606,834
|
)
|
Amortization of intangible assets
|
|
|
(397,464
|
)
|
|
|
(227,440
|
)
|
|
|
(236,521
|
)
|
Integration, acquisition, restructuring and other
|
|
|
(160,337
|
)
|
|
|
(29,277
|
)
|
|
|
(37,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
110,717
|
|
|
|
210,953
|
|
|
|
341,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
79,817
|
|
|
|
70,936
|
|
|
|
62,901
|
|
Loss on investments
|
|
|
21,194
|
|
|
|
6,220
|
|
|
|
10,961
|
|
(Gain) loss on foreign currency
|
|
|
(13,982
|
)
|
|
|
20,761
|
|
|
|
2,637
|
|
Interest income
|
|
|
(4,395
|
)
|
|
|
(2,379
|
)
|
|
|
(2,590
|
)
|
Other expense ( income), net
|
|
|
3,991
|
|
|
|
8,362
|
|
|
|
28,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
24,092
|
|
|
$
|
107,053
|
|
|
$
|
239,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2016, 2015 and 2014, the compositions of our corporate and
unallocated costs that are reflected in the consolidated statement of operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Corporate and unallocated costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
150,588
|
|
|
$
|
56,311
|
|
|
$
|
69,973
|
|
Selling, general and administrative expenses
|
|
|
375,747
|
|
|
|
349,993
|
|
|
|
349,693
|
|
Research and development expenses
|
|
|
171,499
|
|
|
|
162,032
|
|
|
|
187,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
697,834
|
|
|
$
|
568,336
|
|
|
$
|
606,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys net intangible assets and goodwill by reportable segment
as of December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
N&C
|
|
|
Total
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,391,171
|
|
|
$
|
624,998
|
|
|
$
|
2,016,169
|
|
Intangible assets, net
|
|
|
1,064,692
|
|
|
|
612,486
|
|
|
|
1,677,178
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
682,582
|
|
|
$
|
331,381
|
|
|
$
|
1,013,963
|
|
Intangible assets, net
|
|
|
525,920
|
|
|
|
284,528
|
|
|
|
810,448
|
|
113
The following table summarizes the Companys revenues by products and services as of
December 31, 2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
CPE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband CPE
|
|
$
|
1,683,491
|
|
|
$
|
1,452,164
|
|
|
$
|
1,494,925
|
|
Video CPE
|
|
|
3,063,954
|
|
|
|
1,684,421
|
|
|
|
2,195,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
4,747,445
|
|
|
|
3,136,585
|
|
|
|
3,690,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network & Cloud:
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure equipment
|
|
|
1,800,480
|
|
|
|
1,407,735
|
|
|
|
1,435,676
|
|
Global services
|
|
|
230,588
|
|
|
|
181,892
|
|
|
|
141,625
|
|
Cloud solutions
|
|
|
80,640
|
|
|
|
71,967
|
|
|
|
60,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
2,111,708
|
|
|
|
1,661,594
|
|
|
|
1,637,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(30,035
|
)
|
|
|
153
|
|
|
|
(5,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
6,829,118
|
|
|
$
|
4,798,332
|
|
|
$
|
5,322,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys three largest customers (including their affiliates, as applicable) are AT&T,
Charter and Comcast. Over the past year, certain customers beneficial ownership may have changed as a result of mergers and acquisitions. Therefore the revenue for ARRISs customers for prior periods has been adjusted to include the
affiliates under common control. A summary of sales to these customers for 2016, 2015 and 2014 is set forth below (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
AT&T and affiliates
|
|
$
|
901,001
|
|
|
$
|
347,063
|
|
|
$
|
612,413
|
|
% of sales
|
|
|
13.2
|
%
|
|
|
7.2
|
%
|
|
|
11.5
|
%
|
|
|
|
|
Charter and affiliates
|
|
$
|
1,064,408
|
(1)
|
|
$
|
960,497
|
|
|
$
|
1,031,553
|
|
% of sales
|
|
|
15.6
|
%
|
|
|
20.0
|
%
|
|
|
19.4
|
%
|
|
|
|
|
Comcast and affiliates
|
|
$
|
1,637,519
|
(1)
|
|
$
|
1,007,376
|
|
|
$
|
1,012,367
|
|
% of sales
|
|
|
24.0
|
%
|
|
|
21.0
|
%
|
|
|
19.0
|
%
|
(1)
|
Revenues were reduced by $30.2 million in total as a result of Warrants held by Charter and Comcast that are intended to incent additional purchases from them. (see
Note 17
Warrants
for additional information).
|
114
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 28.1%, 28.8% and 25.7% of total sales for the years ended December 31, 2016, 2015 and 2014, respectively.
International sales for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic U.S
|
|
$
|
4,909,698
|
|
|
$
|
3,418,583
|
|
|
$
|
3,957,203
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas, excluding U.S.
|
|
|
982,769
|
|
|
|
880,581
|
|
|
|
900,822
|
|
Asia Pacific
|
|
|
291,504
|
|
|
|
142,893
|
|
|
|
147,921
|
|
EMEA
|
|
|
645,147
|
|
|
|
356,275
|
|
|
|
316,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
$
|
1,919,420
|
|
|
$
|
1,379,749
|
|
|
$
|
1,365,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
6,829,118
|
|
|
$
|
4,798,332
|
|
|
$
|
5,322,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes ARRISs international property, plant and equipment assets by
geographic region as of December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Domestic U.S
|
|
$
|
220,397
|
|
|
$
|
223,736
|
|
International
|
|
|
|
|
|
|
|
|
Americas, excluding U.S.
|
|
|
12,838
|
|
|
|
6,659
|
|
Asia Pacific
|
|
|
81,655
|
|
|
|
74,651
|
|
EMEA
|
|
|
38,487
|
|
|
|
7,265
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
$
|
132,980
|
|
|
$
|
88,575
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment assets
|
|
$
|
353,377
|
|
|
$
|
312,311
|
|
|
|
|
|
|
|
|
|
|
Note 11. Inventories
The components of inventory are as follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw material
|
|
$
|
86,243
|
|
|
$
|
60,287
|
|
Work in process
|
|
|
3,877
|
|
|
|
3,076
|
|
Finished goods
|
|
|
461,421
|
|
|
|
338,229
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
551,541
|
|
|
$
|
401,592
|
|
|
|
|
|
|
|
|
|
|
115
Note 12. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
68,562
|
|
|
$
|
68,562
|
|
Buildings and leasehold improvements
|
|
|
163,333
|
|
|
|
141,171
|
|
Machinery and equipment
|
|
|
440,955
|
|
|
|
407,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
672,850
|
|
|
|
616,843
|
|
Less: Accumulated depreciation
|
|
|
(319,473
|
)
|
|
|
(304,532
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
353,377
|
|
|
$
|
312,311
|
|
|
|
|
|
|
|
|
|
|
Note 13. Restructuring and Integration
Restructuring
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
|
|
|
Write-off
of property,
plant and
equipment
|
|
|
Total
|
|
Balance at December 31, 2015
|
|
$
|
3
|
|
|
$
|
87
|
|
|
$
|
|
|
|
$
|
90
|
|
Restructuring charges
|
|
|
92,246
|
|
|
|
3,379
|
|
|
|
716
|
|
|
|
96,341
|
|
Cash payments / adjustments
|
|
|
(64,363
|
)
|
|
|
(1,223
|
)
|
|
|
|
|
|
|
(65,586
|
)
|
Non-cash expense
|
|
|
|
|
|
|
|
|
|
|
(716
|
)
|
|
|
(716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
27,886
|
|
|
$
|
2,243
|
|
|
$
|
|
|
|
$
|
30,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 estimated cost recorded during 2016 for the restructuring plan was approximately $96.3 million. This amount is included in the
Consolidated Statement of Operations in the line item titled Integration, acquisition, restructuring and other costs. The restructuring plan affected approximately 1,545 positions across the Company. The remaining liability is expected
to be paid in 2017.
