Item 1A. RISK FACTORS
Our business is dependent on customers capital spending on broadband communication systems, and reductions by customers in capital spending would
adversely affect our business.
Our performance is primarily dependent on customers capital spending for constructing, rebuilding,
maintaining or upgrading broadband communications systems. Capital spending in the broadband communications industry is cyclical and can be curtailed or deferred on short notice. A variety of factors affect capital spending, and, therefore, our
sales and profits, including:
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demand for network services;
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general economic conditions;
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foreign currency fluctuations;
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competition from other providers of broadband and high-speed services;
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customer specific financial or stock market conditions;
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availability and cost of capital;
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governmental regulations;
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customer acceptance of new services offered; and
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real or perceived trends or uncertainties in these factors.
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Several of our customers have accumulated
significant levels of debt. These high debt levels, coupled with the volatility in the capital markets, may impact their access to capital in the future. Even if the financial health of our customers remains intact, these customers may not purchase
new equipment at levels we have seen in the past or expect in the future. We cannot predict the impact, if any, of any softening or downturn in the national or global economy or of specific customer financial challenges on our customers
expansion and maintenance expenditures.
The markets on which our business is focused is significantly impacted by technological change.
The broadcast and broadband communication systems industry has gone through dramatic technological change resulting in service providers rapidly
migrating their business from a
one-way
television service to a
two-way
communications network enabling multiple services, such as residential and business high-speed
Internet
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access, residential and business telephony services, digital television, video on demand and advertising services. New services, such as home security, power monitoring and control, and 4K (UHD)
television that are or may be offered by service providers, are also based on, and will be characterized by, rapidly evolving technology. The development of increasing transmission speed, density and bandwidth for Internet traffic has also enabled
the provision of high quality, feature length video over the Internet. This
over-the-top
IP video service enables content providers such as Netflix and Hulu, programmers
such as HBO and ESPN and portals like Google to provide video services
on-demand,
by-passing
traditional video service providers. As these service providers enhance
their quality and scalability, many are also introducing similar OTT services over their existing networks, for delivery not only to televisions but to computers, tablets, and telephones to remain competitive. In addition, service providers continue
to explore ways to virtualize portions of their networks, reducing dependence on specifically designed equipment, including our products, by utilizing software that provide the same functions. We must retain skilled and experienced personnel, as
well as deploy substantial resources to meet the changing demands of the industry and must be nimble to be able to capitalize on change.
We compete with
international, national and regional manufacturers, distributors and wholesalers including some companies that are larger than we are. In some instances, our customers themselves may be our competition. Some of our customers may develop their own
software requiring support within our products and/or may design and develop products of their own which are produced to their own specifications directly by a contract manufacturer.
Our business is dependent on our ability to develop products that enable current and new customers to exploit these rapid technological changes. To the extent
that we are unable to adapt our technologies to serve these emerging demands, including obtaining necessary certifications from content providers and programmers to include their
over-the-top
video applications as part of our product offerings and software to provide virtualized network functions, our business may be adversely affected.
Another trend that could affect us is the emerging interest in Distributed Access Architectures, which disaggregates some of the functions of CCAP and the
Access and Transport platforms to enable deployment of these functions in ways that could reduce operator capital expenditures. ARRIS is developing a line of DAA products but operators are not aligned on the specific implementations of DAA and ARRIS
could lose market share to competitors. Service providers also have the goal of virtualizing CCAP management and control functions as they deploy DAA as well, potentially enabling new competitors to enter the market and reducing their dependence on
ARRIS products.
The
Wi-Fi
and wireless networking markets for both service providers and enterprises is generally
characterized by rapidly changing technology, changing end customer needs, evolving industry standards and frequent introductions of new products and services.
To succeed, we must effectively anticipate, and adapt in a timely manner to, end customer requirements and continue to develop or acquire new products and
features that meet market demands, technology trends and regulatory requirements. Likewise, if our competitors introduce new products and services that compete with ours, we may be required to reposition our product and service offerings or
introduce new products and services in response to such competitive pressure. If we fail to develop new products or product enhancements, or our end customers or potential end customers do not perceive our products to have compelling technical
advantages, our business could be adversely affected, particularly if our competitors are able to introduce solutions with such increased functionality earlier than we do. Developing our products is expensive, complex and involves uncertainties.
