NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
)
Note 1. Organization and
Basis of Presentation
On January 4, 2016, ARRIS Group, Inc. (ARRIS Group) completed its combination (the Combination)
with Pace plc, a company incorporated in England and Wales (Pace). In connection with the Combination, (i) ARRIS International plc (the Registrant), a company incorporated in England and Wales, acquired all of the
outstanding ordinary shares of Pace (the Pace Acquisition) and (ii) a wholly-owned subsidiary of the Registrant was merged with and into ARRIS Group (the Merger), with ARRIS Group surviving the Merger as an indirect
wholly-owned subsidiary of the Registrant. Under the terms of the Combination, (a) Pace shareholders received 132.5 pence in cash and 0.1455 ordinary shares of the Registrant for each Pace Share they held, and (b) ARRIS Group stockholders
received one ordinary share of the Registrant for each share of ARRIS Group common stock they held. Following the Combination, ARRIS Group became an indirect wholly-owned subsidiary of the Registrant and Pace became a direct wholly-owned subsidiary
of the Registrant. The ordinary shares of the Registrant trade on the NASDAQ under the symbol ARRS.
The Registrant is deemed to be the
successor to ARRIS Group pursuant to Rule
12g-3(a)
under the Securities Exchange Act of 1934, as amended (the Exchange Act), and the ordinary shares of the Registrant are deemed to be registered
under Section 12(b) of the Exchange Act.
ARRIS International plc (together with its consolidated subsidiaries and consolidated venture, except as
the context otherwise indicates, ARRIS or the Company) is a global media entertainment and data communications solutions provider, headquartered in Suwanee, Georgia. The Company operates in two business segments, Customer
Premises Equipment (CPE) and Network & Cloud (N&C) (See Note 14
Segment Information
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 CPE. The Companys solutions are complemented by a broad array of services including technical support, repair and refurbishment, and systems design and integration.
The consolidated financial statements 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. All intercompany accounts and transactions have been eliminated.
The
accompanying financial data as of September 30, 2017 and for the three and nine months ended September 30, 2017 and September 30, 2016 has been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP)
have been condensed or omitted pursuant to such rules and regulations. The December 31, 2016 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by GAAP in the United States.
However, the Company believes that the disclosures are adequate to make the information presented not misleading. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto
included in the Companys Annual Report on Form
10-K
for the fiscal year ended December 31, 2016.
In
the opinion of management, all normal recurring adjustments necessary to present fairly the consolidated balance sheet as of September 30, 2017, the consolidated statements of operations, the statements of comprehensive income (loss), and the
statements of cash flows for the nine months ended September 30, 2017 and September 30, 2016 as applicable, have been made. The results of operations for the three and nine months ended September 30, 2017 are not necessarily
indicative of the operating results for the full fiscal year or any future periods.
The Company has evaluated subsequent events through the date that the
financial statements were issued.
6
Note 2. Impact of Recently Adopted Accounting Standards
Adoption of new accounting standards
In July 2015, the Financial Accounting Standards Board (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. ARRIS adopted this update as of January 1, 2017. The adoption of this guidance did not have any impact on the
Companys consolidated financial position and results of operations.
In March 2016, the FASB issued guidance, Improvements to Employee Share-Based
Payment Accounting, which simplifies the accounting for share-based payment transactions. The guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement. 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. ARRIS adopted this guidance in the first quarter of 2017. Upon adoption, using the modified retrospective
transition method, the Company recorded a cumulative-effect adjustment for previously unrecognized excess tax benefits of $8.9 million, decreasing opening accumulated deficit and increasing
non-current
deferred tax assets. Applying the guidance prospectively, an income tax benefit of approximately $1.2 million was recognized in the nine months ended September 30, 2017. Also as a result of the adoption of this guidance, the Company made
an accounting policy election to continue to estimate the number of forfeitures expected to occur and has applied the amendments in this guidance relating to classification on the statement of cash flows prospectively, as such no prior periods have
been adjusted. Following adoption, the primary impact on the 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 tax effects will be treated as discrete items in the quarter in which share-based amounts vest or are exercised. The actual
impact of adopting this standard on the effective tax rate will vary depending on ARRISs share price during fiscal 2017.
In October 2016, the FASB
issued new guidance for intra-entity transfer of assets other than inventory that requires 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. ARRIS adopted this update as of January 1, 2017. Upon adoption, using the modified retrospective transition method, the Company recorded a cumulative-effect adjustment for previously recognized
prepaid income taxes, decreasing opening accumulated deficit by $2.0 million and increasing
non-current
deferred tax assets by $4.5 million, and decreasing other current prepaid asset by
$2.5 million. Applying the guidance prospectively, an income tax expense of approximately $8.0 million was recognized in the quarter ended March 31, 2017. Also as a result of the adoption of this guidance, any future
inter-company sale transactions of assets other than inventory will result in either income tax expense or benefit in the period of the transaction.
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.
7
The Company has a cross-functional team that analyzed 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, performed an analysis of a sample of contracts to evaluate the
impact of the standard, and are finalizing our contract analysis review and accounting policies and evaluating the new disclosure requirements. ARRIS is in the process of testing a new revenue recognition application, new business processes, and
implementing new controls to support the adoption of the new standard.
While the Company continues to assess all potential impacts of adopting the new
guidance, based on analysis completed to date, the Company has identified certain instances where 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 enters 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. 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.
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 has established a project management team to analyze the impact of this standard by reviewing its current accounting policies and practices to identify potential impacts that would result from the
application of this standard. The Company has determined changes are likely required to its business processes, systems and controls to effectively report leases and disclosure under the new standard.
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 its Consolidated
Financial Statements.
In November 2016, the FASB issued new guidance that 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
assessing the potential impact of the adoption of this guidance on its Consolidated Financial Statements.
In January 2017, the FASB issued an accounting
standard update that clarifies the definition of a business to help companies evaluate whether acquisition or disposal transactions should be accounted for as asset groups or as businesses. The accounting standard update will be effective for the
Company beginning in the first quarter of fiscal 2019 on a prospective basis. The impact of this accounting standard update will be facts and circumstances dependent, but the Company expects, that in some situations, transactions that were
previously accounted for as business combinations or disposal transactions will be accounted for as asset purchases or asset sales under the accounting standard update.
8
In January 2017, the FASB issued an accounting standard update that removes Step two of the goodwill impairment
test, which requires the assessment of fair value of individual assets and liabilities of a reporting unit to measure goodwill impairments. Goodwill impairment will now be the amount by which a reporting units carrying value exceeds its fair
value. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2021 on a prospective basis, and early adoption is permitted. The Company is currently assessing the potential impact of the adoption of
this standard on its Consolidated Financial Statements.
