Item 7.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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Overview
ARRIS,
headquartered in Suwanee, Georgia, is a global leader in entertainment, communications, and networking technology. Our innovations combine hardware, software, and services to enable advanced video experiences and constant connectivity across a
variety of environmentsfor service providers, commercial verticals, small enterprises, and the hundreds of millions of people they serve.
We operate in three business segments: Customer Premises Equipment, Network & Cloud and Enterprise Networks. We enable service providers, including cable, telecom, digital broadcast
satellite operators and media programmers, to deliver media, voice, and IP data services to their subscribers. We are a leader in
set-tops,
digital video and Internet Protocol Television distribution systems,
broadband access infrastructure platforms, and broadband data and voice CPE, which we also sell directly to consumers through retail channels. Our solutions are complemented by a broad array of services, including technical support, repair and
refurbishment, and system design and integration. The Enterprise Networks segment focuses on enabling constant, wireless and wired connectivity across complex and varied networking environments. It offers dedicated engineering, sales
46
and marketing resources to serve customers across a spectrum of verticalsincluding hospitality, education, smart cities, government, venues, service providers and more.
On December 1, 2017, we completed a stock and asset purchase acquisition of the Ruckus Wireless
®
and ICX
®
Switch business for $761.0 million cash (net of estimated adjustment for working capital and
non-cash
settlement of
pre-existing
payables and receivables). In addition, approximately $61.5 million in cash was transferred related to the cash settlement of stock-based awards held by transferring employees. The purchase
agreement provides for customary final adjustments and potential cash payments or receipts that are expected to occur in 2018.
Business and Financial Highlights:
Business Highlights
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Completed the acquisition of Ruckus Networks in December 2017.
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Launched and deployed our next generation line cards for E6000 platform.
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Strong demand for DOCSIS devices; achieved 200 million-unit DOCSIS shipment milestone.
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International revenues reflected growth in all regions as operators invested in broadband and video capabilities compared to 2016.
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Maintained strong capital structure and provided for more flexibility by refinancing our credit agreement by extending maturities and improving terms
and conditions.
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During 2017, we used $197.0 million of cash to repurchase 7.5 million of our ordinary shares at an average price of $26.12 per share.
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Financial Highlights
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Sales in 2017 were $6,614.4 million as compared to $6,829.1 million in 2016, a decrease of 3.1%.
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Gross margin percentage was 25.2% in 2017, compared to 25.0% in 2016.
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Total operating expenses (excluding amortization of intangible assets, impairment of goodwill and intangible assets, integration, acquisition,
restructuring and other costs) were $1,014.5 million in 2017, as compared to $1,039.1 million in the same period last year.
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We ended 2017 with $511.4 million of cash, cash equivalents, and marketable security investments, which compares to $1,106.7 million at the
end of 2016. We generated approximately $533.8 million of cash from operating activities in 2017 and $362.5 million during 2016.
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Under our credit facility, we ended 2017 with long-term debt of $2,161.4 million, at face value, the current portion of which is
$87.5 million. We made mandatory payments of $91.7 million and in conjunction with refinancing the credit facility we repaid $152.3 million to exiting lenders and recorded proceeds from issuance of debt of $175.8 million.
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Industry Conditions
Global macro-economic conditions improved in 2017 over the historically low levels experienced since 2007, although the U.S. and many other international markets we serve saw only modest growth. We expect
to see further limited economic growth in many of our markets in 2018 notwithstanding the continuing global economic uncertainty. We believe this economic uncertainty will continue to influence the capital expenditure strategy of many of our
customers and, as a result, we expect only low to modest growth in the overall capital expenditure in the markets we serve in 2018.
Consolidation of Customers Has Occurred and May Continue
Vodafone received regulatory approval in July 2017 to merge its mobile operations in India with Idea Cellular, Cable One
completed its purchase of
47
NewWave Communications in May 2017, and in September 2017 Cablevision SA (Argentina) shareholders approved its merger with Telecom Argentina SA. In 2016, Altice completed its acquisition of
Cablevision, Liberty Global completed its acquisition of Cable & Wireless, Charter completed its acquisition of Time Warner Cable and BrightHouse and Frontier Communications completed its acquisition of certain Verizon properties. We
believe we are favorably positioned to capitalize on this consolidation through a broader portfolio, global scale, and leadership in many of the platforms and components that these providers depend on to deliver services. The impact of this customer
M&A activity is difficult to estimate but may include:
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a near-term delay in capital expenditures by the impacted customers until acquisitions are integrated. Once the acquisition is integrated, we believe
there is the potential for increased capital expenditure as acquiring operators work to standardize the purchased network to the acquirers existing systems and, in many cases, upgrade the acquired networks;
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pressures from the resulting customers for lower prices or better terms, reflecting the increase in the total volume of products purchased or the
elimination of a price differential between the acquiring customer and the company acquired; and
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potential volatility in demand depending upon which technology, products and vendors each customer chooses to use post integration, including
reductions in purchases from us to diversify their supplier base.
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In addition to consolidation of service
providers on a global basis, many of the firms that ARRIS purchases equipment and services from have consolidated as well and the trend is expected to continue. The specific impact of the above trend is difficult to predict and quantify, but in
general we believe:
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Vendor consolidation gives suppliers greater scale for R&D, sales and marketing, and manufacturing. This increased scale increases risk of supplier
inflexibility as well as being locked to a particular supplier with potentially high switching costs.
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At the same time, supplier consolidation provides benefits of reduced costs through innovation, efficiency of working with fewer suppliers and higher
levels of service and support. These benefits facilitate higher level of service throughout the entire ecosystem for our customers.
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Capital Expenditures of Telecom Customers Have Been and May Continue to be Lower
Many of our telecom customers, including AT&T and Verizon, have participated in FCC sponsored
spectrum auctions in the interest of expanding their network capacity to meet increasing customer demand. As a result, capital expenditures at our existing and potential telecom customers are expected to be lower as a result of the costs associated
with participating in the auction. The purchase of DirecTV by AT&T has altered the historic AT&T product strategy for video deployments, decreasing our sales. Verizon completed the sale of certain properties to Frontier, which, coupled with
a decrease in net subscriber additions, has impacted the demand for our products. Nevertheless, as described below, we still believe that the need for network expansion to meet subscriber demand presents potential opportunities for increased sales
of our products to these customers.
The markets for both Service Provider and Enterprise
Wi-Fi
are growing but are also highly competitive
We believe the markets for our
Wi-Fi
solutions are growing rapidly and our intention is to
continue to invest for long-term growth to maintain our competitiveness. We expect to continue to invest heavily in research and development to expand the capabilities of our solutions with respect to services providers and enterprises. We will
invest in migrating to cloud-based managed
Wi-Fi
services as a way for organizations to further leverage investments in
Wi-Fi
infrastructure. Managed
Wi-Fi
services, such as the ability to use
Wi-Fi
to gather detailed user analytics, demographics and user location information, allow companies to better understand network
traffic and user interactions. We also plan to continue to make significant investments in our field sales and marketing activities, both by increasing our service provider focused direct sales force and by expanding our network of channel partners.
Foreign Exchange Fluctuations Have and May Continue to Impact Demand
The majority of our international
sales are denominated in U.S. dollars. During periods where the U.S. dollar strengthens, it may impact these customers ability to purchase products, which could have a material impact on our sales in the
48
affected countries. These customers may delay or reduce future purchases from us, and we may experience pricing pressures in order to maintain or increase our market share with these
international customers, and we may face longer payment cycles.
Growth of Connected Device Ecosystem
Consumers growing appetite for connected devices creates an unprecedented opportunity to deliver consistent and engaging services over the Internet of Things. Service providers have an incumbent advantage in offering new forms of entertainment
and communications, but still face many challenges in delivering new services across this complex system of devices. ARRIS is in position to drive this opportunity for providers as a result of our expertise in full-cycle service delivery from
the network to the cloud and the home. We provide the portfolio and professional services to navigate this new combination of device interfaces, communications protocols, device management standards, and security considerations.
Wireline Broadband Service Providers may Evolve into partial or predominantly Wireless Network Operators
As consumer
and business demand for ubiquitous connectivity for their devices continues to increase, wireline operators may shift or increase investment into wireless technologies such as
Wi-Fi,
LTE Small Cell, or the
emerging Citizens Band Radio Service (CBRS). ARRIS is positioned to participate in Service Providers residential wireless investments with our portfolio of
Wi-Fi
enabled cable
modems and DSL modems. With the recently completed Ruckus Networks acquisition, we now also have a portfolio of Access Points, Controllers, Cloud Management, and Data Analytics to participate in opportunities in both the enterprise market and
Service Provider public access (e.g. hot spots).
Network Optimization and Scaling Infrastructure to Keep Up with
Increasing Consumer Bandwidth Demand
As service providers prepare to deliver more advanced services to subscribers such as 4K TV, IoT, gigabit
Wi-Fi
they are investing increasingly
in their networks to anticipate the reciprocal need for more bandwidth. Providers are looking to ARRIS for its leadership in technologies like DOCSIS, CCAP, and DAA to scale to these multi-gigabit services and ARRIS continues to invest in R&D to
keep its customers networks ahead of market demand for these services.
Competition Increasing between Cable
Operators, Telecom Companies, and New Entrants
The lines between telecom and cable providers has blurred as each has embraced the triple play. Moreover, OTT market participants and individual programming networks have entered
the market with competing products placing higher bandwidth demands on the network. This competition emphasizes the enabling technologies behind each approach including DOCSIS, fiber, G.Fast, and others and the increasing investment in
the network infrastructure and CPE required to deliver these services. ARRISs leadership across these solutions positions us to capitalize on the growing competition between all three stakeholders.
Service Providers are Demanding Advanced Network Technologies and Software Solutions
The
increase in volume and complexity of the signals transmitted over broadband networks as a result of the migration to an
all-digital,
all-IP,
on demand network is causing
service providers to deploy new technologies. Service providers also are demanding sophisticated network and service management software applications that minimize operating expenditures needed to support the complexity of
two-way
broadband communications systems. As a result, service providers are focusing on technologies and products that are flexible, cost-effective, compliant with open industry standards, and scalable to meet
subscriber growth and effectively deliver reliable, enhanced services. As part of this evolution, some operators (for example Comcast with its Reference Design Kit (RDK) efforts) are choosing to design portions of the
set-tops
firmware internally. As a result, we anticipate that over time operators will migrate to an all IP network and look to enable new platforms and technologies intended to accelerate the deployment of new
services. As this occurs, which we believe will be over a multi-year period, we anticipate a decline in demand for our traditional
set-tops
and an increase in demand in new IP
set-tops.
Results of Operations
Overview
As highlighted above, we have faced, and in the future, will face significant changes in our industry and business. These changes have impacted our results of operations and are expected to do so in the
future. As a result, we have implemented strategies both in anticipation and in reaction to the impact of these dynamics.
49
Below is a table that shows our key operating data as a percentage of sales. Following the
table is a detailed description of the major factors impacting the year-over-year changes of the key lines of our results of operations (as a percentage of sales)
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Years Ended December 31,
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2017
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2016
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2015
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Net sales
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100.0
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%
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100.0
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%
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100.0
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%
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Cost of sales
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74.8
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75.0
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70.4
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Gross margin
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25.2
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25.0
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29.6
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Operating expenses:
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Selling, general, and administrative expenses
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7.2
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6.6
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8.7
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Research and development expenses
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8.1
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8.6
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11.1
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Amortization of intangible assets
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5.7
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5.8
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4.8
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Impairment of goodwill and intangible assets
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0.8
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Integration, acquisition, restructuring and other costs
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1.5
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2.3
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0.6
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Operating income
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1.9
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1.7
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4.4
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Other expense (income):
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Interest expense
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1.3
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1.2
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1.5
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Loss on investments
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0.2
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0.3
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0.1
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(Gain) Loss on foreign currency
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0.2
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(0.2
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0.5
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Interest income
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(0.1
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(0.1
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(0.1
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Other expense, net
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0.1
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0.2
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Income before income taxes
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0.3
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0.4
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2.2
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Income tax (benefit) expense
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(0.7
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0.2
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0.5
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Consolidated net income
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1.0
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%
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0.2
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%
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1.7
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%
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Net loss attributable to noncontrolling interest
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(0.4
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(0.1
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(0.2
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Net income attributable to ARRIS International plc.
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1.4
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%
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0.3
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%
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1.9
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%
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Comparison of Operations for the Three Years Ended December 31, 2017
Net Sales
The table below sets forth our net sales for each of our segments (in thousands, except percentages):
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Net Sales
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Increase (Decrease) Between Periods
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For the Years Ended December 31,
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2017 vs. 2016
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2016 vs. 2015
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2017
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2016
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2015
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$
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%
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$
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%
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Business Segment:
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CPE
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$
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4,475,670
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$
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4,747,445
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$
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3,136,585
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$
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(271,775
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(5.7
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)%
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$
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1,610,860
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51.3
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%
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N&C
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2,094,113
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2,111,708
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1,661,594
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(17,595
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(0.8
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)%
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450,114
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27.1
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%
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Enterprise
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45,749
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45,749
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100
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%
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Other
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(1,140
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(30,035
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153
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28,895
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96.2
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%
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(30,188
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)
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Total sales
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$
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6,614,392
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$
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6,829,118
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$
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4,798,332
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$
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(214,726
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(3.1
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)%
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$
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2,030,786
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42.3
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%
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50
The table below sets forth our domestic and international sales (in thousands, except
percentages):
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Net Sales
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Increase (Decrease) Between Periods
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For the Years Ended December 31,
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2017 vs. 2016
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2016 vs. 2015
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2017
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2016
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2015
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$
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%
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$
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%
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Domestic U.S.
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$
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4,351,843
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$
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4,909,698
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$
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3,418,583
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$
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(557,855
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)
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(11.4
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)%
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$
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1,491,115
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43.6
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%
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International:
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Americas, excluding U.S.
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1,080,456
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982,769
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880,581
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97,687
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9.9
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%
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102,188
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11.6
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%
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Asia Pacific
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374,772
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291,504
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142,893
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83,268
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28.6
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%
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148,611
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104.0
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%
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EMEA
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807,321
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645,147
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356,275
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162,174
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25.1
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%
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288,872
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81.1
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%
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Total international
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$
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2,262,549
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$
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1,919,420
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$
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1,379,749
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$
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343,129
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17.9
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%
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$
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539,671
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39.1
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%
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Total sales
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$
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6,614,392
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$
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6,829,118
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$
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4,798,332
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$
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(214,726
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)
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(3.1
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)%
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$
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2,030,786
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42.3
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%
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Customer Premises Equipment Net Sales 2017 vs. 2016
During the year ended December 31, 2017, sales in our CPE segment decreased by approximately $271.8 million, or 5.7%, as
compared to 2016. Video CPE sales declined due to lower volumes and were partially offset by increased Broadband CPE sales due to growth in our DOCSIS portfolio as compared to the same period in 2016. We anticipate the continued trend towards more
broadband CPE sales and less video CPE sales as operators adopt all IP networks.
Network & Cloud Net Sales
2017 vs. 2016
During the year ended December 31, 2017, sales in the N&C segment decreased by approximately
$17.6 million, or 0.8%, as compared to 2016. The decrease in sales was primarily a result of lower CMTS hardware sales, which were impacted by the timing of the introduction of our next generation products, as well as lower video product sales.
This decrease was partially offset by higher Access Technologies products and software and services sales, as operators continue to build out their networks to accommodate higher bandwidth needs.
Enterprise Networks Net Sales 2017 vs. 2016
During the year ended December 31, 2017, sales in the Enterprise segment was approximately $45.7 million, primarily a result of the acquisition of Ruckus Networks. Sales in the Enterprise
Networks include revenues from sales to service providers that were previously included in the Network and Cloud segment when we were a reseller of Ruckus products.
Customer Premises Equipment Net Sales 2016 vs. 2015
During the
year ended December 31, 2016, sales in our CPE segment increased by approximately $1,610.9 million, or 51.3%, as compared to 2015. The increase was primarily attributable to expansion of both video and broadband products resulting from the
Pace combination and our customers ongoing investment in CPE technology to improve the offering to their subscribers.
Network
& Cloud Net Sales 2016 vs. 2015
During the year ended December 31, 2016, sales in the N&C segment increased by approximately $450.1 million, or 27.1%, as
compared to 2015. The increase in sales was primarily a result of the Pace combination and increased customer spend as service providers increase their investment to expand broadband network capacity and high-speed data Internet access speeds.
51
Gross Margin
The table below sets forth our gross margin (in thousands, except percentages):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
Increase (Decrease) Between Periods
|
|
|
|
For the Years Ended December 31,
|
|
|
2017 vs. 2016
|
|
|
2016 vs. 2015
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Gross margin dollars
|
|
$
|
1,666,239
|
|
|
$
|
1,707,617
|
|
|
$
|
1,418,923
|
|
|
|
(41,378
|
)
|
|
|
(2.4
|
)%
|
|
|
288,694
|
|
|
|
20.3
|
%
|
Gross margin
|
|
|
25.2
|
%
|
|
|
25.0
|
%
|
|
|
29.6
|
%
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
(4.6
|
)
|
During the year ended December 31, 2017, gross margin dollars decreased as compared to the same
period in 2016 primarily due to lower sales, a change in product and customer mix, timing of product introductions and memory pricing increases. Pressures on gross margin relating to memory pricing and the competitive landscape for some of our
products, particularly in the CPE segment, are expected to continue in the near term and could make it difficult to return to historical gross margin levels. In addition, the gross margins were impacted by $8.5 million in 2017 associated with
writing up the historic cost of inventory, related to acquired businesses, to fair value at the date of acquisition thereby increasing cost of goods sold. The Ruckus Networks acquisition also impacted the gross margin for 2017, due to a
proportionately higher average gross margin than the historic ARRIS business.
During the year ended December 31, 2016,
gross margin dollars increased primarily due to the Pace combination as compared to 2015. The gross margin percentage decreased primarily due to product mix as compared to 2015. We had a change in mix within our CPE segment, reflecting higher sales
of lower margin products. We also had higher sales of CPE products compared to Network and Cloud products. CPE sales have a lower margin than the consolidated average. The gross margin for the year ended December 31, 2016 included a
$51.4 million impact associated with writing up the historic cost of the Pace inventory to fair value at the date of acquisition. In addition, the gross margins were impacted by $30.2 million associated with a reduction in sales associated
with the fair value of the warrant issued to customers.
Operating Expenses
The table below provides detail regarding our operating expenses (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
Increase (Decrease) Between Periods
|
|
|
|
For the Years Ended December 31,
|
|
|
2017 vs. 2016
|
|
|
2016 vs. 2015
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Selling, general &
administrative
|
|
$
|
475,369
|
|
|
$
|
454,190
|
|
|
$
|
417,085
|
|
|
$
|
21,179
|
|
|
|
4.7
|
%
|
|
$
|
37,105
|
|
|
|
8.9
|
%
|
Research & development
|
|
|
539,094
|
|
|
|
584,909
|
|
|
|
534,168
|
|
|
|
(45,815
|
)
|
|
|
(7.8
|
)%
|
|
|
50,741
|
|
|
|
9.5
|
%
|
Amortization of intangible
assets
|
|
|
375,407
|
|
|
|
397,464
|
|
|
|
227,440
|
|
|
|
(22,057
|
)
|
|
|
(5.5
|
)%
|
|
|
170,024
|
|
|
|
74.8
|
%
|
Impairment of goodwill and intangible assets
|
|
|
55,000
|
|
|
|
2,200
|
|
|
|
|
|
|
|
52,800
|
|
|
|
2,400.0
|
%
|
|
|
2,200
|
|
|
|
100.0
|
%
|
Integration, acquisition, restructuring & other
|
|
|
98,357
|
|
|
|
158,137
|
|
|
|
29,277
|
|
|
|
(59,780
|
)
|
|
|
(37.8
|
)%
|
|
|
128,860
|
|
|
|
440.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,543,227
|
|
|
$
|
1,596,900
|
|
|
$
|
1,207,970
|
|
|
$
|
(53,673
|
)
|
|
|
(3.4
|
)%
|
|
$
|
388,930
|
|
|
|
32.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2017, we have embarked on significant enhancements to our business processes and Enterprise Resource
Planning (ERP) systems. During 2017, we incurred $ 12.7 million related to this global ERP effort which is projected to continue into 2019. We expect this project to incur approximately $5.0 million per quarter going
forward.
52
Selling, General, and Administrative, or SG&A, Expenses
Our selling, general and administrative expenses include sales and marketing costs, including personnel expenses for sales and marketing
staff expenses, advertising, trade shows, corporate communications, product marketing expenses and other marketing expenses. In addition, general and administrative expenses consist of personnel expenses and other general corporate expenses for
corporate executives, finance and accounting, human resources, facilities, information technology, legal and professional fees.
2017 vs. 2016
The year-over-year increase in SG&A expenses reflects the inclusion of expenses associated with the Ruckus Networks acquisition. In addition, we incurred higher legal fees and professional services,
which were partially offset by lower expenses due to reductions in force following the Pace combination in 2016.
2016
vs. 2015
The year-over-year increase in SG&A expenses primarily reflected the inclusion of incremental expenses
associated with the Pace combination, as well as higher variable compensation costs. Costs were reduced through the year as Pace was integrated into ARRIS.
Research & Development, or R&D, Expenses
Research and
development expenses consist primarily of personnel expenses, payments to suppliers for design services, product certification expenditures to qualify our products for sale into specific markets, prototypes, other consulting fees and reasonable
allocations of our information technology and corporate facility costs. Research and development expenses are recognized as they are incurred.
2017 vs. 2016
The decrease year-over-year in R&D expense
reflected the result of reduction in force following the Pace combination and the divestiture of certain product lines that occurred during 2016. The decrease was partially offset by an increase from the inclusion of expenses associated with the
Ruckus Networks acquisition.
2016 vs. 2015
The increase year-over-year in R&D expense reflected the inclusion of incremental expenses associated with the expanded product
portfolio with our acquisition of Pace. Costs were reduced through the year as Pace was integrated into ARRIS.
Amortization of Intangible Assets
Our intangible amortization expense relates to finite-lived intangible assets primarily acquired in business combinations. Intangibles amortization expense was $375.4 million in 2017, as compared
with $397.5 and $227.4 million in 2016 and 2015, respectively. The decrease in amortization expense resulted from certain intangible assets becoming fully amortized, which was partially offset by an increase in amortization expense from
acquired intangibles associated with the Ruckus acquisition.
Impairment of Goodwill and Intangible Assets
During the fourth quarter of 2017, we recorded partial impairments of goodwill and indefinite-lived tradenames of $51.2 million and
$3.8 million, respectively, acquired in our ActiveVideo acquisition and included as part of our Cloud TV reporting unit, of which $19.3 million is attributable to the noncontrolling interest.
In addition, we will adopt new guidance on revenue recognition as of January 1, 2018. As a result of retrospective application of
this guidance, an additional goodwill impairment of approximately $5 million to $8 million is expected to be recognized in our Cloud TV reporting unit in first quarter of 2018, resulting from the indirect effect of the change in accounting
principle, effecting changes in the composition and carrying amount of the net assets.
53
During 2016, we
wrote-off
$2.2 million related
to
in-process
research and development projects acquired in the Pace combination that were subsequently abandoned.
Integration, Acquisition, Restructuring and Other Costs
During 2017, we
recorded acquisition related expenses and integration expenses of $77.4 million. These expenses are primarily due to the acquisition of Ruckus Networks and include $61.5 million related to the cash settlement of stock-based awards held by
transferring employees, as well as banker and other fees.
During 2016, we recorded acquisition related expenses and
integration expenses of $53.2 million. These expenses related to the Pace combination and consisted of banker fees, legal fees, integration related outside services and other direct costs of the combination. The Company substantially completed
its integration of the Pace business in 2016.
During 2015, we recorded acquisition related expenses and integration expenses
of $28.2 million. The expenses in 2015 were primarily related to the Pace combination completed in 2016 and the ActiveVideo acquisition.
During 2017, 2016 and 2015, we recorded restructuring charges of $20.9 million, $96.3 million and $1.0 million, respectively. The charge in 2017 primarily related to employee severance and
contractual obligation costs. The restructuring plan affected approximately 195 positions across the Company and its reportable segments. The charges in 2016 primarily related to employee severance and contractual obligation costs. The restructuring
plan affected approximately 1,545 positions across the Company and its reportable segments. The charges in 2015 were related to severance and employee termination benefits.
Other costs of $8.6 million was recorded during 2016 of which $1.1 million was related to the loss resulting from the divestitures of certain product lines and $7.5 million was related to
the loss on disposal of property, plant and equipment.
Direct Contribution
The table below sets forth our direct contribution, which is defined as gross margin less direct operating expenses (in thousands, except
percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Contribution
|
|
|
Increase (Decrease) Between Periods
|
|
|
|
For the Years Ended December 31,
|
|
|
2017 vs. 2016
|
|
|
2016 vs. 2015
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
$
|
497,986
|
|
|
$
|
684,744
|
|
|
$
|
548,840
|
|
|
$
|
(186,758
|
)
|
|
|
(27.3
|
)%
|
|
$
|
135,904
|
|
|
|
24.8
|
%
|
N&C
|
|
|
806,355
|
|
|
|
681,608
|
|
|
|
487,166
|
|
|
|
124,747
|
|
|
|
18.3
|
%
|
|
|
194,442
|
|
|
|
39.9
|
%
|
Enterprise
|
|
|
6,094
|
|
|
|
|
|
|
|
|
|
|
|
6,094
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,310,435
|
|
|
$
|
1,366,352
|
|
|
$
|
1,036,006
|
|
|
$
|
(55,917
|
)
|
|
|
(4.1
|
)%
|
|
$
|
330,346
|
|
|
|
31.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Premises Equipment Direct Contribution 2017 vs. 2016
During 2017, direct contribution in our CPE segment decreased by approximately 27.3% as compared to the same period in 2016. The decline
in direct contribution resulted from lower sales and product mix, as well as lower gross margin due primarily to memory pricing increases and price competition, which are expected to continue in the near-term. Year over year, memory component
pricing increased by approximately $100 million. Our CPE reporting unit has approximately $1.4 billion of goodwill as of December 31, 2017. The estimated fair value of our CPE reporting unit is closely aligned with the ultimate
amount of revenue and operating income that it achieves, and as such, a prolonged or continued erosion in the direct contribution in the CPE segment could result in an impairment of goodwill associated with this business.
54
Network & Cloud Direct Contribution 2017 vs. 2016
During 2017, direct contribution in our N&C segment increased by approximately 18.3% as compared to the same period in 2016. The
increase was primarily attributable to the mix of product, including the sale of more software licenses and reductions in operating expenses.
Enterprise Networks Direct Contribution 2017 vs. 2016
During 2017, direct
contribution in our Enterprise was approximately $6.1 million. This was primarily a result of the acquisition of Ruckus Networks.
Customer Premises Equipment Direct Contribution 2016 vs. 2015
During 2016,
direct contribution in our CPE segment increased by approximately 24.8% as compared to the same period in 2015. The increase was primarily attributable the higher sales resulting from the Pace combination, offset by higher R&D, also a result of
the Pace combination.
Network & Cloud Direct Contribution 2016 vs. 2015
During 2016, direct contribution in our N&C segment increased by approximately 39.9% as compared to the same period in 2015. The
increase was primarily attributable to higher sales resulting from the Pace combination.
Corporate and Unallocated Costs
There are expenses that 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. The Corporate and Unallocated Costs category of expenses include corporate sales and marketing, home office general
and administrative expenses, annual bonus and equity compensation. Corporate and Unallocated Costs also includes corporate sales and marketing for the CPE and N&C segments. Marketing and Sales expenses related to the Enterprise
segment are considered a direct operating expense for that segment and are not included in the Corporate and Unallocated Costs.
The composition of our corporate and unallocated costs that are reflected in the consolidated statement of operations were as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Contribution
|
|
|
Increase (Decrease) Between Periods
|
|
|
|
For the Years Ended December 31,
|
|
|
2017 vs. 2016
|
|
|
2016 vs. 2015
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Cost of sales
|
|
$
|
90,791
|
|
|
$
|
150,588
|
|
|
$
|
56,311
|
|
|
|
(59,797
|
)
|
|
|
(39.7
|
)%
|
|
|
94,277
|
|
|
|
167.4
|
%
|
Selling, general & administrative expense
|
|
|
389,753
|
|
|
|
375,747
|
|
|
|
349,993
|
|
|
|
14,006
|
|
|
|
3.7
|
%
|
|
|
25,754
|
|
|
|
7.4
|
%
|
Research & development expenses
|
|
|
178,115
|
|
|
|
171,499
|
|
|
|
162,032
|
|
|
|
6,616
|
|
|
|
3.9
|
%
|
|
|
9,467
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
658,659
|
|
|
$
|
697,834
|
|
|
$
|
568,336
|
|
|
|
(39,175
|
)
|
|
|
(5.6
|
)%
|
|
|
129,498
|
|
|
|
22.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2017, corporate and unallocated costs decreased compared to in 2016. During 2017 and 2016, cost of
sales included $8.5 million and $51.4 million, respectively, associated with the turnaround effect of
stepping-up
the underlying net book value of acquired inventory to fair market value in our
acquisitions, as of the acquisition date.
During 2016, corporate and unallocated costs increased compared to 2015. The
increase was primarily due to costs from the Pace combination.