Each phase in the development of our products presents serious risks of failure, rework or delay, any one of which could impact the timing and cost-effective development of such product and could jeopardize end customer acceptance of the product. We
have experienced in the past and may in the future experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. In addition, the
introduction of new or enhanced products requires that we carefully manage the transition from older products to minimize disruption in customer ordering practices and ensure that new products can be timely delivered to meet our customers
demand. As a result, we may not be successful in modifying our current products or introducing new products in a timely or appropriately responsive manner, or at all. If we fail to address these changes successfully, our business and operating
results could be materially harmed.
Consolidations in the broadcast and broadband communication systems industry could have a material adverse
effect on our business.
The broadcast and broadband communication systems industry historically has experienced, and continues to experience, the
consolidation of many industry participants. For example, Comcast recently announced a bid to acquire Sky, Vodafone announced it would merge its mobile operations in India with Idea Cellular, Wave Broadband announced it was consolidating with RCN
under common ownership, Atlantic Broadband/Cogeco
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announced it would purchase MetroCast, Cable One bought NewWave Communications,
T-Mobile
US announced plans to acquire TV service provider Layer3, and
Cablevision SA (Argentina) announced it would merge with Telecom Argentina SA. When consolidations occur, it is possible that the acquirer will not continue using the same suppliers, possibly resulting in an immediate or future elimination of sales
opportunities for us. Even if sales are not reduced, consolidations also could result in delays in purchasing decisions by the affected companies prior to completion of the transaction. Further, even if we believe we will receive additional sales
from a customer following a transaction as a result of, for example, typical network upgrades that follow combinations or otherwise, no assurance can be provided that such anticipated sales will be realized. In addition, consolidations can also
result in increased pressure from 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. Any
of these results could have a material adverse effect on our business.
We have significant indebtedness, which could limit our operations and
opportunities, make it more difficult for us to pay or refinance our debts and/or may cause us to issue additional equity in the future, which would increase the dilution of our stockholders or reduce earnings.
As of March 31, 2018, we had approximately $2,139.5 million in total indebtedness and $498.3 million available under our revolving line of
credit to support our working capital needs. Our debt service obligations with respect to this indebtedness could have an adverse impact on our earnings and cash flows for as long as the indebtedness is outstanding.
This significant indebtedness also could have important consequences to stockholders. For example, it could:
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make it more difficult for us to pay or refinance our debts as they become due during adverse economic and industry conditions because any decrease in revenues could cause us to not have sufficient cash flows from
operations to make our scheduled debt payments;
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limit our flexibility to pursue other strategic opportunities or react to changes in our business and the industry in which we operate and, consequently, place us at a competitive disadvantage to competitors with less
debt;
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require a substantial portion of our cash flows from operations to be used for debt service payments, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and
other general corporate purposes; and
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result in higher interest expense in the event of increases in interest rates since the majority of our debt is subject to variable rates.
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Based upon current levels of operations, we expect to be able to generate sufficient cash on a consolidated basis to make all the principal and interest
payments on our indebtedness when such payments are due, but there can be no assurance that we will be able to repay or refinance such borrowings and obligations.
We may consider it appropriate to reduce the amount of indebtedness currently outstanding. This may be accomplished in several ways, including issuing
additional ordinary shares or securities convertible into ordinary shares, reducing discretionary uses of cash or a combination of these and other measures. Issuances of additional ordinary shares or securities convertible into ordinary shares would
have the effect of diluting the ownership percentage that stockholders will hold in the company and may reduce our reported earnings per share.
We
face risks relating to currency fluctuations and currency exchange.
On an ongoing basis we are exposed to various changes in foreign currency
rates because certain sales are denominated in foreign currencies. Additionally, certain intercompany transactions are denominated in foreign currencies and subject to revaluation. These changes can impact our results of operations, cash flows and
financial position. We manage these risks through regular operating and financing activities and periodically use derivative financial instruments such as foreign exchange forward and option contracts. There can be no assurance that our risk
management strategies will be effective. In addition, many of our international customers make purchases from us that 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 affected countries.