In March 2017, the FASB issued an accounting standard update that requires entities to
disaggregate the service cost component from the other components of net periodic benefit costs and present it with other current compensation costs for related employees in the income statement, and present the other components elsewhere in the
income statement and outside of income from operations if that subtotal is presented. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. The accounting standard update will be
effective for the Company in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently assessing the potential impact of the adoption of this standard on its Consolidated Financial Statements.
In May 2017, the FASB issued an accounting standard which amends the scope of modification accounting for share-based payment arrangements. The standard
provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The accounting standard will be applied prospectively to awards modified on or
after the effective date. It will be effective for interim and annual periods beginning after December 15, 2017 (January 1, 2018 for the Company). Early adoption is permitted. The Company is currently assessing the potential impact of the
adoption of this standard on its Consolidated Financial Statements.
In August 2017, the FASB issued an accounting standard
which eliminates the
requirement to separately measure and report hedge ineffectiveness and requires companies to recognize all elements of hedge accounting that impact earnings in the same income statement line item where the hedged item resides. The standard includes
new alternatives for measuring the hedged item for fair value hedges of interest rate risk and eases the requirements for effectiveness testing, hedge documentation and applying the critical terms match method. Finally, the standard introduces new
alternatives that permit companies to reduce the risk of material error if the shortcut method is misapplied. The accounting standard is effective beginning January 1, 2019 and is required to be applied prospectively. The Company is currently
assessing the potential impact of the adoption of this standard on its Consolidated Financial Statements.
Note 3. Business Acquisition
Acquisition of Pace
On January 4, 2016, ARRIS
completed its previously announced acquisition of Pace for approximately $2,074 million, including $638.8 million in cash and issuance of 47.7 million ordinary shares of ARRIS International plc (formerly ARRIS International Limited)
and $0.3 million of
non-cash
consideration.
The Company completed the accounting for the aforementioned
business combination during the fourth quarter of 2016.
Pending acquisition of Ruckus Wireless and ICX Switch business
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 product lines (the
Ruckus Networks) 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. The Company anticipates
closing the acquisition in the fourth quarter of 2017, once regulatory approvals are complete.
This acquisition of these product lines 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 segment within the Company
focused on wireless networking and wired switching technology to address evolving and emerging needs across a number of vertical markets.
9
Note 4. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill
for the year to date period ended September 30, 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
N & C
|
|
|
Total
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in year 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation and other
|
|
|
411
|
|
|
|
|
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
$
|
1,391,582
|
|
|
$
|
624,998
|
|
|
$
|
2,016,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
1,391,582
|
|
|
|
1,003,654
|
|
|
|
2,395,236
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
$
|
1,391,582
|
|
|
$
|
624,998
|
|
|
$
|
2,016,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
The
gross carrying amount and accumulated amortization of the Companys acquired intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Definite-lived intangible assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,574,294
|
|
|
$
|
741,103
|
|
|
$
|
833,191
|
|
|
$
|
1,572,947
|
|
|
$
|
624,719
|
|
|
$
|
948,228
|
|
Developed technology, patents & licenses
|
|
|
1,256,894
|
|
|
|
719,884
|
|
|
|
537,010
|
|
|
|
1,248,719
|
|
|
|
571,808
|
|
|
|
676,911
|
|
Trademarks, trade and domain names
|
|
|
62,872
|
|
|
|
36,482
|
|
|
|
26,390
|
|
|
|
83,472
|
|
|
|
41,433
|
|
|
|
42,039
|
|
Backlog
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,400
|
|
|
|
16,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
$
|
2,894,060
|
|
|
$
|
1,497,469
|
|
|
$
|
1,396,591
|
|
|
$
|
2,921,538
|
|
|
$
|
1,254,360
|
|
|
$
|
1,667,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
5,900
|
|
|
|
|
|
|
|
5,900
|
|
|
|
5,900
|
|
|
|
|
|
|
|
5,900
|
|
In-process
research and development
|
|
|
4,100
|
|
|
|
|
|
|
|
4,100
|
|
|
|
4,100
|
|
|
|
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
10,000
|
|
|
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,904,060
|
|
|
$
|
1,497,469
|
|
|
$
|
1,406,591
|
|
|
$
|
2,931,538
|
|
|
$
|
1,254,360
|
|
|
$
|
1,677,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2017, certain fully amortized intangible assets have been eliminated from both the gross and accumulated amortization
amounts.
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 acquired intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of sales
|
|
$
|
871
|
|
|
$
|
529
|
|
|
$
|
2,293
|
|
|
$
|
1,562
|
|
Selling, general and administrative expenses
|
|
|
950
|
|
|
|
950
|
|
|
|
2,849
|
|
|
|
2,849
|
|
Amortization of acquired intangible assets
(1)
|
|
|
90,162
|
|
|
|
89,042
|
|
|
|
274,819
|
|
|
|
297,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
91,983
|
|
|
$
|
90,521
|
|
|
$
|
279,961
|
|
|
$
|
301,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects amortization expense for the intangible assets acquired through business combinations.