55
Other Expense
The table below provides detail regarding our other expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expense (Income)
|
|
|
Increase (Decrease) Between Periods
|
|
|
|
For the Years Ended December 31,
|
|
|
2017 vs. 2016
|
|
|
2016 vs. 2015
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
Interest expense
|
|
$
|
87,088
|
|
|
$
|
79,817
|
|
|
$
|
70,936
|
|
|
$
|
7,271
|
|
|
|
9.1
|
%
|
|
$
|
8,881
|
|
|
|
12.5
|
%
|
Loss on investments
|
|
|
11,066
|
|
|
|
21,194
|
|
|
|
6,220
|
|
|
|
(10,128
|
)
|
|
|
(47.8
|
%)
|
|
|
14,974
|
|
|
|
240.7
|
%
|
Loss (gain) on foreign currency
|
|
|
9,757
|
|
|
|
(13,982
|
)
|
|
|
20,761
|
|
|
|
23,739
|
|
|
|
(169.8
|
)%
|
|
|
(34,743
|
)
|
|
|
(167.3
|
)%
|
Interest income
|
|
|
(7,975
|
)
|
|
|
(4,395
|
)
|
|
|
(2,379
|
)
|
|
|
(3,580
|
)
|
|
|
(81.5
|
)%
|
|
|
(2,016
|
)
|
|
|
(84.7
|
)%
|
Other expense (income), net
|
|
|
1,873
|
|
|
|
3,991
|
|
|
|
8,362
|
|
|
|
(2,118
|
)
|
|
|
(53.1
|
)%
|
|
|
(4,371
|
)
|
|
|
(52.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
101,809
|
|
|
$
|
86,625
|
|
|
$
|
103,900
|
|
|
$
|
15,184
|
|
|
|
17.5
|
%
|
|
$
|
(17,275
|
)
|
|
|
(16.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
Interest expense reflects the amortization of debt issuance costs (deferred finance fees and debt discounts) related to our term loans, and interest expense paid on the notes, term loans and other debt
obligations.
Interest expense was $87.1 million in 2017, as compared with $79.8 million and $70.9 million in
2016 and 2015, respectively, reflecting the increase in debt resulting from the Pace combination.
During 2017, in connection
with amending our credit agreement, we expensed approximately $4.5 million of debt issuance costs and wrote off approximately $1.3 million of existing debt issuance costs associated with certain lenders who were not party to the amended
term loan facilities, which were included as interest expense in the Consolidated Statements of Income for the year ended December 31, 2017.
Upon the closing of the Pace combination in 2016, we incurred an additional $2.3 million of debt issuance costs which were capitalized and amortized over the term of the loan.
During 2015, in connection with amending our credit agreement, we expensed approximately $13.0 million of debt issuance costs and
wrote off approximately $2.1 million of existing debt issuance costs associated with certain lenders who were not party to the amended Term Loan A Facility and Revolving Credit Facility, which were included as interest expense in the
Consolidated Statements of Income for the year ended December 31, 2015.
Loss on Investments
We hold certain investments in equity securities of private and publicly-traded companies and investments in rabbi trusts associated with
our deferred compensation plans, and certain investments in limited liability companies and partnerships that are accounted for using the equity method of accounting. Our equity portion in current earnings of such investments is included in the loss
(gain) on investments.
During the years ended December 31, 2017, 2016 and 2015, we recorded net losses on investment
related to these investments of $11.1 million, $21.2 million and $6.2 million, respectively, including impairment charges.
The Company performed an evaluation of its investments and concluded that indicators of impairment existed for certain investments, and that their fair value had declined. This resulted in
other-than-temporary impairment charges of $2.8 million, $12.3 million and $0.2 million during the year ended December 31, 2017, 2016 and 2015, respectively.
Loss (Gain) on Foreign Currency
During the years ended December 31, 2017, 2016 and 2015, we recorded net losses (gains) on foreign currency of $9.8 million, $(14.0) million and $20.8 million, respectively. We have U.S.
dollar functional
56
currency entities that bill certain international customers or have liabilities payable in their local currency. Additionally, certain intercompany transactions are denominated in foreign
currencies and subject to
re-measurement.
To mitigate the volatility related to fluctuations in the foreign exchange rates, we have entered into various foreign currency contracts. The gain or loss on foreign
currency is driven by the fluctuations in the foreign currency exchange rates.
As part of the Pace combination completed in
2016, we paid the former Pace shareholders 132.5 pence per share in cash consideration, which was approximately 434.3 million British pounds, in the aggregate. We entered into foreign currency forward contracts to purchase British pounds and
sell U.S. Dollars in order to mitigate the volatility related to fluctuations in the foreign exchange rate prior to the closing. The contracts fixed the British pound to U.S. dollar forward exchange rate at various rates. These foreign currency
forward contracts were effectively terminated upon the close of the combination in January 2016 and cash settled upon maturity on March 31, 2016, which included a loss of $1.6 million in the first quarter of 2016. During the year ended
December 31, 2015, losses of $22.3 million were recorded related to the British pound forward contracts.
Interest Income
Interest income reflects interest earned on cash, cash equivalents, and short-term and long-term marketable security investments. During the years ended December 31, 2017, 2016 and 2015, we recorded
interest income of $8.0 million, $4.4 million and $2.4 million, respectively.
Other Expense (Income), net
Other expense (income), net for the years ended December 31, 2017, 2016 and 2015 were $1.9 million,
$4.0 million and $8.4 million, respectively.
In connection with our acquisition of Motorola Home, we obtained
certain foreign tax credit benefits for which we recorded a $20.5 million liability to Google resulting from certain provisions in the acquisition agreement. During 2015, we recorded income of $3.7 million to reduce the foreign tax credit
attributes and reduce the previously recorded liability to Google to $16.8 million.
For the year ended December 31,
2015, we recorded a loss of $5.3 million from the sale of land and building associated with our San Diego campus facilities.
Income Tax Expense
Our annual provision for income taxes and determination
of the deferred tax assets and liabilities requires management to assess uncertainties, make judgments regarding outcomes, and utilize estimates. To the extent the final outcome differs from initial assessments and estimates, future adjustments to
our tax assets and liabilities will be necessary.
In 2017, we recorded $44.9 million of income tax benefit for U.K., U.S.
federal and state taxes and other foreign taxes, which was (211.9)% of our
pre-tax
income of $21.2 million. The Companys effective income tax rate for 2017 was favorably impacted by
$22.3 million of tax rate changes primarily driven by US Tax Reform, $25.4 million related to the generation of research and development credits primarily in the U.S., and $36.2 million of tax benefits from other foreign tax regimes,
primarily Luxembourg and Hong Kong.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Act) was
signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, a
one-time
transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, a new alternative U.S. tax on certain Base Erosion Anti-Avoidance (BEAT) payments from a U.S.
company to any foreign related party, a new U.S. tax on certain
off-shore
earnings referred to as Global Intangible
Low-Taxed
Income (GILTI), additional limitations on
certain executive compensation and limitations on interest deductions. We have calculated our best estimate of the impact of the Act in the year end income tax provision in accordance with our understanding of the Act and guidance available as of
the date of this filing and as a result has recorded ($22.5)
57
million as an income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets
and liabilities based on the rates at which they are expected to reverse in the future was ($22.3) million. The provisional amount related to the
one-time
transition tax on the mandatory deemed repatriation of
foreign earnings was ($0.2) million based on cumulative foreign earnings of $32.4 million.
On December 22, 2017,
Staff Accounting Bulletin No. 118 (SAB 118) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in
reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, we have determined that the ($22.3) million of the deferred tax benefit recorded in connection with the remeasurement of certain
deferred tax assets and liabilities and the ($0.2) million of current tax benefit recorded in connection with the transition tax on the mandatory deemed repatriation of foreign earnings was a provisional amount and a reasonable estimate at
December 31, 2017. Additional work is necessary to do a more detailed analysis of historical foreign earnings as well as potential correlative adjustments. Any subsequent adjustment to these amounts will be recorded to tax expense in the
quarter of 2018 when the analysis is complete.
In 2016, we recorded $15.1 million of income tax expense for U.K., U.S.
federal and state taxes and other foreign taxes, which was 62.8% of our
pre-tax
income of $24.1 million. The Companys effective income tax rate for 2016 was unfavorably impacted by
$50.8 million of
non-recurring
items. The Company recorded $55 million of withholding tax expense in connection with the Pace combination, as well as $2.1 million of tax expense on expiring net
operating losses. The Company also recorded $7.0 million of net tax benefit relating to the release of valuation allowances.
In 2015, we recorded $22.6 million of income tax expense for U.S. federal and state taxes and foreign taxes, which was 21.1% of our
pre-tax
income of
$107.1 million. The Companys effective income tax rate for 2015 was favorably impacted by $2.4 million for the following items. The tax benefit was due to the release of $27.3 million of valuation allowances primarily recorded
for U.S. federal net operating losses arising from the acquisition of the Motorola Home business from Google. This benefit was offset unfavorably by $19.0 million for a gain recognized on the Taiwan entity, $4.9 million for increases in
Subpart F income and $1.1 million for the recapture of losses upon conversion of ARRIS International Limited to a private limited company. Other favorable items were recorded for U.S Federal, U.S. State and
non-U.S.
return to provision items of $1.3 million and adjustments to uncertain tax positions of $8.6 million. Other items with an unfavorable impact on the tax rate include adjustments to foreign
tax credits received from Google of $3.7 million, the effect of accelerating the vesting of equity compensation of $4.1 million and $2.2 million for the conversion of Active Video to a partnership. In addition, $20.4 million of
current tax benefit was recorded when the President signed legislation to approve the extension of the U.S. federal research and development tax credit permanently. Exclusive of these items, the effective income tax rate would have been
approximately 22.6%.
Non-GAAP
Measures
ARRIS reports its financial results in accordance with accounting principles generally accepted in the United States (GAAP or
referred to herein as reported). However, management believes that certain
non-GAAP
financial measures provide management and other users with additional meaningful financial information that
should be considered when assessing our ongoing performance. Our management regularly uses our supplemental
non-GAAP
financial measures internally to understand, manage and evaluate our business and make
operating decisions. These
non-GAAP
measures are among the factors management uses in planning for and forecasting future periods.
Non-GAAP
financial measures should be
viewed in addition to, and not as an alternative to, the Companys reported results prepared in accordance with GAAP.
58
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|
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Year 2017
|
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Year 2016
|
|
|
Year 2015
|
|
|
|
Amount
|
|
|
Per Diluted
Share
|
|
|
Amount
|
|
|
Per Diluted
Share
|
|
|
Amount
|
|
|
Per Diluted
Share
|
|
Sales
|
|
$
|
6,614,392
|
|
|
|
|
|
|
$
|
6,829,118
|
|
|
|
|
|
|
$
|
4,798,332
|
|
|
|
|
|
Highlighted items:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in revenue related to warrants
|
|
|
|
|
|
|
|
|
|
|
30,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition accounting impacts of deferred revenue
|
|
|
1,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
Adjusted Sales
|
|
$
|
6,615,512
|
|
|
|
|
|
|
$
|
6,859,276
|
|
|
|
|
|
|
$
|
4,798,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ARRIS International plc
|
|
|
92,027
|
|
|
|
0.49
|
|
|
|
18,100
|
|
|
|
0.09
|
|
|
|
92,181
|
|
|
|
0.62
|
|
Highlighted Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impacting gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
13,947
|
|
|
|
0.07
|
|
|
|
9,397
|
|
|
|
0.05
|
|
|
|
8,508
|
|
|
|
0.06
|
|
Reduction in revenue related to warrants
|
|
|
|
|
|
|
|
|
|
|
30,159
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
Acquisition accounting impacts of deferred revenue
|
|
|
1,120
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition accounting impacts of fair valuing inventory
|
|
|
8,468
|
|
|
|
0.04
|
|
|
|
51,405
|
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
Impacting operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration, acquisition, restructuring and other costs
|
|
|
98,357
|
|
|
|
0.52
|
|
|
|
152,810
|
|
|
|
0.79
|
|
|
|
29,277
|
|
|
|
0.20
|
|
Impairment of goodwill and intangible assets
|
|
|
55,000
|
|
|
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
375,407
|
|
|
|
1.98
|
|
|
|
397,464
|
|
|
|
2.07
|
|
|
|
227,440
|
|
|
|
1.52
|
|
Stock-based compensation expense
|
|
|
66,711
|
|
|
|
0.35
|
|
|
|
50,652
|
|
|
|
0.26
|
|
|
|
55,710
|
|
|
|
0.37
|
|
Noncontrolling interest share of
Non-GAAP
adjustments
|
|
|
(22,352
|
)
|
|
|
(0.12
|
)
|
|
|
(3,145
|
)
|
|
|
(0.02
|
)
|
|
|
(2,947
|
)
|
|
|
(0.02
|
)
|
Impacting other (income)/expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment (gain) on investments
|
|
|
929
|
|
|
|
|
|
|
|
12,297
|
|
|
|
0.06
|
|
|
|
(9
|
)
|
|
|
|
|
Debt amendment fees
|
|
|
5,851
|
|
|
|
0.03
|
|
|
|
(237
|
)
|
|
|
|
|
|
|
15,342
|
|
|
|
0.10
|
|
Credit facility ticking fees
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
1,700
|
|
|
|
0.01
|
|
Foreign exchange contract losses related to Pace combination
|
|
|
|
|
|
|
|
|
|
|
1,610
|
|
|
|
0.01
|
|
|
|
22,283
|
|
|
|
0.15
|
|
Remeasurement of deferred taxes
|
|
|
9,360
|
|
|
|
0.05
|
|
|
|
(16,356
|
)
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
Adjustment to liability related to foreign tax credits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,669
|
)
|
|
|
(0.02
|
)
|
Loss on sale of building
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,142
|
|
|
|
0.03
|
|
Impacting income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign withholding tax
|
|
|
|
|
|
|
|
|
|
|
54,741
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(190,151
|
)
|
|
|
(1.00
|
)
|
|
|
(208,524
|
)
|
|
|
(1.08
|
)
|
|
|
(128,864
|
)
|
|
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total highlighted items
|
|
|
422,647
|
|
|
|
2.22
|
|
|
|
532,264
|
|
|
|
2.77
|
|
|
|
229,913
|
|
|
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
|
514,674
|
|
|
|
2.71
|
|
|
|
550,364
|
|
|
|
2.86
|
|
|
|
322,094
|
|
|
|
2.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year 2017
|
|
|
Year 2016
|
|
|
Year 2015
|
|
|
|
Amount
|
|
|
Per Diluted
Share
|
|
|
Amount
|
|
|
Per Diluted
Share
|
|
|
Amount
|
|
|
Per Diluted
Share
|
|
Weighted average common shares basic
|
|
|
|
|
|
|
187,133
|
|
|
|
|
|
|
|
190,701
|
|
|
|
|
|
|
|
146,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares diluted
|
|
|
|
|
|
|
189,616
|
|
|
|
|
|
|
|
192,185
|
|
|
|
|
|
|
|
149,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
non-GAAP
financial measures reflect adjustments based on the
following items, as well as the related income tax effects:
Reduction in Revenue Related to
Warrants
: We entered into agreements with two customers for the issuance of warrants to purchase up to 14.0 million of ARRISs ordinary shares. Vesting of the warrants is subject to certain purchase volume
commitments, and therefore the accounting guidance requires that we record any change in the fair value of warrants as a reduction in revenue. Until final vesting, changes in the fair value of the warrants will be marked to market and any adjustment
recorded in revenue. We have excluded the effect of the implied fair value in calculating our
non-GAAP
financial measures. We believe it is useful to understand the effects of these items on our total
revenues and gross margin.
Acquisition Accounting Impacts Related to Deferred Revenue
: In
connection with the accounting related to our acquisitions, business combination rules require us to account for the fair values of deferred revenue arrangements for post contract support in our purchase accounting. The
non-GAAP
adjustment to our sales and cost of sales is intended to include the full amounts of such revenues as if these purchase accounting adjustments had not been applied. We believe the adjustment to these
revenues is useful as a measure of the ongoing performance of our business. We historically have experienced high renewal rates related to our support agreements, and our objective is to increase the renewal rates on acquired post contract support
agreements. However, we cannot be certain that our customers will renew their contracts.
Stock-Based Compensation
Expense
: We have excluded the effect of stock-based compensation expenses in calculating our
non-GAAP
operating expenses and net income (loss) measures. Although stock-based
compensation is a key incentive offered to our employees, we continue to evaluate our business performance excluding stock-based compensation expenses. We record
non-cash
compensation expense related to grants
of restricted stock units. Depending upon the size, timing and the terms of the grants, the
non-cash
compensation expense may vary significantly but will recur in future periods.
Acquisition Accounting Impacts Related to Inventory Valuation:
In connection with the accounting related to
our acquisitions, business combinations rules require the acquired inventory be recorded at fair value on the opening balance sheet. This is different from historical cost. Essentially, we are required to write the inventory up to the end
customer price less a reasonable margin as a distributor. We have excluded the resulting adjustments in inventory and cost of goods sold as the historic and forward gross margin trends will differ as a result of the adjustments. We believe it is
useful to understand the effects of this on cost of goods sold and margin.
Integration, Acquisition, Restructuring and
Other Costs
: We have excluded the effect of acquisition, integration, and other expenses and the effect of restructuring expenses in calculating our
non-GAAP
operating expenses and
net income measures. We incurred expenses in connection with the ActiveVideo, Motorola Home, Pace and Ruckus Networks acquisitions, which we generally would not otherwise incur in the periods presented as part of our continuing operations.
Acquisition and integration expenses consist of transaction costs, costs for transitional employees, other acquired employee related costs, and integration related outside services. Restructuring expenses consist of employee severance, abandoned
facilities, product line disposition and other exit costs. We believe it is useful to understand the effects of these items on our total operating expenses.
Impairment of Goodwill and Intangible Assets
: We have excluded the effect of the estimated impairment of goodwill and intangible assets in calculating our
non-GAAP
operating expenses and net income measures. Although an impairment does not directly impact the Companys current cash position, such expense represents the declining value of the technology and other
intangible assets that were acquired. We exclude these impairments when significant and they are not reflective of ongoing business and operating results.
60
Amortization of Intangible Assets
: We have excluded the effect
of amortization of intangible assets in calculating our
non-GAAP
operating expenses and net income (loss) measures. Amortization of intangible assets is
non-cash,
and is
inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will
contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.
Noncontrolling Interest share of
Non-GAAP
Adjustments
: The joint
venture formed for the ActiveVideo acquisition is accounted for by ARRIS under the consolidation method. As a result, the consolidated Statements of Income include the revenues, expenses, and gains and losses of the noncontrolling interest. The
amount of net income (loss) related to the noncontrolling interest are reported and presented separately in the consolidated Statements of Income. We have excluded the noncontrolling share of any
non-
GAAP
adjusted measures recorded by the venture, as we believe it is useful to understand the effect of excluding this item when evaluating our ongoing performance.
Impairment (Gain) on Investments
: We have excluded the effect of other-than-temporary impairments and certain gains on investments in calculating our
non-GAAP
financial measures. We believe it is useful to understand the effect of this
non-cash
item in our other expense (income).
Debt Amendment Fees
: In 2017 and 2015, the Company amended its credit agreement. This debt modification
allowed us 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 new term loan facility. We have excluded the effect of the
associated fees in calculating our
non-GAAP
financial measures. We believe it is useful to understand the effect of this item in our other expense (income).
Credit Facility Ticking Fees
: In connection with the Pace combination, the cash portion of the
consideration was funded through debt financing commitments. A ticking fee was a fee paid to our banks to compensate for the time lag between the commitment allocation on a loan and the actual funding. We have excluded the effect of the ticking fee
in calculating our
non-GAAP
financial measures. We believe it is useful to understand the effect of this item in our other expense (income).
Foreign Exchange Contract Losses Related to Pace Combination
: In the second quarter of 2015, the Company
announced its intent to acquire Pace in exchange for stock and cash. We subsequently entered into foreign exchange forward contracts in order to hedge the foreign currency risk associated with the cash consideration of the Pace combination. These
foreign exchange forward contracts were not designated as hedges, and accordingly, all changes in the fair value of these instruments are recognized as a loss (gain) on foreign currency in the Consolidated Statements of Income. We believe it is
useful to understand the effect of this on our other expense (income).
Remeasurement of Deferred
Taxes
: The Company records foreign currency remeasurement gains and losses related to deferred tax liabilities in the United Kingdom. The foreign currency remeasurement gains and losses derived from the remeasurement of
the deferred income taxes from GBP to USD. We have excluded the impact of these gains and losses in the calculation of our
non-GAAP
measures. We believe it is useful to understand the effects of this item on
our total other expense (income).
Adjustment to Liability Related to Foreign Tax Credits
: In
connection with our acquisition of Motorola Home, we obtained certain foreign tax credit benefits for which we have recorded a liability to Google resulting from certain provisions in the acquisition agreement. The expense and subsequent adjustments
related to this liability has been recorded as part of other expense (income). We have excluded the effect of the expense in the calculation of our
non-GAAP
financial measures. We believe it is useful to
understand the effects of this item on our total other expense (income).
Loss on Sale of
Building
: In the first quarter of 2015, the Company sold land and a building that qualified for sale-leaseback accounting and was classified as an operating lease. A loss has been recorded on the sale. We have excluded the
effect of the loss on sale of property in calculating our
non-GAAP
financial measures. We believe it is useful to understand the effect of excluding this item when evaluating our ongoing performance.
61
Foreign Withholding Tax
: In connection with the Pace
combination, ARRIS U.S. Holdings, Inc. transferred shares of its subsidiary ARRIS Financing II Sarl to ARRIS International. Under U.S. tax law, based on the best available information, we believe the transfer constituted a deemed distribution from
ARRIS U.S. Holdings Inc. to ARRIS International that is treated as a dividend for U.S. tax purposes. A deemed dividend of this type is subject to U.S. withholding tax to the extent of the current and accumulated earnings and profits (as computed for
tax purposes) (E&P) of ARRIS U.S. Holdings Inc., which include the E&P of the former ARRIS Group and subsidiaries through December 31, 2016. Accordingly, ARRIS U.S. Holdings Inc. remitted U.S. withholding tax in the amount
of $55 million based upon its estimated E&P of $1.1 billion and the U.S. dividend withholding tax rate of 5 percent (as provided in Article 10 (Dividends) of the United Kingdom-United States Tax Treaty). We have excluded the
withholding tax in calculating our
non-GAAP
financial measures.
Income Tax Expense
(Benefit)
: We have excluded the tax effect of the
non-GAAP
items mentioned above. Additionally, we have excluded the effects of certain tax adjustments related to tax and legal
restructuring, state valuation allowances, research and development tax credits and provision to return differences.
Financial Liquidity
and Capital Resources
Overview
One of our key strategies is to ensure we have adequate liquidity and the financial flexibility to support our strategy, including acquisitions. The key metrics we focus on are summarized in the table
below:
Liquidity & Capital Resources Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands, except DSO and Turns)
|
|
Key Working Capital Items
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
533,837
|
|
|
$
|
362,495
|
|
|
$
|
343,872
|
|
Cash, cash equivalents, and short-term investments
|
|
$
|
511,447
|
|
|
$
|
1,095,676
|
|
|
$
|
879,052
|
|
Long-term U.S corporate bonds
|
|
$
|
|
|
|
$
|
10,998
|
|
|
$
|
|
|
Accounts Receivable, net
|
|
$
|
1,218,088
|
|
|
$
|
1,359,430
|
|
|
$
|
651,893
|
|
-Days Sales Outstanding
|
|
|
63
|
|
|
|
61
|
|
|
|
48
|
|
Inventory, net
|
|
$
|
825,211
|
|
|
$
|
551,541
|
|
|
$
|
401,592
|
|
- Turns
|
|
|
7.2
|
|
|
|
8.6
|
|
|
|
8.4
|
|
Key Financing Items
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans at face value
|
|
$
|
2,161,400
|
|
|
$
|
2,229,563
|
|
|
$
|
1,509,063
|
|
Proceeds from issuance of debt
|
|
$
|
175,847
|
|
|
$
|
800,000
|
|
|
$
|
|
|
Cash used for debt repayment
|
|
$
|
244,009
|
|
|
$
|
319,750
|
|
|
$
|
53,500
|
|
Financing lease obligation
|
|
$
|
61,321
|
|
|
$
|
58,010
|
|
|
$
|
58,687
|
|
Cash used for share repurchases
|
|
$
|
196,965
|
|
|
$
|
178,035
|
|
|
$
|
24,999
|
|
Key Investing Items
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for acquisitions, net of cash acquired
|
|
$
|
760,802
|
|
|
$
|
340,118
|
|
|
$
|
97,905
|
|
Capital Expenditures
|
|
$
|
78,072
|
|
|
$
|
66,760
|
|
|
$
|
49,890
|
|
In managing our liquidity and capital structure, we remain focused on key goals, and we have and will
continue in the future to implement actions to achieve them. They include:
|
|
|
Liquidity ensure that we have sufficient cash resources or other short-term liquidity to manage day to day operations.
|
62
|
|
|
Growth implement a plan to ensure that we have adequate capital resources, or access thereto, to fund internal growth and execute acquisitions.
|
|
|
|
Deleverage reduce our debt obligations.
|
|
|
|
Share repurchases opportunistically repurchase our ordinary shares.
|
Accounts Receivable
We use the number of times per year that inventory turns over (based upon sales for the most recent period, or turns) to evaluate inventory management, and days sales outstanding, or DSOs, to evaluate
accounts receivable management.
Accounts receivable at the end of 2017 decreased as compared to the end of 2016, primarily
due to the timing of purchases by customers in late 2016. DSO increased in 2017, primarily reflecting a larger international mix.
Accounts receivable increased at the end of 2016 as compared to 2015, primarily due to the inclusion of sales associated with the Pace products, which were not included in 2015, as well as payment
patterns and timing of shipments to customers. As part of the Pace combination, we acquired approximately $452.3 million of accounts receivable. Our DSO increased year over year as a result of the timing of sales and payment patterns of
customers.
Accounts receivable at the end of 2015 increased as compared to the end of 2014, primarily due to payment patterns
of our customers and timing of shipments to customers. DSOs increased reflecting a larger international mix.
Inventory
Inventory at the end of 2017 increased as compared to the end of 2016, reflecting timing of shipments to customers and
anticipated demand for certain products, inventory acquired in the Ruckus acquisition, and the impact of transitioning component inventories from outsourced assemblers to
in-house
production. We anticipate a
reduction in inventory in 2018.
Inventory increased at the end of 2016 as compared to 2015, primarily due to the Pace
combination. We acquired approximately $427.6 million of inventory upon closing of the Pace combination in January 2016. Inventory turns increased year over year reflecting timing of shipments to customers.
Inventory at the end of 2015 was similar to that of the end of 2014, however, inventory turns were lower in 2015 reflecting the timing of
customer requirements and anticipated demand for certain products.
Debt Repayments and Proceeds
In 2017, we repaid $91.7 million of our term debt. With regards to our Term Loan B facility, we repaid $29.1 million in debt to
exiting lenders and recorded proceeds from issuance of debt of $30.3 million. With regards to our Term Loan A and
A-1,
we repaid $123.2 million in debt to exiting lenders and recorded proceeds from
issuance of debt of $145.5 million.
In 2016, we repaid $79.5 million of our term debt as well as
$240.2 million of debt assumed and settled in conjunction with the Pace combination in January 2016. In addition, we received proceeds upon the closing of the Pace combination for our Term Loan
A-1
Facility of $800 million.
In 2015, we repaid $53.5 million of our term debt, of which $38.5 million was term
debt under our senior secured credit facilities and $15.0 million was term debt assumed and settled in conjunction with the ActiveVideo acquisition in April 2015.
63
Financing Lease Obligation
In 2015, we sold our San Diego office complex consisting of land and buildings. We 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
amount 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.
Share Repurchases
Upon completing the Pace combination, we conducted a court-approved process in accordance with section 641(1)(b) of the UK Companies Act 2006, pursuant to which we reduced our stated share capital and
thereby increased our distributable reserves or excess capital out of which we may legally pay dividends or repurchase shares. Distributable reserves are not linked to a U.S. GAAP reported amount.
In 2016, our Board of Directors approved a $300 million share repurchase authorization replacing all prior programs. In early 2017,
the Board authorized an additional $300 million for share repurchases. Unless terminated earlier by a Board resolution, this new plan will expire when ARRIS has used all authorized funds for repurchase. The remaining authorized amount for stock
repurchases under this plan was $225.0 million as of December 31, 2017. However, U.K. law also generally prohibits a company from repurchasing its own shares through off market purchases without prior approval of shareholders
because we are not traded on a recognized investment exchange in the U.K. This shareholder approval lasts for a maximum period of five years. Prior to and in connection with the Pace combination, we obtained approval to purchase our own shares. This
authority to repurchase shares terminates in January 2021, unless otherwise reapproved by our shareholders.
During 2017, we
repurchased 7.5 million ordinary shares for $197.0 million at an average stock price of $26.12. During 2016, we repurchased 7.4 million of our ordinary shares for $178.0 million at an average stock price of $24.09. During 2015,
we repurchased 0.9 million shares of our stock for $25.0 million at an average stock price of $28.70.
Summary of
Current Liquidity Position and Potential for Future Capital Raising
We believe our current liquidity position, where we
had approximately $511.4 million of cash, cash equivalents, short-term investments on hand as of December 31, 2017, together with approximately $498.3 million in availability under our Revolving Credit Facility, and the prospects for
continued generation of cash from operations, are adequate for our short- and medium-term business needs. Our cash, cash-equivalents and short-term investments as of December 31, 2017 include approximately $364.6 million held by all
non-U.S.
subsidiaries. Of that amount, $64.3 million was held by
non-U.S.
subsidiaries legally owned by ARRIS U.S. entities whose earnings we expect to reinvest
indefinitely outside of the United States. We do not expect to need the cash generated by those
non-U.S.
subsidiaries to fund our U.S. operations. However, in the unforeseen event that we repatriate cash from
those
non-U.S.
subsidiaries, we may be required to provide for and pay U.S. taxes on permanently repatriated funds.
We have subsidiaries in countries that maintain restrictions, such as legal reserves, with respect to the dividend amount that the subsidiaries can distribute. Additionally, some countries impose
restrictions or controls over how and when dividends can be paid by these subsidiaries. While we do not currently intend to repatriate earnings from entities in these countries, if we were to be required to distribute earnings from such
countries, the timing of the distribution and the funds available to distribute, would be adversely impacted by these restrictions.
We expect to be able to generate sufficient cash on a consolidated basis to make all of the principal and interest payments under our senior secured credit facilities. Should our available funds be
insufficient to support these initiatives or our operations, it is possible that we will raise capital through private or public, share or debt offerings.