Contractual obligations
ARRIS has restructuring accruals representing contractual
obligations that relate to excess leased facilities and equipment. A liability for such costs is recognized and measured initially at fair value on the cease-use date based on remaining lease rentals, adjusted for the effects of any prepaid or
deferred items recognized, reduced by the estimated sublease rentals that could be reasonably obtained even if it is not the intent to sublease. The fair value of these liabilities is based on a net present value model using a credit-adjusted
risk-free rate. The liability will be paid out over the remainder of the leased properties terms, which continue through 2018. Actual sublease terms may differ from the estimates originally made by the Company. Any future
changes in the estimates or in the actual sublease income could require future adjustments to the liabilities, which would impact net income in the period the adjustment is recorded. As of the cease-use date, the fair value of this
restructuring liability totaled $2.2 million.
Write-off of property, plant and equipment
As part of the
restructuring plan initiated as a result of the Pace acquisition, the Company recorded a restructuring charge of $0.7 million related to the write-off of property, plant and equipment associated with a closure of a facility. This restructuring plan
was related to the Network and Cloud segment.
116
Integration
Integration expenses was approximately $24.2 million, $1.6 million and $34.5 million for the years ended December 31, 2016, 2015 and
2014, respectively. The expense was related to outside services and other integration related activities.
Note 14. Lease Financing
Obligation
Sale-leaseback of San Diego Office Complex:
In 2015, the Company sold its San Diego office complex consisting of land and buildings with a net book value of $71.0 million, for total
consideration of $85.5 million. The Company concurrently entered into a leaseback arrangement for two buildings on the San Diego campus (Building 1 and Building 2) with an initial leaseback term of ten years for Building 1
and a maximum term of one year for Building 2. The Company determined that the sale-leaseback of Building 1 did not qualify for sale-leaseback accounting due to continuing involvement that will exist for the 10-year lease term. Accordingly, the
carrying amount of Building 1 will remain on the Companys balance sheet and will be depreciated over its remaining useful life with the proceeds reflected as a financing obligation.
The Company concluded that Building 2 qualified for sale-leaseback accounting with the subsequent leaseback classified as an operating
lease. A loss of $5.3 million was recorded in Other expense (income), net on the Consolidated Statements of Operations at the closing of the transaction in 2015.
At December 31, 2016, the minimum lease payments required on the financing obligation were as follows (in thousands):
|
|
|
|
|
2017
|
|
$
|
4,136
|
|
2018
|
|
|
4,260
|
|
2019
|
|
|
4,388
|
|
2020
|
|
|
4,520
|
|
2021
|
|
|
4,655
|
|
Thereafter through 2025
|
|
|
16,102
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
38,061
|
|
|
|
|
|
|
117
Note 15. Indebtedness
The following is a summary of indebtedness and lease financing obligations as of December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
As of December 31, 2015
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Term A loan
|
|
$
|
49,500
|
|
|
$
|
49,500
|
|
Term A-1 loan
|
|
|
40,000
|
|
|
|
|
|
Lease finance obligation
|
|
|
775
|
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
Current obligations
|
|
|
90,275
|
|
|
|
50,258
|
|
Current deferred financing fees and debt discount
|
|
|
(7,541
|
)
|
|
|
(6,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
82,734
|
|
|
|
43,591
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Term A loan
|
|
|
866,250
|
|
|
|
915,750
|
|
Term A-1 loan
|
|
|
730,000
|
|
|
|
|
|
Term B loan
|
|
|
543,812
|
|
|
|
543,812
|
|
Revolver
|
|
|
|
|
|
|
|
|
Lease finance obligation
|
|
|
57,902
|
|
|
|
58,676
|
|
|
|
|
|
|
|
|
|
|
Noncurrent obligations
|
|
|
2,197,964
|
|
|
|
1,518,238
|
|
Noncurrent deferred financing fees and debt discount
|
|
|
(17,955
|
)
|
|
|
(21,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,180,009
|
|
|
|
1,496,243
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,262,743
|
|
|
$
|
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 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 December 31, 2016
|
|
Term Loan A
|
|
LIBOR + 1.75 %
|
|
|
2.52
|
%
|
Term Loan A-1
|
|
LIBOR + 1.75 %
|
|
|
2.52
|
%
|
Term Loan B
|
|
LIBOR
(1)
+ 2.75 %
|
|
|
3.52
|
%
|
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.
|
118
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 and
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 December 31, 2016, ARRIS was in compliance with all covenants under the Amended Credit Agreement.
During 2016, the Company made mandatory prepayments of approximately $79.5 million related to the senior secured credit facilities. In addition, the Company repaid $240.2 million of debt assumed in the
Pace acquisition in the first quarter of 2016.
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. As of December 31, 2016, there is no outstanding balance under this program.
The AR Financing Program was accounted for as secured borrowings and amounts outstanding were included in the current portion of long-term
debt on the consolidated balance sheet. The Company paid certain transaction fees and interest of 1.23% on the outstanding balance in connection with this Program.
Other
As of December 31, 2016, the scheduled maturities of the
contractual debt obligations for the next four years are as follows (in thousands):
|
|
|
|
|
2017
|
|
$
|
89,500
|
|
2018
|
|
|
89,500
|
|
2019
|
|
|
89,500
|
|
2020
|
|
|
1,961,063
|
|
119
Note 16. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ARRIS International plc.
|
|
$
|
18,100
|
|
|
$
|
92,181
|
|
|
$
|
327,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
190,701
|
|
|
|
146,388
|
|
|
|
144,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.63
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ARRIS International plc.
|
|
$
|
18,100
|
|
|
$
|
92,181
|
|
|
$
|
327,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
190,701
|
|
|
|
146,388
|
|
|
|
144,386
|
|
Net effect of dilutive shares
|
|
|
1,484
|
|
|
|
2,971
|
|
|
|
3,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
192,185
|
|
|
|
149,359
|
|
|
|
148,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.62
|
|
|
$
|
2.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential dilutive shares include stock options, unvested restricted and performance awards and warrants.
For the year ended December 31, 2016, 2015 and 2014, approximately 0.9 million, 6.8 thousand and
4.3 million of the equity-based awards, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. These exclusions are made if the exercise price of these equity-based
awards is in excess of the average market price of the shares for the period, or if the Company has net losses, both of which have an anti-dilutive effect.
During the twelve months ended December 31, 2016, the Company issued 2.3 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.
The warrants have a dilutive effect in those periods in which the average
market price of the shares exceeds the current effective conversion price (under the treasury stock method), and are not subject to performance conditions. During the fourth quarter of 2016, approximately 2.2 million warrants vested based on
the amount of purchases of products and services by the customer from the Company. The dilutive effect of these vested shares was immaterial.
In connection with the Combination, 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 4
Business Acquisitions
for additional details)
The Company has not paid cash dividends on its stock since its inception. Any future determination to pay dividends will be at the discretion of the Board of Directors and will be dependent on
then-existing conditions, including the Companys financial condition, results of operations, capital requirements, contractual and legal restrictions, business prospects and other factors that the Board considers relevant. The credit agreement
governing the Companys senior secured credit facilities contains restrictions on the Companys ability to pay dividends on its ordinary shares.