|
10
The estimated total amortization expense for finite-lived intangibles for each of the next five fiscal years is
as follows (in thousands):
|
|
|
|
|
2017 (for the remaining three months)
|
|
$
|
92,019
|
|
2018
|
|
|
317,627
|
|
2019
|
|
|
271,595
|
|
2020
|
|
|
259,865
|
|
2021
|
|
|
125,079
|
|
Thereafter
|
|
|
330,406
|
|
Note 5. Investments
ARRISs investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
2017
|
|
|
As of December 31,
2016
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
33,309
|
|
|
$
|
115,553
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
7,308
|
|
|
|
15,391
|
|
Equity method investments
|
|
|
25,393
|
|
|
|
22,688
|
|
Cost method investments
|
|
|
10,091
|
|
|
|
6,841
|
|
Other investments
|
|
|
30,407
|
|
|
|
28,012
|
|
|
|
|
|
|
|
|
|
|
Total classified as
non-current
assets
|
|
|
73,199
|
|
|
|
72,932
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
106,508
|
|
|
$
|
188,485
|
|
|
|
|
|
|
|
|
|
|
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 the Consolidated Balance Sheets 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Amortized
Costs
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Amortized
Costs
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Certificates of deposit (foreign)
|
|
$
|
12,226
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,226
|
|
|
$
|
87,372
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
87,372
|
|
Corporate bonds
|
|
|
21,029
|
|
|
|
78
|
|
|
|
(23
|
)
|
|
|
21,084
|
|
|
|
34,175
|
|
|
|
35
|
|
|
|
(77
|
)
|
|
|
34,133
|
|
Short-term bond fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,046
|
|
|
|
69
|
|
|
|
(69
|
)
|
|
|
5,046
|
|
Corporate obligations
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Mutual funds
|
|
|
101
|
|
|
|
13
|
|
|
|
|
|
|
|
114
|
|
|
|
94
|
|
|
|
28
|
|
|
|
(21
|
)
|
|
|
101
|
|
Other investments
|
|
|
6,798
|
|
|
|
434
|
|
|
|
(97
|
)
|
|
|
7,135
|
|
|
|
4,192
|
|
|
|
530
|
|
|
|
(487
|
)
|
|
|
4,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,212
|
|
|
$
|
525
|
|
|
$
|
(120
|
)
|
|
$
|
40,617
|
|
|
$
|
130,936
|
|
|
$
|
662
|
|
|
$
|
(654
|
)
|
|
$
|
130,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The following table represents the breakdown of the
available-for-sale
investments with gross unrealized losses and the duration that those losses had been unrealized (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
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)
|
|
$
|
12,226
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,226
|
|
|
$
|
|
|
Corporate bonds
(1)
|
|
|
21,084
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
21,084
|
|
|
|
(23
|
)
|
Short-term bond fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
Mutual funds
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114
|
|
|
|
|
|
Other investments
|
|
|
7,135
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
7,135
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,617
|
|
|
$
|
(120
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40,617
|
|
|
$
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
(1)
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of September 30, 2017, 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 more likely than not that it will not 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Proceeds from sales
|
|
$
|
5,000
|
|
|
$
|
885
|
|
|
$
|
155,301
|
|
|
$
|
3,327
|
|
Gross gains
|
|
|
1
|
|
|
|
|
|
|
|
13
|
|
|
|
26
|
|
Gross losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of the Companys
available-for-sale
securities 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):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Within 1 year
|
|
$
|
33,255
|
|
|
$
|
33,309
|
|
After 1 year through 5 years
|
|
|
|
|
|
|
|
|
After 5 years through 10 years
|
|
|
|
|
|
|
|
|
After 10 years
|
|
|
6,957
|
|
|
|
7,308
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,212
|
|
|
$
|
40,617
|
|
|
|
|
|
|
|
|
|
|
12
Other-than-temporary investment impairments
In making this determination, ARRIS evaluates its
investments for any other-than-temporary impairment on a quarterly basis considering all available evidence, including changes in general market conditions, specific industry and individual entity data, the financial condition and the
near-term
prospects of the entity issuing the security, and the Companys ability and intent to hold the investment until recovery. For the nine months ended September 30, 2017, ARRIS concluded that one
private company had indicators of impairment, as the cost basis exceeded the fair value of the investments, resulting in an other-than-temporary impairment charges of $2.8 million. 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 an other-than-temporary impairment charges of $12.3 million. These charges are reflected in the
Consolidated Statements of Operations.
Classification of securities as current or noncurrent 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 noncurrent.
Note 6. Fair Value Measurement
Fair value is based on
the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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. 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 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit (foreign)
|
|
$
|
|
|
|
$
|
12,226
|
|
|
$
|
|
|
|
$
|
12,226
|
|
Corporate bonds
|
|
|
|
|
|
|
21,084
|
|
|
|
|
|
|
|
21,084
|
|
Corporate obligations
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Mutual funds
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
114
|
|
Other investments
|
|
|
|
|
|
|
7,135
|
|
|
|
|
|
|
|
7,135
|
|
Interest rate derivatives asset derivatives
|
|
|
|
|
|
|
7,805
|
|
|
|
|
|
|
|
7,805
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(7,567
|
)
|
|
|
|
|
|
|
(7,567
|
)
|
Foreign currency contracts asset position
|
|
|
|
|
|
|
1,923
|
|
|
|
|
|
|
|
1,923
|
|
Foreign currency contracts liability position
|
|
|
|
|
|
|
(9,360
|
)
|
|
|
|
|
|
|
(9,360
|
)
|
|
|
|
|
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
|
)
|
13
In addition to the financial instruments included in the above table, certain nonfinancial assets and liabilities
are measured at fair value on a nonrecurring basis in accordance with applicable authoritative guidance. This includes items such as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at
fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are measured at
fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized. As of September 30, 2017, 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 debt as
of September 30, 2017 approximated fair value because of interest-bearing rates that are adjusted periodically, analysis of recent market conditions, prevailing interest rates, and other Company specific factors. The Company has classified the
debt as a Level 2 item within the fair value hierarchy.
Note 7. Derivative Instruments and Hedging Activities
Overview
ARRIS is exposed to financial market risk,
primarily related to foreign currency and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, the Company enters into a variety of derivative financial instruments.
Managements objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency and interest rates. ARRISs policies and practices are to use derivative
financial instruments only to the extent necessary to manage exposures. ARRIS does not hold or issue derivative financial instruments for trading or speculative purposes.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended
use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives
designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and
qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives also may be designated as hedges of the foreign currency exposure of a net
investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that
are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk,
even though hedge accounting does not apply or the Company elects not to apply hedge accounting. In accordance with the FASBs fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its
derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Cash Flow Hedges of Interest
Rate Risk
The Companys senior secured credit facilities, which are comprised of (i) a Term Loan A Facility, (ii) a Term
Loan
A-1
Facility, (iii) a Term Loan
B-2
Facility, and (iv) a Revolving Credit Facility, have variable interest rates based on LIBOR.
(See Note 13
Indebtedness
for additional details.) As a result of exposure to interest rate movements, the Company entered into various interest rate swap arrangements, which effectively converted $625 million of its variable-rate debt
based on
one-month
LIBOR to an aggregate fixed rate. The aggregated fixed rate changes as certain swaps mature and other swaps begin and could vary up by 50 basis points or down by 25 basis points based on
future changes to the Companys net leverage ratio. Based on the Companys interest rates as of September 30, 2017, 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. the Company 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.
14
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 September 30, 2017. This fixed rate could vary by up to 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 2017, such derivatives were used to hedge the variable cash flows associated with debt. The ineffective
portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2017, the Company did not have expenses related to hedge ineffectiveness.
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 $1.5 million may be reclassified as an increase to interest expense.
The table below presents the impact the Companys derivative financial instruments had on Consolidated Statement of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
Gain(Loss)
Reclassified from
AOCI into Income
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Loss) Gain Recognized in OCI on Derivatives (Effective Portion)
|
|
|
Interest expense
|
|
|
$
|
340
|
|
|
$
|
5,681
|
|
|
$
|
(394
|
)
|
|
|
(18,756
|
)
|
Amounts Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
|
Interest expense
|
|
|
|
(17
|
)
|
|
|
1,998
|
|
|
|
1,777
|
|
|
|
5,678
|
|
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 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Interest rate derivatives asset derivatives
|
|
Other current assets
|
|
|
2,131
|
|
|
|
222
|
|
Interest rate derivatives asset derivatives
|
|
Other assets
|
|
|
5,674
|
|
|
|
8,043
|
|
Interest rate derivatives liability derivatives
|
|
Other accrued liabilities
|
|
|
(3,608
|
)
|
|
|
(2,989
|
)
|
Interest rate derivatives liability derivatives
|
|
Other noncurrent liabilities
|
|
|
(3,959
|
)
|
|
|
(6,421
|
)
|
Credit-risk-related Contingent Features
Each of ARRISs agreements with its derivative counterparties contains 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 September 30, 2017, and December 31, 2016, the fair value of derivatives,
which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was a net asset position of $0.1 million and a net liability position of $1.4 million, respectively. As of September 30,
2017, the Company had not posted any collateral related to these agreements nor had it required any of its counterparties to post collateral related to these or any other agreements.