We also may encounter difficulties in converting our
earnings from international operations to U.S. dollars for use in the United States. These obstacles may include problems moving funds out of the countries in which the funds were earned and difficulties in collecting accounts receivable in foreign
countries where the usual accounts receivable payment cycle is longer.
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We may have difficulty in forecasting our sales and may experience volatility in revenues and inventory
levels.
Because a significant portion of our customers purchases are discretionary, accurately forecasting our sales is difficult. In
addition, our customers have increasingly submitted their purchase orders less evenly over the course of each quarter and with shorter lead times than they have historically. The combination of our dependence on relatively few key customers and the
award by those customers of irregular but sizeable orders, together with the size of our operations, make it difficult to forecast sales and can result in revenue volatility, which could further result in maintaining inventory levels that are not
optimal for our ultimate needs and could have a negative impact on our business.
We also have outstanding warrants with a customer to purchase our
ordinary shares. Vesting of the warrants is subject to both the volume of purchases by the customers and product mix. Under applicable accounting guidance, if we believe that vesting of a tranche of the warrants is probable, we are required to
mark-to-market
the fair value of the warrant until it vests, and any change in the fair value is treated as a change in revenues from sales to the customer. The amount of the
change in revenues that will be recorded is difficult to predict as both sales to the customer and changes in our stock price impact the calculation and are outside of our control. As a result, the warrants also could increase our revenue
volatility.
Our gross margins and operating margins will vary over time, and our aggregate gross margin may decrease from historical levels.
We expect our product gross margins to vary over time, and the aggregate gross margin we have achieved in recent years may continue to decrease
and be adversely affected in the future by numerous factors, including customer, product and geographic mix shifts, the introduction of new products, customer acceptance of designed products with a lower cost to us, fluctuations in our license sales
or services we provide, changes in the actions of our competitors, currency fluctuations that impact our costs or the cost of our products and services to our customers, increases in material, labor, or inventory carrying costs, and increased costs
due to changes in component pricing, such as flash memory for our CPE products. We will continue to focus on increasing revenues and operating margins and managing our operating expenses; however, no assurance can be provided that we will be able to
achieve all or any of these goals.
Changes to United States tax, tariff and import/export regulations may have a negative effect on global economic
conditions, financial markets and our business.
We import a significant amount of our products and components from our partner manufacturers in
China. The Office of the U.S. Trade Representative (the USTR) recently proposed a 25% tariff on imports into the U.S. of approximately 1,300 Chinese products with a combined import value of approximately $50 billion. Although
some of the products and components we import were included on this list, we do not expect these tariffs, if enacted, to have a material impact on us. However, the USTR has stated that it expects to propose similar tariffs on the import of
other Chinese products with an additional combined import value of approximately $100 billion. If our products, in particular our CPE products, are included in the additional tariffs, it could materially negatively impact our financial
results as we may be unable to pass the costs of the tariffs on to our customers, or even if we are able to pass the costs on, it is likely to reduce the amount of impacted products that customers in the U.S. will purchase. While we may be able
to shift the manufacturing locations for some of these products to locations that would not be subject to the proposed tariffs, manufacturing in such locations may increase our manufacturing costs and it will take time, likely in excess of six
months, for us to establish manufacturing in the locations.
As evidenced by the USTR proposed tariffs, the current administration, along with Congress, has
created significant uncertainty about the future relationship between the United States and other countries with respect to the trade policies, treaties, taxes, government regulations and tariffs that would be applicable. In addition to the
potential direct impact to us of proposed tariffs as discussed above, these developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets,
and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors could depress economic activity and restrict our access to suppliers or customers and have a material
adverse effect on our business, financial condition and results of operations.
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The IRS may not agree that we are a foreign corporation for U.S. federal income tax purposes.