64
Senior Secured Credit Facilities
On December 20, 2017, we entered into a Fourth Amendment (the Fourth Amendment) to our Amended and Restated Credit
Facility dated June 18, 2015, as previously amended on December 14, 2015, April 26, 2017, and October 17, 2017 (the Credit Agreement). The Fourth Amendment provided for a new Term B Loan facility in the principal
amount of $542.3 million, the proceeds of which (along with cash on hand) were used to repay in full the existing Term B Loan facility. Under the terms of the Fourth Amendment, the maturity date of the new Term B Loan facility remains
April 26, 2024, but the new Term B Loan facility has an interest rate of LIBOR (as defined in the Credit Agreement) plus a percentage ranging from 2.00% to 2.25% for Eurocurrency Loans (as defined in the Credit Agreement) or the prime rate (as
determined in accordance with the Credit Agreement) plus a percentage ranging from 1.00% to 1.25% for Base Rate Loans (as defined in the Credit Agreement), in either case depending on ARRISs Consolidated Net Leverage Ratio. The Fourth
Amendment also increased to $500 million the amount of cash that can be used to offset indebtedness in the calculation of the Consolidated Net Leverage Ratio for purposes of determining the applicable interest rate. All other material terms of
the Credit Agreement remained unchanged.
On October 17, 2017, we entered into the Third Amendment and Consent (the
Third Amendment) to the 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, 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.
The Third Amendment extended the maturity date of the Term A Loans and the Revolving
Credit Facility to October 17, 2022. Pursuant to the Third Amendment, ARRIS 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 Third Amendment were not changed.
On April 26, 2017, we entered into a Second Amendment (the Second Amendment) to the Credit Agreement. The Second Amendment provided 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.
Interest
rates on borrowings under the senior secured credit facilities are set forth in the table below. As of December 31, 2017, we had $386.1 million, $1,234.4 million and $540.9 million principal amounts outstanding under the Term
Loan A, Term Loan
A-1
and Term Loan
B-3
Facilities. No borrowings existed under the Revolving Credit Facility and there were letters of credit totaling $1.7 million
issued under the Revolving Credit Facility.
|
|
|
|
|
|
|
|
|
Rate
|
|
|
As of December 31, 2017
|
Term Loan A
|
|
|
LIBOR + 1.75
|
%
|
|
3.32%
|
Term Loan
A-1
|
|
|
LIBOR + 1.75
|
%
|
|
3.32%
|
Term Loan
B-3
|
|
|
LIBOR + 2.25
|
%
|
|
3.82%
|
Revolving Credit Facility
(1)
|
|
|
LIBOR + 1.75
|
%
|
|
Not Applicable
|
(1)
|
Includes unused commitment fee of 0.30% and letter of credit fee of 1.75% not reflected in interest rate above.
|
65
The Credit Agreement provides for certain adjustments to the interest rates paid on the Term
Loan A, Term Loan
A-1,
Term Loan
B-3
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 Credit Agreement governing the senior secured credit facilities. The Credit Agreement provides terms for mandatory prepayments and optional
prepayments and commitment reductions. The Credit Agreement also includes events of default, which are customary for facilities of this type (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an
event of default, all amounts outstanding under the credit facilities may be accelerated. The Credit Agreement contains usual and customary limitations on indebtedness, liens, restricted payments, acquisitions and asset sales in the form of
affirmative, negative and financial covenants, which are customary for financings of this type, including the maintenance of a minimum interest coverage ratio and a maximum leverage ratio. As of December 31, 2017, ARRIS was in compliance with
all covenants under the Credit Agreement.
In connection with the Pace combination, ARRIS assumed an
accounts receivable financing program which was entered into by Pace on June 30, 2015. Under this program, ARRIS assigned trade receivables on a revolving basis of up to $50 million to the lender and the lender advanced 95% of the
receivable value to us. The remaining 5% was remitted to ARRIS upon receipt of cash from the customer.
The accounts receivable
financing program is accounted for as secured borrowings and amounts outstanding are included in the current portion of long-term debt on the consolidated balance sheet. We pay certain transaction fees and interest of 1.23% on the outstanding
balance in connection with this program.
As of December 31, 2016, we had no outstanding balance under this program and
the program was terminated as of June 30, 2017.
Commitments
Following is a summary of our contractual obligations as of December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Less than 1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More than
5 Years
|
|
|
Total
|
|
Credit facilities
(1)
|
|
$
|
87,500
|
|
|
$
|
175,000
|
|
|
$
|
1,385,238
|
|
|
$
|
513,662
|
|
|
$
|
2,161,400
|
|
Operating leases, net of sublease income
(2
)
|
|
|
46,637
|
|
|
|
75,290
|
|
|
|
59,550
|
|
|
|
57,260
|
|
|
|
238,737
|
|
Purchase obligations
(3
)
|
|
|
772,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
772,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
(4)
|
|
$
|
906,223
|
|
|
$
|
250,290
|
|
|
$
|
1,444,788
|
|
|
$
|
570,922
|
|
|
$
|
3,172,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the face value of loans outstanding under our credit facility
|
(2)
|
Includes leases which are reflected in restructuring accruals on the consolidated balance sheets.
|
(3)
|
Represents obligations under agreements with
non-cancelable
terms to purchase goods or services. The agreements are enforceable
and legally binding, and specify terms, including quantities to be purchased and the timing of the purchase.
|
(4)
|
Approximately $148.6 million of net uncertain tax positions have been excluded from the contractual obligation table because we are unable to make reasonably
reliable estimates of the period of cash settlement with the respective taxing authorities.
|
Off-Balance
Sheet Arrangements
We do not have any material
off-balance
sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K.
66
Cash Flow
Below is a table setting forth the key line items of our Consolidated Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
533,837
|
|
|
$
|
362,495
|
|
|
$
|
343,872
|
|
Investing activities
|
|
|
(747,662
|
)
|
|
|
(524,509
|
)
|
|
|
(45,946
|
)
|
Financing activities
|
|
|
(277,469
|
)
|
|
|
290,652
|
|
|
|
(134
|
)
|
Effect of exchange rate changes
|
|
|
(1,256
|
)
|
|
|
(12,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
$
|
(492,550
|
)
|
|
$
|
116,541
|
|
|
$
|
297,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the Consolidated Statements of Cash Flows, changes in operating assets and liabilities are presented
excluding the effects of changes in foreign currency exchange rates and the effects of acquisitions. Accordingly, the amounts in the consolidated statements of cash flows differ from changes in the operating assets and liabilities that are presented
in the Consolidated Balance Sheets.
Operating Activities:
Below are the key line items affecting cash from operating activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Consolidated net income
|
|
$
|
66,124
|
|
|
$
|
8,961
|
|
|
$
|
84,459
|
|
Adjustments to reconcile net income to cash provided by operating activities
|
|
|
567,585
|
|
|
|
441,592
|
|
|
|
395,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income including adjustments
|
|
|
633,709
|
|
|
|
450,553
|
|
|
|
480,107
|
|
Decrease (increase) in accounts receivable
|
|
|
175,930
|
|
|
|
(258,677
|
)
|
|
|
(55,132
|
)
|
(Increase) decrease in inventory
|
|
|
(224,582
|
)
|
|
|
282,644
|
|
|
|
(6,685
|
)
|
Increase (decrease) in accounts payable and accrued liabilities
|
|
|
49,988
|
|
|
|
(178,086
|
)
|
|
|
15,065
|
|
All other, net
|
|
|
(101,208
|
)
|
|
|
66,061
|
|
|
|
(89,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
533,837
|
|
|
$
|
362,495
|
|
|
$
|
343,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
Consolidated net income including adjustments, as per the table above, increased $183.2 million during 2017 as compared to 2016. It should be noted that net income in 2017 includes 1)
$61.5 million of expense related to the cash settlement of stock-based awards held by transferring employees in our Ruckus acquisition and 2) restructuring costs of $20.9 million, and 3) inventory
step-up
in fair market value of $8.5 million. The net income reflected in 2016 includes: 1) restructuring costs of $96.3 million, 2) withholding tax of $54.7 million and 3) inventory
step-up
in fair market value of $51.4 million. These 2016 items were either not present or less significant in 2017.
Accounts receivable decreased $175.9 million in 2017. This increase was primarily a result of purchasing pattern and payment patterns of our customers.
Inventory increased by $224.6 million in 2017, reflecting timing of customer requirements and anticipated demand for certain
products, inventory acquired in the Ruckus acquisition, and the transition of component inventory from outsourced assemblers to
in-house
production. In 2017 and 2016, we recognized reductions of
$8.5 million and $51.4 million, respectively, related to turnaround effects of inventory markups in acquisition accounting. We anticipate reducing inventory in 2018.
67
Accounts payable and accrued liabilities increased by $50.0 million in 2017. The change
reflects an increase in accounts payable due to timing of payments primarily for inventory and was partially offset by reduction in accrued expenses and deferred revenues.
All other accounts, net, include the changes in other receivables, income taxes payable (recoverable), and prepaids. The other receivables represent amounts due from our contract manufacturers for
material used in the assembly of our finished goods. The change in our income taxes recoverable account is a result of the timing of the actual estimated tax payments during the year as compared to the actual tax liability for the year. The net
change during 2017 was approximately $101.2 million as compared to $66.1 million in 2016.
2016 vs. 2015
Consolidated net (loss) income including adjustments, decreased $29.6 million during 2016 as compared to 2015. The
net loss reflected in the 2016 includes: 1) restructuring costs of $96.3 million, 2) acquisition and integration costs of $53.2 million, 3) withholding tax of $54.7 million and 4) inventory
step-up
in fair market value of $51.4 million. These items were either not present or were insignificant in 2015.
Accounts receivable increased by $258.7 million during 2016. The increase was primarily a result of normal purchasing pattern and payment patterns of our customers. A significant component of this
change was an increase in accounts receivable due to the acquisition of Pace.
Inventory decreased by $282.6 million
during 2016, reflecting the timing of customer requirements and anticipated demand for certain products. In 2016, there was a $51.4 million reduction related to turnaround effect of inventory markup in acquisition accounting.
Accounts payable and accrued liabilities decreased by $178.1 million during 2016, reflecting timing of payments. The Company acquired
$799.8 million of accounts payable and accrued liabilities as part of the Pace combination. We acquired $298.7 million of cash as part of the Pace combination. This cash is netted against the cash used for acquisitions in the investing
section of the cash flow statement and is not included in the operating section.
All other accounts, net, include changes in
other receivables, income taxes payable (recoverable), and prepaid expenses. The other receivables represent amounts due from our contract manufacturers for material used in the assembly of our finished goods. The change in our income taxes
recoverable account is a result of the timing of the actual estimated tax payments during the year as compared to the actual tax liability for the year.
Investing Activities:
Below are the key line items affecting
investing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Purchases of investments
|
|
$
|
(68,493
|
)
|
|
$
|
(141,543
|
)
|
|
$
|
(48,566
|
)
|
Sales of investments
|
|
|
165,301
|
|
|
|
25,931
|
|
|
|
161,824
|
|
Purchases of property, plant and equipment
|
|
|
(78,072
|
)
|
|
|
(66,760
|
)
|
|
|
(49,890
|
)
|
Purchase of intangible assets
|
|
|
(6,422
|
)
|
|
|
(5,526
|
)
|
|
|
(39,340
|
)
|
Proceeds from sale-leaseback transaction
|
|
|
|
|
|
|
|
|
|
|
24,960
|
|
Acquisitions, net of cash acquired
|
|
|
(760,802
|
)
|
|
|
(340,118
|
)
|
|
|
(97,905
|
)
|
Other, net
|
|
|
826
|
|
|
|
3,507
|
|
|
|
2,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
$
|
(747,662
|
)
|
|
$
|
(524,509
|
)
|
|
$
|
(45,946
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and sales of investments
Represents purchases and sales of securities and other
investments.
Purchases of property,
plant and equipment
Represents capital expenditures which are mainly
for test equipment, laboratory equipment, and computer and networking equipment and facilities.
Purchase of intangible
assets
Represent primarily the purchase of patents and technology licenses.
68
Proceeds from sale-leaseback transaction
Represent proceeds received from the
sale of land and building that qualified for sale leaseback accounting.
Acquisitions, net of cash acquired
Represents cash investments we have made in our various acquisitions. See Note 4
Business Acquisitions
of Notes to the Consolidated Financial Statements for disclosures related to acquisitions.
Other, net
Represent dividend proceeds received from equity investments and cash proceeds received from sale of product line
and assets.
Financing Activities:
Below are the key items affecting our financing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Proceeds from issuance of shares, net
|
|
$
|
17,469
|
|
|
$
|
12,885
|
|
|
$
|
16,189
|
|
Repurchase of shares
|
|
|
(196,965
|
)
|
|
|
(178,035
|
)
|
|
|
(24,999
|
)
|
Excess tax benefits from stock-based compensation plans
|
|
|
|
|
|
|
20,085
|
|
|
|
3,997
|
|
Repurchase of shares to satisfy minimum tax withholdings
|
|
|
(26,573
|
)
|
|
|
(17,925
|
)
|
|
|
(46,680
|
)
|
Proceeds from issuance of debt
|
|
|
175,847
|
|
|
|
800,000
|
|
|
|
|
|
Payment of debt obligations
|
|
|
(244,009
|
)
|
|
|
(319,750
|
)
|
|
|
(53,500
|
)
|
Payment of financing lease obligation
|
|
|
(777
|
)
|
|
|
(758
|
)
|
|
|
(425
|
)
|
Proceeds from sale-leaseback financing transaction
|
|
|
|
|
|
|
|
|
|
|
58,729
|
|
Payment on accounts receivable financing facility
|
|
|
|
|
|
|
(23,546
|
)
|
|
|
|
|
Payment of deferred financing fees and debt discount
|
|
|
(5,961
|
)
|
|
|
(2,304
|
)
|
|
|
(8,239
|
)
|
Contribution from noncontrolling interest
|
|
|
3,500
|
|
|
|
|
|
|
|
54,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
$
|
(277,469
|
)
|
|
$
|
290,652
|
|
|
$
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of shares, net
Represents cash proceeds related to the vesting of
restricted share units, offset with expenses paid related to the issuance of shares.
Repurchase of shares
Represents the cash used to buy back the Companys ordinary shares.
Excess tax benefits from stock-based compensation
plans
Represents the cash that otherwise would have been paid for income taxes if increases in the value of equity instruments also had not been deductible in determining taxable income. Prospectively, all excess tax benefits from
share-based payments will be reported as operating activities under new guidance, see Note 3
Impact of Recently Issued Accounting Standards
of Notes to the Consolidated Financial Statements for disclosures related to the impact of recently
adopted accounting standards.
Repurchase of shares to satisfy employee minimum tax withholdings
Represents the
shares withheld and cancelled for cash, to satisfy the employee minimum tax withholding when restricted stock units vest.
Proceeds from issuance of debt
Represents the proceeds from new borrowings for our Term Loan Facilities upon the
re-financing
of our Credit Agreement in 2017, and Term Loan
A-1
Facility of $800 million, which was funded upon the closing of the Pace combination in 2016.
Payment of debt obligation
Represents the mandatory payment of the term loans under the senior secured credit
facilities, payments to lenders exiting our credit facilities upon
re-financing,
as well as the repayment of debt assumed and settled in conjunction with the closing of the Pace combination in 2016 and
ActiveVideo acquisition in 2015.
Payment of financing lease obligation
Represents the amortization related to
the portion of the sale of building that did not qualify for sale-leaseback accounting.
69
Proceeds from sale-leaseback financing transaction
Represents the portion of
the sale of building that did not qualify for sale-leaseback accounting. As such the sale was recorded as a financing transaction that will be amortized over the
ten-year
lease period.
Repayment on accounts receivable financing facility
As part of the Pace combination, we obtained an accounts receivable
securitization program, which was terminated in 2017. This represents the repayment of the secured borrowings.
Payment of
deferred financing costs and debt discount
Represents the financing costs in connection with the execution of our senior secured credit facility under the Credit Agreement. The costs have been deferred and will be recognized over the
terms of the applicable credit facilities. It also represents amounts paid to lenders in the form of upfront fees, which have been treated as a reduction in the proceeds received by the ARRIS and are considered a component of the discount of the
facilities under the Credit Agreement.
Contribution from noncontrolling interest
Represents the equity
investment contributions by the noncontrolling interest in a joint venture formed for the ActiveVideo acquisition.
Excess
Income Taxes Benefit Related to Equity Compensation
During 2017, approximately $2.6 million of U.S. federal tax
benefits were obtained from tax deductions arising from equity-based compensation deductions, all of which resulted from 2017 lapses of restrictions on restricted stock awards. During 2016, approximately $2.5 million of U.S. federal tax
benefits were obtained from tax deductions arising from equity-based compensation deductions, all of which resulted from 2016 lapses of restrictions on restricted stock awards. During 2015, approximately $20.2 million of U.S. federal tax
benefits were obtained from tax deductions arising from equity-based compensation deductions, all of which resulted from 2015 exercises of
non-qualified
stock options and lapses of restrictions on restricted
stock awards.
Interest Rates
As described above, all indebtedness under our senior secured credit facilities bears interest at variable rates based on LIBOR plus an applicable spread. We entered into interest rate swap arrangements
to convert a notional amount of $1,075.0 million of our variable rate debt based on
one-month
LIBOR to a fixed rate. The objective of these swaps is to manage the variability of cash flows in the interest
payments related to the portion of the variable rate debt designated as being hedged.
Foreign Currency
A significant portion of our products are manufactured or assembled in Brazil, China, Mexico and Taiwan, and we have research and
development centers outside the United States in Canada, China, France, India, Ireland, Israel, Singapore, Sweden, Taiwan and United Kingdom. Our sales into international markets have been and are expected in the future to be an important part of
our business. These foreign operations are subject to the usual risks inherent in conducting business abroad, including risks with respect to currency exchange rates, economic and political destabilization, restrictive actions and taxation by
foreign governments, nationalization, the laws and policies of the United States affecting trade, foreign investment and loans, and foreign tax laws.
We have certain international customers who are billed in their local currency and certain international operations that procure in U.S dollars. We also have certain predictable expenditures for
international operations in local currency. Additionally, certain intercompany transactions are denominated in foreign currencies and subject to revaluation. As part of the Pace combination, we paid the former Pace shareholders 132.5 pence per share
in cash consideration, which is approximately 434.3 million British pounds, in the aggregate. These contracts were settled upon the close of the Pace combination in January 2016. We use a strategy to economically hedge these transactions and
enter into forward or currency option contracts based on a percentage of expected foreign currency revenues and expenses. The percentage can vary, based on the predictability of the exposures denominated in the foreign currency.
70
Financial Instruments
In the ordinary course of business, we, from time to time, will enter into financing arrangements with customers. These financial
arrangements include letters of credit, commitments to extend credit and guarantees of debt. These agreements could include the granting of extended payment terms that result in longer collection periods for accounts receivable and slower cash
inflows from operations and/or could result in the deferral of revenue.
We execute letters of credit and bank guarantees in
favor of certain landlords, customers and vendors to guarantee performance on contracts. Certain financial instruments require cash collateral, and these amounts are reported in Other Current Assets and Other Assets on the Consolidated Balance
Sheets. As of December 31, 2017 and 2016, we had approximately $1.5 million and $1.6 million outstanding, respectively, of restricted cash.
Cash, Cash Equivalents, Short-Term Investments and Long-Term Investments
Our cash and cash equivalents (which are highly-liquid investments with an original maturity of three months or less) are primarily held
in demand deposit accounts and money market accounts. We hold short-term investments consisting of debt securities classified as
available-for-sale,
which are stated at
estimated fair value. The debt securities consist primarily of commercial paper, certificates of deposits, short term corporate obligations and U.S. government agency financial instruments.
We hold cost method investments in private companies. These investments are recorded at $10.1 million and $6.8 million as of
December 31, 2017 and 2016, respectively. See Note 6
Investments
of Notes to the Consolidated Financial Statements for disclosures related to our investments.
We have two rabbi trusts that are used as funding vehicles for various deferred compensation plans that were available to certain current and former officers and key executives. We also have deferred
retirement salary plans, which were limited to certain current or former officers of a business acquired in 2007. We hold investments to cover the liability.
ARRIS also funds its nonqualified defined benefit plan for certain executives in a rabbi trust.
Capital Expenditures
Capital expenditures are made at a level designed to
support the strategic and operating needs of the business. ARRISs capital expenditures were $78.1 million in 2017 as compared to $66.8 million in 2016 and $49.9 million in 2015. We had no significant commitments for capital
expenditures at December 31, 2017. Management expects to invest approximately $80.0 million to $100.0 million in capital expenditures for 2018.
Deferred Income Taxes
Deferred income tax assets represent amounts
available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit
carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings
and available tax planning strategies. If we conclude that deferred tax assets are
more-likely-than-not
to not be realized, then we record a valuation allowance against those assets. We continually review the
adequacy of the valuation allowances established against deferred tax assets. As part of that review, we regularly project taxable income based on book income projections by legal entity. Our ability to utilize our U.S. federal, state and foreign
deferred tax assets is dependent upon our future taxable income by legal entity.
Net deferred tax assets of $46.5 million
(net of valuation allowances of $91.7 million and deferred tax liabilities of $333.0) as of December 31, 2017 decreased by $28.7 million as compared to the prior year. Significant components of the change in net deferred tax asset
balances include: 1) increase in the intangible deferred tax liability due to the impacts of the acquisition of Ruckus business; and 2) the benefit related to the remeasurement of certain deferred tax assets and liabilities due primarily to U.S.
corporate tax reform.
71
Defined Benefit Pension Plans
ARRIS sponsors a qualified and a
non-qualified
non-contributory
defined benefit pension plan that cover certain U.S. employees. As of January 1, 2000, we froze the qualified defined pension plan benefits for its participants
.
No minimum funding contribution are required in 2017 under the our U.S. defined benefit plan. We made voluntary minimum funding
contributions to our U.S. pension plan during 2016 and 2017. During 2017, $1.4 million was contributed. During 2016, in an effort to reduce future premiums and administrative fees as well as to increase our funded status
in connection with our U.S. pension obligation, we made a voluntary funding contribution of $5.0 million.
In late 2017,
we commenced the process of terminating our U.S. defined benefit pension plan. Ultimate plan termination is subject to regulatory approval and to prevailing market conditions and other considerations. In the event approvals are received and we
proceed with effecting termination, settlement of the plan obligations is expected to occur in 2019. If the settlement occurs as expected in 2019, the plans deferred actuarial losses remaining in accumulated other comprehensive income (loss)
at that time will be recognized as expense.
The U.S. pension plan benefit formulas generally provide for payments to retired
employees based upon their length of service and compensation as defined in the plans. Our investment policy is to fund the qualified plan as required by the Employee Retirement Income Security Act of 1974 (ERISA) and to the extent that
such contributions are tax deductible. For 2017, the plan assets were comprised of approximately 100% of cash equivalents. For 2016, the plan assets are comprised of approximately 30% equity securities, 2% debt securities, and 68% cash equivalents.
For 2018, the plans current target allocations are 80% to 100% cash equivalents. Liabilities or amounts in excess of these funding levels are accrued and reported in the consolidated balance sheets. We have established a rabbi trust to fund
the pension obligations of the Executive Chairman under his Supplemental Retirement Plan including the benefit under our
non-qualified
defined benefit plan. In addition, we have established a rabbi trust for
certain executive officers and certain senior management personnel to fund the pension liability to those officers under the
non-qualified
plan.
The investment strategies of the plans place a high priority on benefit security. The plans invest conservatively so as not to expose
assets to depreciation in adverse markets. The plans strategy also places a high priority on earning a rate of return greater than the annual inflation rate along with maintaining average market results. The plan has targeted asset
diversification across different asset classes and markets to take advantage of economic environments and to also act as a risk minimizer by dampening the portfolios volatility.
The weighted-average actuarial assumptions used to determine the benefit obligations for the three years presented are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Assumed discount rate for plan participants
|
|
|
3.45
|
%
|
|
|
3.90
|
%
|
|
|
4.15
|
%
|
The weighted-average actuarial assumptions used to determine the net periodic benefit costs are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Assumed discount rate plan participants
|
|
|
3.9
|
%
|
|
|
4.15
|
%
|
|
|
3.75
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected long-term rate of return on plan assets
|
|
|
5.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
The expected long-term rate of return on assets is derived using the building block approach which
includes assumptions for the long-term inflation rate, real return, and equity risk premiums.
No minimum funding contributions
are required in 2018 for the U.S. pension plan.
ARRIS also provides a
non-contributory
defined benefit plan which cover employees in Taiwan. Any other benefit plans outside of the U.S. are not material to ARRIS either individually or in the aggregate.
72
Key assumptions used in the valuation of the Taiwan Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Assumed discount rate for obligations
|
|
|
1.10
|
%
|
|
|
1.30
|
%
|
|
|
1.70
|
%
|
Assumed discount rate for expense
|
|
|
1.30
|
%
|
|
|
1.70
|
%
|
|
|
1.90
|
%
|
Rate of compensation increase for indirect labor
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Rate of compensation increase for direct labor
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
|
|
2.00
|
%
|
Expected long-term rate of return on plan assets (1)
|
|
|
1.40
|
%
|
|
|
1.60
|
%
|
|
|
2.00
|
%
|
(1)
|
Asset allocation is 100% in money market investments
|
The Company made funding contributions of $1.2 million related to our
non-U.S.
pension plan in 2017. ARRIS estimates it will make funding contributions of
$1.2 million in 2018.
Other Benefit Plans
ARRIS has established defined contribution plans pursuant to the Internal Revenue Code Section 401(k) that cover all eligible U.S.
employees. We contribute to these plans based upon the dollar amount of each participants contribution. We made matching contributions to these plans of approximately $16.5 million, $16.4 million, and $16.6 million in 2017, 2016
and 2015, respectively.
We have a deferred compensation plan that does not qualify under Section 401(k) of the Internal
Revenue Code and is available to our key executives and certain other employees. Employee compensation deferrals and matching contributions are held in a rabbi trust. The total of net employee deferrals and matching contributions, which is reflected
in other long-term liabilities, were $5.7 million and $4.2 million at December 31, 2017 and 2016, respectively. Total expenses included in continuing operations for the matching contributions were approximately $0.3 million and
$0.2 million in 2017 and 2016, respectively.
We previously offered a deferred compensation arrangement that allowed
certain employees to defer a portion of their earnings and defer the related income taxes. As of December 31, 2004, the plan was frozen and no further contributions are allowed. The deferred earnings are invested in a rabbi trust. The total of
net employee deferral and matching contributions, which was reflected in other long-term liabilities, was $3.1 million and $3.0 million at December 31, 2017 and 2016, respectively.
We also have a deferred retirement salary plan, which was limited to certain current or former officers of a business acquired in 2007.
The present value of the estimated future retirement benefit payments is being accrued over the estimated service period from the date of signed agreements with the employees. The accrued balance of this plan, the majority of which is included in
other long-term liabilities, was $1.5 million and $1.6 million at December 31, 2017 and 2016, respectively. Total expense (income) included in continuing operations for the deferred retirement salary plan were approximately
$0.2 million and $0.4 million for 2017 and 2016, respectively.
Critical Accounting Policies and Estimates
The accounting and financial reporting policies of ARRIS are in conformity with U.S. generally accepted accounting
principles. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management has discussed the development and selection of the critical accounting estimates
discussed below with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the related disclosures.
a) Revenue Recognition
ARRIS generates revenue from
varying activities, including the delivery of stand-alone equipment, custom design and installation services, and bundled sales arrangements inclusive of equipment, software and services.
73
The revenue from these activities is recognized in accordance with applicable accounting guidance and their related interpretations. Revenue is recognized when all the following criteria have
been met:
|
|
|
When persuasive evidence of an arrangement exists
. Contracts and customer purchase orders are used to determine the
existence of an arrangement. For professional services evidence that an agreement exists includes information documenting the scope of work to be performed, price, and customer acceptance provisions. These are contained in the signed Contract,
Purchase Order, or other documentation that shows scope, price and customer acceptance provisions.
|
|
|
|
Delivery has occurred
. Shipping documents, proof of delivery and customer acceptance (when applicable) are used to verify
delivery.
|
|
|
|
The fee is fixed or determinable
. Pricing is considered fixed or determinable at the execution of a customer arrangement,
based on specific products and quantities to be delivered at specific prices. This determination includes a review of the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment or future
discounts.
|
|
|
|
Collectability is reasonably assured
. We assess the ability to collect from customers based on a number of factors that
include information supplied by credit agencies, analyzing customer accounts, reviewing payment history and consulting bank references. Should a circumstance arise where a customer is deemed not creditworthy, all revenue related to the transaction
will be deferred until such time that payment is received and all other criteria to allow us to recognize revenue have been met.
|
Revenue is deferred if any of the above revenue recognition criteria are not met as well as when certain circumstances exist for any of our products or services, including, but not limited to:
|
|
|
When undelivered products or services that are essential to the functionality of the delivered product exist, revenue is deferred until such
undelivered products or services are delivered.
|
|
|
|
When required acceptance has not occurred.
|
|
|
|
When
trade-in
rights are granted at the time of sale, that portion of the sale is deferred until the
trade-in
right is exercised or the right expires. In determining the deferral amount, management estimates the expected
trade-in
rate and future value of the product upon
trade-in.
These factors are periodically reviewed and updated by management, and the updates may result in either an increase or decrease in the deferral.
|
Equipment
We provide customers with equipment that can be placed within various stages of a broadband system that allows
for the delivery of telephony, video and high-speed data as well as outside plant construction and maintenance equipment. For the Enterprise segment, equipment sales include products for wireless and wired connections to data networks. For equipment
sales, revenue recognition is generally established when the products have been shipped, risk of loss has transferred, objective evidence exists that the product has been accepted, and no significant obligations remain relative to the transaction.
Additionally, based on historical experience, ARRIS has established reliable estimates related to sales returns and other allowances for discounts. These estimates are recorded as a reduction to revenue at the time the revenue is initially recorded.
Our equipment deliverables typically include proprietary operating system software, which together deliver the essential
functionality of our products. Therefore, our equipment deliverables are considered
non-software
elements and are not subject to industry-specific software revenue recognition guidance.
Multiple Element Arrangements
Certain customer transactions may include multiple deliverables based on the bundling of
equipment, software and services. When a multiple element arrangement exists, the fee from the arrangement is allocated to the various deliverables, to the extent appropriate, so that the proper amount can be recognized as revenue as each element is
delivered. Based on the composition of the arrangement, we analyze the provisions of the accounting guidance to determine the appropriate model to allocate revenue to the multiple elements. If the arrangement includes a combination of elements that
fall within different applicable guidance,
74
ARRIS follows the provisions of the hierarchal literature to separate those elements and apply the relevant guidance to each.