15
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 September 30, 2017, the Company had option collars with notional amounts
totaling 10 million euros which mature throughout 2017, forward contracts with notional amounts totaling 80 million euros which mature throughout 2017 and 2018, forward contracts with a total notional amount of 55 million Australian
dollars which mature throughout 2017 and 2018, forward contracts with notional amounts totaling 70 million Canadian dollars which mature throughout 2017 and 2018, forward contracts with notional amounts totaling 100 million British pounds
which mature throughout 2017 and 2018, and forward contracts with notional amounts totaling 700.9 million South African rand which mature throughout 2017 and 2019.
The Companys objectives in using foreign currency derivatives are to add stability to foreign currency gains and losses recorded as other expense
(income) and to manage its exposure to foreign currency movements. To accomplish this objective, the Company uses foreign currency option and foreign currency forward contracts as part of its foreign currency risk management strategy. The
Companys foreign currency derivative instruments 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 16 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 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Foreign exchange contracts asset derivatives
|
|
Other current assets
|
|
$
|
1,409
|
|
|
$
|
7,369
|
|
Foreign exchange contracts asset derivatives
|
|
Other assets
|
|
|
514
|
|
|
|
|
|
Foreign exchange contracts liability derivatives
|
|
Other accrued liabilities
|
|
|
(9,286
|
)
|
|
|
(3,671
|
)
|
Foreign exchange contracts liability derivatives
|
|
Other noncurrent
liabilities
|
|
|
(74
|
)
|
|
|
|
|
The change in the fair value of ARRISs derivatives not designated as hedging instruments recorded in the Consolidated
Statements of Operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Location
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Foreign exchange contracts
|
|
(Gain)/loss on foreign currency
|
|
$
|
3,155
|
|
|
$
|
4,691
|
|
|
$
|
19,474
|
|
|
$
|
16,638
|
|
Note 8. Pension Benefits
Components of Net Periodic Pension Cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
Three months ended
September 30,
|
|
|
Three months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
154
|
|
|
$
|
173
|
|
Interest cost
|
|
|
434
|
|
|
|
438
|
|
|
|
113
|
|
|
|
151
|
|
Return on assets (expected)
|
|
|
(224
|
)
|
|
|
(199
|
)
|
|
|
(75
|
)
|
|
|
(68
|
)
|
Amortization of net actuarial loss
|
|
|
138
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
348
|
|
|
$
|
375
|
|
|
$
|
192
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
Nine months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
462
|
|
|
$
|
519
|
|
Interest cost
|
|
|
1,302
|
|
|
|
1,313
|
|
|
|
339
|
|
|
|
452
|
|
Return on assets (expected)
|
|
|
(672
|
)
|
|
|
(596
|
)
|
|
|
(225
|
)
|
|
|
(203
|
)
|
Amortization of net actuarial loss (gain)
|
|
|
414
|
|
|
|
408
|
|
|
|
|
|
|
|
(1,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
1,044
|
|
|
$
|
1,125
|
|
|
$
|
576
|
|
|
$
|
(1,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer Contributions
No minimum funding contributions are required in 2017 under the Companys U.S. defined benefit plan. The Company made voluntary minimum funding
contributions to its U.S. pension plan during 2016 and 2017. For the three and nine months ending September 30, 2017, $1.4 million was contributed. For the three months and nine months ending September 30, 2016, $5.0 million
and $5.2 million was contributed, respectively.
During the three and nine months ended September 30, 2017, the Company made minimum funding
contributions of $0.3 and $0.9 million, respectively, related to its Taiwan pension plan. During the three and nine months ended September 30, 2016, the Company made minimum funding contributions of $0.3 million and
$10.7 million, respectively, related to its Taiwan pension plan.
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 to the
warranty liability.
The Company offers extended warranties and support service agreements on certain products. Revenue from these agreements is deferred
at the time of the sale and recognized on a straight-line basis over the contract period. Costs of services performed under these types of contracts are charged to expense as incurred, which approximates the timing of the revenue stream.
Information regarding the changes in ARRISs aggregate product warranty liabilities for the nine months ended September 30, 2017 was as follows (in
thousands):
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
88,187
|
|
Accruals related to warranties (including changes in assumptions)
|
|
|
30,148
|
|
Settlements made (in cash or in kind)
|
|
|
(36,478
|
)
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
81,857
|
|
|
|
|
|
|
17
Note 10. Inventories
The components of inventory were as follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Raw material
|
|
$
|
100,138
|
|
|
$
|
86,243
|
|
Work in process
|
|
|
9,023
|
|
|
|
3,877
|
|
Finished goods
|
|
|
665,981
|
|
|
|
461,421
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
775,142
|
|
|
$
|
551,541
|
|
|
|
|
|
|
|
|
|
|
Note 11. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Land
|
|
$
|
68,562
|
|
|
$
|
68,562
|
|
Buildings and leasehold improvements
|
|
|
196,566
|
|
|
|
163,333
|
|
Machinery and equipment
|
|
|
431,457
|
|
|
|
440,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
696,585
|
|
|
|
672,850
|
|
Less: Accumulated depreciation
|
|
|
(349,079
|
)
|
|
|
(319,473
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
347,506
|
|
|
$
|
353,377
|
|
|
|
|
|
|
|
|
|
|
Note 12. Restructuring, Acquisition 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, 2016
|
|
$
|
27,886
|
|
|
$
|
2,243
|
|
|
$
|
|
|
|
$
|
30,129
|
|
Restructuring charges
|
|
|
15,185
|
|
|
|
5,004
|
|
|
|
1,842
|
|
|
|
22,031
|
|
Cash payments / adjustments
|
|
|
(29,163
|
)
|
|
|
(3,744
|
)
|
|
|
|
|
|
|
(32,907
|
)
|
Non-cash
expense
|
|
|
(898
|
)
|
|
|
|
|
|
|
(1,842
|
)
|
|
|
(2,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2017
|
|
$
|
13,010
|
|
|
$
|
3,503
|
|
|
$
|
|
|
|
$
|
16,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and termination benefits
In the first nine months of 2017, ARRIS recorded restructuring
charges of $15.2 million related to severance and employee termination benefits for 173 employees. This initiative affected all segments. The liability for the plan is expected to be paid by the first half of 2018.