Following the Pace combination, we are incorporated under the laws of England and Wales and are a tax resident in the United Kingdom for U.K. tax purposes, the
IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal income tax purposes. For U.S. federal income tax purposes, a corporation generally is considered to be a tax resident in the
jurisdiction of its organization or incorporation. Because we are incorporated under the laws of England and Wales, we generally would be classified as a
non-U.S.
corporation (and, therefore, a
non-U.S.
tax resident) under these rules. Section 7874 of the Internal Revenue Code of 1986, as amended (the Code), however, provides an exception to this general rule under which a foreign
incorporated entity may, in certain circumstances, be treated as a U.S. corporation for U.S. federal income tax purposes.
Generally, for us to be treated
as a
non-U.S.
corporation for U.S. federal income tax purposes under Section 7874, the former stockholders of ARRIS Group must own (within the meaning of Section 7874) less than 80% (by both vote and
value) of all of the outstanding shares of ARRIS (the Ownership Test). Based on the terms of the Pace combination, we believe historic ARRIS stockholders owned less than 80% of all the outstanding shares in ARRIS and, thus, the Ownership
Test has been satisfied. However, ownership for purposes of Section 7874 is subject to various adjustments under the Code and the Treasury Regulations promulgated thereunder, and there is limited guidance regarding the Section 7874
provisions, including regarding the application of the Ownership Test. There can be no assurance that the IRS will agree with the position that the Ownership Test was satisfied following the Pace combination and/or would not successfully challenge
the status of ARRIS as a
non-U.S.
corporation for U.S. federal income tax purposes.
If we were to be treated as a
U.S. corporation for U.S. federal income tax purposes, we could be subject to substantial additional U.S. taxes. For U.K. tax purposes, we are expected, regardless of any application of Section 7874, to be treated as a U.K. tax resident.
Consequently, if we are treated as a U.S. corporation for U.S. federal income tax purposes under Section 7874, we could be liable for both U.S. and U.K. taxes, which could have a material adverse effect on our financial condition and results of
operations.
Our status as a foreign corporation for U.S. tax purposes could be affected by a change in law.
Under current law, we expect to be treated as a
non-U.S.
corporation for U.S. federal income tax purposes. However,
changes to Section 7874 or the Treasury Regulations promulgated thereunder, or other changes in law, could adversely affect our status as a
non-U.S.
corporation for U.S. federal income tax purposes, our
effective tax rate and/or future tax planning, and any such changes could have prospective or retroactive application to us and our stockholders.
In
2016, the U.S. Treasury issued proposed and temporary Regulations under Section 7874 and other sections of the Code, which, among other things, make it more difficult for the Ownership Test to be satisfied and would limit or eliminate certain
tax benefits to
so-called
inverted corporations. These temporary Regulations generally apply to transactions occurring on or after April 4, 2016. Accordingly, with respect to the Pace combination, as it
occurred prior to that date, we do not expect these temporary Regulations to adversely affect the tax status of ARRIS. However, these Regulations, among other things, may affect how, or limit options for how, ARRIS will be able to structure future
acquisitions. We continue to monitor this situation, we will review any comments on these proposed Regulations that are made public, we will review the final Regulations when issued, and we will review any additional guidance issued by the U.S.
Treasury and the IRS. Any such future guidance could have a material adverse impact on our financial position and results of operations.
Section 7874 of the Code may limit our ability to utilize certain U.S. tax attributes.
Following the acquisition of a U.S. corporation by a
non-U.S.
corporation, Section 7874 of the Code can limit the
ability of the acquired U.S. corporation and its U.S. affiliates to utilize certain U.S. tax attributes (including net operating losses and certain tax credits) to offset, during the
ten-year
period following
the acquisition, their U.S. taxable income, or related income tax liability, resulting from certain (a) transfers to related foreign persons of stock or other properties of the acquired U.S. corporation and its U.S. affiliates and
(b) income received or accrued from related foreign persons during such period by reason of a license of any property by the acquired U.S. corporation and its U.S. affiliates (collectively, inversion gain). Based on the limited
guidance available and as a result of the Pace transaction, we believe that this limitation under Section 7874 will apply and, as a result, we do not currently expect that the Company or its U.S. affiliates will be able to utilize certain U.S.
tax attributes to reduce the amount of any inversion gain and/or to offset applicable U.S. federal income tax liability attributable to any inversion, but may continue to be used to reduce our taxable income from ordinary operations.