To determine the estimated selling price in multiple-element arrangements, we first look to establish vendor specific objective evidence
(VSOE) of the selling price using the prices charged for a deliverable when sold separately. If VSOE of the selling price cannot be established for a deliverable, we look to establish third-party evidence (TPE) of the selling
price by evaluating the pricing of similar and interchangeable competitor products or services in stand-alone arrangements. However, as our products typically contain a significant element of proprietary technology and may offer substantially
different features and functionality from our competitors, we have been unable to obtain comparable pricing information with respect to our competitors products. Therefore, we have not been able to obtain reliable evidence of TPE of the
selling price. If neither VSOE nor TPE of the selling price can be established for a deliverable, we establish best estimate selling price (BESP) by reviewing historical transaction information and considering several other internal
factors, including discounting and margin objectives. We regularly review estimated selling price of the product offerings and maintain internal controls over the establishment and updates of these estimates.
Our equipment deliverables typically include proprietary operating system software, which together deliver the essential functionality of
our products. Therefore, our equipment deliverables are considered
non-software
elements and are not subject to industry-specific software revenue recognition guidance. For equipment, revenue recognition
is generally established when the products have been shipped, risk of loss has transferred, objective evidence exists that the product has been accepted, and no significant obligations remain relative to the transaction.
For arrangements that fall within the software revenue recognition guidance, the fee is allocated to the various elements based on VSOE
of fair value. If sufficient VSOE of fair value does not exist for the allocation of revenue to all the various elements in a multiple element arrangement, all revenue from the arrangement is deferred until the earlier of the point at which such
sufficient VSOE of fair value is established or all elements within the arrangement are delivered. If VSOE of fair value exists for all undelivered elements, but does not exist for one or more delivered elements, the arrangement consideration is
allocated to the various elements of the arrangement using the residual method of accounting. Under the residual method, the amount of the arrangement consideration allocated to the delivered elements is equal to the total arrangement consideration
less the aggregate fair value of the undelivered elements. Using this method, any potential discount on the arrangement is allocated entirely to the delivered elements, which ensures that the amount of revenue recognized at any point in time is not
overstated. Under the residual method, if VSOE of fair value exists for the undelivered element, generally PCS, the fair value of the undelivered element is deferred and recognized ratably over the term of the PCS contract, and the remaining portion
of the arrangement is recognized as revenue upon delivery, which generally occurs upon delivery of the product or implementation of the system. Many of ARRISs products are sold in combination with customer support and maintenance services,
which consist of software updates and product support. Software updates provide customers with rights to unspecified software updates that ARRIS chooses to develop and to maintenance releases and patches that we choose to release during the term of
the support period. Product support services include telephone support, remote diagnostics, email and web access, access to
on-site
technical support personnel and repair or replacement of hardware in the
event of damage or failure during the term of the support period. Maintenance and support service fees are recognized ratably under the straight-line method over the term of the contract, which is generally one year. We do not record receivables
associated with maintenance revenues without a firm,
non-cancelable
order from the customer. VSOE of fair value is determined based on the price charged when the same element is sold separately and based on
the prices at which our customers have renewed their customer support and maintenance. For elements that are not yet being sold separately, the price established by management, if it is probable that the price, once established, will not change
before the separate introduction of the element into the marketplace is used to measure VSOE of fair value for that element.
Software Sold Without Tangible Equipment
While not significant, ARRIS does sell internally developed software as well as
software developed by outside third parties that does not require significant production, mod-
75
ification or customization. For arrangements that contain only software and the related post-contract support, we recognize revenue in accordance with the applicable software revenue recognition
guidance. If the arrangement includes multiple elements that are software only, then the software revenue recognition guidance is applied and the fee is allocated to the various elements based on VSOE of fair value. If sufficient VSOE of fair value
does not exist for the allocation of revenue to all the various elements in a multiple element software arrangement, all revenue from the arrangement is deferred until the earlier of the point at which such sufficient VSOE of fair value is
established or all elements within the arrangement are delivered. If VSOE of fair value exists for all undelivered elements, but does not exist for one or more delivered elements, the arrangement consideration is allocated to the various elements of
the arrangement using the residual method of accounting. Under the residual method, the amount of the arrangement consideration allocated to the delivered elements is equal to the total arrangement consideration less the aggregate fair value of the
undelivered elements. Under the residual method, if VSOE of fair value exists for the undelivered element, generally post contract support (PCS), the fair value of the undelivered element is deferred and recognized ratably over the term
of the PCS contract, and the remaining portion of the arrangement is recognized as revenue upon delivery. If sufficient VSOE of fair value does not exist for PCS, revenue for the arrangement is recognized ratably over the term of support.
Standalone Services
Installation, training, and professional services are generally recognized as service
revenue when performed or upon completion of the service when the final act is significant in relation to the overall service transaction. The key element for Professional Services in determining when service transaction revenue has been earned is
determining the pattern of delivery or performance which determines the extent to which the earnings process is complete and the extent to which customers have received value from services provided. The delivery or performance conditions of our
service transactions are typically evaluated under the proportional performance or completed performance model.
Incentives
Customer incentive programs that include consideration, primarily rebates/credits to be used against future product purchases and certain volume discounts, are recorded as a reduction of revenue when the shipment of the requisite
equipment occurs.
Value Added Resellers
ARRIS typically employs the
sell-in
method of accounting for revenue when using a Value Added Reseller (VAR) as our channel to market. Because product returns are restricted, revenue under this method is generally recognized
at the time of shipment to the VAR provided all criteria for recognition are met. There are occasions, based on facts and circumstances surrounding the VAR transaction, where ARRIS will employ the sell-through method of recognizing revenue and defer
that revenue until payment occurs.
Retail
Some of our product is sold through retail channels, which may
include provisions involving a right of return. Upon shipment of the product, we reduce revenue for an estimate of potential future product returns related to the current period product revenue. Management analyzes historical returns,
channel inventory levels, and current economic trends related to our products when evaluating the adequacy of the allowance for sales returns. When applicable, revenue on shipments is reduced for estimated price protection and sales incentives
that are deemed to be contra-revenue under the authoritative guidance for revenue recognition.
b) Goodwill and Intangible Assets
Intangible assets are classified into three categories: (1) goodwill (2) intangible assets with indefinite lives not subject to amortization and (3) intangible assets with definite lives
subject to amortization. For intangible assets with definite lives, tests for impairment must be performed if conditions exist that indicate the carrying amount may not be recoverable. For intangible assets with indefinite lives and goodwill, tests
for impairment must be performed at least annually or more frequently if events or circumstances indicate that assets might be impaired.
76
The following table presents the carrying amounts of intangible assets included in our
consolidated balance sheet (in thousands):
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Carrying
Amount
|
|
|
Percentage
of Total
Assets
|
|
Goodwill
|
|
$
|
2,278,512
|
|
|
|
30
|
%
|
Indefinite-lived intangible assets
|
|
|
54,100
|
|
|
|
|
|
Definite-lived intangible assets, net
|
|
|
1,717,262
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,049,874
|
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
Goodwill
We perform impairment tests of goodwill at our reporting unit level, which is at or one level below our operating segments. For purposes of impairment testing, our reporting units are based on our
organizational structure, the financial information that is provided to and reviewed by segment management and aggregation criteria applicable to component businesses that are economically similar. Our operating segments are primarily based on the
nature of the products and services offered, which is consistent with the way management runs our business. Our CPE and our Enterprise Networks operating segments are the same as the reporting unit. Our Network & Cloud operating segment is
subdivided into three reporting units which are Network Infrastructure, Cloud and Services, and Cloud TV. Goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each business combination.
We evaluate goodwill for impairment annually as of October 1st, or when an indicator of impairment exists. As of October 1, 2017, we
early adopted Accounting Standards Update (ASU)
2017-04,
Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment (ASU
2017-04).
ASU
2017-04
eliminated Step 2 of the goodwill impairment test in which an entity had to perform procedures to determine the fair value at the impairment
testing date of its assets and liabilities. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. In accordance with the new standard, we compare the fair value of our reporting units with the carrying
amount, including goodwill. We recognize an impairment charge for the amount by which the carrying amount exceeds a reporting units fair value, as applicable.
Step 1 of the goodwill impairment test is to compare the fair value of a reporting unit to its carrying amount, including goodwill. We typically use a weighting of income approach using discounted cash
flow models and a market approach to determine the fair value of a reporting unit. The assumptions used in these models are consistent with those we believe hypothetical marketplace participants would use. Under the income approach, we calculate the
fair value of a reporting unit based on the present value of estimated future cash flows. The discounted cash flow analysis requires us to make various judgmental assumptions, including assumptions about future cash flows, growth rates and weighted
average cost of capital (discount rate). The assumptions about future cash flows and growth rates are based on the current and long-term business plans of each reporting unit. Discount rate assumptions are based on an assessment of the risk inherent
in the future cash flows of the respective reporting units. Under the market approach, we estimate the fair value based upon Market multiples of revenue and earnings derived from publicly traded companies with similar operating and investment
characteristics as the reporting unit. The weighting of the fair value derived from the market approach ranges from 0% to 50% depending on the level of comparability of these publicly-traded companies to the reporting unit. When market comparable
are not meaningful or not available, we may estimate the fair value of a reporting unit using only the income approach. We considered the relative strengths and weaknesses inherent in the valuation methodologies utilized in each approach and
consulted with a third-party valuation specialist to assist in determining the appropriate weighting.
In order to assess the
reasonableness of the calculated fair values of our reporting units, we also compare the sum of the reporting units fair values to our market capitalization and calculate an implied control premium (the excess of the sum of the reporting
units fair values over the market capitalization). We evaluate the control premium by comparing it to the fair value estimates of the reporting unit. If the implied control premium is not
77
reasonable in light of the analysis, we will reevaluate the fair value estimates of the reporting unit by adjusting the discount rates and/or other assumptions.
We continue to have the option to perform the optional qualitative assessment of goodwill prior to completing the Step 1 process
described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
Assumptions and estimates about future cash flows and discount rates are complex and often subjective. They are sensitive to changes in underlying assumptions and can be affected by a variety of factors,
including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Our assessment includes significant estimates and assumptions including the timing and amount
of future discounted cash flows, the discount rate and the perpetual growth rate used to calculate the terminal value.
Our
discounted cash flow analysis included projected cash flows over a
ten-year
period. These forecasted cash flows took into consideration managements outlook for the future and were compared to historical
performance to assess reasonableness. A discount rate was applied to the forecasted cash flows. The discount rate considered market and industry data, as well as the specific risk profile of the reporting unit. A terminal value was calculated, which
estimates the value of annual cash flow to be received after the discrete forecast periods. The terminal value was based upon an exit value of annual cash flow after the discrete forecast period in year ten.
We assign corporate assets and liabilities to our reporting units to the extent that such assets or liabilities relate to the cash flows
of the reporting unit and would be included in determining the reporting units fair value.
Examples of events or
circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting units may include such items as the following:
|
|
|
a prolonged decline in capital spending for constructing, rebuilding, maintaining, or upgrading broadband communications systems;
|
|
|
|
rapid changes in technology occurring in the broadband communication markets which could lead to the entry of new competitors or increased competition
from existing competitors that would adversely affect our sales and profitability;
|
|
|
|
the concentration of business we receive from several key customers, the loss of which would have a material adverse effect on our business;
|
|
|
|
continued consolidation of our customers base in the telecommunications industry could result in delays or reductions in purchases of our products and
services, if the acquirer decided not to continue using us as a supplier;
|
|
|
|
new products and markets currently under development may fail to realize anticipated benefits;
|
|
|
|
changes in business strategies affecting future investments in businesses, products and technologies to complement or expand our business could result
in adverse impacts to existing business and products;
|
|
|
|
volatility in the capital (equity and debt) markets, resulting in a higher discount rate; and
|
|
|
|
legal proceeding settlements and/or recoveries, and its effect on future cash flows.
|
As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will
prove to be accurate predictions of the future. Although management believes the assumptions and estimates made are reasonable and appropriate, different assumptions and estimates could materially impact the reported financial results.
78
Impairment and Analysis
During the fourth quarter of 2017, we determined the carrying amount of our Cloud TV reporting unit associated with our ActiveVideo
acquisition exceeded its fair value, and as such have recorded a partial goodwill impairment of $51.2 million as of December 31, 2017, of which $17.9 million is attributable to the noncontrolling interest. The fair value of the
reporting unit was impacted during the fourth quarter, by changes in managements expectations regarding the timing of attainment and growth for new customers, in correlation to the expense profile of the business. These changes resulted in a
lower assessment of the future cash flows for the business. The impairment is included in impairment of goodwill and intangible assets on the Consolidated Statements of Income.
In addition, the Company will adopt new guidance on revenue recognition as of January 1, 2018. As a result of retrospective application of this guidance in our Cloud TV reporting unit, an additional
goodwill impairment of approximately $5 million to $8 million is expected to be recognized in first quarter of 2018 resulting from the indirect effect of the change in accounting principle, effecting changes in the composition and carrying amount of
the net assets.
We continue to evaluate the anticipated discounted cash flows from the Cloud TV reporting unit. If current
long-term projections for this unit are not realized or materially decrease, we may be required to
write-off
all or a portion of the remaining $30 million of goodwill and $30 million of associated
intangible assets.
Our CPE segment has significant goodwill as of October 1, 2017. The following table sets forth
information regarding our CPE reporting unit as of October 1, 2017, including key assumptions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key Assumptions
|
|
|
Fair Value Exceeds
Carrying Amount as of
October 1, 2017
|
|
|
Goodwill as of October 1, 2017
|
|
|
|
Discount
Rate
|
|
|
Terminal
Growth
Rate
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percent of
Total Assets
|
|
CPE
|
|
|
10
|
%
|
|
|
0.5
|
%
|
|
|
34
|
%
|
|
$
|
1,391,582
|
|
|
|
18
|
%
|
During 2017, our CPE gross margins declined due to higher memory pricing. Our projected cash flows
reflect assumptions regarding modest improvement in the margin profile resulting from easing of these memory pricing pressures; and/or offsetting pricing increases over the next several years. Although managements assumptions are believed to
be reasonable, there can be no assurance lower memory pricing and/or pricing increases, given the competitive landscape for some of our products, particularly in the CPE segment, will occur and could make it difficult to return to historical
operating margin levels. Relatively small changes in certain key assumptions could result in this reporting unit failing Step 1 of the goodwill impairment test. Using the income approach, and holding other assumptions constant, the following table
provides sensitivity analysis related to the impact of key assumptions on a standalone basis, on the resulting percentage change in fair value of our CPE reporting unit and corresponding percentage coverage under each scenario, as of October 1,
2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assuming hypothetical 10%
reduction in cash flows
|
|
|
Assuming hypothetical 1%
increase in discount rate
|
|
|
Assuming hypothetical 10%
reduction in cash flows and 1%
increase
in discount rate
|
|
Percent reduction in fair value
|
|
|
(14
|
%)
|
|
|
(13
|
%)
|
|
|
(25
|
%)
|
Percent by which fair value exceeds carrying amount
|
|
|
18
|
%
|
|
|
19
|
%
|
|
|
2
|
%
|
There was no impairment of goodwill resulting from our annual impairment testing in 2016 and 2015.
Indefinite-lived intangible assets, net
We test intangible assets determined to have indefinite useful lives, including certain trademarks,
in-process
research and development and goodwill, for impairment
annually, or more frequently if events or circumstances indicate that assets might be impaired. We use a variety of methodologies in conducting impairment assessments of indefinite-lived intangible assets, including, but not limited to, discounted
cash flow models, which are based
79
on the assumptions we believe hypothetical marketplace participants would use. For indefinite-lived intangible assets, other than goodwill, if the carrying amount exceeds the fair value, an
impairment charge is recognized in an amount equal to that excess. Acquired
in-process
research and development assets are initially recognized and measured at fair value and classified as indefinite-lived
assets until the successful completion or abandonment of the associated research and development efforts. Accordingly, during the development period after acquisition, this asset is not amortized as charges to earnings. Completion of the associated
research and development efforts would cause the indefinite-lived
in-process
research and development assets to become a definite-lived asset. As such, prior to commencing amortization the assets are tested
for impairment.
We have the option to perform a qualitative assessment of indefinite-lived intangible assets, prior to
completing the impairment test described above. The Company must assess whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount. If the Company concludes that this is the case, it must perform
the testing described above. Otherwise, the Company does not need to perform any further assessment.
Assumptions and estimates
about future values and remaining useful lives of our acquired intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as
changes in our business strategy and our internal forecasts.
During the fourth quarter of 2017, the Company recorded a
$3.8 million partial impairment related to indefinite-lived tradenames acquired in our ActiveVideo acquisition and included as part of our Cloud TV reporting unit, of which $1.3 million is attributable the noncontrolling interest. The
impairment reflects changes resulting from the future projected cash flows of the business. The impairment is included in impairment of goodwill and intangible assets on the Consolidated Statements of Income.
In 2016,
in-process
research and development of $2.2 million was written off related to
projects for which development efforts were abandoned subsequent to the Pace combination. The write off related to the CPE segment and was included in Integration, acquisition, restructuring and other costs on the Consolidated Statements of Income.
There were no impairment charges related to indefinite-lived intangible assets in 2015.
Our ongoing consideration of all the factors described previously could result in additional impairment charges in the future, which could
adversely affect our net income.
Definite-lived intangible assets, net
When facts and circumstances indicate that the carrying amount of definite-lived intangible assets may not be recoverable, management
assesses the recoverability of the carrying amount by preparing estimates of cash flows. Examples of such circumstances include, but are not limited to, operating or cash flow losses from the use of such assets or changes in our intended uses of
such assets. These estimated future cash flows are consistent with those we use in our internal planning. To test for recovery, we group assets (an asset group) in a manner that represents the lowest level for which identifiable cash
flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the expected future cash flows (undiscounted and
pre-tax
based upon policy decision) is less than the
carrying amount, we recognize an impairment loss. The impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the fair value. We use a variety of methodologies to determine the fair value of these
assets, including discounted cash flow models, which are consistent with the assumptions we believe hypothetical marketplace participants would use.
There were no impairment charges related to definite-lived intangible assets during 2017, 2016 and 2015.
c) Accounts Receivable and Allowance for Doubtful Accounts and Sales Returns
Accounts receivable are stated at amounts owed by the customers, net of allowance for doubtful accounts, sales returns and allowances. We establish a reserve for doubtful accounts based upon our
historical experience
80
and leading market indicators in collecting accounts receivable. A majority of our accounts receivable are from a few large cable system operators and telecommunication companies, either with
investment rated debt outstanding or with substantial financial resources, and have favorable payment histories. If we were to have a collection problem with one of our major customers, it is possible the reserve will not be sufficient. We calculate
our reserve for uncollectible accounts using a model that considers customer payment history, recent customer press releases, bankruptcy filings, if any, Dun & Bradstreet reports, and financial statement reviews. Our calculation is reviewed
by management to assess whether there needs to be an adjustment to the reserve for uncollectible accounts. The reserve is established through a charge to the provision and represents amounts of current and past due customer receivable balances of
which management deems a loss to be both probable and estimable. Accounts receivable are charged to the allowance when determined to be no longer collectible.
In the event that we are not able to predict changes in the financial condition of our customers, resulting in an unexpected problem with collectability of receivables and our actual bad debts differ from
estimates, or we adjust estimates in future periods, our established allowances may be insufficient and we may be required to record additional allowances. Alternatively, if we provided more allowances than are ultimately required, we may reverse a
portion of such provisions in future periods based on our actual collection experience. In the event we adjust our allowance estimates, it could materially affect our operating results and financial position.
We also establish a reserve for sales returns and allowances. The reserve is an estimate of the impact of potential returns based upon
historic trends.
d) Inventory Valuation
Inventory is stated at the lower of cost or 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. Inventory cost is determined on a
first-in,
first-out
basis.
The cost of
work-in-process
and finished goods is comprised of material, labor and overhead.
We continuously evaluate future usage of product and where supply exceeds demand, we may establish a reserve. In reviewing inventory valuations, we also review for obsolete items. This evaluation requires
us to estimate future usage, which, in an industry where rapid technological changes and significant variations in capital spending by system operators are prevalent, is difficult. As a result, to the extent that we have overestimated future usage
of inventory, the value of that inventory on our financial statements may be overstated. When we believe that we have overestimated our future usage, we adjust for that overstatement through an increase in cost of sales in the period identified as
the inventory is written down to its net realizable value. Inherent in our valuations are certain management judgments and estimates, including markdowns, shrinkage, manufacturing schedules, possible alternative uses and future sales forecasts,
which can significantly impact ending inventory valuation and gross margin. The methodologies utilized by ARRIS in its application of the above methods are consistent for all periods presented.
We conduct physical inventory counts at all ARRIS locations, either annually or through ongoing cycle-counts, to confirm the existence of
our inventory.
e) Warranty
We offer warranties of various lengths to our customers depending on product specifics and agreement terms with our customers. We provide,
by a current charge to cost of sales in the period in which the related revenue is recognized, an estimate of future warranty obligations. The estimate is based upon historical experience. The embedded product base, failure rates, cost to repair and
warranty periods are used as a basis for calculating the estimate. We also provide, via a charge to current cost of sales, estimated expected costs associated with
non-recurring
product failures. In the event
of a significant
non-recurring
product failure, the amount of the reserve may not be sufficient. In the event that our historical experience of product failure rates and costs of correcting product failures
change, our estimates relating to probable losses resulting from a significant
non-recurring
product failure changes, or to the extent that other
non-recurring
warranty
claims occur in the future, we may be required to record additional warranty reserves. Alternatively, if we provided more reserves
81
than we needed, we may reverse a portion of such provisions in future periods. In the event we change our warranty reserve estimates, the resulting charge against future cost of sales or reversal
of previously recorded charges may materially affect our operating results and financial position.
f)
Income Taxes
Considerable judgment must be exercised in determining the proper amount of deferred
income tax assets to record on the balance sheet and in concluding as to the correct amount of income tax liabilities relating to uncertain tax positions.
Deferred income tax assets must be evaluated quarterly and a valuation allowance should be established and maintained when it is
more-likely-than-not
that all or a
portion of deferred income tax assets will not be realized. In determining the likelihood of realizing deferred income tax assets, management must consider all positive and negative evidence, such as the probability of future taxable income, tax
planning, and the historical profitability of the entity in the jurisdiction where the asset has been recorded. Significant judgment must also be utilized by management in modeling the future taxable income of a legal entity in a particular
jurisdiction. Whenever management subsequently concludes that it is
more-likely-than-not
that a deferred income tax asset will be realized, the valuation allowance must be partially or totally removed.
Uncertain tax positions occur, and a resulting income tax liability is recorded, when management concludes that an income tax
position fails to achieve a
more-likely-than-not
recognition threshold. In evaluating whether an income tax position is uncertain, management must presume the income tax position will be examined by the
relevant taxing authority that has full knowledge of all relevant information and management must consider the technical merits of an income tax position based on the statutes, legislative intent, regulations, rulings and case law specific to each
income tax position. Uncertain income tax positions must be evaluated quarterly and, when they no longer fail to meet the
more-likely-than-not
recognition threshold, the related income tax liability must be
derecognized.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Act) was enacted into law. The new
legislation contains several key tax provisions that affected us, specifically for the year ended December 31, 2017, including a
one-time
mandatory transition tax on accumulated foreign earnings and a
remeasurement of certain deferred tax assets and liabilities to reflect the reduced corporate income tax rate of 21% effective January 1, 2018. We are required to recognize the effect of the tax law changes in the period of enactment, such as
determining the transition tax, remeasuring our U.S. deferred tax assets and liabilities as well as reassessing the realizability of our deferred tax assets. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax
Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Act was passed late in the fourth
quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the transition tax, deferred tax
re-measurements,
and other items to be
incomplete due to the forthcoming guidance and our ongoing analysis of final
year-end
data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118.
Impact of Recently Issued Accounting Pronouncements
Accounting pronouncements that have recently been issued but have not yet been implemented by us are described in Note 3
Impact of Recently Issued Accounting Standards
of Notes to the
Consolidated Financial Statements, which describes the potential impact that these pronouncements are expected to have on our financial position, results of operations and cash flows.
Forward-Looking Statements
Certain information and statements contained in
this Managements Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report, including statements using terms such as may, expect, anticipate,
intend, estimate, believe, plan, continue, could be, or similar varia-
82
tions thereof, constitute forward-looking statements with respect to the financial condition, results of operations, and business of ARRIS, including statements that are based on current
expectations, estimates, forecasts, and projections about the markets in which we operate and managements beliefs and assumptions regarding these markets. These and any other statements in this document that are not statements about historical
facts also are forward-looking statements. We caution investors that forward-looking statements made by us are not guarantees of future performance and that a variety of factors could cause our actual results to differ materially from
the anticipated results or other expectations expressed in our forward-looking statements. Important factors that could cause results or events to differ from current expectations are described in the risk factors set forth in Item 1A,
Risk Factors. These factors are not intended to be an
all-encompassing
list of risks and uncertainties that may affect the operations, performance, development and results of our business, but
instead are the risks that we currently perceive as potentially being material. In providing forward-looking statements, ARRIS expressly disclaims any obligation to update publicly or otherwise these statements, whether as a result of new
information, future events or otherwise except to the extent required by law.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
On January 4, 2016, ARRIS Group, Inc. (ARRIS Group) completed its combination with Pace plc, a company incorporated in England and Wales (Pace). In connection with the Pace
combination, (i) ARRIS International plc (the Registrant), a company incorporated in England and Wales, acquired all of the outstanding ordinary shares of Pace 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 Pace 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 Pace combination, ARRIS
Group became an indirect wholly-owned subsidiary of the Registrant and Pace became a direct wholly-owned subsidiary of the Registrant. The ordinary shares of the Registrant trade on the NASDAQ under the symbol ARRS.
This Annual Report on Form
10-K
is being filed by the Registrant on behalf of, and as successor,
to ARRIS Group. The Registrant is deemed to be the successor to ARRIS Group pursuant to Rule
12g-3(a)
under the Securities Exchange Act of 1934, as amended (the Exchange Act), and the ordinary
shares of the Registrant are deemed to be registered under Section 12(b) of the Exchange Act.
ARRIS International plc
(together with its consolidated subsidiaries and consolidated venture, except as the context otherwise indicates, ARRIS or the Company) is a global entertainment, communications, and networking technology and solutions
provider, headquartered in Suwanee, Georgia. The Company operates in three business segments, Customer Premises Equipment, Network & Cloud, and Enterprise Networks (See Note 10
Segment Information
of Notes to the Consolidated
Financial Statements for additional details), specializing in enabling service providers including cable, telephone, and digital broadcast satellite operators and media programmers to deliver media, voice, IP data services, and
Wi-Fi
to their subscribers and enabling enterprises to experience constant, wireless and wired connectivity across complex and varied networking environments. ARRIS is a leader in
set-tops,
digital video and Internet Protocol Television distribution systems, broadband access infrastructure platforms, associated data and voice Customer Premises Equipment, and wired and wireless
enterprise networking. The Companys solutions are complemented by a broad array of services including technical support, repair and refurbishment, and systems design and integration.
The Company has evaluated subsequent events through the date that the financial statements were issued.
Note 2. Summary of Significant Accounting Policies
(a) Consolidation
The accompanying consolidated
financial statements include the accounts of the Company and its wholly owned subsidiaries and consolidated venture in which the Company owns more than 50% of the outstanding voting shares of the entity. Intercompany accounts and transactions have
been eliminated in consolidation. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP), and our reporting currency is the United States Dollar (USD).
(b) Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
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(c) Reclassifications
Certain prior year amounts in the financial statements and notes have been reclassified to conform to the fiscal year 2017 presentation.
(d) Cash, Cash Equivalents, and Investments
ARRISs cash and cash equivalents (which are highly-liquid investments with a remaining maturity at the date of purchase of three
months or less) are primarily held in demand deposit accounts and money market accounts. The Company holds investments consisting of mutual funds and debt securities classified as
available-for-sale,
which are stated at estimated fair value. The debt securities consist primarily of commercial paper, certificates of deposits, short term corporate
obligations and U.S. government agency financial instruments. These investments are on deposit with major financial institutions.
The Company accounts for investments in companies in which it has significant influence, or ownership between 20% and 50% of the investee under the equity method of accounting. Under the equity method,
the investment is originally recorded at cost and adjusted to recognize the Companys share of net earnings or losses, any basis difference of the investee, and dividends received.
Investments in which we do not exercise significant influence (generally less than a 20 percent ownership interest) are accounted for
under the cost method.
The Company evaluates its investments for impairment whenever events or changes in circumstances
indicate that the carrying amount of such investments may not be recoverable. An investment is written down to fair value if there is evidence of a loss in value which is other than temporary.
(e) Accounts Receivable and Allowance for Doubtful Accounts and Sales Returns
Accounts receivable are stated at amounts owed by the customers, net of allowance for doubtful accounts, sales returns and allowances.
ARRIS establishes a reserve for doubtful accounts based upon the historical experience and leading market indicators in collecting accounts receivable. A majority of the accounts receivable are from a few large cable system operators and
telecommunication companies, either with investment rated debt outstanding or with substantial financial resources, and have favorable payment histories. If ARRIS was to have a collection problem with one of its major customers, it is possible the
reserve will not be sufficient. ARRIS calculates the reserve for uncollectible accounts using a model that considers customer payment history, recent customer press releases, bankruptcy filings, if any, Dun & Bradstreet reports, and
financial statement reviews. The calculation is reviewed by management to assess whether there needs to be an adjustment to the reserve for uncollectible accounts. The reserve is established through a charge to the provision and represents amounts
of current and past due customer receivable balances of which management deems a loss to be both probable and estimable. Accounts receivable are charged to the allowance when determined to be no longer collectible.
ARRIS also establishes a reserve for sales returns and allowances. The reserve is an estimate of the impact of potential returns based
upon historic trends.