In the first quarter of 2016, ARRIS completed its combination with Pace. ARRIS initiated restructuring plans as a result of the Combination that focuses on
the rationalization of personnel, facilities and systems across the ARRIS organization. The cost recorded during 2016 was approximately $96.3 million. The restructuring plan affected approximately 1,545 employees across the Company. The
remaining liability is expected to be paid in 2017. The restructuring charges are included in the Consolidated Statement of Operations in the line item titled Integration, acquisition, restructuring costs and other costs.
Contractual obligations
ARRIS has accruals representing contractual obligations that relate to excess leased facilities. 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 2021. 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. During the first nine months of 2017, the Company exited two facilities and recorded a charge of $5.0 million.
18
Write-off
of property, plant and equipment
As part of the
restructuring plan initiated as a result of the Pace Combination, the Company recorded a restructuring charge of $1.8 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 Corporate segment.
Acquisition
During the three and nine months ended September 30, 2017, acquisition expenses were approximately $2.0 million and $6.7 million, respectively.
These expenses related to the pending acquisition of the Ruckus Networks and consisted of banker and other fees. During the three and nine months ended September 30, 2016, acquisition expenses were approximately $(0.2) million and
$28.8 million, respectively. These expenses related to banker fees, legal fees and other direct costs of the Combination.
Integration
Integration expenses of approximately $0.3 million and $1.9 million were recorded during the three months and nine months ended September 30,
2017, respectively, related to integration-related outside services following the Combination. Integration expenses of $3.1 million and $21.6 million, respectively, were recorded during the three and nine months ended September 30,
2016.
Note 13. Indebtedness
The following is a
summary of indebtedness and lease financing obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
|
As of December 31, 2016
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Term A loan
|
|
$
|
49,500
|
|
|
$
|
49,500
|
|
Term
A-1
loan
|
|
|
40,000
|
|
|
|
40,000
|
|
Term
B-2
loan
|
|
|
5,450
|
|
|
|
|
|
Lease finance obligation
|
|
|
827
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
Current obligations
|
|
|
95,777
|
|
|
|
90,275
|
|
Current deferred financing fees and debt discount
|
|
|
(6,621
|
)
|
|
|
(7,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
89,156
|
|
|
|
82,734
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Term A loan
|
|
|
829,125
|
|
|
|
866,250
|
|
Term
A-1
loan
|
|
|
700,000
|
|
|
|
730,000
|
|
Term B loan
|
|
|
|
|
|
|
543,812
|
|
Term
B-2
loan
|
|
|
536,825
|
|
|
|
|
|
Revolver
|
|
|
|
|
|
|
|
|
Lease finance obligation
|
|
|
61,261
|
|
|
|
57,902
|
|
|
|
|
|
|
|
|
|
|
Noncurrent obligations
|
|
|
2,127,211
|
|
|
|
2,197,964
|
|
Noncurrent deferred financing fees and debt discount
|
|
|
(14,717
|
)
|
|
|
(17,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,112,494
|
|
|
|
2,180,009
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,201,650
|
|
|
$
|
2,262,743
|
|
|
|
|
|
|
|
|
|
|
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
was scheduled to mature on April 17, 2020, but has been amended as described below.
19
On April 26, 2017, ARRIS and certain of ARRISs subsidiaries entered into a Second Amendment (the
Second Amendment) to its Amended and Restated Credit Facility dated June 18, 2015, as previously amended on December 15, 2015. The Second Amendment provides for a new Term B Loan facility in the principal amount of
$545 million, the proceeds of which (along with cash on hand) were used to repay the existing Term B Loan facility. Under the terms of the Second Amendment, the new Term
B-2
Loan has a maturity date of
April 2024 and an interest rate of LIBOR plus a percentage ranging from 2.25% to 2.50% for Eurocurrency Rate Loans (as defined in the Credit Agreement), or the prime rate plus a percentage ranging from 1.25% to 1.50% for Base Rate Loans (as defined
in the Amended Credit Agreement), in either case depending on the Companys consolidated net leverage ratio. All other material terms of the Amended Credit Agreement remain unchanged.
In connection with the Second Amendment, the Company capitalized approximately $0.1 million of financing fees and $1.4 million of original issuance
discount. In addition, the Company expensed approximately $2.5 million of debt issuance costs and wrote off approximately $0.3 million of existing debt issuance costs associated with certain lenders who were not party to the Term Loan
B-2
Facility, which were included as interest expense in the Consolidated Statements of Operations for the nine months ended September 30, 2017.
Interest rates on borrowings under the senior secured credit facilities are set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
As of September 30, 2017
|
|
Term Loan A
|
|
|
LIBOR + 1.75
|
%
|
|
|
2.99
|
%
|
Term Loan
A-1
|
|
|
LIBOR + 1.75
|
%
|
|
|
2.99
|
%
|
Term Loan
B-2
|
|
|
LIBOR + 2.50
|
%
|
|
|
3.74
|
%
|
Revolving Credit Facility
(1)
|
|
|
LIBOR + 1.75
|
%
|
|
|
Not Applicable
|
|
(1)
|
Includes unused commitment fee of 0.35% and letter of credit fee of 1.75% not reflected in interest rate above.
|
The Amended Credit Agreement provides for adjustments to the interest rates paid on the Term Loan A, Term Loan
A-1,
Term Loan
B-2
and Revolving Credit Facility based upon the achievement of certain leverage ratios.
Borrowings
under the senior secured credit facilities are secured by first priority liens on substantially all of the assets of ARRIS and certain of its present and future subsidiaries who are or become parties to, or guarantors under, the Amended Credit
Agreement governing the senior secured credit facilities. The Amended Credit Agreement provides terms for mandatory prepayments, optional prepayments and commitment reductions. The Amended Credit Agreement also includes events of default, which are
customary for facilities of this type (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all amounts outstanding under the credit facilities may be accelerated. The Amended
Credit Agreement contains usual and customary limitations on indebtedness, liens, restricted payments, acquisitions and asset sales in the form of affirmative, negative and financial covenants, which are customary for financings of this type,
including the maintenance of a minimum interest coverage ratio of 3.50:1 and a maximum leverage ratio of 3.50:1. As of September 30, 2017, ARRIS was in compliance with all covenants under the Amended Credit Agreement.
During the three and nine months ended September 30, 2017, the Company made mandatory prepayments of approximately $23.7 million and
$69.9 million, respectively, related to the senior secured credit facilities.
Subsequent to September 30, 2017, the Company entered into that
certain Third Amendment and Consent (the Third Amendment) to the Amended Credit Agreement. See Note 23
Subsequent Events
for additional details.