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Changes to, interpretations of, and rulings related to, U.S., U.K., Luxembourg and other tax laws could
adversely affect ARRIS.
Our business operations are subject to taxation in the U.S., U.K., Luxembourg and a number of other jurisdictions. Changes
in tax laws or tax rulings, or changes in interpretations of existing laws, could materially affect our financial position and results from operations. Recently, the U.S. Congress, the Organization for Economic
Co-operation
and Development and other government agencies in jurisdictions where ARRIS and its affiliates do business have had an extended focus on issues related to the taxation of multinational
corporations. One example is in the area of base erosion and profit shifting, including situations where payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. In this regard,
on December 22, 2017, the President signed into law the Tax Cuts and Jobs Act (the Act). The Act significantly reforms the Internal Revenue Code of 1986, as amended. The Act, among other things, includes changes to U.S.
federal tax rates, imposes significant additional limitations on the deductibility of interest, imposes limitations on the deductibility of certain payments between affiliates, allows for the immediate expensing of certain capital expenditures, and
puts into effect the migration from a worldwide system of taxation to a territorial system and imposes several other changes to tax law on U.S. corporations. As many of the provisions of the Act did not come into effect until 2018 and further
clarification of the law is expected, the total impact on our financial position is uncertain and could be materially adverse.
Another example involves
illegal state aid as determined by the EU Competition Commission, which would require EU member states to recover unlawful aid given to multinational enterprises in the form of favorable transfer pricing treatment. As a result, the tax
laws, and the interpretation thereof, in the United States, the United Kingdom, Luxembourg and other countries in which ARRIS and its affiliates do business could change on a prospective or retroactive basis, including as part of the treaty changes
that could result from the U.K.s decision to leave the EU, and any such changes could adversely affect ARRIS and its affiliates. Further, the IRS or other applicable taxing authorities may disagree with positions we have taken in our tax
filings, which could result in the requirement to pay additional tax, interest and penalties, which amounts could be significant.
Proposed changes
to U.S. Model Income Tax Treaty could adversely affect ARRIS.
On May 20, 2015, the U.S. Treasury released proposed revisions to the U.S.
model income tax convention (the Model), the baseline text used by the U.S. Treasury to negotiate tax treaties. The proposed revisions address certain aspects of the Model by modifying existing provisions and introducing entirely new
provisions. Specifically, the proposed revisions target (1) exempt permanent establishments, (2) special tax regimes, (3) expatriated entities, (4) the anti-treaty shopping measures of the limitation on benefits article, and
(5) subsequent changes in treaty partners tax laws.
With respect to the proposed changes to the Model pertaining to expatriated entities,
because the Pace combination is otherwise subject to Section 7874, if applicable treaties were subsequently amended to adopt such proposed changes, payments of interest, dividends, royalties and certain other items of income by ARRIS U.S.
Holdings, Inc. (our primary U.S. holding company) or its U.S. affiliates to
non-U.S.
persons would become subject to full U.S. withholding tax at a 30% rate. This could result in material U.S. taxes being paid
by recipients of payments from ARRIS Holdings and its U.S. affiliates. Additionally, revisions to the Model may influence the international communitys discussion of approaches to treaty abuse and harmful tax practices with respect to the
Organization for Economic Cooperation and Developments ongoing work regarding base erosion and profit shifting. We are unable to predict the likelihood that the proposed revisions to the Model become a part of the Model or any U.S. income tax
treaty. However, any revisions to a U.S. income tax treaty, including the proposed revisions described in this paragraph, could adversely affect ARRIS and its affiliates.
Consequences of the UKs delivering notice to leave the European Union could materially adversely affect our business.