120
Note 17. Warrants
During 2016, the Company entered into Warrant and Registration Rights Agreements (the Warrants) with certain customers pursuant to which those customers may purchase up to 14.0 million of
ARRISs ordinary shares, (subject to adjustment in accordance with the terms of the Warrants, the Shares).
The Warrants will vest in tranches based on the amount of purchases of products and services by the customer from the Company. The table
below presents by year, the ordinary shares issuable under outstanding Warrant programs with customers, based on achieving certain purchase levels (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Issuable
|
|
|
Exercise Price per
Maximum Share Issuable
|
|
|
|
Minimum
|
|
|
Maximum
|
|
|
$22.19
|
|
|
$28.54
|
|
|
Note
1
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
1,500
|
|
|
|
4,000
|
|
|
|
3,000
|
|
|
|
1,000
|
|
|
|
|
|
2017
|
|
|
2,000
|
|
|
|
7,500
|
|
|
|
5,000
|
|
|
|
2,500
|
|
|
|
|
|
2018
|
|
|
1,000
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
(1)
|
The exercise price for the 2018 warrants will be determined based upon the lower of 1) the volume-weighted price for the 10-day trading period preceding January 1,
2018 (the January Price) or 2) the average of $28.54 and the January Price.
|
For Warrants in which an
exercise price has been established, the exercise price per Share was established based upon the average volume-weighted price of ARRISs ordinary shares on NASDAQ for the 10-day trading period preceding the date of the Warrants.
The Warrants provide for net Share settlement that, if elected by the holders, will reduce the number of Shares issued upon exercise to
reflect net settlement of the exercise price. Customers may also request cash settlement of the Warrants upon exercise in lieu of issuing Shares, however, such cash election is at the discretion of ARRIS. The Warrants will expire by
September 30, 2023.
The Warrants provide for certain adjustments that may be made to the exercise price and the number of
Shares issuable upon exercise due to customary anti-dilution provisions based on future corporate events. In addition, in connection with any consolidation, merger or similar extraordinary event involving the Company, the Warrants will be deemed to
represent the right to receive, upon exercise, the same consideration received by the holders of the Companys ordinary shares in connection with such transaction. Upon a change of control of ARRIS or if ARRIS materially breaches its applicable
agreements with customers (and such breach is not cured pursuant to the terms of the agreements), the Warrants will immediately vest for the minimum threshold of Shares that would otherwise be issuable.
ARRIS has also agreed, if requested by the holders, to register the Shares issuable upon exercise of the Warrants under the Securities Act
of 1933, as amended (the Securities Act) and has also granted piggyback registration rights in the event ARRIS files a registration statement with the U.S. Securities and Exchange Commission under the Securities Act covering
its equity securities, subject to the terms and conditions included in the Warrants.
Because the Warrants contain performance
criteria, which includes aggregate purchase levels and product mix, under which customers must achieve for the Warrants to vest, as detailed above, the final measurement date for the Warrants is the date on which the Warrants vest. Prior to the
final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of Warrants is being recorded as a reduction to net sales based on the projected number of Warrants expected to vest, the proportion
of purchases by customers and its affiliates within the period relative to the aggregate purchase levels required for the Warrants to vest and the then-current fair value of the related Warrants. To the extent that projections change in the future
as to the number of Warrants that will vest, as well as changes in the fair market value of the Warrants, a cumulative catch-up adjustment will be recorded in the period in which the estimates change.
121
The fair value of the Warrants is determined using the Black-Scholes option pricing model.
The assumptions utilized in the Black-Scholes model include the risk-free interest rate, expected volatility, and expected life in years. The risk-free interest rate over the expected life is equal to the prevailing U.S. Treasury note rate over the
same period. Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of the warrant. Expected life is equal to the remaining contractual term of the warrant. The dividend yield is assumed to
be zero since we have not historically declared dividends and do not have any plans to declare dividends in the future.
During
the fourth quarter of 2016, approximately 2.2 million warrants, with a weighted average exercise price of $24.56, vested based on the amount of purchases of products and services by the customers from the Company. For the year ended
December 31, 2016, ARRIS recorded $30.2 million as a reduction to net sales in connection with Warrants. This transaction is considered an equity contract, and is classified as such.
Note 18. Income Taxes
Income (loss) before income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
U.K
|
|
$
|
(36,300
|
)
|
|
$
|
(5,321
|
)
|
|
$
|
(1,604
|
)
|
U.S
|
|
|
(149,605
|
)
|
|
|
47,063
|
|
|
|
180,133
|
|
Other Foreign
|
|
|
209,997
|
|
|
|
65,311
|
|
|
|
60,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,092
|
|
|
$
|
107,053
|
|
|
$
|
239,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current U.K
|
|
$
|
81,822
|
|
|
$
|
559
|
|
|
$
|
(94
|
)
|
U.S.
|
|
|
47,025
|
|
|
|
2,141
|
|
|
|
59,197
|
|
Other Foreign
|
|
|
31,552
|
|
|
|
14,476
|
|
|
|
18,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,399
|
|
|
|
17,176
|
|
|
|
77,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred U.K.
|
|
|
(23,177
|
)
|
|
|
(30
|
)
|
|
|
121
|
|
U.S.