20
Other
As of
September 30, 2017, the scheduled maturities of the contractual debt obligations for the next five years are as follows (in thousands):
|
|
|
|
|
2017 (for the remaining three months)
|
|
$
|
23,738
|
|
2018
|
|
|
94,950
|
|
2019
|
|
|
94,950
|
|
2020
|
|
|
1,422,700
|
|
2021
|
|
|
5,450
|
|
Thereafter
|
|
|
519,112
|
|
Lease Financing Obligation
In 2015, the Company sold its San Diego office complex consisting of land and buildings. The Company concurrently entered into a leaseback arrangement for two
of the buildings (Building 1 and Building 2). 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 value
of Building 1 will remain on the Companys balance sheet and will be depreciated over the
ten-year
lease period with the proceeds reflected as a financing obligation.
Note 14. Segment Information
The management
approach has been used to present the following segment information. This approach is based upon the way the management of the Company organizes segments within an enterprise for making operating decisions and assessing performance. Financial
information is reported on the basis that it is used internally by the chief operating decision maker (CODM) for evaluating segment performance and deciding how to allocate resources to segments. The Companys chief executive
officer has been identified as the CODM.
Our CODM manages the Company under two segments:
|
|
|
Customer Premises Equipment
The CPE segments product solutions include
set-top
boxes, gateways, and subscriber premises equipment that
enable service providers to offer voice, video and high-speed data services to residential and business subscribers.
|
|
|
|
Network
& Cloud
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, repair services and system integration offerings to enable solutions sales of ARRISs
end-to-end
product portfolio.
|
These operating segments were determined based on the nature of the products and services offered. The measures that are used to assess the
reportable segments operating performance are sales and direct contribution. Direct contribution is defined as gross margin less direct operating expense. The Corporate and Unallocated Costs category of expenses include corporate
sales and marketing, home office general and administrative expenses, annual bonus and equity compensation. These expenses are not included in the measure of segment direct contribution and as such are reported as Corporate and Unallocated
Costs and are included in the reconciliation to income (loss) before income taxes. A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating resources.
21
The table below represents information about the Companys reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
$
|
1,174,750
|
|
|
$
|
1,230,811
|
|
|
$
|
3,385,689
|
|
|
$
|
3,491,893
|
|
N&C
|
|
|
556,863
|
|
|
|
504,107
|
|
|
|
1,498,271
|
|
|
|
1,591,837
|
|
Other
|
|
|
(3,089
|
)
|
|
|
(9,773
|
)
|
|
|
(8,161
|
)
|
|
|
(13,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,728,524
|
|
|
|
1,725,145
|
|
|
|
4,875,799
|
|
|
|
5,069,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
132,168
|
|
|
|
191,938
|
|
|
|
374,307
|
|
|
|
501,448
|
|
N&C
|
|
|
218,995
|
|
|
|
162,867
|
|
|
|
543,488
|
|
|
|
503,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
|
351,163
|
|
|
|
354,805
|
|
|
|
917,795
|
|
|
|
1,004,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and unallocated costs
|
|
|
(166,008
|
)
|
|
|
(163,619
|
)
|
|
|
(476,644
|
)
|
|
|
(524,081
|
)
|
Amortization of intangible assets
|
|
|
(90,162
|
)
|
|
|
(89,042
|
)
|
|
|
(274,819
|
)
|
|
|
(297,417
|
)
|
Integration, acquisition, restructuring and other
|
|
|
(10,836
|
)
|
|
|
(10,831
|
)
|
|
|
(30,622
|
)
|
|
|
(144,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
84,157
|
|
|
|
91,313
|
|
|
|
135,710
|
|
|
|
38,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
20,211
|
|
|
|
20,104
|
|
|
|
63,238
|
|
|
|
58,832
|
|
Loss on investments
|
|
|
839
|
|
|
|
5,058
|
|
|
|
8,978
|
|
|
|
13,406
|
|
Interest income
|
|
|
(2,288
|
)
|
|
|
(804
|
)
|
|
|
(5,997
|
)
|
|
|
(2,772
|
)
|
(Gain) loss on foreign currency
|
|
|
(8,543
|
)
|
|
|
5,729
|
|
|
|
5,570
|
|
|
|
8,169
|
|
Other expense (income), net
|
|
|
1,434
|
|
|
|
6,723
|
|
|
|
2,275
|
|
|
|
11,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
72,504
|
|
|
$
|
54,503
|
|
|
$
|
61,646
|
|
|
$
|
(51,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The compositions of our corporate and unallocated costs that are reflected in the consolidated statement of operations were as
follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Corporate and unallocated costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
24,925
|
|
|
$
|
28,524
|
|
|
$
|
68,468
|
|
|
$
|
117,189
|
|
Selling, general and administrative expenses
|
|
|
95,774
|
|
|
|
92,584
|
|
|
|
278,634
|
|
|
|
276,556
|
|
Research and development expenses
|
|
|
45,309
|
|
|
|
42,511
|
|
|
|
129,542
|
|
|
|
130,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
166,008
|
|
|
$
|
163,619
|
|
|
$
|
476,644
|
|
|
$
|
524,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15. Sales Information
ARRIS sells its products primarily in the United States. The Companys international revenue is generated from Asia Pacific, Canada, Europe, Middle East
and Latin America. Sales to customers outside of United States were approximately 34.5% and 28.0% of total sales for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016,
sales to customers outside of United States were approximately 34.1% and 26.8%, respectively.
The table below set forth our domestic (U.S.) and
international sales (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Domestic U.S.
|
|
$
|
1,131,723
|
|
|
$
|
1,242,748
|
|
|
$
|
3,211,278
|
|
|
$
|
3,711,668
|
|
Americas, excluding U.S.
|
|
|
283,769
|
|
|
|
227,940
|
|
|
|
832,630
|
|
|
|
708,663
|
|
Asia Pacific
|
|
|
105,135
|
|
|
|
90,923
|
|
|
|
265,508
|
|
|
|
212,779
|
|
EMEA
|
|
|
207,897
|
|
|
|
163,534
|
|
|
|
566,383
|
|
|
|
436,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
596,801
|
|
|
|
482,397
|
|
|
|
1,664,521
|
|
|
|
1,358,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
1,728,524
|
|
|
$
|
1,725,145
|
|
|
$
|
4,875,799
|
|
|
$
|
5,069,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Note 16. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for the periods
indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ARRIS International plc
|
|
$
|
88,320
|
|
|
$
|
48,162
|
|
|
$
|
79,558
|
|
|
$
|
(70,183
|
)
|
Weighted average shares outstanding
|
|
|
187,064
|
|
|
|
190,515
|
|
|
|
187,878
|
|
|
|
190,888
|
|
Basic earnings (loss) per share
|
|
$
|
0.47
|
|
|
$
|
0.25
|
|
|
$
|
0.42
|
|
|
$
|
(0.37
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ARRIS International plc
|
|
$
|
88,320
|
|
|
$
|
48,162
|
|
|
$
|
79,558
|
|
|
$
|
(70,183
|
)
|
Weighted average shares outstanding
|
|
|
187,064
|
|
|
|
190,515
|
|
|
|
187,878
|
|
|
|
190,888
|
|
Net effect of dilutive equity awards
|
|
|
1,877
|
|
|
|
993
|
|
|
|
2,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
188,941
|
|
|
|
191,508
|
|
|
|
190,264
|
|
|
|
190,888
|
|
Diluted earnings (loss) per share
|
|
$
|
0.47
|
|
|
$
|
0.25
|
|
|
$
|
0.42
|
|
|
$
|
(0.37
|
)
|
Potential dilutive shares include unvested restricted and performance awards and warrants.