In March 2017, the U.K. government delivered formal notice of its intention to withdraw from the European Union. As a result, it now has up to two years to
negotiate the terms of its exit, unless all the remaining member states of the European Union agree to an extension. Given the lack of precedent, it is unclear how the withdrawal of the U.K. from the European Union will affect the U.K.s access
to the EU Single Market and other important financial and trade relationships and how it will affect us. The withdrawal could, among other outcomes, disrupt the free movement of goods, services and people between the U.K. and the European Union,
undermine bilateral cooperation in key policy areas and significantly disrupt trade between the U.K. and the European Union. Additionally, absent planning and restructuring, the withdrawal will impact the application of the limitation on benefit
clause under Article 24 of the U.S. Luxembourg tax treaty to impose a full U.S. withholding tax at a 30% rate on certain payments made by ARRIS Holdings. Under current European Union rules, following the withdrawal the U.K. will not be able
to negotiate bilateral trade agreements with member
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states of the European Union. In addition, a withdrawal of the U.K. from the European Union could significantly affect the fiscal, monetary, legal and regulatory landscape within the U.K. and
could have a material impact on its economy and the future growth of its various industries, including the broadcast and broadband communication systems industry in which we operate. Although it is not possible to predict fully the effects of the
withdrawal of the U.K. from the European Union, the possible exit of the U.K. from the European Union or prolonged periods of uncertainty in relation to it could have a material adverse effect on our business and our results of operations.
Although certain technical problems experienced by users may not be caused by our products, our business and reputation may be harmed if users perceive
our products as the cause of a slow or unreliable network connection, or a high-profile network failure.
Our products have been deployed in many
different locations and user environments and are capable of providing services and connectivity to many different types of devices operating a variety of applications. The ability of our products to operate effectively can be negatively impacted by
many different elements unrelated to our products. For example, a users experience may suffer from an incorrect setting in a
Wi-Fi
device. Although certain technical problems experienced by users may not
be caused by our products, users often may perceive the underlying cause to be a result of poor performance of the wireless network. This perception, even if incorrect, could harm our business and reputation. Similarly, a high-profile network
failure may be caused by improper operation of the network or failure of a network component that we did not supply, but other service providers may perceive that our products were implicated, which, even if incorrect, could harm our business,
operating results and financial condition.
If our Enterprise segment products do not interoperate with cellular networks and mobile devices, future
sales of our products could be negatively affected.
Our Enterprise segment products are designed to interoperate with cellular networks and mobile
devices using
Wi-Fi
technology. These networks and devices have varied and complex specifications. As a result, we must attempt to ensure that our products interoperate effectively with these existing and
planned networks and devices. To meet these requirements, we must continue to undertake development and testing efforts that require significant capital and employee resources. We may not accomplish these development efforts quickly or
cost-effectively, or at all. If our products do not interoperate effectively, orders for our products could be delayed or cancelled, which would harm our revenue, operating results and our reputation, potentially resulting in the loss of existing
and potential end customers. The failure of our products to interoperate effectively with cellular networks or mobile devices may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations problems. In addition, our end customers may require our products to comply with new and rapidly evolving security or other certifications and standards. If our products are late
in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards, such end customers may not purchase our products, which would harm our business,
operating results and financial condition.
The continued industry move to open standards may impact our future results.
Our industry has and will continue to demand products based on open standards. The move toward open standards is expected to increase the number of providers
that will offer services to the market. This trend is also expected to increase the number of competitors who are able to supply products to service providers and the enterprise market and drive down the capital costs. These factors may adversely
impact both our future revenues and margins. In addition, many of our customers participate in technology pools and increasingly request that we donate a portion of our source code used by the customer to these pools, which may impact
our ability to recapture the R&D investment made in developing such code.
We believe that we will be increasingly required to work with third party
technology providers. As a result, we expect the shift to more open standards may require us to license software and other components indirectly to third parties via various open source or royalty-free licenses. In some circumstances, our use of
such open source technology may include technology or protocols developed by standards settings bodies, other industry forums or third-party companies. The terms of the open source licenses granted by such parties, or the granting of royalty-free
licenses, may limit our ability to commercialize products that utilize such technology, which could have a material adverse effect on our results.
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Our business is concentrated in a couple key customers. The loss of any of these customers or a significant
reduction in sales to any of these customers would have a material adverse effect on our business.