The following table represents a summary of the changes in the reserve for allowance for doubtful
accounts, and sales returns and allowances for fiscal 2017, 2016 and 2015 (in thousands):
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2017
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2016
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2015
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Balance at beginning of fiscal year
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$
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15,253
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|
|
$
|
9,975
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|
$
|
6,392
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(Credit) charges to expenses
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(566
|
)
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1,386
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|
|
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2,997
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|
(Write-offs) recoveries, net
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|
(4,457
|
)
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3,892
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586
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|
|
|
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Balance at end of fiscal year
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$
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10,230
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|
$
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15,253
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$
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9,975
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(f) Inventories
Inventories are stated at the lower of cost or net realizable value. Inventory cost is determined on a
first-in,
first-out
basis. The cost of
work-in-process
and finished goods is comprised of
material, labor, and overhead.
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(g) Revenue recognition
ARRIS generates revenue from of varying activities, including the delivery of stand-alone equipment, custom design and installation
services, and bundled sales arrangements inclusive of equipment, software and services. The revenue from these activities is recognized in accordance with applicable accounting guidance and their related interpretations.
Revenue is recognized when all the following criteria have been met:
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When persuasive evidence of an arrangement exists
. Contracts and customer purchase orders are used to determine the
existence of an arrangement. For professional services evidence that an agreement exists includes information documenting the scope of work to be performed, price, and customer acceptance. These are contained in the signed contract, purchase order,
or other documentation that shows scope, price and customer acceptance.
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Delivery has occurred
. Shipping documents, proof of delivery and customer acceptance (when applicable) are used to verify
delivery.
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The fee is fixed or determinable
. Pricing is considered fixed or determinable at the execution of a customer arrangement,
based on specific products and quantities to be delivered at specific prices. This determination includes a review of the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment or future
discounts.
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Collectability is reasonably assured
. The Company assesses the ability to collect from customers based on a number of
factors that include information supplied by credit agencies, analyzing customer accounts, reviewing payment history and consulting bank references. Should a circumstance arise where a customer is deemed not creditworthy, all revenue related to the
transaction will be deferred until such time that payment is received and all other criteria to allow the Company to recognize revenue have been met.
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Revenue is deferred if any of the above revenue recognition criteria are not met as well as when certain circumstances exist for any of our products or services, including, but not limited to:
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When undelivered products or services that are essential to the functionality of the delivered product exist, revenue is deferred until such
undelivered products or services are delivered.
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When required acceptance has not occurred.
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When
trade-in
rights are granted at the time of sale, that portion of the sale is deferred until the
trade-in
right is exercised or the right expires. In determining the deferral amount, management estimates the expected
trade-in
rate and future value of the product upon
trade-in.
These factors are periodically reviewed and updated by management, and the updates may result in either an increase or decrease in the deferral.
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Equipment
The Company provides customers with equipment that can be placed within various stages of a broadband system that
allows for the delivery of telephony, video and high-speed data as well as outside plant construction and maintenance equipment. For the Enterprise segment, equipment sales include products for wireless and wired connections to data networks. For
equipment sales, revenue recognition is generally established when the products have been shipped, risk of loss has transferred, objective evidence exists that the product has been accepted, and no significant obligations remain relative to the
transaction. Additionally, based on historical experience, ARRIS has established reliable estimates related to sales returns and other allowances for discounts. These estimates are recorded as a reduction to revenue at the time the revenue is
initially recorded.
ARRISs equipment deliverables typically include proprietary operating system software, which
together deliver the essential functionality of its products. Therefore, ARRISs equipment deliverables are considered
non-software
elements and are not subject to industry-specific software revenue
recognition guidance.
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Multiple Element Arrangements -
Certain customer transactions may include multiple
deliverables based on the bundling of equipment, software and services. When a multiple element arrangement exists, the fee from the arrangement is allocated to the various deliverables, to the extent appropriate, so that the proper amount can be
recognized as revenue as each element is delivered. Based on the composition of the arrangement, the Company analyzes the provisions of the accounting guidance to determine the appropriate model to allocate revenue to the multiple elements. If the
arrangement includes a combination of elements that fall within different applicable guidance, ARRIS follows the provisions of the hierarchal literature to separate those elements and apply the relevant guidance to each.
To determine the estimated selling price in multiple-element arrangements, the Company first looks to establish vendor specific objective
evidence (VSOE) of the selling price using the prices charged for a deliverable when sold separately. If VSOE of the selling price cannot be established for a deliverable, the Company looks to establish third-party evidence
(TPE) of the selling price by evaluating the pricing of similar and interchangeable competitor products or services in stand-alone arrangements. However, as ARRISs products typically contain a significant element of proprietary
technology and may offer substantially different features and functionality from its competitors, ARRIS has been unable to obtain comparable pricing information with respect to its competitors products. Therefore, the Company has not been able
to obtain reliable evidence of TPE of the selling price. If neither VSOE nor TPE of the selling price can be established for a deliverable, the Company establishes best estimate selling price (BESP) by reviewing historical transaction
information and considering several other internal factors, including discounting and margin objectives. The Company regularly reviews estimated selling price of the product offerings and maintain internal controls over the establishment and
updates of these estimates.
For arrangements that fall within the software revenue recognition guidance, the fee is allocated
to the various elements based on VSOE of fair value. If sufficient VSOE of fair value does not exist for the allocation of revenue to all the various elements in a multiple element arrangement, all revenue from the arrangement is deferred until the
earlier of the point at which such sufficient VSOE of fair value is established or all elements within the arrangement are delivered. If VSOE of fair value exists for all undelivered elements, but does not exist for one or more delivered elements,
the arrangement consideration is allocated to the various elements of the arrangement using the residual method of accounting. Under the residual method, the amount of the arrangement consideration allocated to the delivered elements is equal to the
total arrangement consideration less the aggregate fair value of the undelivered elements. Using this method, any potential discount on the arrangement is allocated entirely to the delivered elements, which ensures that the amount of revenue
recognized at any point in time is not overstated. Under the residual method, if VSOE of fair value exists for the undelivered element, generally PCS, the fair value of the undelivered element is deferred and recognized ratably over the term of the
PCS contract, and the remaining portion of the arrangement is recognized as revenue upon delivery, which generally occurs upon delivery of the product or implementation of the system. Many of ARRISs products are sold in combination with
customer support and maintenance services, which consist of software updates and product support. Software updates provide customers with rights to unspecified software updates that ARRIS chooses to develop and to maintenance releases and patches
that the Company chooses to release during the period of the support period. Product support services include telephone support, remote diagnostics, email and web access, access to
on-site
technical support
personnel and repair or replacement of hardware in the event of damage or failure during the term of the support period. Maintenance and support service fees are recognized ratably under the straight-line method over the term of the contract, which
is generally one year. The Company does not record receivables associated with maintenance revenues without a firm,
non-cancelable
order from the customer. VSOE of fair value is determined based on the price
charged when the same element is sold separately and based on the prices at which our customers have renewed their customer support and maintenance. For elements that are not yet being sold separately, the price established by management, if it is
probable that the price, once established, will not change before the separate introduction of the element into the marketplace is used to measure VSOE of fair value for that element.
99
Software Sold Without Tangible Equipment
While not significant, ARRIS does
sell internally developed software as well as software developed by outside third parties that does not require significant production, modification or customization. For arrangements that contain only software and the related post-contract support,
the Company recognizes revenue in accordance with the applicable software revenue recognition guidance. If the arrangement includes multiple elements that are software only, then the software revenue recognition guidance is applied and the fee is
allocated to the various elements based on VSOE of fair value. If sufficient VSOE of fair value does not exist for the allocation of revenue to all the various elements in a multiple element software arrangement, all revenue from the arrangement is
deferred until the earlier of the point at which such sufficient VSOE of fair value is established or all elements within the arrangement are delivered. If VSOE of fair value exists for all undelivered elements, but does not exist for one or more
delivered elements, the arrangement consideration is allocated to the various elements of the arrangement using the residual method of accounting. Under the residual method, the amount of the arrangement consideration allocated to the delivered
elements is equal to the total arrangement consideration less the aggregate fair value of the undelivered elements. Under the residual method, if VSOE of fair value exists for the undelivered element, generally post contract support
(PCS), the fair value of the undelivered element is deferred and recognized ratably over the term of the PCS contract, and the remaining portion of the arrangement is recognized as revenue upon delivery. If sufficient VSOE of fair value
does not exist for PCS, revenue for the arrangement is recognized ratably over the term of support.
Standalone Services
Installation, training, and professional services are generally recognized in service revenue when performed or upon completion of the service when the final act is significant in relation to the overall service transaction. The key
element for Professional Services in determining when service transaction revenue has been earned is determining the pattern of delivery or performance which determines the extent to which the earnings process is complete and the extent to which
customers have received value from services provided. The delivery or performance conditions of our service transactions are typically evaluated under the proportional performance or completed performance model.
Incentives
Customer incentive programs that include consideration, primarily rebates/credits to be used against future
product purchases and certain volume discounts, are recorded as a reduction of revenue when the shipment of the requisite equipment occurs.
Value Added Resellers
ARRIS typically employs the
sell-in
method of accounting for revenue when using a Value Added Reseller (VAR) as our
channel to market. Because product returns are restricted, revenue under this method is generally recognized at the time of shipment to the VAR provided all criteria for recognition are met. There are occasions, based on facts and circumstances
surrounding the VAR transaction, where ARRIS will employ the sell-through method of recognizing revenue and defer that revenue until payment occurs.
Retail
Some of ARRISs product is sold through retail channels, which may include provisions involving a right of return. Upon shipment of the product, the Company reduces revenue
for an estimate of potential future product returns related to the current period product revenue. Management analyzes historical returns, channel inventory levels, and current economic trends related to the Companys products when
evaluating the adequacy of the allowance for sales returns. When applicable, revenue on shipments is reduced for estimated price protection and sales incentives that are deemed to be contra-revenue under the authoritative guidance for revenue
recognition.
(h) Shipping and Handling Fees
Shipping and handling costs for the years ended December 31, 2017, 2016, and 2015 were approximately $12.6 million,
$4.3 million and $5.6 million, respectively, and are classified in cost of sales.
100
(i) Taxes Collected from Customers and Remitted to Governmental
Authorities
Taxes assessed by a government authority that are both imposed on and concurrent with specific revenue
transactions between us and our customers are presented on a net basis in our Consolidated Statements of Income.
(j) Depreciation of Property, Plant and Equipment
The Company provides for depreciation of property, plant and equipment on the straight-line basis over estimated useful lives of 10 to 40 years for buildings and improvements, 2 to 10 years for machinery
and equipment, and the shorter of the term of the lease or useful life for leasehold improvements. Included in depreciation expense is the amortization of landlord funded tenant improvements which amounted to $12.1 million in 2017,
$6.6 million in 2016 and $4.5 million in 2015. Depreciation expense, including amortization of capital leases, for the years ended December 31, 2017, 2016, and 2015 was approximately $88.2 million, $90.6 million, and
$71.8 million, respectively.
Certain events or changes in circumstances may indicate that the recoverability of the
carrying amount of property, plant and equipment should be assessed, including, among others, a significant decrease in market value, a significant change in the business climate in a particular market, or a current period operating or cash flow
loss combined with historical losses or projected future losses. To test for recovery, ARRIS groups assets (an asset group) in a manner that represents the lowest level for which identifiable cash flows are largely independent of the
cash flows of other groups of assets and liabilities. When such events or changes in circumstances are present, the Company estimates the future cash flows expected to result from the use of the asset or asset group and its eventual disposition.
These estimated future cash flows are consistent with those used in internal planning. If the sum of the expected future cash flows (undiscounted and
pre-tax
based upon policy decision) is less than the
carrying amount, the Company recognizes an impairment loss. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. A variety of methodologies are used to determine the fair value of property, plant and
equipment, including appraisals and discounted cash flow models, which are consistent with the assumptions the Company believes hypothetical marketplace participants would use. See Note 12
Property, Plant and Equipment
of Notes to the
Consolidated Financial Statements for further information on property, plant and equipment.
(k)
Goodwill, and Other Intangible Assets
Intangible assets are classified into three categories: (1) goodwill,
(2) intangible assets with definite lives subject to amortization, and (3) intangible assets with indefinite lives not subject to amortization. The Company determines the useful lives of its identifiable intangible assets after considering
the specific facts and circumstances related to each intangible asset. Factors the Company considers when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, the
Companys long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset, and other economic factors, including competition and specific market conditions. Intangible assets that are
deemed to have definite lives are amortized, primarily on a straight-line basis, over their useful lives, generally ranging from 1 to 13 years. Certain intangible assets are being amortized using an accelerated method, as an accelerated method best
approximates the distribution of cash flows generated by the intangible assets. See Note 5
Goodwill and Other Intangible Assets
of Notes to the Consolidated Financial Statements for further information on goodwill and other intangible assets.
Goodwill
The Company performs impairment tests of goodwill at the reporting unit level, which is at or one level below the operating segments. The operating segments are primarily based on the nature of the
products and services offered, which is consistent with the way management operates the business. The Customer Premises Equipment and Enterprise Networks operating segments are the same as the reporting unit. The Network &
101
Cloud operating segment is subdivided into three reporting units which are Network Infrastructure, Cloud Services, and Cloud TV. Goodwill is assigned to the reporting unit or units that benefit
from the synergies arising from each business combination.
The Company evaluates goodwill for impairment
annually as of October 1
st
, or when an indicator of
impairment exists. As of October 1, 2017, we early adopted Accounting Standards Update (ASU) 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04
eliminated Step 2 of the goodwill impairment test in which an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities. The standard does not change the guidance on completing Step 1
of the goodwill impairment test. In accordance with the new standard, we compare the fair value of our reporting units with the carrying amount, including goodwill. We recognize an impairment charge for the amount by which the carrying amount
exceeds a reporting units fair value, as applicable.
The Company typically uses a weighting of income approach using
discounted cash flow models and a market approach to determine the fair value of a reporting unit. The assumptions used in these models are consistent with those the Company believes hypothetical marketplace participants would use.
The Company continues to have the option to perform the optional qualitative assessment of goodwill prior to completing the Step 1
process described above to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
During the fourth quarter of 2017, the Company determined the carrying amount of its Cloud TV reporting unit associated with our ActiveVideo acquisition exceeded its fair value, and as such have recorded
a partial goodwill impairment of $51.2 million as of December 31, 2017, of which $17.9 million is attributable to noncontrolling interest. There was no impairment of goodwill resulting from the Companys annual impairment testing
in 2016 and 2015.
Indefinite-lived intangible assets, net
The Company tests intangible assets determined to have indefinite useful lives, including certain trademarks and
in-process
research and development, for impairment annually, or more frequently if events or circumstances indicate that assets might be impaired. The Company performs these annual impairment reviews as of the
first day of our fourth fiscal quarter (October 1). A variety of methodologies are used in conducting impairment assessments of indefinite-lived intangible assets, including, but not limited to, discounted cash flow models, which are based on the
assumptions the Company believes hypothetical marketplace participants would use. For indefinite-lived intangible assets other than goodwill, if the carrying amount exceeds the fair value, an impairment charge is recognized in an amount equal to
that excess. Acquired
in-process
research and development assets are initially recognized and measured at fair value and classified as indefinite-lived assets until the successful completion or abandonment of
the associated research and development efforts. Accordingly, during the development period after acquisition, this asset is not amortized as charges to earnings. Completion of the associated research and development efforts cause the
indefinite-lived
in-process
research and development assets to become a finite-lived asset. As such, prior to commencing amortization the assets is tested for impairment.
The Company has the option to perform a qualitative assessment of indefinite-lived intangible assets, prior to completing the impairment
test described above. The Company must assess whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount. If the Company concludes that this is the case, it must perform the testing described
above. Otherwise, the Company does not need to perform any further assessment.
During the fourth quarter of 2017, the Company
recorded a $3.8 million partial impairment related to indefinite-lived tradenames acquired included as part of our Cloud TV reporting unit, of which $1.3 million is attributable to noncontrolling interest.
102
During 2016, the Company wrote off $2.2 million of
in-process
R&D related to projects for which development efforts were abandoned subsequent to the Pace combination.
There were no impairment charges related to intangible assets with indefinite-lives in 2015.
Definite-lived intangible assets, net
When facts and circumstances indicate that the carrying amount of definite-lived intangible assets may not be recoverable, management assesses the recoverability of the carrying amount by preparing
estimates of future cash flows. These estimated future cash flows are consistent with those we use in our internal planning. To test for recovery, the Company group assets (an asset group) in a manner that represents the lowest level for
which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the expected future cash flows (undiscounted and
pre-tax
based upon policy
decision) is less than the carrying amount, the Company recognizes an impairment loss. The impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the fair value. A variety of methodologies are used
to determine the fair value of these assets, including discounted cash flow models, which are consistent with the assumptions the Company believes hypothetical marketplace participants would use.
There were no impairment charges related to definite-lived intangible assets during 2017, 2016 and 2015.
(l) Advertising and Sales Promotion
Advertising and sales promotion costs are expensed as incurred. Advertising and sales promotion expense was approximately
$17.5 million, $19.6 million, and $16.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.
(m) Research and Development
Research and
development (R&D) costs are expensed as incurred. The expenditures include compensation costs, materials, other direct expenses, and an allocation of information technology, telecommunications, and facilities costs.
(n) Warranty
ARRIS provides warranties of various lengths to customers based on the specific product and the terms of individual agreements. For further discussion, see Note 9
Guarantees
of the Notes to the
Consolidated Financial Statements for further discussion.
(o) Income Taxes
ARRIS uses the liability method of accounting for income taxes, which requires recognition of temporary differences between financial
statement and income tax bases of assets and liabilities, measured by enacted tax rates.
If necessary, the measurement of
deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on available evidence. ARRIS reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be
taken in a tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. See Note 18
Income Taxes
of Notes to the Consolidated Financial Statements for further discussion.
(p) Foreign Currency
A significant portion of the Companys products are manufactured or assembled in Brazil, China, Mexico and Taiwan, and we have research and development centers in Canada, China, France, India,
Ireland, Israel, Singapore, Sweden, Taiwan and United Kingdom. Sales into international markets have been and are expected in
103
the future to be an important part of the Companys business. These foreign operations are subject to the usual risks inherent in conducting business abroad, including risks with respect to
currency exchange rates, economic and political destabilization, restrictive actions and taxation by foreign governments, nationalization, the laws and policies of the United States affecting trade, foreign investment and loans, and foreign tax
laws.
The financial position and results of operations of certain of the Companys international subsidiaries are
measured using the local currency as the functional currency. Revenues and expenses of these subsidiaries are translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities of these subsidiaries are
translated at the exchange rates as of the balance sheet date. Translation gains and losses are recorded in accumulated other comprehensive income.
ARRIS has certain international customers who are billed in their local currency and certain international operations that procure in U.S. dollars. ARRIS also has certain predictable expenditures for
international operations in local currency. Additionally, certain intercompany transactions are denominated in foreign currencies and subject to revaluation. The Company enters into forward or currency option contracts based on a percentage of
expected foreign currency exposures. The percentage can vary, based on the predictability of the exposures denominated in the foreign currency. See Note 8
Derivative Instruments and Hedging Activities
of Notes to the Consolidated Financial
Statements for further discussion. Foreign currency transaction gains and losses were recognized in earnings when incurred.
(q) Stock-Based Compensation
See Note 19
Stock-Based Compensation
of Notes to the Consolidated Financial Statements for further discussion of the Companys significant accounting policies related to stock based
compensation.
(r) Concentrations of Credit Risk
Financial instruments that potentially subject ARRIS to concentrations of credit risk consist principally of cash, cash equivalents and
short-term investments, accounts receivable and derivatives. ARRIS places its temporary cash investments with high credit quality financial institutions. Concentrations with respect to accounts receivable occur as the Company sells primarily to
large, well- established companies, including companies outside of the United States. The Companys credit policy generally does not require collateral from its customers. ARRIS closely monitors extensions of credit to other parties and, where
necessary, utilizes common financial instruments to mitigate risk or requires cash on delivery terms. Overall financial strategies and the effect of using a hedge are reviewed periodically. As of December 31, 2017, two customers represented 19%
and 14% of total accounts receivable. As of December 31, 2016, three customers represented 20%, 17% and 14% of total accounts receivable.
(s) Fair Value
The following methods and
assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
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Cash, cash equivalents, and short-term investments: The carrying amounts reported in the consolidated balance sheets for cash, cash equivalents, and
short-term investments approximate their fair values.
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Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate
their fair values.
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|
Marketable securities: The fair values for trading and
available-for-sale
equity securities are based on quoted market prices or observable prices based on inputs not in active markets but corroborated by market data.
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Non-marketable
securities:
Non-marketable
equity securities are subject
to a periodic impairment review; however, there are no open-market valuations, and the impairment analysis requires significant
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judgment. This analysis includes assessment of the investees financial condition, the business outlook for its products and technology, its projected results and cash flow, recent rounds of
financing, and the likelihood of obtaining subsequent rounds of financing.
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Senior secured credit facilities: Comprised of term loans and a revolving credit facility of which the outstanding principal amount approximates fair
value
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Derivative instruments: The carrying amounts reported in the balance sheet for derivative financial instruments reflect their estimated fair values.
The Company has designated interest rate derivatives as cash flow hedges and the objective is to manage the variability of cash flows in the interest payments related to the portion of the variable-rate debt designated as being hedged. The
Companys foreign currency derivative instruments economically hedge certain risk but are not designated as hedges. The objective of these derivatives instruments is to add stability to foreign currency gains and losses recorded as other
expense (income) and to manage its exposure to foreign currency movements.
|
(t)
Computer Software
Internal-use
software
The Company capitalizes costs associated with internally developed and/or purchased software systems for internal use that have reached
the application development stage and meet recoverability tests. Capitalized costs include external direct costs of materials and services utilized in developing or obtaining
internal-use
software and payroll
and payroll-related expenses for employees who are directly associated with and devote time to the
internal-use
software project. Capitalization of such costs begins when the preliminary project stage is
complete and ceases no later than the point at which the project is substantially complete and ready for its intended purpose. These capitalized costs are amortized on a straight-line basis over periods of two to seven years, beginning when the
asset is ready for its intended use. Capitalized costs are included in property, plant, and equipment on the consolidated balance sheets.
External-use
software
Research and
development costs are charged to expense as incurred. ARRIS generally has not capitalized any such development costs because the costs incurred between the attainment of technological feasibility for the related software product through the date
when the product is available for general release to customers has been insignificant.
(u) Comprehensive Income (Loss)
The components of comprehensive income (loss) include net income (loss), unrealized gains (losses) on
available-for-sale
securities, unrealized gains (losses) on certain derivative instruments, change in pension liability, net of tax, if applicable and change in foreign currency translation adjustments.
(v) Warrants
The Company has outstanding warrants with certain customers to purchase ARRISs ordinary shares. Vesting of the warrants is subject to certain purchase volume commitments by the customers. Under
applicable accounting guidance, if the vesting of a tranche of the warrants is probable, the Company is required to
mark-to-market
the fair value of the warrant until it
vests, and any increase in the fair value is treated as a reduction in revenues from sales to the customers. See Note 17
Warrants
of Notes to the Consolidated Financial Statements for further discussion.
Note 3. Impact of Recently Issued Accounting Standards
Adoption of new accounting standards
In July 2015, the Financial Accounting Standards Board (FASB) issued updated guidance related to the simplification of the measurement of
inventory. This standard
105
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 or 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 new 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. Applying the guidance prospectively, an income tax
benefit of approximately ($2.6) million was recognized for the year ended December 31, 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 our interim financial statements.
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.
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 measured as the amount by which a reporting units carrying amount exceeds its fair value. The accounting standard update is effective for the Company for its annual or any interim goodwill impairment tests in fiscal
years beginning after December 15, 2020 on a prospective basis, and early adoption is permitted. ARRIS early adopted this update as of its annual impairment testing date on October 1, 2017. Upon adoption this guidance did not have any
impact on the Companys consolidated financial position and results of operations. Subsequently during the quarter ended December 31, 2017, as a result of a change in strategy for our Cloud TV reporting unit associated with our ActiveVideo
acquisition, the Company expects lower future projected cash flows for the business, and as such, the Company has recorded a partial impairment of $51.2 million for the amount by which our Cloud TV reporting unit carrying amount exceeded its
fair value of which $17.9 million is attributable to noncontrolling interest.
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
106
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 its 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 cumulative effect change in retained earnings. ARRIS is adopting the standard using the modified retrospective method on January 1, 2018.
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. Likewise, the Company will recognize revenue earlier for certain arrangements with Value Added Resellers (VARs) currently accounted for utilizing the sell-through method. The new standard also requires an allocation of the
transaction price to contract performance obligations based on their relative standalone selling prices, which could impact the amount and timing of revenue recognition depending on when each performance obligation is satisfied. The new revenue
standard is not expected to have a material impact on the amount and timing of revenue recognized in the Companys consolidated financial statements. While the process to determine the adjustment at adoption and the related controls are still
in process, the Company expects to recognize a cumulative effect adjustment of $1.0 million to $10.0 million in 2018 that will reduce the accumulated deficit. The Company is currently assessing the tax impact from adoption.
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
107
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.
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 2018. Early adoption is permitted. See Note 20
Employee Benefit Plans
of Notes to the Consolidated Financial Statements for the components of net periodic cost for 2017, 2016 and 2015.
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 4. Business Acquisitions
Acquisition of Ruckus Wireless and ICX
Switch business
On December 1, 2017, ARRIS completed the acquisition of Ruckus Wireless and ICX Switch business
(Ruckus Networks). The total cash paid was approximately $761.0 million (net of estimated adjustments for
108
working capital and noncash settlement of
pre-existing
payables and receivables) The purchase agreement provides for customary final adjustments and
potential cash payments or receipts that are expected to occur in 2018.
With this acquisition, ARRIS expands its leadership in
converged wired and wireless networking technologies beyond the home into the education, public venue, enterprise, hospitality, and multi-dwelling unit markets.
The preliminary estimated goodwill of $318.0 million arising from the acquisition is attributable to the strategic opportunities and synergies that are expected to arise from the acquisition of
Ruckus Networks and the workforce of the acquired business. Goodwill has been preliminarily assigned to our new Enterprise Networks reporting unit as of December 31, 2017. The Company will finalize the assignment during the measurement period.
Goodwill is not expected to be deductible for income tax purposes.
The following table summarizes the fair value of
consideration transferred for Ruckus Networks (in thousands):
|
|
|
|
|
Cash consideration
|
|
$
|
779,743
|
|
Estimated working capital adjustments
|
|
|
(16,371
|
)
|
Non-cash
consideration
(1)
|
|
|
(2,359
|
)
|
|
|
|
|
|
Total consideration transferred
|
|
$
|
761,013
|
|
|
|
|
|
|
(1)
|
Non-cash
consideration represents $2.4 million settlement of preexisting payables and receivables between Ruckus Networks
and ARRIS.
|
Total consideration excludes $61.5 million paid to Broadcom for the cash settlement of
stock-based awards for which vesting was accelerated as contemplated in the purchase agreement. This was expensed in the fourth quarter of 2017.
The following is a summary of the estimated fair values of the net assets acquired (in thousands):
|
|
|
|
|
|
|
Amounts Recognized
as of Acquisition
Date
|
|
Total estimated consideration transferred
|
|
$
|
761,013
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
18,958
|
|
Accounts receivables
|
|
|
32,940
|
|
Inventories
|
|
|
48,897
|
|
Prepaids and other
|
|
|
4,836
|
|
Property, plant & equipment
|
|
|
33,500
|
|
Intangible assets
|
|
|
472,500
|
|
Other assets
|
|
|
39,528
|
|
Accounts payable and accrued liabilities
|
|
|
(17,216
|
)
|
Other current liabilities
|
|
|
(9,666
|
)
|
Deferred revenue
|
|
|
(47,718
|
)
|
Noncurrent deferred income tax liabilities, net
|
|
|
(92,233
|
)
|
Other noncurrent liabilities
|
|
|
(41,347
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
442,979
|
|
|
|
|
|
|
Goodwill
|
|
$
|
318,034
|
|
|
|
|
|
|
The acquisition was accounted for using the acquisition method of accounting, which requires, among other
things, that the assets acquired and liabilities assumed be recognized at their acquisition date fair values, with any
109
excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill. The accounting for the business combination is based on
currently available information and is considered preliminary. The Company has not received a final valuation report from the independent valuation expert for acquired property, plant and equipment and intangible assets. In addition, the Company is
still gathering information about income taxes and deferred income tax assets and liabilities, accounts receivables, inventories, deferred revenues, warranty obligations, other assets and accrued liabilities based on facts that existed as of the
date of the acquisition. The final accounting for the business combination may differ materially from that presented in these unaudited consolidated financial statements.
The $472.5 million of acquired intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Preliminary
Estimated
Fair value
|
|
|
Estimated Weighted
Average Life (years)
|
|
Technology and patents
|
|
$
|
265,000
|
|
|
|
6.8
|
|
Customer contracts and relationships
|
|
|
100,000
|
|
|
|
7.0
|
|
In-process
research and development
|
|
|
50,000
|
|
|
|
indefinite
|
|
Trademarks and tradenames
|
|
|
22,500
|
|
|
|
10.0
|
|
Backlog
|
|
|
35,000
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Total estimated fair value of intangible assets
|
|
$
|
472,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of trade accounts receivable is $32.9 million with the gross contractual amount being
$33.8 million. The Company expects $0.9 million to be uncollectible.
The Company incurred acquisition related costs
of $74.5 million during 2017, of which $61.5 million relates to the cash settlement of equity awards held by transferring employees. This amount was expensed by the Company as incurred and is included in the Consolidated Statement of
Operations in the line item titled Integration, acquisition, restructuring and other costs.
The Ruckus Networks
business contributed revenues of approximately $45.7 million to our consolidated results from the date of acquisition through December 31, 2017.
Acquisition of Pace
On January 4, 2016, ARRIS completed its
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 business combination
during the fourth quarter of 2016.