For the three months ended September 30, 2017 and 2016, approximately 1.0 million and 0.1 million, respectively, of the equity-based awards
were excluded from the computation of diluted earnings per share. During the nine months ended September 30, 2017, approximately 1.7 million of equity-based awards were excluded from the computation of diluted earnings per share. During
the nine months ended September 30, 2016, all of the equity-based awards were excluded from the computation of diluted earnings per share. 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 nine months ended
September 30, 2017, the Company issued 2.2 million ordinary shares related to the vesting of restricted share units, as compared to 2.3 million shares for the twelve months ended December 31, 2016.
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 respective customers from the
Company. There was no vesting in the first nine months of 2017. The dilutive effect of these vested shares was immaterial.
In connection with the
Combination, ARRIS issued approximately 47.7 million 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.
The Company has not paid cash dividends on its shares 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 Amended Credit Agreement contains restrictions on the Companys ability to pay dividends on its ordinary shares.
23
Note 17. Income Taxes
On January 4, 2016, ARRIS Group completed the Combination transaction with Pace. In connection with the Combination, (i) ARRIS acquired all of the
outstanding ordinary shares of Pace and (ii) a wholly-owned subsidiary of ARRIS was merged with and into ARRIS Group, with ARRIS Group surviving the Merger as an indirect wholly-owned subsidiary of ARRIS. As a result of the Merger, ARRIS
incurred withholding taxes of $55 million. Subsequent to the Merger, ARRIS is subject to the U.K. statutory tax rate and a territorial corporate tax system. The U.K. statutory rate for 2017 is 19.25% as compared to 20% in 2016. The statutory
rate in the U.K. decreased from 20% to 19% effective April 1, 2017. The Companys statutory rate for 2017 represents the blended rate that will be in effect for the year ended December 31, 2017 based on the 20% statutory rate that was
effective for the first quarter of 2017 and the 19% rate effective for the remainder of 2017. Prior to the Merger, ARRIS was subject to the U.S. statutory tax rate of 35% and a worldwide corporate tax system.
The Company reported the following operating results for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Income (loss) before income taxes
|
|
$
|
72,504
|
|
|
$
|
54,503
|
|
|
$
|
61,646
|
|
|
$
|
(51,016
|
)
|
Income tax (benefit) expense
|
|
|
(14,311
|
)
|
|
|
8,851
|
|
|
|
(12,613
|
)
|
|
|
26,069
|
|
Effective income tax rate
|
|
|
(19.7
|
)%
|
|
|
16.2
|
%
|
|
|
(20.5
|
)%
|
|
|
(51.1
|
)%
|
The Companys effective income tax rate fluctuates based on, among other factors, the level and location of income. The
difference between the U.K. federal statutory income tax rate of 19.25% and the Companys effective income tax rate for the 2017 and 2016 periods is primarily due to the benefits of other foreign income tax regimes and the U.S. federal research
and development credits.
The Companys effective income tax rate for the nine months ended September 30, 2017 was impacted by
$8.0 million of expense related to the intra-entity sale of an asset, offset by $4.8 million of benefit related to a decrease of over-accrued interest related to uncertain tax positions and $5.0 million of benefit related to the
release of uncertain tax positions due to settlement of audits and expiration of the statute of limitations for certain uncertain tax positions, and a $1.2 million of benefit related to excess tax deductions for stock-based compensation.
Note 18. Shareholders Equity
The following table
provides a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to shareholders of ARRIS and equity attributable to noncontrolling interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
Shares
|
|
|
Capital in
Excess of
Par Value
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total ARRIS
International
plc
stockholders
equity
|
|
|
Non-
controlling
Interest
|
|
|
Total
stockholders
equity
|
|
Balance, December 31, 2016
|
|
$
|
2,831
|
|
|
$
|
3,314,707
|
|
|
$
|
(132,013
|
)
|
|
$
|
3,291
|
|
|
$
|
3,188,816
|
|
|
$
|
37,921
|
|
|
$
|
3,226,737
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
79,558
|
|
|
|
|
|
|
|
79,558
|
|
|
|
(5,300
|
)
|
|
|
74,258
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,547
|
|
|
|
5,547
|
|
|
|
(43
|
)
|
|
|
5,504
|
|
Contribution from
non-controlling
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,500
|
|
|
|
3,500
|
|
Compensation under stock award plans
|
|
|
|
|
|
|
62,851
|
|
|
|
|
|
|
|
|
|
|
|
62,851
|
|
|
|
|
|
|
|
62,851
|
|
Issuance of ordinary shares and other, net
|
|
|
28
|
|
|
|
(17,763
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,735
|
)
|
|
|
|
|
|
|
(17,735
|
)
|
Provision for warrants
|
|
|
|
|
|
|
8,145
|
|
|
|
|
|
|
|
|
|
|
|
8,145
|
|
|
|
|
|
|
|
8,145
|
|
Repurchase of ordinary shares, net
|
|
|
(71
|
)
|
|
|
|
|
|
|
(146,894
|
)
|
|
|
|
|
|
|
(146,965
|
)
|
|
|
|
|
|
|
(146,965
|
)
|
Cumulative effect adjustment to opening balance
(1)
|
|
|
|
|
|
|
|
|
|
|
10,974
|
|
|
|
|
|
|
|
10,974
|
|
|
|
|
|
|
|
10,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017
|
|
$
|
2,788
|
|
|
$
|
3,367,940
|
|
|
$
|
(188,375
|
)
|
|
$
|
8,838
|
|
|
$
|
3,191,191
|
|
|
$
|
36,078
|
|
|
$
|
3,227,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cumulative adjustment related to the adoption of accounting standards, see Note 2
Impact of Recently Adopted Accounting Standards
for additional information.
|
24
Note 19. Warrants
During 2016, the Company entered into two separate Warrant and Registration Rights Agreements (the Warrants) with certain customers pursuant to
which those customers may purchase up to an aggregate of 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 customers from the Company.
At September 30, 2017, approximately 2.2 million Warrants are vested and outstanding, with a weighted average exercise price of $24.56, which vested
based on the amount of purchases of products and services by the customers from the Company in 2016.