|
|
|
(105,735
|
)
|
|
|
5,119
|
|
|
|
(160,382
|
)
|
Other Foreign
|
|
|
(16,356
|
)
|
|
|
329
|
|
|
|
(5,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(145,268
|
)
|
|
|
5,418
|
|
|
|
(165,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
15,131
|
|
|
$
|
22,594
|
|
|
$
|
(87,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
A reconciliation of the U.K. statutory income tax rate of 20% for 2016 and the U.S. federal
statutory income tax rate of 35% for 2015 and 2014 and the effective income tax rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Statutory income tax rate
|
|
|
20.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
(10.0
|
)
|
|
|
5.2
|
|
|
|
(6.6
|
)
|
Acquired deferred tax assets
|
|
|
|
|
|
|
5.8
|
|
|
|
(16.5
|
)
|
U.S. domestic manufacturing deduction
|
|
|
(12.0
|
)
|
|
|
(0.7
|
)
|
|
|
(2.1
|
)
|
Transaction costs
|
|
|
22.0
|
|
|
|
|
|
|
|
|
|
Research and development tax credits
|
|
|
(90.6
|
)
|
|
|
(26.6
|
)
|
|
|
(8.7
|
)
|
Withholding taxes (U.K. entities)
|
|
|
245.5
|
|
|
|
|
|
|
|
|
|
U.K. stamp duty
|
|
|
9.4
|
|
|
|
|
|
|
|
|
|
Subpart F income
|
|
|
4.0
|
|
|
|
4.8
|
|
|
|
0.8
|
|
Changes in valuation allowance
|
|
|
6.0
|
|
|
|
(26.6
|
)
|
|
|
(44.2
|
)
|
Foreign tax credits
|
|
|
(14.0
|
)
|
|
|
(20.7
|
)
|
|
|
(0.6
|
)
|
Non-deductible officer compensation
|
|
|
|
|
|
|
5.3
|
|
|
|
0.6
|
|
Non-U.S. tax rate differential
|
|
|
|
|
|
|
(5.0
|
)
|
|
|
(2.6
|
)
|
Non-U.K. tax rate differential
|
|
|
(8.9
|
)
|
|
|
|
|
|
|
|
|
Benefit of other foreign tax regimes
|
|
|
(124.5
|
)
|
|
|
|
|
|
|
|
|
Recapture of dual consolidated losses
|
|
|
|
|
|
|
1.1
|
|
|
|
4.0
|
|
Taiwan gain
|
|
|
|
|
|
|
34.3
|
|
|
|
|
|
Other, net
|
|
|
15.9
|
|
|
|
9.2
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62.8
|
%
|
|
|
21.1
|
%
|
|
|
(36.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123
Deferred income taxes reflect the net tax effects of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of ARRIS net deferred income tax assets (liabilities) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Inventory costs
|
|
$
|
63,887
|
|
|
$
|
28,728
|
|
Accrued vacation
|
|
|
7,062
|
|
|
|
7,138
|
|
Acquisition charges
|
|
|
|
|
|
|
6,556
|
|
Allowance for bad debt
|
|
|
7,611
|
|
|
|
4,396
|
|
Equity compensation
|
|
|
18,861
|
|
|
|
14,673
|
|
Federal/state net operating loss carryforwards
|
|
|
53,116
|
|
|
|
95,571
|
|
Foreign net operating loss carryforwards
|
|
|
14,409
|
|
|
|
10,989
|
|
Research and development credits
|
|
|
113,061
|
|
|
|
79,809
|
|
Pension and deferred compensation
|
|
|
15,933
|
|
|
|
19,166
|
|
Warranty reserve
|
|
|
36,693
|
|
|
|
18,215
|
|
Capitalized interest
|
|
|
24,963
|
|
|
|
|
|
Capitalized research and development
|
|
|
177,574
|
|
|
|
215,894
|
|
Other
|
|
|
71,500
|
|
|
|
24,214
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
604,670
|
|
|
|
525,349
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
(3,713
|
)
|
|
|
(4,394
|
)
|
Goodwill and intangible assets
|
|
|
(467,957
|
)
|
|
|
(248,231
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(471,670
|
)
|
|
|
(252,625
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
133,000
|
|
|
|
272,724
|
|
Valuation allowance
|
|
|
(57,772
|
)
|
|
|
(87,788
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets (liabilities)
|
|
$
|
75,228
|
|
|
$
|
184,936
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016 and December 31, 2015, ARRIS had $85.7 million and $218.9 million,
respectively, of U.S. federal net operating losses available to offset against future taxable income. During 2016, ARRIS utilized approximately $66.4 million of U.S. federal net operating losses against taxable income. The U.S. federal net operating
losses may be carried forward for twenty years. The available acquired U.S. Federal net operating losses as of December 31, 2016, will expire between the years 2017 and 2031. A significant portion of the acquired U.S. federal net operating
losses expire in 2017.
As of December 31, 2016, ARRIS also had $453.0 million of state net operating loss carryforwards
in various states. The amounts available for utilization vary by state due to the apportionment of the Companys taxable income and state laws governing the expiration of these net operating losses. State net operating loss carryforwards of
approximately $26.4 million relate to the exercise of employee stock options and restricted stock (equity compensation). When cash benefit is realized from the utilization of these state net operating losses attributable to equity
compensation, the benefit is recorded.
ARRIS has foreign net operating loss carryforwards available, as of December 31,
2016, of approximately $59.5 million with varying expiration dates. NOLs related to our Irish and Luxemburg subsidiaries in the amount of $23.8 million have indefinite lives. Other foreign NOLs arise from our Canadian subsidiary
($8.5 million, expiring within 17 years). The net operating losses are subject to various limitations on how and when the losses can be used to offset against taxable income.
124
During the tax years ending December 31, 2016, and 2015, we utilized $11.1 and $0.0
million, respectively, of U.S. federal research and development credits to reduce U.S. federal income tax liabilities. We also utilized $23.4 million and $0.1 million of U.S. foreign tax credits during the tax years ending December 31, 2016 and
2015, respectively. As of December 31, 2016, ARRIS has $91.9 million of available U.S. federal research and development tax credits and $51.3 million of available state research and development tax credits to carry forward to subsequent years.
U.S. research and development credit carryforwards of approximately $8.9 million relate to the exercise of restricted stock (equity compensation). The remaining unutilized U.S. federal research and development tax credits can be
carried back one year and carried forward twenty years. The state research and development tax credits carry forward and will expire pursuant to various applicable state rules.
ARRIS ability to use U.S. federal and state net operating loss carryforwards to reduce future taxable income, or to use U.S. federal and state research and development tax credit and other
carryforwards to reduce future income tax liabilities, is subject to restrictions attributable to equity transactions that resulted in a change of ownership during prior tax years, as defined in Internal Revenue Code Sections 382, 383 and the
separate return limitation year (SRLY) rules. These limitations, as noted above, prevent the Company from utilizing certain deferred tax assets and were considered in establishing the valuation allowances.
The valuation allowance for deferred income tax assets of $57.8 million and $87.8 million at December 31, 2016 and 2015,
respectively, relates to the uncertainty surrounding the realization of certain deferred income tax assets in various jurisdictions. The $30.0 million net reduction in valuation allowances for the year was due primarily to net operating losses and
research and development credits that expired unutilized in the current year. The Company continually reviews the adequacy of its valuation allowances by reassessing whether it is more-likely-than-not to realize its various deferred income tax
assets.
An analysis of the deferred tax asset valuation allowances is as follows: (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance at beginning of fiscal year
|
|
$
|
87,788
|
|
|
$
|
118,629
|
|
|
$
|
163,745
|
|
Additions
|
|
|
17,973
|
|
|
|
3,312
|
|
|
|
37,708
|
|
Deductions
|
|
|
(47,989
|
)
|
|
|
(34,153
|
)
|
|
|
(82,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of fiscal year
|
|
$
|
57,772
|
|
|
$
|
87,788
|
|
|
$
|
118,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, the Company did not provide U.S. federal income taxes or foreign withholding
taxes on approximately $23.8 million of undistributed earnings of its foreign subsidiaries as such earnings are intended to be reinvested indefinitely. Should earnings of the other foreign subsidiaries be distributed in the form of dividends,
or otherwise, ARRIS would have additional taxable income and, depending on the companys tax posture in the year of repatriation, may have to pay additional income taxes. Withholding taxes in various jurisdictions may also apply to the
repatriation of foreign earnings. Determination of the amount of unrecognized income tax liability related to these permanently reinvested and undistributed foreign subsidiary earnings is not practicable because of the complexities associated with
this hypothetical calculation.
125
Tabular Reconciliation of Unrecognized Tax Benefits (in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Beginning balance
|
|
$
|
49,919
|
|
|
$
|
48,019
|
|
|
$
|
28,344
|
|
Gross increases tax positions in prior period
|
|
|
8,068
|
|
|
|
1,599
|
|
|
|
17,636
|
|
Gross decreases tax positions in prior period
|
|
|
(5,700
|
)
|
|
|
(2,185
|
)
|
|
|
(4,115
|
)
|
Gross increases current-period tax positions
|
|
|
27,774
|
|
|
|
9,578
|
|
|
|
9,979
|
|
Increases (decreases) from acquired businesses
|
|
|
60,796
|
|
|
|
|
|
|
|
(196
|
)
|
Changes related to foreign currency translation adjustment and remeasurement
|
|
|
(1,087
|
)
|
|
|
|
|
|
|
|
|
Decreases relating to settlements with taxing authorities and other
|
|
|
(3,933
|
)
|
|
|
(6,689
|
)
|
|
|
(2,480
|
)
|
Decreases due to lapse of statute of limitations
|
|
|
(7,784
|
)
|
|
|
(403
|
)
|
|
|
(1,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
128,053
|
|
|
$
|
49,919
|
|
|
$
|
48,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company and its subsidiaries file income tax returns in the U.S. and U.K. jurisdictions, and various
state and other foreign jurisdictions. As of December 31, 2016, the Company and its subsidiaries were under income tax audit in various jurisdictions including The United Kingdom, The United States, and various states and other foreign
countries. ARRIS does not anticipate any audit adjustments in excess of its current accrual for uncertain tax positions.