110
Note 5. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for the three years ended December 31, 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
N & C
|
|
|
Enterprise
|
|
|
Total
|
|
Goodwill
|
|
|
682,582
|
|
|
|
710,037
|
|
|
|
|
|
|
$
|
1,392,619
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
682,582
|
|
|
$
|
331,381
|
|
|
$
|
|
|
|
$
|
1,013,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in year 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired (disposed), net
|
|
|
698,106
|
|
|
|
291,331
|
|
|
|
|
|
|
|
989,437
|
|
Currency translation
|
|
|
10,483
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
10,423
|
|
Other
|
|
|
|
|
|
|
2,346
|
|
|
|
|
|
|
|
2,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
1,391,171
|
|
|
$
|
624,998
|
|
|
$
|
|
|
|
$
|
2,016,169
|
|
|
|
|
|
|
Goodwill
|
|
|
1,391,171
|
|
|
|
1,003,654
|
|
|
|
|
|
|
|
2,394,825
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
1,391,171
|
|
|
$
|
624,998
|
|
|
$
|
|
|
|
$
|
2,016,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in year 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired, net
|
|
|
|
|
|
|
|
|
|
|
318,034
|
|
|
|
318,034
|
|
Impairment
|
|
|
|
|
|
|
(51,200
|
)
|
|
|
|
|
|
|
(51,200
|
)
|
Other
|
|
|
(4,491
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
1,386,680
|
|
|
$
|
573,798
|
|
|
$
|
318,034
|
|
|
$
|
2,278,512
|
|
|
|
|
|
|
Goodwill
|
|
|
1,386,680
|
|
|
|
1,003,654
|
|
|
|
318,034
|
|
|
|
2,708,368
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(429,856
|
)
|
|
|
|
|
|
|
(429,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
1,386,680
|
|
|
$
|
573,798
|
|
|
$
|
318,034
|
|
|
$
|
2,278,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2017, the Company recorded preliminary estimated goodwill of $318.0 million related to the Ruckus
Network acquisition. In addition, during the quarter ended December 31, 2017, as a result of a change in strategy for our Cloud TV reporting unit associated with our Active Video acquisition, the Company expects lower future projected cash flows for
the business, and as such, the Company has recorded a partial impairment of $51.2 million for the amount by which the Cloud TV reporting unit carrying amount exceeded its fair value of which $17.9 million is attributable to noncontrolling interest.
The partial impairment was included in impairment of goodwill and intangible assets on the Consolidated Statements of Income.
During 2016, the Company recorded $989.5 million of goodwill related to the Pace combination, and disposed of $(0.1) million of
goodwill related to a business divestiture.
111
Intangible Assets
The gross carrying amount and accumulated amortization of the Companys intangible assets as of December 31, 2017 and
December 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Definite-lived intangible assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,672,470
|
|
|
$
|
780,655
|
|
|
$
|
891,815
|
|
|
$
|
1,572,947
|
|
|
$
|
624,719
|
|
|
$
|
948,228
|
|
Developed technology, patents & licenses
|
|
|
1,521,893
|
|
|
|
771,200
|
|
|
|
750,693
|
|
|
|
1,248,719
|
|
|
|
571,808
|
|
|
|
676,911
|
|
Trademarks, trade and domain names
|
|
|
87,472
|
|
|
|
41,885
|
|
|
|
45,587
|
|
|
|
83,472
|
|
|
|
41,433
|
|
|
|
42,039
|
|
Backlog
|
|
|
35,000
|
|
|
|
5,833
|
|
|
|
29,167
|
|
|
|
16,400
|
|
|
|
16,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
$
|
3,316,835
|
|
|
$
|
1,599,573
|
|
|
$
|
1,717,262
|
|
|
$
|
2,921,538
|
|
|
$
|
1,254,360
|
|
|
$
|
1,667,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,900
|
|
|
|
|
|
|
|
5,900
|
|
In-process
research and development
|
|
|
54,100
|
|
|
|
|
|
|
|
54,100
|
|
|
|
4,100
|
|
|
|
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
54,100
|
|
|
|
|
|
|
|
54,100
|
|
|
|
10,000
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,370,935
|
|
|
$
|
1,599,573
|
|
|
$
|
1,771,362
|
|
|
$
|
2,931,538
|
|
|
$
|
1,254,360
|
|
|
$
|
1,677,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2017, the Company recorded $472.5 million of intangible assets (other than goodwill) associated
with the Ruckus Networks acquisition, see Note 4 Business Acquisitions of Notes to the Consolidated Financial Statements for further discussion. Due to lower projected cashflows of its Cloud TV reporting unit, the Company recorded a $3.8 million
partial impairment of indefinite-lived trademarks and tradenames, determined using a relief from royalty income approach. The partial impairment was included in impairment of goodwill and intangible assets on the Consolidated Statements
of Income. The remaining carrying amount was reclassified as a definite-lived intangible asset. Certain fully amortized intangible assets have been eliminated from both the gross and accumulated amortization amounts.
During 2016, the Company recorded $1,258.7 million of intangible assets (other than goodwill) associated with the Pace combination,
along with $5.4 million related to acquired technology licenses and $8.3 million for foreign currency translation. In addition,
in-process
research and development of $2.2 million was written
off related to projects for which development efforts were abandoned subsequent to the Pace combination. The write off related to the Companys CPE segment and was included in impairment of goodwill and intangible assets on the Consolidated
Statements of Income.
Amortization expense is reported in the Consolidated Statements of Income within cost of goods sold and
operating expenses. The following table presents the amortization of intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cost of sales
|
|
$
|
3,174
|
|
|
$
|
2,963
|
|
|
$
|
670
|
|
Selling, general & administrative expense
|
|
|
3,835
|
|
|
|
4,048
|
|
|
|
3,480
|
|
Amortization of acquired intangible assets
|
|
|
375,407
|
|
|
|
397,464
|
|
|
|
227,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
382,416
|
|
|
$
|
404,475
|
|
|
$
|
231,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
The estimated total amortization expense for finite-lived intangibles for each of the next
five fiscal years is as follows (in thousands):
|
|
|
|
|
2018
|
|
$
|
402,005
|
|
2019
|
|
|
326,807
|
|
2020
|
|
|
315,077
|
|
2021
|
|
|
180,290
|
|
2022
|
|
|
146,499
|
|
Thereafter
|
|
|
344,484
|
|
Note 6. Investments
ARRISs investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
2017
|
|
|
As of December 31,
2016
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
23,874
|
|
|
$
|
115,553
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
5,718
|
|
|
|
15,391
|
|
Equity method investments
|
|
|
22,021
|
|
|
|
22,688
|
|
Cost method investments
|
|
|
10,092
|
|
|
|
6,841
|
|
Other investments
|
|
|
33,251
|
|
|
|
28,012
|
|
|
|
|
|
|
|
|
|
|
Total classified as
non-current
assets
|
|
|
71,082
|
|
|
|
72,932
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94,956
|
|
|
$
|
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 our Consolidated Balance Sheet as a component of accumulated other comprehensive income (loss).
The amortized costs and fair value of
available-for-sale
securities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
(non-U.S.)
|
|
$
|
12,809
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,809
|
|
|
$
|
87,372
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
87,372
|
|
Corporate bonds
|
|
|
11,003
|
|
|
|
86
|
|
|
|
(24
|
)
|
|
|
11,065
|
|
|
|
34,175
|
|
|
|
35
|
|
|
|
(77
|
)
|
|
|
34,133
|
|
Short-term bond fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,046
|
|
|
|
69
|
|
|
|
(69
|
)
|
|
|
5,046
|
|
Corporate obligations
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Money markets
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Mutual funds
|
|
|
65
|
|
|
|
14
|
|
|
|
|
|
|
|
79
|
|
|
|
94
|
|
|
|
28
|
|
|
|
(21
|
)
|
|
|
101
|
|
Other investments
|
|
|
4,941
|
|
|
|
744
|
|
|
|
(97
|
)
|
|
|
5,588
|
|
|
|
4,192
|
|
|
|
530
|
|
|
|
(487
|
)
|
|
|
4,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,869
|
|
|
$
|
844
|
|
|
$
|
(121
|
)
|
|
$
|
29,592
|
|
|
$
|
130,936
|
|
|
$
|
662
|
|
|
$
|
(654
|
)
|
|
$
|
130,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
The following table represents the breakdown of the
available-for-sale
investments with gross realized losses and the duration that those losses had been unrealized (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
(non-U.S.)
|
|
$
|
12,809
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,809
|
|
|
$
|
|
|
Corporate bonds
|
|
|
11,065
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
11,065
|
|
|
|
(24
|
)
|
Corporate obligations
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
Money markets
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
Mutual funds
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
Other investments
|
|
|
5,588
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
5,588
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,592
|
|
|
$
|
(121
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
29,592
|
|
|
$
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (non-U.S.)
|
|
$
|
87,372
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
87,372
|
|
|
$
|
|
|
Corporate bonds
|
|
|
34,133
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
34,133
|
|
|
|
(77
|
)
|
Short-term bond fund
|
|
|
5,046
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
5,046
|
|
|
|
(69
|
)
|
Corporate obligations
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
Mutual funds
|
|
|
101
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
(21
|
)
|
Other investments
|
|
|
4,235
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
4,235
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
130,944
|
|
|
$
|
(654
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
130,944
|
|
|
$
|
(654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 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 not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost
basis.
The sale and/or maturity of
available-for-sale
securities resulted in the following activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Proceeds from sales
|
|
$
|
165,301
|
|
|
$
|
25,932
|
|
|
$
|
157,965
|
|
Gross gains
|
|
|
16
|
|
|
|
33
|
|
|
|
305
|
|
Gross losses
|
|
|
|
|
|
|
|
|
|
|
(452
|
)
|
114
The contractual maturities of the Companys
available-for-sale
securities as of December 31, 2017 are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay
obligations without prepayment penalties (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Within 1 year
|
|
$
|
23,812
|
|
|
$
|
23,874
|
|
After 1 year through 5 years
|
|
|
|
|
|
|
|
|
After 5 years through 10 years
|
|
|
|
|
|
|
|
|
After 10 years
|
|
|
5,057
|
|
|
|
5,718
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,869
|
|
|
$
|
29,592
|
|
|
|
|
|
|
|
|
|
|
Equity method investments
ARRIS owns certain investments in limited liability companies and
partnerships that are accounted for using the equity method as the Company has significant influence over operating and financial policies of the investee companies. These investments are recorded at $22.0 million and $22.7 million as of
December 31, 2017 and 2016, respectively.
The following table summarizes the ownership structure and ownership percentage
of the
non-consolidated
investments as of December 31, 2017, accounted for using the equity method.
|
|
|
|
|
Name of Investee
|
|
Ownership Structure
|
|
% Ownership
|
MPEG LA
|
|
Limited Liability Company
|
|
8.4%
|
Music Choice
|
|
Limited Liability Partnership
|
|
18.2%
|
Conditional Access Licensing (CAL)
|
|
Limited Liability Company
|
|
49.0%
|
Combined Conditional Access Development (CCAD)
|
|
Limited Liability Company
|
|
50.0%
|
ARRIS owns investments in two limited liability corporations whereby the investees were determined to be
variable interest entities and ARRIS is not the primary beneficiary, as ARRIS does not have the power to direct the activities of the investee that most significantly impact its economic performance. The limited liability corporations are a
licensing and a research and development company. The purpose of the limited liability corporations is to develop, deploy, license, support, and to gain market acceptance for certain technologies that reside in a cable plant or in a cable device.
Subject to agreement on annual statements of work, the Company has provided to one of the ventures, engineering services per year approximating 20% to 30% of the approved venture budget. During 2017, the Company made funding contributions to the
investment of $15.6 million. No further funding is planned for 2018 and beyond.
Cost method investments
ARRIS holds cost method investments in certain private companies. Due to the fact the investments are in private companies, the Company is exempt from estimating the fair value on an interim and annual basis. It is impractical to estimate the fair
value since the quoted market price is not available. Furthermore, the cost of obtaining an independent valuation appears excessive considering the materiality of the investments to the Company. However, ARRIS is required to estimate the fair value
if there has been an identifiable event or change in circumstance that may have a significant adverse effect on the fair value of the investment.
Other investments
ARRIS holds investments in certain life insurance contracts. The Company determined the fair value to be the amount that could be realized under the insurance contract as
of each reporting period. The changes in the fair value of these contracts are included in net income.
115
Other-Than-Temporary Investment Impairments
ARRIS evaluates its investments
for any other-than-temporary impairment on a quarterly basis considering all available evidence, including changes in general market conditions, specific industry and individual entity data, the financial condition and the near-term prospects of the
entity issuing the security, and the Companys ability and intent to hold the investment until recovery.
For the year
ended December 31, 2017, ARRIS concluded that one private company had indicators of impairment, as the cost basis exceeded the fair value of the investment, resulting in other-than-temporary impairment charge of $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 other-than-temporary impairment charges of $12.3 million.
These charges are reflected in the Consolidated Statements of Income.
Classification of securities as current or
non-current
is dependent upon managements intended holding period, the securitys maturity date and liquidity consideration based on market conditions. If management intends to hold the securities for
longer than one year as of the balance sheet date, they are classified as
non-current.
Note 7.
Fair Value Measurements
Fair value is based on the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. U.S GAAP establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In
order to increase consistency and comparability in fair value measurements, the FASB has established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. An asset or
liabilitys categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by U.S. GAAP are as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or
liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is
available.
116
The following table presents the Companys investment assets (excluding equity and cost
method investments) and derivatives measured at fair value on a recurring basis as of December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit (foreign)
|
|
$
|
|
|
|
$
|
12,809
|
|
|
$
|
|
|
|
$
|
12,809
|
|
Corporate bonds
|
|
|
|
|
|
|
11,065
|
|
|
|
|
|
|
|
11,065
|
|
Corporate obligations
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
13
|
|
Money markets
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Mutual funds
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
Other investments
|
|
|
|
|
|
|
5,588
|
|
|
|
|
|
|
|
5,588
|
|
Interest rate derivatives asset derivatives
|
|
|
|
|
|
|
10,156
|
|
|
|
|
|
|
|
10,156
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(4,024
|
)
|
|
|
|
|
|
|
(4,024
|
)
|
Foreign currency contracts asset position
|
|
|
|
|
|
|
405
|
|
|
|
|
|
|
|
405
|
|
Foreign currency contracts liability position
|
|
|
|
|
|
|
(8,802
|
)
|
|
|
|
|
|
|
(8,802
|
)
|
|
|
|
|
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
|
)
|
All of the Companys short-term and long-term investments at December 31, 2017 are classified
within Level 1 or Level 2 of the fair value hierarchy as they are valued using quoted market prices, market prices for similar securities, or alternative pricing sources with reasonable levels of price transparency. The types of
instruments valued based on quoted market prices in active markets include the Companys investment in money market funds, mutual funds and municipal bonds. Such instruments are generally classified within Level 1 of the fair value
hierarchy. The types of instruments valued based on other observable inputs include corporate obligations and bonds, commercial paper and certificates of deposit. Such instruments are classified within Level 2 of the fair value hierarchy.
In addition to the financial instruments included in the above table, certain nonfinancial assets and liabilities are to be
measured at fair value on a nonrecurring basis in accordance with applicable authoritative guidance. This includes items such as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair
value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are measured at fair
value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized. During the fourth quarter of 2017, the Company recorded partial impairments of goodwill and indefinite-lived tradenames of $51.2
million and $3.8 million, respectively, acquired in the ActiveVideo acquisition and included as part of the Cloud TV reporting unit, of which $19.3 million is attributable to the noncontrolling interest. See Note 5
Goodwill and Intangible
Assets
of Notes to the Consolidated Financial Statements for further discussion.
117
The Company believes the principal amount of the debt as of December 31, 2017
approximated the fair value because of interest-bearing rates that are adjusted periodically, analysis of recent market conditions, prevailing interest rates, and other Company specific factors. The Company has classified the debt as a Level 2
item within the fair value hierarchy.
Note 8. Derivative Instruments and Hedging Activities
Overview
ARRIS is exposed to financial market risk, primarily related to foreign currency and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of
these exposures, the Company enters into a variety of derivative financial instruments. Managements objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign
currency and interest rates. ARRISs policies and practices are to use derivative financial instruments only to the extent necessary to manage exposures. ARRIS does not hold or issue derivative financial instruments for trading or speculative
purposes.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value
of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to
apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value
hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives also may be designated as hedges of the
foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to
economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. In accordance with the FASBs fair value measurement guidance, the Company made an accounting policy
election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Cash flow hedges of interest rate risk
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-3
Facility, and (iv) a Revolving Credit Facility, have variable interest rates based on LIBOR. (See Note 15
Indebtedness
for additional details.) As a result of exposure to interest rate movements, during 2015, the
Company entered into various interest rate swap arrangements, which effectively converted $625.0 million of its variable-rate debt based on
one-month
LIBOR to an aggregate fixed rate of 2.25% plus a
leverage-based margin. During 2016, due to additional exposure from the Term Loan
A-1
Facility, the Company added additional interest rate swap arrangements which effectively converted $450.0 million
of the Companys variable-rate debt based on
one-month
LIBOR to an aggregate fixed rate of 0.98% plus a leverage-based margin. Total notional amount of the swaps as of December 31, 2017 was
$1,075.0 million and each swap 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.
118
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 years ended December 31, 2017, 2016 and 2015 no expense has been recorded
related to hedge ineffectiveness by the Company.
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 $0.5 million may be reclassified as a decrease to
interest expense.
The table below presents the impact of the Companys derivative financial instruments had on
Consolidated Statement of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
Gain(Loss)
Reclassified from
AOCI into
Income
|
|
|
Years Ended
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Gain (loss) Recognized in OCI on Derivatives (Effective Portion)
|
|
|
Interest expense
|
|
|
$
|
5,587
|
|
|
$
|
2,103
|
|
|
$
|
(13,256
|
)
|
Amounts Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
|
Interest expense
|
|
|
|
1,663
|
|
|
|
7,512
|
|
|
|
7,495
|
|
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Interest rate derivatives asset derivatives
|
|
Other current assets
|
|
|
3,590
|
|
|
|
222
|
|
Interest rate derivatives asset derivatives
|
|
Other assets
|
|
|
6,566
|
|
|
|
8,043
|
|
Interest rate derivatives liability derivatives
|
|
Other accrued liabilities
|
|
|
(3,053
|
)
|
|
|
(2,989
|
)
|
Interest rate derivatives liability derivatives
|
|
Other noncurrent liabilities
|
|
|
(971
|
)
|
|
|
(6,421
|
)
|
Credit-risk-related contingent features
Each of ARRISs agreements with its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the
underlying indebtedness is accelerated by the lender due to the Companys default on the indebtedness. As of December 31, 2017, the fair value of derivatives in a net asset position, which includes accrued interest but excludes
any adjustment for nonperformance risk, related to these agreements was $6.1 million. As of December 31, 2017, the Company has not posted any collateral related to these agreements nor has it required any of its counterparties to post
collateral related to these or any other agreements.
Non-designated
hedges of foreign currency
risk
The Company has U.S. dollar functional currency subsidiaries that bill certain international customers in their local
currency and foreign functional currency entities that procure in U.S. dollars. ARRIS also has certain predictable expenditures for international operations in local currency. Additionally, certain intercompany transactions are denominated in
foreign currencies and subject to revaluation. To mitigate the volatility related to fluctuations in the foreign exchange rates for certain exposures, ARRIS has entered into various foreign currency contracts. As of December 31, 2017, the
Company had forward contracts with notional amounts totaling
119
70 million euros which mature throughout 2018, forward contracts with a total notional amount of 50 million Australian dollars which mature throughout 2018, forward contracts with
notional amounts totaling 65 million Canadian dollars which mature throughout 2018, forward contracts with notional amounts totaling 70.0 million British pounds which mature throughout 2018, forward contracts with notional amounts totaling
656.9 million South African rand which mature throughout 2018 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 Income. The maximum time frame for ARRISs derivatives is currently 15 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Foreign exchange contracts asset derivatives
|
|
Other current assets
|
|
$
|
405
|
|
|
$
|
7,369
|
|
Foreign exchange contracts liability derivatives
|
|
Other accrued liabilities
|
|
|
(8,202
|
)
|
|
|
(3,671
|
)
|
Foreign exchange contracts liability derivatives
|
|
Other noncurrent liabilities
|
|
|
(600
|
)
|
|
|
|
|
The change in the fair values of ARRISs derivatives not designated as hedging instruments recorded
in the Consolidated Statements of Income were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Location
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Foreign exchange contracts
|
|
Loss on foreign currency
|
|
$
|
25,339
|
|
|
$
|
5,909
|
|
|
$
|
7,597
|
|
Note 9. Guarantees
Warranty
ARRIS provides warranties of various lengths to customers based
on the specific product and the terms of individual agreements. The Company provides for the estimated cost of product warranties based on historical trends, the embedded base of product in the field, failure rates, and repair costs at the time
revenue is recognized. Expenses related to product defects and unusual product warranty problems are recorded in the period that the problem is identified. While the Company engages in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of its suppliers, the estimated warranty obligation could be affected by changes in ongoing product failure rates, material usage and service delivery costs incurred in correcting a product failure, as
well as specific product failures outside of ARRISs baseline experience. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions (which could be material) would be recorded against the
warranty liability.
The Company offers extended warranties and support service agreements on certain products. Revenue from
these agreements is deferred at the time of the sale and recognized on a straight-line basis over the contract period. Costs of services performed under these types of contracts are charged to expense as incurred, which approximates the timing of
the revenue stream.
120
Information regarding the changes in ARRISs aggregate product warranty liabilities for
the years ending December 31, 2017 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
88,187
|
|
|
$
|
49,027
|
|
Warranty reserve at acquisition
|
|
|
1,700
|
|
|
|
43,723
|
|
Accruals related to warranties (including changes in assumptions)
|
|
|
36,379
|
|
|
|
51,947
|
|
Settlements made (in cash or in kind)
|
|
|
(50,177
|
)
|
|
|
(56,510
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
76,089
|
|
|
$
|
88,187
|
|
|
|
|
|
|
|
|
|
|
Note 10. Segment Information
The management approach has been used to present the following segment information. This approach is based upon the way the management of the Company organizes segments for making operating
decisions and assessing performance. Financial information is reported on the basis that it is used internally by the chief operating decision maker (CODM) for evaluating segment performance and deciding how to allocate resources to
segments. The Companys chief executive officer has been identified as the CODM.
The CODM manages the Company under three
segments:
|
|
|
Customer Premises Equipment (CPE)
The CPE segments product solutions include
set-tops,
gateways, and subscriber premises equipment that enable service providers to offer voice, video and high-speed data services to residential and business subscribers.
|
|
|
|
Network
& Cloud (N&C)
The N&C segments product solutions
include cable modem termination system, video infrastructure, distribution and transmission equipment and cloud solutions that enable facility-based service providers to construct a
state-of-the-art
residential and metro distribution network. The portfolio also includes a full suite of global services that offer technical support, professional services and system integration
offerings to enable solutions sales of ARRISs
end-to-end
product portfolio.
|
|
|
|
Enterprise Networks (Enterprise)
The Enterprise Networks segment focuses on enabling constant, wireless and
wired connectivity across complex and varied networking environments. It offers dedicated engineering, sales and marketing resources to serve customers across a spectrum of verticalsincluding hospitality, education, smart cities, government,
venues, service providers and more.
|
These operating segments are determined based on the nature of the
products and services offered. The measures that are used to assess the reportable segments operating performance are sales and direct contribution. Direct contribution is defined as gross margin less direct operating expense. The
Corporate and Unallocated Costs category of expenses include corporate sales and marketing, home office general and administrative expenses, annual bonus and equity compensation. Corporate and Unallocated Costs also includes
corporate sales and marketing for the CPE and N&C segments. Marketing and sales expenses related to the Enterprise segment are considered a direct operating expense for that segment and are not included in the Corporate and Unallocated
Costs. 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.
121
The tables below present information about the Companys reportable segments (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
CPE
|
|
$
|
4,475,670
|
|
|
$
|
4,747,445
|
|
|
$
|
3,136,585
|
|
N&C
|
|
|
2,094,113
|
|
|
|
2,111,708
|
|
|
|
1,661,594
|
|
Enterprise
|
|
|
45,749
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(1,140
|
)
|
|
|
(30,035
|
)
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,614,392
|
|
|
|
6,829,118
|
|
|
|
4,798,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution:
|
|
|
|
|
|
|
|
|
CPE
|
|
|
497,986
|
|
|
|
684,744
|
|
|
|
548,840
|
|
N&C
|
|
|
806,355
|
|
|
|
681,608
|
|
|
|
487,166
|
|
Enterprise
|
|
|
6,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
|
1,310,435
|
|
|
|
1,366,352
|
|
|
|
1,036,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and unallocated costs
|
|
|
(658,659
|
)
|
|
|
(697,834
|
)
|
|
|
(568,336
|
)
|
Amortization of intangible assets
|
|
|
(375,407
|
)
|
|
|
(397,464
|
)
|
|
|
(227,440
|
)
|
Impairment of goodwill and intangible assets
|
|
|
(55,000
|
)
|
|
|
(2,200
|
)
|
|
|
|
|
Integration, acquisition, restructuring and other
|
|
|
(98,357
|
)
|
|
|
(158,137
|
)
|
|
|
(29,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
123,012
|
|
|
|
110,717
|
|
|
|
210,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
87,088
|
|
|
|
79,817
|
|
|
|
70,936
|
|
Loss on investments
|
|
|
11,066
|
|
|
|
21,194
|
|
|
|
6,220
|
|
Loss (gain) on foreign currency
|
|
|
9,757
|
|
|
|
(13,982
|
)
|
|
|
20,761
|
|
Interest income
|
|
|
(7,975
|
)
|
|
|
(4,395
|
)
|
|
|
(2,379
|
)
|
Other expense (income), net
|
|
|
1,873
|
|
|
|
3,991
|
|
|
|
8,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
21,203
|
|
|
$
|
24,092
|
|
|
$
|
107,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2017, 2016 and 2015, the compositions of our corporate and
unallocated costs that are reflected in the consolidated statement of operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Corporate and unallocated costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
90,791
|
|
|
$
|
150,588
|
|
|
$
|
56,311
|
|
Selling, general and administrative expenses
|
|
|
389,753
|
|
|
|
375,747
|
|
|
|
349,993
|
|
Research and development expenses
|
|
|
178,115
|
|
|
|
171,499
|
|
|
|
162,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
658,659
|
|
|
$
|
697,834
|
|
|
$
|
568,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
The following table summarizes the Companys net intangible assets and goodwill by
reportable segment as of December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
N&C
|
|
|
Enterprise
|
|
|
Total
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,386,680
|
|
|
$
|
573,798
|
|
|
$
|
318,034
|
|
|
$
|
2,278,512
|
|
Intangible assets, net
|
|
|
807,314
|
|
|
|
501,998
|
|
|
|
462,050
|
|
|
|
1,771,362
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,391,171
|
|
|
$
|
624,998
|
|
|
$
|
|
|
|
$
|
2,016,169
|
|
Intangible assets, net
|
|
|
1,064,692
|
|
|
|
612,486
|
|
|
|
|
|
|
|
1,677,178
|
|
The following table summarizes the Companys revenues by products and services as of
December 31, 2017, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
CPE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband CPE
|
|
$
|
1,808,600
|
|
|
$
|
1,683,491
|
|
|
$
|
1,452,164
|
|
Video CPE
|
|
|
2,667,070
|
|
|
|
3,063,954
|
|
|
|
1,684,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
4,475,670
|
|
|
|
4,747,445
|
|
|
|
3,136,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network & Cloud:
|
|
|
|
|
|
|
|
|
|
|
|
|
Networks
|
|
|
1,747,936
|
|
|
|
1,789,097
|
|
|
|
1,390,283
|
|
Software and services
|
|
|
346,177
|
|
|
|
322,611
|
|
|
|
271,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
2,094,113
|
|
|
|
2,111,708
|
|
|
|
1,661,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Networks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Networks
|
|
|
45,749
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(1,140
|
)
|
|
|
(30,035
|
)
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
6,614,392
|
|
|
$
|
6,829,118
|
|
|
$
|
4,798,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys two largest customers (including their affiliates, as applicable) are Charter and
Comcast. Over the past year, certain customers beneficial ownership may have changed as a result of mergers and acquisitions. Therefore, the revenue for ARRISs customers for prior periods has been adjusted to include the affiliates under
common control. A summary of sales to these customers for 2017, 2016 and 2015 is set forth below (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Charter and affiliates
|
|
$
|
985,237
|
|
|
$
|
1,064,408
|
(1)
|
|
$
|
960,497
|
|
% of sales
|
|
|
14.9
|
%
|
|
|
15.6
|
%
|
|
|
20.0
|
%
|
|
|
|
|
Comcast and affiliates
|
|
$
|
1,479,415
|
|
|
$
|
1,637,519
|
(1)
|
|
$
|
1,007,376
|
|
% of sales
|
|
|
22.4
|
%
|
|
|
24.0
|
%
|
|
|
21.0
|
%
|
(1)
|
Revenues were reduced $30.2 million in 2016, as a result of warrants held by Charter and Comcast that are intended to incent additional purchases from them. (see
Note 17
Warrants
for additional information).
|
ARRIS sells its products primarily in the United States.