For the quarter ended March 31, 2018,
sales to our three largest customers (including their affiliates, as applicable) accounted for approximately 44% of our total revenue. The loss of any of our large customers, or a significant reduction in the products or services provided to any of
them would have a material adverse impact on our business. For many of these customers, we also are one of their largest suppliers. As a result, if from
time-to-time
customers elect to purchase products from our competitors in order to diversify their supplier base and to dual-source key products or to curtail purchasing due to budgetary or market conditions, such decisions could have material consequences to
our business. In addition, because of the magnitude of our sales to these customers, the terms and timing of our sales are heavily negotiated, and even minor changes can have a significant impact upon our business.
Also, many of our service provider or larger enterprise customers have substantial purchasing power and leverage in negotiating contractual arrangements with
us. These end customers may require us to develop additional product features, may require penalties for
non-performance
of certain obligations, such as delivery, outages or response time. The leverage held by
these large end customers could result in lower revenues and gross margins. The loss of a single large end customer could materially harm our business and operating results.
Our Enterprise Networks segment sales may be impacted as a result of changes in public funding for the Federal Government and educational institutions.
Customers in the Enterprise Networks segment include agencies of the U.S. Federal Government and both public and private
K-12
institutions in the United States. These markets typically operate on limited budgets and depend on the U.S. federal government to provide supplemental funding. For example, the Federal Communications
Commission, or FCC, through its
E-rate
program (also known as the Schools and Libraries Program of the Universal Service Fund), provides supplemental funding to school districts to fund upgrades to technical
infrastructure, including
Wi-Fi
infrastructure. The most recently announced order under the
E-rate
program provides for a significant increase to the annual
E-rate
funding cap, to $3.9 billion with inflation adjustments annually, and increases funding availability from a
two-year
period to five-year period. However, the
E-rate
program continues to be subject to uncertainty regarding eligibility criteria and specific timing of actual federal funding as well as subject to further federal program guidelines and funding appropriation.
This uncertainty and potential further changes to the
E-rate
program may affect or delay purchasing decisions by our end customers in the education market and will continue to cause fluctuations in our overall
revenue forecasts and financial results and create greater uncertainty regarding the level of customer orders in this market during the term of the
E-rate
program. Similarly, fluctuations in the annual
budgeting process for U.S. Federal Government IT spending may result in deferral or cancellation of projects from which ARRIS expected to derive revenue for the Enterprise Networks segment.
We may face higher costs associated with protecting our intellectual property or obtaining necessary access to the intellectual property of others.
Our future success depends in part upon our proprietary technology, product development, technological expertise and distribution channels, in
addition to a number of important patents and licenses. We cannot predict whether we can protect our technology or whether competitors will be able to develop similar technology independently, and such technology could be subject to challenge,
unlawful copying or other unfair competitive practices. Given the dependence on technology within the market in which we compete, there are frequent claims and related litigation regarding patent and other intellectual property rights. We have
received, directly or indirectly, and expect to continue to receive, from third parties, including some of our competitors, notices claiming that we, or our customers using our products, have infringed upon third-party patents or other proprietary
rights. We are involved in several proceedings (and other proceedings have been threatened) in which our customers were sued for patent infringement. (See Part II, Item 1, Legal Proceedings) In these cases our customers have made
claims against us and other suppliers for indemnification. We may become involved in similar litigation involving these and other customers in the future. These claims, regardless of their merit, could result in costly litigation, divert the time,
attention and resources of our management, delay our product shipments, and, in some cases, require us to enter into royalty or licensing agreements. If a claim of patent infringement against us or our customer is successful and we fail to obtain a
license or develop
non-infringing
technology, we or our customer may be prohibited from marketing or selling products containing the infringing technology which could materially affect our business and
operating results. In addition, the payment of any damages or any necessary licensing fees or indemnification costs associated with a patent infringement claim could be material and could also materially adversely affect our operating results.
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We may not realize the anticipated benefits of past or future acquisitions, divestitures, and strategic
investments, including the recently completed Ruckus Networks acquisition, and the integration of acquired companies or technologies or divestiture of businesses may negatively impact our business and financial results.