Liabilities related to uncertain tax positions were $137.2 million and $51.6 million at December 31, 2016 and 2015, respectively,
inclusive of interest and penalties of $9.2 million and $1.7 million at December 31, 2016 and 2015, respectively. These liabilities at December 31, 2016 and 2015 were reduced by $28.4 million and $5.9 million, respectively, for
offsetting benefits from the corresponding effects of potential transfer pricing adjustments, state income taxes and other unrecognized tax benefits. These offsetting benefits are recorded in other non-current assets and noncurrent deferred income
taxes. The net result of $108.7 million and $46.2 million at December 31, 2016 and 2015, respectively, if recognized and released, would favorably affect earnings.
Based on information currently available, the Company anticipates that over the next twelve month period, statutes of limitations may close and audit settlements will occur relating to existing
unrecognized tax benefits of approximately $7.2 million primarily arising from U.S. Federal and state tax related items. The Company reported approximately $9.2 million and $1.7 million, respectively, of interest and penalty accrual related to the
anticipated payment of these potential tax liabilities as of December 31, 2016 and 2015. The increase in interest and penalty accrual in 2016 results from interest on the positions added from the acquisition of Pace.
Note 19. Stock-Based Compensation
ARRIS grants stock awards under its 2016 Stock Incentive Plan (SIP). Upon approval of the 2016 SIP, all shares available for grant under existing stock incentive plans were no longer
available. However, all outstanding options granted under the previous plans are still exercisable. The Board of Directors approved the SIP and the prior plans to facilitate the retention and continued motivation of key employees, consultants and
directors, and to align more closely their interests with those of the Company and its stockholders.
Awards under the SIP may
be in the form of stock options, stock grants, stock units, restricted stock, stock appreciation rights, performance shares and units, and dividend equivalent rights. A total of 31,215,000 shares of the Companys shares may be issued pursuant
to the SIP. The SIP has been designed to allow for flexibility in the form of awards; however, awards denominated in shares of common stock other than stock options and stock appreciation rights will be counted against the SIP limit as 1.87 shares
for every one share covered by such an award. The vesting requirements for issuance under the SIP may vary; however, awards generally are required to have a minimum three-year vesting period or term.
126
In connection with the 2011 acquisition of BigBand Networks, Inc., ARRIS assumed the BigBand
Networks, Inc. 2007 Equity Incentive Plan (the Assumed BigBand Plan), including the restricted stock units outstanding under the Assumed BigBand Plan at the time of the acquisition. ARRIS may continue to grant awards under the Assumed
BigBand Plan in certain circumstances so long as the grants comply with the applicable requirements of NASDAQ. A total of 180,613 shares of the Companys ordinary shares remain available for issuance under the Assumed BigBand Plan.
Restricted Stock (Non-Performance) and Stock Units
ARRIS grants restricted stock and stock units to certain employees and its non-employee directors. The Company records a fixed compensation expense equal to the fair market value of the shares of
restricted stock granted on a straight-line basis over the requisite services period for the restricted shares. The Company applies an estimated forfeiture rate based upon historical rates. The fair value is the market price of the underlying
ordinary shares on the date of grant.
In connection with the Pace acquisition, ARRIS accelerated the vesting of the time-based
restricted shares that otherwise were scheduled to vest in 2016 for all of its executive officers and additional acceleration of Messrs. Stanzione and Margolis time-based restricted shares that otherwise would vest in 2017, 2018 and 2019. The total
shares accelerated in December 2015 were 504,833 shares.
The following table summarizes ARRISs unvested restricted stock
(excluding performance-related) and stock unit transactions during the year ending December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average
Grant Date
Fair
Value
|
|
Unvested at December 31, 2015
|
|
|
5,985,249
|
|
|
$
|
23.59
|
|
Granted
|
|
|
3,358,005
|
|
|
|
22.85
|
|
Vested
|
|
|
(2,155,527
|
)
|
|
|
20.91
|
|
Forfeited
|
|
|
(692,678
|
)
|
|
|
24.17
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2016
|
|
|
6,495,049
|
|
|
|
24.04
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares Subject to Comparative Market Performance
ARRIS grants to certain employees restricted shares, in which the number of shares is dependent upon the Companys total shareholder
return as compared to the shareholder return of the NASDAQ composite over a three year period. The number of shares which could potentially be issued ranges from zero to 200% of the target award. For the shares granted in 2014, the three-year
measurement period ended on December 31, 2016. This resulted in an achievement of 99.8% of the target award, or 211,655 shares. The remaining grants outstanding that are subject to market performance are 608,095 shares at target; at 200%
performance 1,216,190 would be issued. Compensation expense is recognized on a straight-line basis over the three year measurement period and is based upon the fair market value of the shares expected to vest. The fair value of the restricted shares
is estimated on the date of grant using a Monte Carlo Simulation model.
The total fair value of restricted shares, including
both non-performance and performance-related shares, that vested during 2016, 2015 and 2014 was $52.3 million, $118.3 million and $82.6 million, respectively.
Employee Stock Purchase Plan (ESPP)
ARRIS offers an ESPP to
certain employees. The plan complies with Section 423 of the U.S. Internal Revenue Code, which provides that employees will not be immediately taxed on the difference between the market price of the stock and a discounted purchase price if it
meets certain requirements. Participants can request that up to 10% of their base compensation be applied toward the purchase of ARRIS ordinary shares under ARRISs ESPP. Purchases by any one participant are limited to $25,000 (based upon the
fair market value) in any one
127
year. The exercise price is the lower of 85% of the fair market value of the ARRIS ordinary shares on either the first day of the purchase period or the last day of the purchase period. A plan
provision which allows for the more favorable of two exercise prices is commonly referred to as a look-back feature. Any discount offered in excess of five percent generally will be considered compensatory and appropriately is recognized
as compensation expense. Additionally, any ESPP offering a look-back feature is considered compensatory. ARRIS uses the Black-Scholes option valuation model to value shares issued under the ESPP. The valuation is comprised of two components; the 15%
discount of a share of ordinary shares and 85% of a six month option held (related to the look-back feature). The weighted average assumptions used to estimate the fair value of purchase rights granted under the ESPP for 2016, 2015 and 2014, were as
follows: risk-free interest rates of 0.5%, 0.1% and 0.1%, respectively; a dividend yield of 0%; volatility factor of the expected market price of ARRISs stock of 0.37, 0.41, and 0.37, respectively; and a weighted average expected life of 0.5
year for each. The Company recorded stock compensation expense related to the ESPP of approximately $4.6 million, $5.1 million and $4.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Unrecognized Compensation Cost
As of December 31, 2016, there was approximately $124.6 million of total unrecognized compensation cost related to unvested share-based awards granted under the Companys incentive plans. This
compensation cost is expected to be recognized over a weighted-average period of 2.7 years.