The Companys international revenue is generated from Asia Pacific, Canada, Europe and Latin America. Sales to customers outside of United States were approx-
123
imately 34.2%, 28.1% and 28.8% of total sales for the years ended December 31, 2017, 2016 and 2015, respectively. International sales for the years ended December 31, 2017, 2016 and
2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Domestic U.S.
|
|
$
|
4,351,843
|
|
|
$
|
4,909,698
|
|
|
$
|
3,418,583
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas, excluding U.S.
|
|
|
1,080,456
|
|
|
|
982,769
|
|
|
|
880,581
|
|
Asia Pacific
|
|
|
374,772
|
|
|
|
291,504
|
|
|
|
142,893
|
|
EMEA
|
|
|
807,321
|
|
|
|
645,147
|
|
|
|
356,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
$
|
2,262,549
|
|
|
$
|
1,919,420
|
|
|
$
|
1,379,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
6,614,392
|
|
|
$
|
6,829,118
|
|
|
$
|
4,798,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes plant and equipment assets by geographic region as of December 31,
2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Domestic U.S.
|
|
$
|
250,866
|
|
|
$
|
220,397
|
|
International
|
|
|
|
|
|
|
|
|
Americas, excluding U.S.
|
|
|
12,746
|
|
|
|
12,838
|
|
Asia Pacific
|
|
|
85,236
|
|
|
|
81,655
|
|
EMEA
|
|
|
23,619
|
|
|
|
38,487
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
$
|
121,601
|
|
|
$
|
132,980
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment assets
|
|
$
|
372,467
|
|
|
$
|
353,377
|
|
|
|
|
|
|
|
|
|
|
Note 11. Inventories
The components of inventory are as follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw material
|
|
$
|
149,328
|
|
|
$
|
86,243
|
|
Work in process
|
|
|
5,416
|
|
|
|
3,877
|
|
Finished goods
|
|
|
670,467
|
|
|
|
461,421
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
825,211
|
|
|
$
|
551,541
|
|
|
|
|
|
|
|
|
|
|
124
Note 12. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Land
|
|
$
|
68,562
|
|
|
$
|
68,562
|
|
Buildings and leasehold improvements
|
|
|
205,534
|
|
|
|
163,333
|
|
Machinery and equipment
|
|
|
466,325
|
|
|
|
440,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
740,421
|
|
|
|
672,850
|
|
Less: Accumulated depreciation
|
|
|
(367,954
|
)
|
|
|
(319,473
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
372,467
|
|
|
$
|
353,377
|
|
|
|
|
|
|
|
|
|
|
Note 13. 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, 2015
|
|
$
|
3
|
|
|
$
|
87
|
|
|
$
|
|
|
|
$
|
90
|
|
Restructuring charges
|
|
|
92,246
|
|
|
|
3,379
|
|
|
|
716
|
|
|
|
96,341
|
|
Cash payments / adjustments
|
|
|
(64,363
|
)
|
|
|
(1,223
|
)
|
|
|
|
|
|
|
(65,586
|
)
|
Non-cash
expense
|
|
|
|
|
|
|
|
|
|
|
(716
|
)
|
|
|
(716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
27,886
|
|
|
$
|
2,243
|
|
|
$
|
|
|
|
$
|
30,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
13,346
|
|
|
|
5,742
|
|
|
|
1,842
|
|
|
|
20,930
|
|
Cash payments / adjustments
|
|
|
(35,955
|
)
|
|
|
(4,683
|
)
|
|
|
|
|
|
|
(40,638
|
)
|
Non-cash
expense
|
|
|
(898
|
)
|
|
|
|
|
|
|
(1,842
|
)
|
|
|
(2,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
$
|
4,379
|
|
|
$
|
3,302
|
|
|
$
|
|
|
|
$
|
7,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and termination benefits
In 2017, ARRIS recorded
restructuring charges of $13.3 million related to severance and employee termination benefits for 195 employees. This initiative affected all segments. The liability for the plan is expected to be paid by the first half of 2018.
In first quarter of 2016, ARRIS completed its acquisition of Pace. ARRIS initiated restructuring plans as a result of the acquisition that
focused on the rationalization of personnel, facilities and systems across the ARRIS organization. The cost recorded during 2016 was approximately $96.3 million. The 2016 restructuring plan affected approximately 1,545 positions across the
Company. The liability for the plan is expected to be settled by the first half of 2018.
The amount is included in the
Consolidated Statement of Operations in the line item titled Integration, acquisition, restructuring and other costs.
Contractual obligations
ARRIS has restructuring 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
recog-
125
nized, 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 2017, the Company exited
three facilities and recorded a charge of $5.7 million.
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
Acquisition expenses were approximately $74.5 million, $29.0 million and $25.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. These expenses in 2017
primarily related to the acquisition of Ruckus Networks and include $61.5 million relates to the cash settlement of stock-based awards held by transferring employees, as well as banker and other fees.
Integration
Integration expenses were approximately $2.9 million, $24.2 million and $1.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. The expense was related to
outside services and other integration related activities following the Pace combination.
Note 14. Lease Financing Obligation
Sale-leaseback of San Diego Office Complex:
In 2015, the Company sold its San Diego office complex consisting of land and buildings with a net book value of $71.0 million, for
total consideration of $85.5 million. The Company concurrently entered into a leaseback arrangement for two buildings on the San Diego campus (Building 1 and Building 2) with an initial leaseback term of ten years for
Building 1 and a maximum term of one year for Building 2. The Company determined that the sale-leaseback of Building 1 did not qualify for sale-leaseback accounting due to continuing involvement that will exist for the
10-year
lease term. Accordingly, the carrying amount of Building 1 will remain on the Companys balance sheet and will be depreciated over its remaining useful life with the proceeds reflected as a
financing obligation.
The Company concluded that Building 2 qualified for sale-leaseback accounting with the subsequent
leaseback classified as an operating lease. A loss of $5.3 million was recorded in Other expense (income), net on the Consolidated Statements of Income at the closing of the transaction in 2015.
At December 31, 2017, the minimum lease payments required on the financing obligation were as follows (in thousands):
|
|
|
|
|
2018
|
|
$
|
4,260
|
|
2019
|
|
|
4,388
|
|
2020
|
|
|
4,520
|
|
2021
|
|
|
4,655
|
|
2022
|
|
|
4,795
|
|
Thereafter through 2025
|
|
|
11,307
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
33,925
|
|
|
|
|
|
|
126
Note 15. Indebtedness
The following is a summary of indebtedness and lease financing obligations as of December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
As of December 31, 2016
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Term A loan
|
|
$
|
19,550
|
|
|
$
|
49,500
|
|
Term
A-1
loan
|
|
|
62,500
|
|
|
|
40,000
|
|
Term
B-3
loan
|
|
|
5,450
|
|
|
|
|
|
Lease finance obligation
|
|
|
870
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
Current obligations
|
|
|
88,370
|
|
|
|
90,275
|
|
Current deferred financing fees and debt discount
|
|
|
(4,811
|
)
|
|
|
(7,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
83,559
|
|
|
|
82,734
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Term A loan
|
|
|
366,562
|
|
|
|
866,250
|
|
Term
A-1
loan
|
|
|
1,171,875
|
|
|
|
730,000
|
|
Term B loan
|
|
|
|
|
|
|
543,812
|
|
Term
B-3
loan
|
|
|
535,463
|
|
|
|
|
|
Revolver
|
|
|
|
|
|
|
|
|
Lease finance obligation
|
|
|
61,032
|
|
|
|
57,902
|
|
|
|
|
|
|
|
|
|
|
Noncurrent obligations
|
|
|
2,134,932
|
|
|
|
2,197,964
|
|
Noncurrent deferred financing fees and debt discount
|
|
|
(18,688
|
)
|
|
|
(17,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,116,244
|
|
|
|
2,180,009
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,199,803
|
|
|
$
|
2,262,743
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities
On December 20, 2017, the Company entered into a Fourth Amendment (the Fourth Amendment) to its Amended and Restated
Credit Facility dated June 18, 2015, as previously amended on December 14, 2015, April 26, 2017, and October 17, 2017 (the Credit Agreement). The Fourth Amendment provided for a new Term B Loan facility in the
principal amount of $542.3 million, the proceeds of which (along with cash on hand) were used to repay in full the existing Term B Loan facility. Under the terms of the Fourth Amendment, the maturity date of the new Term B Loan facility remains
April 26, 2024, but the new Term B Loan facility has an interest rate of LIBOR (as defined in the Credit Agreement) plus a percentage ranging from 2.00% to 2.25% for Eurocurrency Loans (as defined in the Credit Agreement) or the prime rate (as
determined in accordance with the Credit Agreement) plus a percentage ranging from 1.00% to 1.25% for Base Rate Loans (as defined in the Credit Agreement), in either case depending on ARRISs consolidated net leverage ratio. The Fourth
Amendment also increased to $500 million the amount of cash that can be used to offset indebtedness in the calculation of the consolidated net leverage ratio for purposes of determining the applicable interest rate. All other material terms of
the Credit Agreement remained unchanged.
On October 17, 2017, the Company entered into the Third Amendment and Consent
(the Third Amendment) to the 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, 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.
127
The Third Amendment extended the maturity date of the Term A Loans and the Revolving Credit
Facility to October 17, 2022. 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 Third Amendment were not changed.
On April 26, 2017, ARRIS entered into a Second Amendment (the Second Amendment) to the Credit Agreement. The Second Amendment provided 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 Credit Agreement), in either case depending on the Companys consolidated net leverage ratio.
In
connection with the Amendments in 2017, the Company paid and capitalized approximately $1.4 million of financing fees and $4.5 million of original issuance discount. In addition, the Company expensed approximately $4.5 million of debt
issuance costs and wrote off approximately $1.3 million of existing debt issuance costs associated with certain lenders who were not party to the credit facility, which were included as interest expense in the Consolidated Statements of Income
for the year ended December 31, 2017.
Interest rates on borrowings under the senior secured credit facilities are set
forth in the table below.
|
|
|
|
|
|
|
|
|
Rate
|
|
As of December 31, 2017
|
|
Term Loan A
|
|
LIBOR + 1.75 %
|
|
|
3.32
|
%
|
Term Loan
A-1
|
|
LIBOR + 1.75 %
|
|
|
3.32
|
%
|
Term Loan
B-3
|
|
LIBOR + 2.25 %
|
|
|
3.82
|
%
|
Revolving Credit Facility
(1)
|
|
LIBOR + 1.75 %
|
|
|
Not Applicable
|
|
(1)
|
Includes unused commitment fee of 0.30% and letter of credit fee of 1.75% not reflected in interest rate above.
|
The Credit Agreement provides for adjustments to the interest rates paid on the Term Loan A, Term Loan
A-1,
Term Loan
B-3
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 Credit Agreement governing the senior secured credit facilities. The Credit Agreement provides terms for mandatory prepayments and optional
prepayments and commitment reductions. The Credit Agreement also includes events of default, which are customary for facilities of this type (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an
event of default, all amounts outstanding under the credit facilities may be accelerated. The Credit Agreement contains usual and customary limitations on indebtedness, liens, restricted payments, acquisitions and asset sales in the form of
affirmative, negative and financial covenants, which are customary for financings of this type, including the maintenance of a minimum interest coverage ratio and a maximum leverage ratio. As of December 31, 2017, ARRIS was in compliance with
all covenants under the Credit Agreement.
During 2017, the Company made mandatory payments of approximately $91.7 million
related to the senior secured credit facilities.
128
Account Receivable Financing Program
In connection with the Pace combination on January 4, 2016, ARRIS assumed an accounts receivable financing program which was entered
into by Pace on June 30, 2015. Under this program, the Company assigned trade receivables on a revolving basis of up to $50 million to the lender and the lender advances 95% of the receivable value to the Company. The remaining 5% is
remitted to ARRIS upon receipt of cash from the customer.
The accounts receivable financing program was accounted for as
secured borrowings and amounts outstanding were included in the current portion of long-term debt on the consolidated balance sheet. The Company paid certain transaction fees and interest of 1.23% on the outstanding balance in connection with this
program.
As of December 31, 2016, there is no outstanding balance under this program and the program was terminated as of
June 30, 2017.
Other
As of December 31, 2017, the scheduled maturities of the contractual debt obligations are as follows (in thousands):
|
|
|
|
|
2018
|
|
$
|
87,500
|
|
2019
|
|
|
87,500
|
|
2020
|
|
|
87,500
|
|
2021
|
|
|
87,500
|
|
2022
|
|
|
1,297,737
|
|
Thereafter
|
|
|
513,663
|
|
Note 16. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ARRIS International plc.
|
|
$
|
92,027
|
|
|
$
|
18,100
|
|
|
$
|
92,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
187,133
|
|
|
|
190,701
|
|
|
|
146,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.49
|
|
|
$
|
0.09
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ARRIS International plc.
|
|
$
|
92,027
|
|
|
$
|
18,100
|
|
|
$
|
92,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
187,133
|
|
|
|
190,701
|
|
|
|
146,388
|
|
Net effect of dilutive shares
|
|
|
2,483
|
|
|
|
1,484
|
|
|
|
2,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
189,616
|
|
|
|
192,185
|
|
|
|
149,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.49
|
|
|
$
|
0.09
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential dilutive shares include stock options, unvested restricted and performance awards and warrants.
For the year ended December 31, 2017, 2016 and 2015, approximately 1.1 million, 0.9 thousand and
6.8 million of the equity-based awards, respectively, were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive. These exclusions are made if the exercise price of these equity-based
awards is in excess of the average market price of the shares for the period, or if the Company has net losses, both of which have an anti-dilutive effect.
129
During the twelve months ended December 31, 2017, the Company issued 2.6 million
shares of its ordinary shares related to the vesting of restricted stock 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 exercise price (under the treasury stock method), and are not subject to
performance conditions. During the fourth quarter of 2016, approximately 2.2 million warrants vested based on the amount of purchases of products and services by the customer from the Company. There was no vesting in 2017. The dilutive effect
of these vested shares was immaterial.
In connection with the Pace combination in 2016, 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 Pace combination.
The Company has not paid cash dividends on its stock since its inception. Any future determination to pay dividends will be at the discretion of the Board of Directors and will be dependent on
then-existing conditions, including the Companys financial condition, results of operations, capital requirements, contractual and legal restrictions, business prospects and other factors that the Board considers relevant. The Credit Agreement
contains restrictions on the Companys ability to pay dividends on its ordinary shares.
Note 17. 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 14.0 million of ARRISs ordinary shares, (subject to adjustment in accordance with the terms of the Warrants, the Shares).
The Warrants will vest in tranches based on the amount of purchases of products and services by the customer from the Company. At
December 31, 2017, approximately 2.2 million Warrants were 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 ordinary shares issuable under our outstanding Warrant program with a customer, based on achieving certain
purchase levels in 2018, are between 1.0 million and 2.5 million at an exercise price for the warrants of $26.14.
For Warrants, other than those issuable in 2018, the exercise price per Share was established based upon the average volume-weighted price
of ARRISs ordinary shares on NASDAQ for the
10-day
trading period preceding the date of the Warrants.
For Warrants issuable in 2018, the exercise price was set based on the volume-weighted price for the
10-day
trading period preceding January 1, 2018.
The Warrants provide for net Share settlement that, if elected by the holders, will reduce the number of Shares issued upon
exercise to reflect net settlement of the exercise price. Customers may also request cash settlement of the Warrants upon exercise in lieu of issuing Shares, however, such cash election is at the discretion of ARRIS. The Warrants will expire
by September 30, 2023.
The Warrants provide for certain adjustments that may be made to the exercise price and the number
of Shares issuable upon exercise due to customary anti-dilution provisions based on future corporate events. In addition, in connection with any consolidation, merger or similar extraordinary event involving the Company, the Warrants will be deemed
to represent the right to receive, upon exercise, the same consideration received by the holders of the Companys ordinary shares in connection with such transaction. Upon a change of control of ARRIS or if ARRIS materially breaches its
applicable agreements with customers (and such breach is not cured pursuant to the terms of the agreements), the Warrants will immediately vest for the minimum threshold of Shares that would otherwise be issuable.
130
ARRIS has also agreed, if requested by the holders, to register the Shares issuable upon
exercise of the Warrants under the Securities Act of 1933, as amended (the Securities Act) and has also granted piggyback registration rights in the event ARRIS files a registration statement with the U.S. Securities and
Exchange Commission under the Securities Act covering its equity securities, subject to the terms and conditions included in the Warrants.
Because the Warrants contain performance criteria, which includes aggregate purchase levels and product mix, under which customers must achieve for the Warrants to vest, as detailed above, the final
measurement date for the Warrants is the date on which the Warrants vest. Prior to the final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of Warrants is being recorded as a reduction to
net sales based on the projected number of Warrants expected to vest, the proportion of purchases by customers and its affiliates within the period relative to the aggregate purchase levels required for the Warrants to vest and the then-current fair
value of the related Warrants. To the extent that projections change in the future as to the number of Warrants that will vest, as well as changes in the fair market value of the Warrants, a cumulative
catch-up
adjustment will be recorded in the period in which the estimates change.
The
fair value of the Warrants is determined using the Black-Scholes option pricing model. The assumptions utilized in the Black-Scholes model include the risk-free interest rate, expected volatility, and expected life in years. The risk-free interest
rate over the expected life is equal to the prevailing U.S. Treasury note rate over the same period. Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of the warrant. Expected life is
equal to the remaining contractual term of the warrant. The dividend yield is assumed to be zero since we have not historically declared dividends and do not have any plans to declare dividends in the future.
For the year ended December 31, 2017 and 2016, ARRIS recorded zero and $30.2 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 18. Income Taxes
Income (loss) before income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
U.K.
|
|
$
|
(64,177
|
)
|
|
$
|
(36,300
|
)
|
|
$
|
(5,321
|
)
|
U.S.
|
|
|
(159,951
|
)
|
|
|
(149,605
|
)
|
|
|
47,063
|
|
Other Foreign
|
|
|
245,331
|
|
|
|
209,997
|
|
|
|
65,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,203
|
|
|
$
|
24,092
|
|
|
$
|
107,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
Income tax expense (benefit) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current U.K.
|
|
$
|
667
|
|
|
$
|
81,822
|
|
|
$
|
559
|
|
U.S.
|
|
|
3,530
|
|
|
|
47,025
|
|
|
|
2,141
|
|
Other Foreign
|
|
|
25,347
|
|
|
|
31,552
|
|
|
|
14,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,544
|
|
|
|
160,399
|
|
|
|
17,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred U.K.
|
|
|
(22,254
|
)
|
|
|
(23,177
|
)
|
|
|
(30
|
)
|
U.S.
|
|
|
(49,671
|
)
|
|
|
(105,735
|
)
|
|
|
5,119
|
|
Other Foreign
|
|
|
(2,540
|
)
|
|
|
(16,356
|
)
|
|
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,465
|
)
|
|
|
(145,268
|
)
|
|
|
5,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(44,921
|
)
|
|
$
|
15,131
|
|
|
$
|
22,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the U.K. statutory income tax rate of 19.25% for 2017 and 20.00% for 2016 and the U.S.
federal statutory income tax rate of 35.00% for 2015 and the effective income tax rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statutory income tax rate
|
|
|
19.25
|
%
|
|
|
20.00
|
%
|
|
|
35.00
|
%
|
Effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
11.0
|
|
|
|
(16.6
|
)
|
|
|
5.2
|
|
Acquired deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
5.8
|
|
U.S. domestic manufacturing deduction
|
|
|
(0.9
|
)
|
|
|
(12.0
|
)
|
|
|
|
|
Facilitative transaction costs
|
|
|
54.2
|
|
|
|
22.0
|
|
|
|
|
|
Research and development tax credits
|
|
|
(119.7
|
)
|
|
|
(90.6
|
)
|
|
|
(25.1
|
)
|
Withholding taxes (U.K. entities)
|
|
|
12.4
|
|
|
|
245.5
|
|
|
|
|
|
U.K. stamp duty
|
|
|
|
|
|
|
9.4
|
|
|
|
|
|
Subpart F income
|
|
|
|
|
|
|
4.0
|
|
|
|
4.8
|
|
Changes in valuation allowance
|
|
|
35.1
|
|
|
|
6.0
|
|
|
|
(26.6
|
)
|
Foreign tax credits
|
|
|
29.5
|
|
|
|
(14.0
|
)
|
|
|
(20.7
|
)
|
Non-deductible
officer compensation
|
|
|
4.9
|
|
|
|
|
|
|
|
5.3
|
|
Non-U.S.
tax rate differential
|
|
|
|
|
|
|
|
|
|
|
(5.0
|
)
|
Non-U.K.
tax rate differential
|
|
|
26.1
|
|
|
|
(50.9
|
)
|
|
|
|
|
Benefit of other foreign tax regimes
|
|
|
(170.6
|
)
|
|
|
(135.4
|
)
|
|
|
|
|
Recapture of dual consolidated losses
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
Taiwan gain
|
|
|
|
|
|
|
|
|
|
|
34.3
|
|
Change in tax rate
|
|
|
(105.0
|
)
|
|
|
|
|
|
|
|
|
Uncertain tax positions
|
|
|
(13.1
|
)
|
|
|
88.9
|
|
|
|
(1.7
|
)
|
Other, net
|
|
|
5.0
|
|
|
|
(13.5
|
)
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(211.85
|
)%
|
|
|
62.8
|
%
|
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the Act) was signed into law
making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, a
one-time
transition tax
132
on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017, a new alternative U.S. tax on certain Base Erosion Anti-Avoidance (BEAT) payments from a U.S.
company to any foreign related party, a new U.S. tax on certain
off-shore
earnings referred to as Global Intangible
Low-Taxed
Income (GILTI), additional limitations on
certain executive compensation, and limitations on interest deductions.
The Company was required to recognize the effect of
the tax law changes in the period of enactment, such as determining the transition tax, remeasuring its U.S. deferred tax assets and liabilities as well as reassessing the realizability of its deferred tax assets. The Company has calculated its best
estimate of the impact of the Act in its year end income tax provision in accordance with its understanding of the Act and guidance available as of the date of this filing and as a result has recorded ($22.5) million as an income tax benefit in the
fourth quarter of 2017, the period in which the legislation was enacted. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was
($22.3) million. The provisional amount related to the
one-time
transition tax on the mandatory deemed repatriation of foreign earnings was ($0.2) million based on cumulative foreign earnings of
$32.4 million.
On December 22, 2017, Staff Accounting Bulletin No. 118 (SAB 118) was issued to
address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of
the Act. SAB 118 allows us to record these provisional amounts during a measurement period not to extend beyond one year of the enactment date. In accordance with SAB 118, the Company has determined that the ($22.3) million of the deferred tax
benefit recorded in connection with the remeasurement of certain deferred tax assets and liabilities and the ($0.2) million of current tax benefit recorded in connection with the transition tax on the mandatory deemed repatriation of foreign
earnings was a provisional amount and a reasonable estimate at December 31, 2017. Since the Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider
the accounting for the transition tax, deferred tax
re-measurements,
and other items to be incomplete due to additional work necessary to (1) do a more detailed analysis of historical foreign earnings as
well as potential correlative adjustments; (2) determine
re-measurement
of any changes to deferred tax assets and liabilities associated with any acquisition accounting adjustments for fair value
adjustments made within the acquisition accounting measurement period; (3) assess any forthcoming guidance; and (4) finalize our ongoing analysis of final
year-end
data and tax positions. Any
subsequent adjustment to these amounts will be recorded to tax expense in the quarter of 2018 when the analysis is complete. We expect to complete our analysis within the measurement period in accordance with SAB 118.
133
Deferred income taxes reflect the net tax effects of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of ARRIS net deferred income tax assets (liabilities) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Inventory costs
|
|
$
|
29,453
|
|
|
$
|
63,756
|
|
Property, plant and equipment
|
|
|
|
|
|
|
2,789
|
|
Accrued employee benefits
|
|
|
34,472
|
|
|
|
41,246
|
|
Accrued operating expenses
|
|
|
24,904
|
|
|
|
42,544
|
|
Reserves
|
|
|
16,434
|
|
|
|
26,731
|
|
Investments
|
|
|
8,796
|
|
|
|
667
|
|
Loss carryforwards
|
|
|
91,832
|
|
|
|
67,645
|
|
Research and development and other credits
|
|
|
164,841
|
|
|
|
118,113
|
|
Capitalized research and development
|
|
|
83,224
|
|
|
|
177,594
|
|
Other
|
|
|
17,379
|
|
|
|
50,171
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
471,335
|
|
|
|
591,256
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(571
|
)
|
|
|
|
|
Other liabilities
|
|
|
(7,190
|
)
|
|
|
(6,656
|
)
|
Goodwill and intangible assets
|
|
|
(325,283
|
)
|
|
|
(451,600
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(333,044
|
)
|
|
|
(458,256
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
138,291
|
|
|
|
133,000
|
|
Valuation allowance
|
|
|
(91,743
|
)
|
|
|
(57,772
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
46,548
|
|
|
$
|
75,228
|
|
|
|
|
|
|
|
|
|
|
Significant attributes of ARRISs deferred tax assets related to loss carryforwards and tax credits
were as follows: (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Expiration
|
|
Net operating loss carryforwards (NOL):
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
(1)
|
|
$
|
27,405
|
|
|
$
|
30,009
|
|
|
|
2018 - 2037
|
|
Georgia
|
|
|
15,948
|
|
|
|
4,737
|
|
|
|
2018 - 2037
|
|
Pennsylvania
|
|
|
17,687
|
|
|
|
13,899
|
|
|
|
2018 - 2037
|
|
Other U.S. states
|
|
|
12,236
|
|
|
|
4,495
|
|
|
|
2018 - 2037
|
|
Non-U.S.
|
|
|
18,556
|
|
|
|
14,505
|
|
|
|
Varies
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax effected loss carryforward
|
|
$
|
91,832
|
|
|
$
|
67,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax credit carryforwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal R&D
|
|
$
|
103,581
|
|
|
$
|
84,711
|
|
|
|
2018 - 2037
|
|
Other U.S. federal
|
|
|
5,742
|
|
|
|
3,075
|
|
|
|
2027
|
|
California R&D
|
|
|
34,208
|
|
|
|
13,782
|
|
|
|
Indefinite
|
|
Other U.S. states R&D
|
|
|
21,310
|
|
|
|
16,545
|
|
|
|
2018 - 2037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit carryforward
|
|
$
|
164,841
|
|
|
$
|
118,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
(1)
|
Gross of tax effect U.S. Federal operating loss carryforwards are $130.5 million for the year ended December 31, 2017 and $85.7 million for the year
ended December 31, 2016.
|
|
(2)
|
Canadian NOLs expire within 16 years and all other material foreign NOLs have an indefinite carryforward life.
|
ARRIS ability to use U.S. federal, state, and other foreign net operating loss carryforwards to reduce future taxable income, or to
use U.S. federal and state research and development tax credit and other carryforwards to reduce future income tax liabilities, is subject to the ability to generate sufficient taxable income of an appropriate characterization in the appropriate
taxing jurisdictions. In some instance the utilization is also subject to restrictions attributable to change of ownership during prior tax years. as defined by appropriate law in the relevant taxing jurisdiction. These limitations, as noted above,
prevent the Company from utilizing certain deferred tax assets and were considered in establishing our valuation allowances.
Significant components of ARRISs valuation allowance were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
U.S. federal R&D
|
|
$
|
(8,578
|
)
|
|
$
|
(8,064
|
)
|
Other U.S. federal
|
|
|
(4,241
|
)
|
|
|
(16,792
|
)
|
Georgia NOL
|
|
|
(15,008
|
)
|
|
|
(3,464
|
)
|
Pennsylvania NOL
|
|
|
(10,068
|
)
|
|
|
(6,596
|
)
|
Other state NOL
|
|
|
(8,988
|
)
|
|
|
(3,265
|
)
|
California R&D
|
|
|
(18,773
|
)
|
|
|
|
|
Other state R&D
|
|
|
(15,606
|
)
|
|
|
(10,438
|
)
|
Non-U.S.
NOL
|
|
|
(10,481
|
)
|
|
|
(9,153
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(91,743
|
)
|
|
$
|
(57,772
|
)
|
|
|
|
|
|
|
|
|
|
A roll-forward analysis of our deferred tax asset valuation allowances is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
57,772
|
|
|
$
|
87,788
|
|
|
$
|
118,629
|
|
Additions
|
|
|
52,680
|
|
|
|
17,973
|
|
|
|
3,312
|
|
Reductions
|
|
|
(18,709
|
)
|
|
|
(47,989
|
)
|
|
|
(34,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
91,743
|
|
|
$
|
57,772
|
|
|
$
|
87,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017, the Company did not provide additional income taxes or other
non-U.K.
withholding taxes on approximately $18.6 million of unremitted earnings from its U.S. foreign subsidiaries directly or indirectly owned by U.S. shareholders, as such earnings are intended to be
reinvested indefinitely outside of the U.S. Accordingly, should earnings of
non-U.K.
subsidiaries be distributed in the form of dividends (or otherwise), ARRIS may be subject to additional taxable income (in
various jurisdictions) and
non-U.K.
withholding taxes. Determination of the amount of unrecognized tax liabilities related to these indefinitely reinvested and undistributed
non-U.K.
earnings is not practicable because of the complexities associated with this hypothetical calculation. Furthermore, the Company does not assert indefinite reinvestment on its earnings of foreign
subsidiaries that are not directly or indirectly owned by a U.S. shareholder, and have recorded a deferred tax liability of $2.7 million associated with the unremitted earnings of those subsidiaries.
In accordance with the Tax Cuts and Jobs Act of 2017 and Staff Accounting Bulletin No. 118 (SAB 118), the Company
provided a provisional estimate for U.S. Federal income taxes of $(0.2) million relating to certain unremitted earnings of
non-U.S.
subsidiaries owned by U.S. entities. With respect to impacts relating to U.S.
state income taxes and
non-U.S.
withholding taxes, as well as the Companys determination with respect to its indefinite reinvestment assertion relating to investments in
non-U.S.
subsidiaries owned by the U.S., we consider
135
our accounting to be incomplete due to forthcoming guidance and our ongoing analysis of final
year-end
data and tax positions. We expect to complete our
analysis with the measurement period in accordance with SAB 118.
Tabular Reconciliation of Unrecognized Tax Benefits (in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
128,053
|
|
|
$
|
49,919
|
|
|
$
|
48,019
|
|
Gross increases tax positions in prior period
|
|
|
6,783
|
|
|
|
8,068
|
|
|
|
1,599
|
|
Gross decreases tax positions in prior period
|
|
|
(21,409
|
)
|
|
|
(5,700
|
)
|
|
|
(2,185
|
)
|
Gross increases current-period tax positions
|
|
|
24,551
|
|
|
|
27,774
|
|
|
|
9,578
|
|
Increases from acquired businesses
|
|
|
39,420
|
|
|
|
60,796
|
|
|
|
|
|
Changes related to foreign currency translation adjustment and remeasurement
|
|
|
1,545
|
|
|
|
(1,087
|
)
|
|
|
|
|
Decreases relating to settlements with taxing authorities and other
|
|
|
(686
|
)
|
|
|
(3,933
|
)
|
|
|
(6,689
|
)
|
Decreases due to lapse of statute of limitations
|
|
|
(4,032
|
)
|
|
|
(7,784
|
)
|
|
|
(403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
174,225
|
|
|
$
|
128,053
|
|
|
$
|
49,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company and its subsidiaries file income tax returns in the U.S. and U.K. jurisdictions, and various
state and other foreign jurisdictions. As of December 31, 2017, the Company and its subsidiaries were under income tax audit in various jurisdictions including the United Kingdom, the United States, Hong Kong and various states and other
foreign countries. ARRIS does not anticipate audit adjustments in excess of its current accrual for uncertain tax positions.