The table below presents by year, the Warrants to
purchase ordinary shares that could vest 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
|
|
|
TBD
1
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
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 issuance date of the Warrants.
The Warrants provide for net Share settlement that, if elected, 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 include annual
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.
25
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 the Company have not historically declared dividends and do not have any plans to declare dividends in the future.
For the three and nine months
ended September 30, 2017, ARRIS recorded $3.1 million and $8.1 million, respectively, as a reduction to net sales in connection with Warrants. This transaction is considered an equity contract, and is classified as such.
Note 20. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for
sale securities
|
|
|
Derivative
instruments
|
|
|
Pension
obligations
|
|
|
Cumulative
translation
adjustments
|
|
|
Total
|
|
Balance as of December 31, 2016
|
|
$
|
137
|
|
|
$
|
671
|
|
|
$
|
(6,810
|
)
|
|
$
|
9,293
|
|
|
$
|
3,291
|
|
Other comprehensive income before reclassifications
|
|
|
260
|
|
|
|
(240
|
)
|
|
|
|
|
|
|
4,364
|
|
|
|
4,384
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
68
|
|
|
|
1,086
|
|
|
|
9
|
|
|
|
|
|
|
|
1,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income
|
|
|
328
|
|
|
|
846
|
|
|
|
9
|
|
|
|
4,364
|
|
|
|
5,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2017
|
|
$
|
465
|
|
|
$
|
1,517
|
|
|
$
|
(6,801
|
)
|
|
$
|
13,657
|
|
|
$
|
8,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for
sale securities
|
|
|
Derivative
instruments
|
|
|
Pension
obligations
|
|
|
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
|
|
|
32
|
|
|
|
(12,560
|
)
|
|
|
|
|
|
|
2,132
|
|
|
|
(10,396
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
6
|
|
|
|
3,803
|
|
|
|
(2,177
|
)
|
|
|
|
|
|
|
1,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
38
|
|
|
|
(8,757
|
)
|
|
|
(2,177
|
)
|
|
|
2,132
|
|
|
|
(8,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2016
|
|
$
|
171
|
|
|
$
|
(15,538
|
)
|
|
$
|
(6,372
|
)
|
|
$
|
329
|
|
|
$
|
(21,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 21. Repurchases of ARRIS Shares
The table below sets forth the purchases of ARRIS shares for the quarter ended September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number of
Shares
Purchased
(1)
|
|
|
Average
Price
Paid
Per
Share
|
|
|
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
|
|
|
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the
Plans
or Programs
(in thousands)
|
|
July 2017
|
|
|
788,974
|
|
|
$
|
27.59
|
|
|
|
342,706
|
|
|
|
285,585
|
|
August 2017
|
|
|
29,039
|
|
|
$
|
27.19
|
|
|
|
28,764
|
|
|
|
284,803
|
|
September 2017
|
|
|
375,783
|
|
|
$
|
26.39
|
|
|
|
371,696
|
|
|
|
275,000
|
|
(1)
|
An aggregate of 450,630 shares shown in the table above were subject to equity awards that were cancelled for cash to satisfy minimum tax withholding obligations that arose on the vesting of the applicable restricted
stock units.
|
26
Upon completing the Combination, ARRIS conducted a court-approved process in accordance with section 641(1)(b) of
the U.K. 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 GAAP reported amount.
In early 2016, the Companys Board of Directors approved a $300 million share repurchase authorization
replacing all prior programs. In March 2017, the Board authorized an additional $300 million for share repurchases.
During the third quarter of
2017, ARRIS repurchased 0.7 million of the Companys ordinary shares at an average price of $26.91 per share, for aggregate consideration of approximately $20.0 million. During the first nine months of 2017, ARRIS repurchased
5.7 million of the Companys ordinary shares at an average price of $25.86 per share, for aggregate consideration of approximately $147.0 million. The remaining authorized amount for stock repurchases under these plans was
$275.0 million as of September 30, 2017. Unless terminated earlier by a Board resolution, these new plans will expire when ARRIS has used all authorized funds for repurchase.
During the third quarter of 2016, ARRIS repurchased 1.0 million shares of the Companys ordinary shares at an average price of $28.03 per share, for
an aggregate consideration of approximately $28.0 million. During the first nine months of 2016, the Company repurchased 7.4 million shares of its common stock for $178.0 million at an average stock price of $24.09.
Note 22. Commitments and Contingencies
Legal
Proceedings
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and
that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information
is obtained and the Companys views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Companys accrued liabilities would be recorded in the period in which such
determinations are made. Unless noted otherwise, the amount of liability is not probable or the amount cannot be reasonably estimated; and, therefore, accruals have not been made.
Due to the nature of the Companys business, it is subject to patent infringement claims, including current suits against it or one or more of its
wholly-owned subsidiaries, or one or more of our customers who may seek indemnification from us, alleging infringement by various Company products and services. The Company believes that it has meritorious defenses to the 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 these proceedings, we are currently unable to reasonably
estimate the possible loss or range of possible losses. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. (See Part II, Item 1 Legal Proceedings for additional
details).
Note 23. Subsequent Event
On
October 17, 2017, the Company and certain of its subsidiaries entered into that certain Third Amendment and Consent (the Third Amendment) to the Credit Agreement dated as of March 27, 2013, as amended and restated as of
June 18, 2015 (the Credit Agreement and, as amended by the Third Amendment, the Amended Credit Agreement). Pursuant to the Third Amendment, ARRIS (i) incurred Refinancing Term A Loans of
$391 million, (ii) incurred Refinancing Term
A-1
Loans of $1,250 million, and (iii) obtained a Refinancing Revolving Credit Facility of $500 million (together
with the Refinancing Term A Loans and the Refinancing Term
A-1
Loans, the Refinancing Facilities), the proceeds of which were used to refinance in full the existing Term A Loans, the existing Term
A-1
Loans and the existing Revolving Credit Loans outstanding under the Credit Agreement immediately prior to the effectiveness of the Third Amendment. The existing Term B Loans were not refinanced and remain
outstanding.
27
The Third Amendment extends the maturity date of the Refinancing Facilities to October 17, 2022. The Term
Loan B Facility maturity date is unchanged and is April 26, 2024. Pursuant to the Third Amendment, the Company is subject to a minimum consolidated interest coverage ratio test, which is unchanged from the Credit Agreement. In addition, the
Company is subject to a maximum consolidated net leverage ratio test of not more than 4.0:1.0, subject to a step-down to 3.75:1.00 commencing with the fiscal quarter ending March 31, 2019. The amount of unrestricted cash used to offset
indebtedness in the calculation of the consolidated net leverage ratio was also increased from $200 million to $500 million. The interest rates under the Refinancing Facilities are unchanged.
28