Note 20. Employee Benefit Plans
The Company sponsors a qualified and a non-qualified non-contributory defined benefit pension plan that covers certain
U.S. and non-U.S. employees. As of January 1, 2000, the Company froze the U.S. qualified defined pension plan benefits for its participants. These participants elected to enroll in ARRISs enhanced 401(k) plan.
The U.S. pension plan benefit formulas generally provide for payments to retired employees based upon their length of service and
compensation as defined in the plans. ARRISs investment policy is to fund the qualified plan as required by the Employee Retirement Income Security Act of 1974 (ERISA) and to the extent that such contributions are tax deductible.
ARRIS also provides a non-contributory defined benefit plan which cover employees in Taiwan. Any other benefit plans outside
of the U.S. are not material to ARRIS either individually or in the aggregate.
During 2016, in an effort to reduce future
premiums and administrative fees as well as to increase our funded status in connection with our U.S. pension obligation, we made a voluntary funding contribution of $5.0 million. The Company also made funding contributions of $10.9 million
related to our non-U.S pension plan in 2016.
The Company has established a rabbi trust to fund the pension obligations of the
Chief Executive Officer under his Supplemental Retirement Plan including the benefit under the Companys non-qualified defined benefit plan. In addition, the Company has established a rabbi trust for certain executive officers to fund the
Companys pension liability to those officers under the non-qualified plan.
128
The following table summarizes the change in projected benefit obligations, fair value of
plan assets and the funded status of pension plan for the years ended December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Change in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
42,999
|
|
|
$
|
46,550
|
|
|
$
|
36,372
|
|
|
$
|
35,541
|
|
Service cost
|
|
|
|
|
|
|
|
|
|
|
703
|
|
|
|
738
|
|
Interest cost
|
|
|
1,751
|
|
|
|
1,716
|
|
|
|
614
|
|
|
|
661
|
|
Actuarial (gain) loss
|
|
|
2,024
|
|
|
|
(3,962
|
)
|
|
|
81
|
|
|
|
708
|
|
Benefit payments
|
|
|
(1,504
|
)
|
|
|
(1,305
|
)
|
|
|
(1,041
|
)
|
|
|
(1,276
|
)
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
(1,626
|
)
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
45,270
|
|
|
$
|
42,999
|
|
|
$
|
35,706
|
|
|
$
|
36,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
13,516
|
|
|
$
|
14,585
|
|
|
$
|
9,232
|
|
|
$
|
8,923
|
|
Actual return on plan assets
|
|
|
751
|
|
|
|
81
|
|
|
|
131
|
|
|
|
236
|
|
Company contributions
|
|
|
5,747
|
|
|
|
155
|
|
|
|
11,120
|
|
|
|
1,273
|
|
Expenses and benefits paid from plan assets
|
|
|
(1,504
|
)
|
|
|
(1,305
|
)
|
|
|
|
|
|
|
(1,200
|
)
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
(1,626
|
)
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
(1)
|
|
$
|
18,510
|
|
|
$
|
13,516
|
|
|
$
|
19,011
|
|
|
$
|
9,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
$
|
(26,760
|
)
|
|
$
|
(29,483
|
)
|
|
$
|
(16,695
|
)
|
|
$
|
(27,140
|
)
|
Unrecognized actuarial (gain) loss
|
|
|
10,720
|
|
|
|
9,196
|
|
|
|
(2,038
|
)
|
|
|
(4,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(16,040
|
)
|
|
$
|
(20,287
|
)
|
|
$
|
(18,733
|
)
|
|
$
|
(31,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In addition to the U.S. pension plan assets, ARRIS has established two rabbi trusts to further fund the pension obligations of the Chief Executive and certain executive
officers of $21.2 million as of December 31, 2016 and $18.0 million as of December 31, 2015, and are included in Investments on the Consolidated Balance Sheets.
|
Amounts recognized in the statement of financial position consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Current liabilities
|
|
$
|
(399
|
)
|
|
$
|
(426
|
)
|
|
$
|
|
|
|
$
|
|
|
Noncurrent liabilities
|
|
|
(26,361
|
)
|
|
|
(29,057
|
)
|
|
|
(16,695
|
)
|
|
|
(27,140
|
)
|
Accumulated other comprehensive income (loss)
(1)
|
|
|
10,720
|
|
|
|
9,196
|
|
|
|
(2,038
|
)
|
|
|
(4,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(16,040
|
)
|
|
$
|
(20,287
|
)
|
|
$
|
(18,733
|
)
|
|
$
|
(31,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The accumulated other comprehensive income on the Consolidated Balance Sheets as of December 31, 2016 and 2015 is presented net of income tax.
|
129
Other changes in plan assets and benefit obligations recognized in other comprehensive
income (loss) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net (gain) loss
|
|
$
|
2,068
|
|
|
$
|
(3,203
|
)
|
|
$
|
5,992
|
|
|
$
|
225
|
|
|
$
|
813
|
|
|
$
|
1,077
|
|
Amortization of net gain (loss)
|
|
|
(544
|
)
|
|
|
(834
|
)
|
|
|
(305
|
)
|
|
|
248
|
|
|
|
(529
|
)
|
|
|
(464
|
)
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,849
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other (loss) comprehensive income
|
|
$
|
1,524
|
|
|
$
|
(4,037
|
)
|
|
$
|
5,687
|
|
|
$
|
2,353
|
|
|
$
|
284
|
|
|
$
|
613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information for defined benefit plans with accumulated benefit obligations or projected benefit obligation
in excess of plan assets as of December 31, 2016 and 2015 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
45,269
|
|
|
$
|
42,999
|
|
|
$
|
27,551
|
|
|
$
|
26,966
|
|
Fair value of plan assets
|
|
|
18,510
|
|
|
|
13,516
|
|
|
|
19,011
|
|
|
|
9,232
|
|
Projected benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
45,269
|
|
|
$
|
42,999
|
|
|
|
35,706
|
|
|
$
|
36,372
|
|
Fair value of plan assets
|
|
|
18,510
|
|
|
|
13,516
|
|
|
|
19,011
|
|
|
|
9,232
|
|
Net periodic pension cost for 2016, 2015 and 2014 for pension and supplemental benefit plans includes the
following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
703
|
|
|
$
|
738
|
|
|
$
|
751
|
|
Interest cost
|
|
|
1,751
|
|
|
|
1,716
|
|
|
|
1,783
|
|
|
|
614
|
|
|
|
661
|
|
|
|
599
|
|
Return on assets (expected)
|
|
|
(795
|
)
|
|
|
(839
|
)
|
|
|
(874
|
)
|
|
|
(275
|
)
|
|
|
(176
|
)
|
|
|
(166
|
)
|
Amortization of net actuarial loss(gain)
(1)
|
|
|
544
|
|
|
|
834
|
|
|
|
305
|
|
|
|
(70
|
)
|
|
|
529
|
|
|
|
464
|
|
Settlement charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,849
|
)
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
1,500
|
|
|
$
|
1,711
|
|
|
$
|
1,214
|
|
|
$
|
(1,086
|
)
|
|
$
|
1,752
|
|
|
$
|
1,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
ARRIS uses the allowable 10% corridor approach to determine the amount of gains/losses subject to amortization in pension cost. Gains/losses are amortized on a
straight-line basis over the average future service of members expected to receive benefits
|
Estimated amounts to
be amortized from accumulated other comprehensive income (loss) into net periodic benefit costs in the year ending December 31, 2017 based on December 31, 2016 plan measurements are $0.6 million, consisting primarily of amortization of the
net actuarial loss in the U.S. pension plans.