Liabilities related to uncertain tax positions inclusive of interest and penalties were $178.2 million and $137.2 million at
December 31, 2017 and 2016, respectively. These liabilities at December 31, 2017 and 2016 were reduced by $29.6 million and $28.4 million, respectively, for offsetting benefits from the corresponding effects of potential transfer
pricing adjustments, state income taxes and other unrecognized tax benefits. These offsetting benefits are recorded in other
non-current
assets and noncurrent deferred income taxes. The net result of
$148.6 million and $108.7 million at December 31, 2017 and 2016, respectively, if recognized and released, would favorably affect tax expense.
Included in the net result of $148.6 million as of December 31, 2017, is $37.9 million of net acquired uncertain tax positions. This amount is fully indemnified and offset by a corresponding
indemnification asset recorded in other
non-current
assets.
The Company reported
approximately $4.0 million and $9.2 million, respectively, of interest and penalty accrual related to the anticipated payment of these potential tax liabilities as of December 31, 2017 and 2016. The Company classifies interest and
penalties recognized on the liability for uncertain tax positions as income tax expense.
Based on information currently
available, the Company anticipates that over the next twelve-month period, statutes of limitations may close and audit settlements will occur relating to existing unrecognized tax benefits of approximately $15.6 million primarily arising from
U.S. federal and state tax related items.
Note 19. Stock-Based Compensation
ARRIS grants stock awards under its 2016 Stock Incentive Plan (SIP). Upon approval of the 2016 SIP, all shares available for
grant under the Companys other existing stock incentive plans were no longer available. The Board of Directors approved the SIP and the prior plans to facilitate the retention and continued motivation of key employees, consultants and
directors, and to align more closely their interests with those of the Company and its stockholders.
Awards under the SIP may
be in the form of stock options, stock grants, stock units, restricted stock, stock appreciation rights, performance shares and units, and dividend equivalent rights. A total of 31,215,000 shares of
136
the Companys shares may be issued pursuant to the SIP. The SIP has been designed to allow for flexibility in the form of awards; however, awards denominated in ordinary shares other than
stock options and stock appreciation rights will be counted against the SIP limit as 1.87 shares for every one share covered by such an award. The vesting requirements for issuance under the SIP may vary; however, awards generally are required to
have a minimum three-year vesting period or term.
Restricted Stock
(Non-Performance)
Units
ARRIS grants restricted stock units to certain employees
and its
non-employee
directors. The Company records a fixed compensation expense equal to the fair market value of the underlying shares of restricted stock unit granted on a straight-line basis over the
requisite services period for the restricted shares. The Company applies an estimated forfeiture rate based upon historical rates. The fair value is the market price of the underlying ordinary shares on the date of grant.
In connection with the Pace combination, ARRIS accelerated the vesting of the time-based restricted shares that otherwise were scheduled
to vest in 2016 for all of its executive officers and additional acceleration of time-based restricted shares for two executives that reached retirement age eligibility that otherwise would vest in 2017, 2018 and 2019.
The following table summarizes ARRISs unvested restricted stock unit (excluding performance-related) transactions during the year
ending December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares
|
|
|
Weighted Average
Grant
Date
Fair Value
|
|
Unvested at December 31, 2016
|
|
|
6,495,049
|
|
|
$
|
24.04
|
|
Granted
|
|
|
3,793,925
|
|
|
|
27.54
|
|
Vested
|
|
|
(2,571,398
|
)
|
|
|
22.98
|
|
Forfeited
|
|
|
(357,232
|
)
|
|
|
24.77
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2017
|
|
|
7,360,344
|
|
|
|
26.18
|
|
|
|
|
|
|
|
|
|
|
Restricted Shares Units Subject to Comparative Market Performance
ARRIS grants to certain employees restricted shares units, in which the number of shares to be issued is dependent upon the Companys
total shareholder return as compared to the shareholder return of the NASDAQ composite over a three-year period. The number of shares which could potentially be issued ranges from zero to 200% of the target award. For the awards granted in 2015, the
three-year measurement period ended on December 31, 2017. The Companys total shareholder return underperformed the NASDAQ composite over the three-year period, therefore resulted in zero achievement of the target award. The remaining
grants outstanding that are subject to market performance are 672,530 shares at target; at 200% performance 1,345,060 would be issued. Compensation expense is recognized on a straight-line basis over the three-year measurement period and is based
upon the fair market value of the shares expected to vest. The fair value of the restricted share units is estimated on the date of grant using a Monte Carlo Simulation model.
|
|
|
|
|
|
|
|
|
|
|
Market Performance
Shares
|
|
|
Weighted Average Grant
Date
Fair Value
|
|
Unvested at December 31, 2016
|
|
|
1,640,410
|
|
|
$
|
29.52
|
|
Granted
|
|
|
524,350
|
|
|
|
24.13
|
|
Vested
|
|
|
(211,689
|
)
|
|
|
41.12
|
|
Performance adjustment
|
|
|
(608,011
|
)
|
|
|
35.85
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2017
|
|
|
1,345,060
|
|
|
|
22.73
|
|
|
|
|
|
|
|
|
|
|
137
The total fair value of restricted share units, including both
non-performance
and performance-related shares, that vested during 2017, 2016 and 2015 was $76.1 million, $52.3 million and $118.3 million, respectively.
Employee Stock Purchase Plan (ESPP)
ARRIS offers an ESPP to certain employees. The plan complies with Section 423 of the U.S. Internal Revenue Code, which provides that employees will not be immediately taxed on the difference between
the market price of the stock and a discounted purchase price if it meets certain requirements. Participants can request that up to 10% of their base compensation be applied toward the purchase of ARRIS ordinary shares under ARRISs ESPP.
Purchases by any one participant are limited to $25,000 (based upon the fair market value) in any one year. The exercise price is the lower of 85% of the fair market value of the ARRIS ordinary shares on either the first day of the purchase period
or the last day of the purchase period. A plan provision which allows for the more favorable of two exercise prices is commonly referred to as a look-back feature. Any discount offered in excess of five percent generally will be
considered compensatory and appropriately is recognized as compensation expense. Additionally, any ESPP offering a look-back feature is considered compensatory. ARRIS uses the Black-Scholes option valuation model to value shares issued under the
ESPP. The valuation is comprised of two components; the 15% discount of a share of ordinary shares and 85% of a
six-month
option held (related to the look-back feature). The weighted average assumptions used
to estimate the fair value of purchase rights granted under the ESPP for 2017, 2016 and 2015, were as follows: risk-free interest rates of 1.2%, 0.5% and 0.1%, respectively; a dividend yield of 0%; volatility factor of the expected market price of
ARRISs stock of 0.28, 0.37, and 0.41, respectively; and a weighted average expected life of 0.5 year for each. The Company recorded stock compensation expense related to the ESPP of approximately $4.8 million, $4.6 million and
$5.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Unrecognized Compensation
Cost
As of December 31, 2017, there was approximately $152.2 million of total unrecognized compensation cost
related to unvested share-based awards granted under the Companys incentive plans. This compensation cost is expected to be recognized over a weighted-average period of 2.8 years.
Note 20. Employee Benefit Plans
The Company sponsors a qualified and a
non-qualified
non-contributory
defined benefit pension plan that covers certain U.S. and
non-U.S.
employees. As of January 1,
2000, the Company froze the U.S. qualified defined pension plan benefits for its participants. These participants elected to enroll in ARRISs enhanced 401(k) plan.
The U.S. pension plan benefit formulas generally provide for payments to retired employees based upon their length of service and compensation as defined in the plans. ARRISs investment policy is to
fund the qualified plan as required by the Employee Retirement Income Security Act of 1974 (ERISA) and to the extent that such contributions are tax deductible.
ARRIS also provides a
non-contributory
defined benefit plan which cover employees in Taiwan. Any other benefit plans outside of the U.S. are not material to ARRIS
either individually or in the aggregate.
No minimum funding contributions are required in 2017 under the Companys U.S.
defined benefit plan. For the year ended December 31, 2017, the Company made a voluntary minimum funding contribution of $1.4 million to its U.S defined benefit plan. The Company also made funding contributions of $1.2 million
related to our
non-U.S.
pension plan in 2017.
During 2016, in an effort to reduce
future premiums and administrative fees as well as to increase our funded status in connection with our U.S. pension obligation, we made a voluntary funding contribution of $5.0 million. The Company also made funding contributions of
$10.9 million related to our
non-U.S.
pension plan in 2016.
The Company has
established a rabbi trust to fund the pension obligations of the Executive Chairman under his Supplemental Retirement Plan including the benefit under the Companys
non-qualified
defined benefit plan.
138
In addition, the Company has established a rabbi trust for certain executive officers to fund the Companys pension liability to those officers under the
non-qualified
plan.
In late 2017, the Company commenced the process of terminating our
U.S. defined benefit pension plan. Ultimate plan termination is subject to regulatory approval and to prevailing market conditions and other considerations. In the event approvals are received and the Company proceeds with effecting termination,
settlement of the plan obligations is expected to occur in 2019. If the settlement occurs as expected in 2019, the plans deferred actuarial losses remaining in accumulated other comprehensive income (loss) at that time will be recognized as
expense.
The following table summarizes the change in projected benefit obligations, fair value of plan assets and the funded
status of pension plan for the years ended December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Change in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
45,270
|
|
|
$
|
42,999
|
|
|
$
|
35,706
|
|
|
$
|
36,372
|
|
Service cost
|
|
|
|
|
|
|
|
|
|
|
664
|
|
|
|
703
|
|
Interest cost
|
|
|
1,733
|
|
|
|
1,751
|
|
|
|
486
|
|
|
|
614
|
|
Actuarial loss
|
|
|
3,868
|
|
|
|
2,024
|
|
|
|
121
|
|
|
|
81
|
|
Benefit payments
|
|
|
(1,651
|
)
|
|
|
(1,504
|
)
|
|
|
|
|
|
|
(1,041
|
)
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
(1,596
|
)
|
|
|
(1,626
|
)
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
2,755
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
49,220
|
|
|
$
|
45,270
|
|
|
$
|
38,136
|
|
|
$
|
35,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
18,510
|
|
|
$
|
13,516
|
|
|
$
|
19,011
|
|
|
$
|
9,232
|
|
Actual return on plan assets
|
|
|
949
|
|
|
|
751
|
|
|
|
183
|
|
|
|
131
|
|
Company contributions
|
|
|
1,856
|
|
|
|
5,747
|
|
|
|
1,259
|
|
|
|
11,120
|
|
Expenses and benefits paid from plan assets
|
|
|
(1,651
|
)
|
|
|
(1,504
|
)
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
(1,596
|
)
|
|
|
(1,626
|
)
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
1,467
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
(1)
|
|
$
|
19,664
|
|
|
$
|
18,510
|
|
|
$
|
20,324
|
|
|
$
|
19,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
$
|
(29,557
|
)
|
|
$
|
(26,760
|
)
|
|
$
|
(17,812
|
)
|
|
$
|
(16,695
|
)
|
Unrecognized actuarial loss (gain)
|
|
|
13,981
|
|
|
|
10,720
|
|
|
|
(1,857
|
)
|
|
|
(2,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(15,576
|
)
|
|
$
|
(16,040
|
)
|
|
$
|
(19,669
|
)
|
|
$
|
(18,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In addition to the U.S. pension plan assets, ARRIS has established two rabbi trusts to further fund the pension obligations of the Executive Chairman and certain
executive officers of $25.4 million as of December 31, 2017 and $21.2 million as of December 31, 2016, and are included in Investments on the Consolidated Balance Sheets.
|
139
Amounts recognized in the statement of financial position consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Current liabilities
|
|
$
|
(17,670
|
)
|
|
$
|
(399
|
)
|
|
$
|
|
|
|
$
|
|
|
Noncurrent liabilities
|
|
|
(11,887
|
)
|
|
|
(26,361
|
)
|
|
|
(17,812
|
)
|
|
|
(16,695
|
)
|
Accumulated other comprehensive loss (income) (1)
|
|
|
13,981
|
|
|
|
10,720
|
|
|
|
(1,857
|
)
|
|
|
(2,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(15,576
|
)
|
|
$
|
(16,040
|
)
|
|
$
|
(19,669
|
)
|
|
$
|
(18,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The accumulated other comprehensive income on the Consolidated Balance Sheets as of December 31, 2017 and 2016 is presented net of income tax.
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Net (gain) loss
|
|
$
|
3,814
|
|
|
$
|
2,068
|
|
|
$
|
(3,203
|
)
|
|
$
|
261
|
|
|
$
|
225
|
|
|
$
|
813
|
|
Amortization of net gain (loss)
|
|
|
(552
|
)
|
|
|
(544
|
)
|
|
|
(834
|
)
|
|
|
78
|
|
|
|
248
|
|
|
|
(529
|
)
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,849
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other (loss) comprehensive income
|
|
$
|
3,262
|
|
|
$
|
1,524
|
|
|
$
|
(4,037
|
)
|
|
$
|
339
|
|
|
$
|
2,353
|
|
|
$
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information for defined benefit plans with accumulated benefit obligations or projected benefit obligation
in excess of plan assets as of December 31, 2017 and 2016 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
49,220
|
|
|
$
|
45,270
|
|
|
$
|
29,741
|
|
|
$
|
27,551
|
|
Fair value of plan assets
|
|
|
19,664
|
|
|
|
18,510
|
|
|
|
20,324
|
|
|
|
19,011
|
|
Projected benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
|
49,220
|
|
|
$
|
45,270
|
|
|
|
38,136
|
|
|
|
35,706
|
|
Fair value of plan assets
|
|
|
19,664
|
|
|
|
18,510
|
|
|
|
20,324
|
|
|
|
19,011
|
|
Net periodic pension cost for 2017, 2016 and 2015 for pension and supplemental benefit plans includes the
following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
664
|
|
|
$
|
703
|
|
|
$
|
738
|
|
Interest cost
|
|
|
1,733
|
|
|
|
1,751
|
|
|
|
1,716
|
|
|
|
486
|
|
|
|
614
|
|
|
|
661
|
|
Return on assets (expected)
|
|
|
(895
|
)
|
|
|
(795
|
)
|
|
|
(839
|
)
|
|
|
(323
|
)
|
|
|
(275
|
)
|
|
|
(176
|
)
|
Amortization of net actuarial loss(gain)
(1)
|
|
|
552
|
|
|
|
544
|
|
|
|
834
|
|
|
|
(78
|
)
|
|
|
(70
|
)
|
|
|
529
|
|
Settlement charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(178
|
)
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,849
|
)
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
1,390
|
|
|
$
|
1,500
|
|
|
$
|
1,711
|
|
|
$
|
749
|
|
|
$
|
(1,086
|
)
|
|
$
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
(1)
|
ARRIS uses the allowable 10% corridor approach to determine the amount of gains/losses subject to amortization in pension cost. Gains/losses are amortized on a
straight-line basis over the average future service of members expected to receive benefits
|
Estimated amounts to
be amortized from accumulated other comprehensive income (loss) into net periodic benefit costs in the year ending December 31, 2018 based on December 31, 2017 plan measurements are $1.0 million, consisting primarily of amortization
of the net actuarial loss in the U.S. pension plans.
The assumptions used to determine the benefit obligations as of
December 31, 2017 and 2016 are as set forth below (in percentage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Weighted-average assumptions used to determine benefit obligations:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.45
|
%
|
|
|
3.90
|
%
|
|
|
4.15
|
%
|
|
|
1.10
|
%
|
|
|
1.30
|
%
|
|
|
1.70
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.90
|
%
|
|
|
4.15
|
%
|
|
|
3.75
|
%
|
|
|
1.30
|
%
|
|
|
1.70
|
%
|
|
|
1.90
|
%
|
Expected long-term rate of return on plan assets
|
|
|
5.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
1.40
|
%
|
|
|
1.60
|
%
|
|
|
2.00
|
%
|
Rate of compensation increase (1)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
(1)
|
Represent an average rate for the
non-U.S.
pension plans. Rate of compensation increase is 4.00% for indirect labor and 2.00%
for direct labor for 2017, 2016 and 2015.
|
The expected long-term rate of return on assets is derived using the
building block approach which includes assumptions for the long-term inflation rate, real return, and equity risk premiums.
No
minimum funding contributions are required for 2018 for the U.S. Pension plan, however the Company may make a voluntary contribution. The Company estimates it will make funding contributions of $1.2 million in 2018 for the
non-U.S.
plan.
As of December 31, 2017, the expected benefit payments related to the
Companys defined benefit pension plans during the next ten years are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
2018
|
|
$
|
18,890
|
|
|
$
|
2,840
|
|
2019
|
|
|
1,770
|
|
|
|
2,122
|
|
2020
|
|
|
1,820
|
|
|
|
2,169
|
|
2021
|
|
|
1,920
|
|
|
|
2,273
|
|
2022
|
|
|
1,920
|
|
|
|
1,905
|
|
2023 2027
|
|
|
10,200
|
|
|
|
10,737
|
|
141
The investment strategies of the plans place a high priority on benefit security. The plans
invest conservatively so as not to expose assets to depreciation in adverse markets. The plans strategy also places a high priority on earning a rate of return greater than the annual inflation rate along with maintaining average market
results. The plan has targeted asset diversification across different asset classes and markets to take advantage of economic environments and to also act as a risk minimizer by dampening the portfolios volatility. The following table
summarizes the weighted average pension asset allocations as December 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
|
Target
|
|
|
Actual
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Equity securities
|
|
|
|
|
|
|
30% - 40%
|
|
|
|
|
|
|
|
30
|
%
|
Debt securities
|
|
|
|
|
|
|
0% - 5%
|
|
|
|
|
|
|
|
2
|
%
|
Cash and cash equivalents
|
|
|
80% - 100%
|
|
|
|
60% - 70%
|
|
|
|
100
|
%
|
|
|
68
|
%
|
Asset allocation for the
non-U.S.
pension assets is 100% in money
market investments.
The following table summarizes the Companys U.S. pension plan assets by category and by level (as
described in Note 7
Fair Value Measurements
of the Notes to the Consolidated Financial Statements) as of December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
(1)
|
|
$
|
19,662
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
19,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,662
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
19,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and cash equivalents
(1)
|
|
$
|
|
|
|
$
|
12,723
|
|
|
$
|
|
|
|
$
|
12,723
|
|
Equity securities
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
1,123
|
|
|
|
|
|
|
|
|
|
|
|
1,123
|
|
U.S. mid cap
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
1,118
|
|
U.S. small cap
|
|
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
1,118
|
|
International
|
|
|
1,685
|
|
|
|
|
|
|
|
|
|
|
|
1,685
|
|
Fixed income securities
(3)
:
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,787
|
|
|
$
|
12,723
|
|
|
$
|
|
|
|
$
|
18,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cash and cash equivalents, which are used to pay benefits and administrative expenses, are held in money market and stable value fund.
|
(2)
|
Equity securities consist of mutual funds and the underlying investments are indexes. Investments in mutual funds are valued at the net asset value per share multiplied
by the number of shares held.
|
(3)
|
Fixed income securities consist of bonds securities in mutual funds, and are valued at the net asset value per share multiplied by the number of shares held.
|
Other Benefit Plans
ARRIS has established defined contribution plans pursuant to the Internal Revenue Code Section 401(k) that cover all eligible U.S. employees. ARRIS contributes to these plans based upon the dollar
amount of each participants contribution. ARRIS made matching contributions to these plans of approximately $16.5 million, $16.4 million and $16.6 million in 2017, 2016 and 2015, respectively.
The Company has a deferred compensation plan that does not qualify under Section 401(k) of the Internal Revenue Code, and is
available to key executives of the Company and certain other employees. Employee com-
142
pensation deferrals and matching contributions are held in a rabbi trust. The total of net employee deferrals and matching contributions, which is reflected in other long-term liabilities, was
$5.7 million and $4.2 million at December 31, 2017 and 2016, respectively. Total expenses included in continuing operations for the matching contributions were approximately $0.3 million and $0.2 million in 2017 and 2016,
respectively.
The Company previously offered a deferred compensation arrangement, which allowed certain employees to defer a
portion of their earnings and defer the related income taxes. As of December 31, 2004, the plan was frozen and no further contributions are allowed. The deferred earnings are invested in a rabbi trust. The total of net employee deferral and
matching contributions, which is reflected in other long-term liabilities, was $3.1 million and $3.0 million at December 31, 2017 and 2016, respectively.
The Company also has a deferred retirement salary plan, which was limited to certain current or former officers. The present value of the estimated future retirement benefit payments is being accrued over
the estimated service period from the date of signed agreements with the employees. The accrued balance of this plan, the majority of which is included in other long-term liabilities, were $1.5 million and $1.6 million at December 31,
2017 and 2016, respectively. Total expenses (income) included in continuing operations for the deferred retirement salary plan were approximately $0.2 million and $0.4 million for 2017 and 2016, respectively.
Note 21. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of taxes, for the year ended December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(11
|
)
|
|
|
1,631
|
|
|
|
(2,934
|
)
|
|
|
11,096
|
|
|
|
9,782
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
15
|
|
|
|
5,821
|
|
|
|
319
|
|
|
|
|
|
|
|
6,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
4
|
|
|
|
7,452
|
|
|
|
(2,615
|
)
|
|
|
11,096
|
|
|
|
15,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
137
|
|
|
$
|
671
|
|
|
$
|
(6,810
|
)
|
|
$
|
9,293
|
|
|
$
|
3,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income before reclassifications
|
|
|
471
|
|
|
|
3,790
|
|
|
|
(2,487
|
)
|
|
|
(2,050
|
)
|
|
|
(276
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
54
|
|
|
|
1,128
|
|
|
|
304
|
|
|
|
|
|
|
|
1,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
525
|
|
|
|
4,918
|
|
|
|
(2,183
|
)
|
|
|
(2,050
|
)
|
|
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
662
|
|
|
$
|
5,589
|
|
|
$
|
(8,993
|
)
|
|
$
|
7,243
|
|
|
$
|
4,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 22. Repurchases of Stock
Upon completing the Pace combination, ARRIS International plc 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 a U.S. GAAP reported amount.
In 2016, the Companys Board of Directors approved a $300 million share repurchase authorization replacing all prior programs.
In early 2017, the Board authorized an additional $300 million for share repurchases.
143
During 2016, the Company repurchased 7.4 million of its ordinary shares for
$178.0 million at an average stock price of $24.09.
During 2017, ARRIS repurchased 7.5 million shares of its
ordinary shares at an average price of $26.12 per share, for an aggregate consideration of approximately $197.0 million. The remaining authorized amount for stock repurchases was $225.0 million as of December 31, 2017. Unless
terminated earlier by a Board resolution, this new plan will expire when ARRIS has used all authorized funds for repurchase. However, U.K. law also generally prohibits a company from repurchasing its own shares through off market
purchases without prior approval of shareholders because we are not traded on a recognized investment exchange in the U.K. This shareholder approval lasts for a maximum period of five years. Prior to and in connection with the Pace
combination, we obtained approval to purchase our own shares. This authority to repurchase shares terminates in January 2021, unless otherwise reapproved by our shareholders.
Note 23. Commitments and Contingencies
General Matters
ARRIS leases office, distribution, and warehouse facilities as well as equipment under long-term leases expiring at various dates through
2023. Included in these operating leases are certain amounts related to restructuring activities; these lease payments and related sublease income are included in restructuring accruals on the consolidated balance sheets. Future minimum operating
lease payments under
non-cancelable
leases at December 31, 2017 were as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
|
2018
|
|
$
|
37,661
|
|
2019
|
|
|
31,864
|
|
2020
|
|
|
27,288
|
|
2021
|
|
|
24,502
|
|
2022
|
|
|
20,558
|
|
Thereafter
|
|
|
42,768
|
|
Less sublease income
|
|
|
(4,674
|
)
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
179,967
|
|
|
|
|
|
|
Total rental expense for all operating leases amounted to approximately $26.4 million,
$34.0 million and $26.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Additionally, the Company had contractual obligations of approximately $772.1 million under agreements with
non-cancelable
terms to purchase goods or services over the next year. All contractual obligations outstanding at the end of prior years were satisfied within a
12-month
period, and the obligations outstanding as of December 31, 2017 are expected to be satisfied by 2018.
Bank Guarantees
The Company has outstanding bank guarantees, of which certain amounts are collateralized by restricted cash. As of
December 31, 2017, the restricted cash associated with the outstanding bank guarantee was $1.5 million which is reflected in Other Assets on the Consolidated Balance Sheets.
Legal Proceedings
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company
reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Companys views on the probable outcomes of
claims, suits, assessments, investigations or legal proceedings change, changes in the Companys accrued liabilities would be recorded in the period in which such determinations are made. Unless noted
other-
144
wise, 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, the Company is currently unable to reasonably estimate the
possible loss or range of possible loss for any of the matters identified in Part II, Item 1 Legal Proceedings. The results in litigation are unpredictable and an adverse resolution of one or more of such matters not included in the
estimate provided, or if losses are higher than what is currently estimated, it could have a material adverse effect on our business, financial position, results of operations or cash flows. In addition, the Company is a defendant in various
litigation matters generally arising out of the normal course of business. (See Part I, Item 3 Legal Proceedings for additional details).
Note 24. Subsequent Events
In February 2018, the Company announced an
agreement to sell its manufacturing facility in New Taipei City, Taiwan, along with certain manufacturing fixed assets. The aggregate consideration for the acquired assets is $81.3 million ($75.0 million for the facility and land, plus
$6.3 million for the manufacturing fixed assets). As a condition of sale, the Company will indemnify the buyer for certain environmental obligations up to $7.0 million. As of December 31, 2017, the carrying amount of the facility,
land, and manufacturing fixed assets was approximately $57.9 million and will be reclassified as held for sale in the first quarter of 2018. The Company expects to close the transaction in the second half of 2018.
In addition, the Company expects to incur restructuring charges of approximately $15.0 million in the first quarter of 2018 for
employee severance and termination benefits in connection with the sale.
Note 25. Summary Quarterly Consolidated Financial Information
(unaudited)
The following table summarizes ARRISs quarterly consolidated financial information (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2017 Ended,
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30
|
|
|
December
31,
(1)(2)(3)(4)
|
|
Net sales
|
|
$
|
1,483,105
|
|
|
$
|
1,664,170
|
|
|
$
|
1,728,524
|
|
|
$
|
1,738,593
|
|
Gross margin
|
|
|
337,257
|
|
|
|
403,357
|
|
|
|
431,155
|
|
|
|
494,470
|
|
Operating (loss) income
|
|
|
(4,084
|
)
|
|
|
55,636
|
|
|
|
84,157
|
|
|
|
(12,698
|
)
|
Net (loss) income attributable to ARRIS International plc.
|
|
$
|
(39,098
|
)
|
|
$
|
30,336
|
|
|
$
|
88,320
|
|
|
$
|
12,469
|
|
Net (loss) income per basic share
|
|
$
|
(0.21
|
)
|
|
$
|
0.16
|
|
|
$
|
0.47
|
|
|
$
|
0.07
|
|
Net (loss) income per diluted share
|
|
$
|
(0.21
|
)
|
|
$
|
0.16
|
|
|
$
|
0.47
|
|
|
$
|
0.07
|
|
|
|
|
|
Quarters in 2016 Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30
|
|
|
December 31,
(5)(6)
|
|
Net sales
|
|
$
|
1,614,706
|
|
|
$
|
1,730,044
|
|
|
$
|
1,725,145
|
|
|
$
|
1,759,223
|
|
Gross margin
|
|
|
384,032
|
|
|
|
444,734
|
|
|
|
442,850
|
|
|
|
436,001
|
|
Operating (loss) income
|
|
|
(86,490
|
)
|
|
|
33,388
|
|
|
|
91,313
|
|
|
|
72,506
|
|
Net (loss) income attributable to ARRIS International plc
|
|
$
|
(202,573
|
)
|
|
$
|
84,228
|
|
|
$
|
48,162
|
|
|
$
|
88,283
|
|
Net (loss) income per diluted share
|
|
$
|
(1.06
|
)
|
|
$
|
0.44
|
|
|
$
|
0.25
|
|
|
$
|
0.46
|
|
Net (loss) income per basic share
|
|
$
|
(1.06
|
)
|
|
$
|
0.44
|
|
|
$
|
0.25
|
|
|
$
|
0.46
|
|
145
Year 2017
(1)
|
For the quarter ended December 31, 2017, the Company recorded an increase to net sales of $8.1 million, to reverse previous quarters reduction in net sales in
connection with Warrants.
|
(2)
|
In the fourth quarter of 2017, the Company recorded partial impairments of goodwill and indefinite-lived tradenames of $51.2 million and $3.8 million,
respectively, acquired in our ActiveVideo acquisition and included as part of our Cloud TV reporting unit, of which $19.3 million is attributable to noncontrolling interest.
|
(3)
|
In the fourth quarter of 2017, the Company recorded acquisition costs of $61.5 million related to the cash settlement of stock-based awards held by transferring
employees.
|
(4)
|
During 2017, the Company recorded a foreign currency remeasurement loss of $10.5 million related primarily to a deferred income tax liability, in the United
Kingdom. This deferred income tax liability is denominated in GBP. The foreign currency remeasurement gain derives from the remeasurement of the GBP deferred income tax liability to the USD, since the date of the acquisition.
|
Year 2016
(5)
|
For the quarter ended December 31, 2016, the Company recorded $16.4 million as a reduction to net sales in connection with Warrants.
|
(6)
|
In the fourth quarter of 2016, the Company recorded foreign currency remeasurement gains of approximately $16 million related to the remeasurement
of net deferred income tax liabilities in the U.K. where the functional currency is the U.S. dollar. Approximately $8 million resulted from changes in exchange rates prior to the 4
th
quarter in 2016 and was considered the correction of an immaterial misstatement of interim financial statements in
2016. In accordance with ASC Topic 250,
Accounting Changes and Error Corrections,
the Company evaluated the impact of the 4
th
quarter adjustment on its previously issued interim financial statements in 2016 and concluded that the results of
operations for these periods were not materially misstated and accordingly the correction was recorded in the
4
th
quarter.
|
146