130
The assumptions used to determine the benefit obligations as of December 31, 2016 and
2015 are as set forth below (in percentage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Weighted-average assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.90
|
%
|
|
|
4.15
|
%
|
|
|
3.75
|
%
|
|
|
1.30
|
%
|
|
|
1.70
|
%
|
|
|
1.90
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.15
|
%
|
|
|
3.75
|
%
|
|
|
4.50
|
%
|
|
|
1.70
|
%
|
|
|
1.90
|
%
|
|
|
1.80
|
%
|
Expected long-term rate of return on plan assets
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
1.60
|
%
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
Rate of compensation increase(1)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.25
|
%
|
(1)
|
Represent an average rate for the non-U.S. pension plans. Rate of compensation increase is 4.00% for indirect labor and 2.00% for direct labor for 2016 and 2015. Rate
of compensation increase is 4.50% for indirect labor and 2.00% for direct labor for 2014.
|
The expected long-term
rate of return on assets is derived using the building block approach which includes assumptions for the long term inflation rate, real return, and equity risk premiums.
No minimum funding contributions are required for 2017 for the U.S. Pension plan, however the Company may make a voluntary contribution. The Company estimates it will make funding contributions of $1.5
million in 2017 for the non-U.S. plan.
As of December 31, 2016, the expected benefit payments related to the
Companys defined benefit pension plans during the next ten years are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
2017
|
|
$
|
1,629
|
|
|
$
|
2,067
|
|
2018
|
|
|
16,443
|
|
|
|
2,486
|
|
2019
|
|
|
1,689
|
|
|
|
2,083
|
|
2020
|
|
|
1,809
|
|
|
|
2,323
|
|
2021
|
|
|
1,929
|
|
|
|
2,489
|
|
2022 2026
|
|
|
10,152
|
|
|
|
12,817
|
|
The investment strategies of the plans place a high priority on benefit security. The plans invest
conservatively so as not to expose assets to depreciation in adverse markets. The plans strategy also places a high priority on earning a rate of return greater than the annual inflation rate along with maintaining average market results. The
plan has targeted asset diversification across different asset classes and markets to take advantage of economic environments and to also act as a risk minimizer by dampening the portfolios volatility. The following table summarizes the
weighted average pension asset allocations as December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
|
Target
|
|
Actual
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
|
2015
|
|
Equity securities
|
|
30% - 40%
|
|
40% - 45%
|
|
|
30
|
%
|
|
|
40
|
%
|
Debt securities
|
|
0% - 5%
|
|
0% - 5%
|
|
|
2
|
%
|
|
|
2
|
%
|
Cash and cash equivalents
|
|
60% - 70%
|
|
50% - 60%
|
|
|
68
|
%
|
|
|
58
|
%
|
|
|
100%
|
|
100%
|
|
|
100
|
%
|
|
|
100
|
%
|
Asset allocation for the non-U.S. pension assets is 100% in money market investments.
131
The following table summarizes the Companys U.S. pension plan assets by category and
by level (as described in Note 7 of the Notes to the Consolidated Financial Statements) as of December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
(1)
|
|
$
|
|
|
|
$
|
12,722
|
|
|
$
|
|
|
|
$
|
12,722
|
|
Equity securities
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
1,123
|
|
|
|
|
|
|
|
|
|
|
|
1,123
|
|
U.S. mid cap
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
1,118
|
|
U.S. small cap
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
1,118
|
|
International
|
|
|
1,685
|
|
|
|
|
|
|
|
|
|
|
|
1,685
|
|
Fixed income securities
(3)
:
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,787
|
|
|
$
|
12,722
|
|
|
$
|
|
|
|
$
|
18,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
(1)
|
|
$
|
|
|
|
$
|
7,424
|
|
|
$
|
|
|
|
$
|
7,424
|
|
Equity securities
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
1,330
|
|
|
|
|
|
|
|
|
|
|
|
1,330
|
|
U.S. mid cap
|
|
|
1,160
|
|
|
|
|
|
|
|
|
|
|
|
1,160
|
|
U.S. small cap
|
|
|
1,160
|
|
|
|
|
|
|
|
|
|
|
|
1,160
|
|
International
|
|
|
1,757
|
|
|
|
|
|
|
|
|
|
|
|
1,757
|
|
Fixed income securities
(3)
:
|
|
|
685
|
|
|
|
|
|
|
|
|
|
|
|
685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,092
|
|
|
$
|
7,424
|
|
|
$
|
|
|
|
$
|
13,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash and cash equivalents, which are used to pay benefits and administrative expenses, are held in a stable value fund.
|
(2)
|
Equity securities consist of mutual funds and the underlying investments are indexes. Investments in mutual funds are valued at the net asset value per share multiplied
by the number of shares held.
|
(3)
|
Fixed income securities consist of bonds securities in mutual funds, and are valued at the net asset value per share multiplied by the number of shares held.
|
Other Benefit Plans
ARRIS has established defined contribution plans pursuant to the Internal Revenue Code Section 401(k) that cover all eligible U.S. employees. ARRIS contributes to these plans based upon the dollar
amount of each participants contribution. ARRIS made matching contributions to these plans of approximately $16.4 million, $16.6 million and $15.3 million in 2016, 2015 and 2014, respectively.
The Company has a deferred compensation plan that does not qualify under Section 401(k) of the Internal Revenue Code, and is
available to key executives of the Company and certain other employees. Employee compensation deferrals and matching contributions are held in a rabbi trust. The total of net employee deferrals and matching contributions, which is reflected in other
long-term liabilities, was $4.2 million and $3.6 million at December 31, 2016 and 2015, respectively. Total expenses included in continuing operations for the matching contributions were approximately $0.2 million and $0.1 million in 2016 and
2015, respectively.
The Company previously offered a deferred compensation arrangement, which allowed certain employees to
defer a portion of their earnings and defer the related income taxes. As of December 31, 2004, the plan was frozen and no further contributions are allowed. The deferred earnings are invested in a rabbi trust. The total of net
132
employee deferral and matching contributions, which is reflected in other long-term liabilities, was $3.0 million and $2.8 million at December 31, 2016 and 2015, respectively.
The Company also has a deferred retirement salary plan, which was limited to certain current or former officers of C-COR. The present
value of the estimated future retirement benefit payments is being accrued over the estimated service period from the date of signed agreements with the employees. The accrued balance of this plan, the majority of which is included in other
long-term liabilities, were $1.6 million and $1.7 million at December 31, 2016 and 2015, respectively. Total expenses (income) included in continuing operations for the deferred retirement salary plan were approximately $0.4 million and $0.3
million for 2016 and 2015, respectively.
Note 21. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of taxes, for the year ended
December 31, 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
|
|
|
(11
|
)
|
|
|
1,631
|
|
|
|
(2,934
|
)
|
|
|
11,096
|
|
|
|
9,782
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
15
|
|
|
|
5,821
|
|
|
|
319
|
|
|
|
|
|
|
|
6,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
4
|
|
|
|
7,452
|
|
|
|
(2,615
|
)
|
|
|
11,096
|
|
|
|
15,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
137
|
|
|
$
|
671
|
|
|
$
|
(6,810
|
)
|
|
$
|
9,293
|
|
|
$
|
3,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(64
|
)
|
|
|
(8,319
|
)
|
|
|
2,044
|
|
|
|
(1,078
|
)
|
|
|
(7,417
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
172
|
|
|
|
4,704
|
|
|
|
942
|
|
|
|
|
|
|
|
5,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
108
|
|
|
|
(3,615
|
)
|
|
|
2,986
|
|
|
|
(1,078
|
)
|
|
|
(1,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
133
|
|
|
$
|
(6,781
|
)
|
|
$
|
(4,195
|
)
|
|
$
|
(1,803
|
)
|
|
$
|
(12,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 22. Repurchases of Stock
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.
During 2016, the Company repurchased 7.4 million shares of its common stock for $178.0 million at an average stock price of $24.09. The remaining authorized amount for stock repurchases under
133
this plan was $122.0 million as of December 31, 2016. Unless terminated earlier by a Board resolution, this new plan will expire when ARRIS has used all authorized funds for repurchase.
During 2015, ARRIS repurchased 0.9 million shares of the Companys common stock at an average price of $28.70 per
share, for an aggregate consideration of approximately $25.0 million.
Note 23. Commitments and Contingencies
General Matters
ARRIS leases office, distribution, and warehouse facilities as well as equipment under long-term leases expiring at various dates through 2023. Included in these operating leases are certain amounts
related to restructuring activities; these lease payments and related sublease income are included in restructuring accruals on the consolidated balance sheets. Future minimum operating lease payments under non-cancelable leases at December 31,
2016 were as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
|
2017
|
|
$
|
31,742
|
|
2018
|
|
|
26,745
|
|
2019
|
|
|
22,349
|
|
2020
|
|
|
19,129
|
|
2021
|
|
|
16,729
|
|
Thereafter
|
|
|
50,128
|
|
Less sublease income
|
|
|
(1,977
|
)
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
164,845
|
|
|
|
|
|
|
Total rental expense for all operating leases amounted to approximately $34.0 million, $26.9 million and
$32.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Additionally, the Company had
contractual obligations of approximately $692.9 million under agreements with non-cancelable terms to purchase goods or services over the next year. All contractual obligations outstanding at the end of prior years were satisfied within a 12 month
period, and the obligations outstanding as of December 31, 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
December 31, 2016, the restricted cash associated with the outstanding bank guarantee was $1.5 million which is reflected in Other Assets and $0.1 million in Other Current Asset on the Consolidated Balance Sheets.
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
134
indemnification from us, alleging infringement by various Company products and services. The Company believes that it has meritorious defenses to the allegations 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 two of the matters listed in Part II, Item 1 Legal Proceedings,
the Company estimates the aggregate range of loss for which a reasonable estimate can be made, to be between $0 and $10.0 million. This estimate covers only two of the matters listed in Part II, Item 1 Legal Proceedings and we
are currently unable to reasonably estimate the possible loss or range of possible loss for each of the remaining identified matters. The results in litigation are unpredictable and an adverse resolution of one or more of such matters not included
in the estimate provided, or if losses are higher than what is currently estimated, it could have a material adverse effect on our business, financial position, results of operations or cash flows. In addition, the Company is a defendant in various
litigation matters generally arising out of the normal course of business. (See Part I, Item 3 Legal Proceedings for additional details).
Note 24. Subsequent Events
On February 22, 2017, ARRIS, Broadcom
Corporation, and a subsidiary of Broadcom entered into a Stock and Asset Purchase Agreement (Purchase Agreement), pursuant to which, upon the terms and subject to the satisfaction or waiver of the conditions in the Purchase Agreement,
ARRIS will acquire Brocade Communication Systems Inc.s Ruckus Wireless and ICX Switch business for approximately $800 million in cash, subject to adjustment as provided in the Purchase Agreement. The acquisition is subject to the completion of
the acquisition of Brocade by Broadcom.
This portfolio will expand ARRISs leadership in converged wired and wireless
networking technologies beyond the home into the education, public venue, enterprise, hospitality, and MDU segments. ARRIS plans to establish a dedicated business unit within the company focused on innovative wireless networking and wired switching
technology to address evolving and emerging needs across a number of vertical markets.
Note 25. Summary Quarterly Consolidated Financial
Information (unaudited)
The following table summarizes ARRISs quarterly consolidated financial information (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2016 Ended,
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30
|
|
|
December 31,
(1)(2)
|
|
Net sales
|
|
$
|
1,614,706
|
|
|
$
|
1,730,044
|
|
|
$
|
1,725,145
|
|
|
$
|
1,759,223
|
|
Gross margin
|
|
|
384,032
|
|
|
|
444,734
|
|
|
|
442,850
|
|
|
|
436,001
|
|
Operating (loss) income
|
|
|
(86,490
|
)
|
|
|
33,388
|
|
|
|
91,313
|
|
|
|
72,506
|
|
Net (loss) income attributable to ARRIS International plc.
|
|
$
|
(202,573
|
)
|
|
$
|
84,228
|
|
|
$
|
48,162
|
|
|
$
|
88,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per basic share
|
|
$
|
(1.06
|
)
|
|
$
|
0.44
|
|
|
$
|
0.25
|
|
|
$
|
0.46
|
|
Net (loss) income per diluted share
|
|
$
|
(1.06
|
)
|
|
$
|
0.44
|
|
|
$
|
0.25
|
|
|
$
|
0.46
|
|
|
|
|
|
Quarters in 2015 Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
(3)
|
|
|
December 31,
(4)
|
|
Net sales
|
|
$
|
1,215,158
|
|
|
$
|
1,260,077
|
|
|
$
|
1,221,416
|
|
|
$
|
1,101,681
|
|
Gross margin
|
|
|
336,556
|
|
|
|
364,361
|
|
|
|
359,333
|
|
|
|
358,673
|
|
Operating (loss) income
|
|
|
45,718
|
|
|
|
51,542
|
|
|
|
60,781
|
|
|
|
52,912
|
|
Net (loss) income attributable to ARRIS Group, Inc.
|
|
$
|
19,126
|
|
|
$
|
16,758
|
|
|
$
|
26,256
|
|
|
$
|
30,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share
|
|
$
|
0.13
|
|
|
$
|
0.11
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
Net income per basic share
|
|
$
|
0.13
|
|
|
$
|
0.11
|
|
|
$
|
0.18
|
|
|
$
|
0.20
|
|
135
Year 2016
(1)
|
For the quarter ended December 31, 2016, the Company recorded $16.4 million as a reduction to net sales in connection with Warrants.
|
(2)
|
In the fourth quarter of 2016, the Company recorded foreign currency remeasurement gains of approximately $16 million related to the remeasurement
of net deferred income tax liabilities in the U.K. where the functional currency is the U.S. dollar. Approximately $8 million resulted from changes in exchange rates prior to the 4
th
quarter in 2016 and was considered the correction of an immaterial misstatement of interim financial statements in
2016. In accordance with ASC Topic 250,
Accounting Changes and Error Corrections,
the Company evaluated the impact of the 4
th
quarter adjustment on its previously issued interim financial statements in 2016 and concluded that the results of
operations for these periods were not materially misstated and accordingly the correction was recorded in the
4
th
quarter.
|
Year 2015
(3)
|
The Company recorded a tax benefit of $27.3 million primarily from the release of valuation allowances from deferred tax assets recorded for U.S. federal net operating
losses arising from the acquisition of the Motorola Home business from Google. The Company also recorded a tax expense of $18.9 million on a gain recognition agreement for its Taiwanese entity, inclusive of a benefit of $18.9 million obtained from
foreign tax credits generated by the transaction.
|
(4)
|
$20.4 million of current tax benefit was recorded when the President signed legislation to approve the extension of the U.S. federal research and development tax credit
permanently during Q4 of 2015.
|
136