We have acquired or made strategic investments in other companies, products, or technologies, and expect to make additional acquisitions and strategic
investments in the future. For example, in 2016, we acquired Pace and sold our whole-home solutions business, and in December 2017, we acquired the Ruckus Networks business. Our ability to realize the anticipated benefits from acquisitions and
strategic investments involves numerous risks, including, but not limited to, the following:
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The ability to satisfy closing conditions necessary to complete an acquisition, including receipt of applicable regulatory approvals;
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Difficulties in successfully integrating the acquired businesses and realizing any expected synergies, including failure to integrate successfully the sales organizations;
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Unanticipated costs, litigation, and other contingent liabilities;
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Diversion of managements attention from our daily operations and business;
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Adverse effects on existing business relationships with customers and suppliers;
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Risks associated with entering into markets in which we have limited or no prior experience;
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Inability to attract and retain key employees; and
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The impact of acquisition and integration related costs, goodwill or
in-process
research and development impairment charges, amortization costs for acquired intangible assets, and
acquisition accounting treatment, including the loss of deferred revenue and increases in the fair values of inventory and other acquired assets, on our GAAP operating results and financial condition.
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The Ruckus Networks acquisition has resulted in an expansion on our current technologies, and we have established a new business unit to focus on this
business. The expansion into new technologies, markets and distributions where we have not previously operated may not be successful and may adversely impact our ability to realize the benefits of the acquisition in the time expected or at all.
We may also divest or reduce our investment in certain businesses or product lines from time to time. Such divestitures involve risks, such as difficulty
separating portions of our business, distracting employees, incurring potential loss of revenue, negatively impacting margins, and potentially disrupting customer relationships. We may also incur significant costs associated with exit or disposal
activities, related impairment charges, or both.
We have substantial goodwill and amortizable intangible assets.
Our financial statements reflect substantial goodwill and intangible assets, approximately $2.3 billion and $1.6 billion, respectively, as of
March 31, 2018, that was recognized in connection with acquisitions, including the recently completed Ruckus Networks acquisition.
We annually (and
more frequently if changes in circumstances indicate that the asset may be impaired) review the carrying amount of our goodwill to determine whether it has been impaired for accounting purposes. In general, if the fair value of the corresponding
reporting unit is less than the carrying amount of the reporting unit, we record an impairment. The determination of fair value is dependent upon a number of factors, including assumptions about future cash flows and growth rates that are based on
our current and long-term business plans. With respect to the amortizable intangible assets, we test recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. 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. If we determine that an asset or asset group is not recoverable, then we would record an impairment charge if
the carrying amount of the asset or asset group exceeds its fair value. Fair value is based on estimated discounted future cash flows expected to be generated by the asset or asset group. The assumptions underlying cash flow projections would
represent managements best estimates at the time of the impairment review.
As the ongoing expected cash flows and carrying amounts of our remaining
goodwill and intangible assets are assessed, changes in the economic conditions, changes to our business strategy, changes in operating performance or other indicators of impairment could cause us to realize impairment charges in the future,
including as a result of restructuring undertaken in connection with the integration of acquisitions.
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As of October 1, 2017 (the date of our annual impairment testing), the fair value of our CPE reporting unit
exceeded its carrying amount by 34% and, accordingly, did not result in a goodwill impairment. Over the last twelve months, near-term trends impacting revenue and gross margin, including higher product costs associated with memory pricing pressures
have decreased the amount by which the fair value exceeds the carrying amount, such that our CPE reporting unit could be at risk of failing step one of the impairment test if future projections are not realized. The estimated fair value of our CPE
reporting unit is closely aligned with the ultimate amount of revenue and operating income that it achieves over the projection period. At this time, our projections assume modest revenue growth and some recovery in gross margins over current levels
in subsequent years, which is dependent on product cost improving and ability to pass on pricing. Our CPE reporting unit has approximately $1.4 billion of goodwill as of March 31, 2018.
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 noncontrolling interest.
In addition, the Company adopted new guidance on revenue recognition as of January 1, 2018. As a result of retrospective application of this guidance in
our Cloud TV reporting unite, an additional goodwill impairment of approximately $3.4 million was 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 $26.5 million of goodwill and $27.9 million of associated intangible assets.
If we determine an impairment exists, we may be required to write off all or a portion of the goodwill and associated intangible assets related to any
impaired business. For additional information, see the discussion under Critical Accounting Policies in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations on Form
10-K
for the year ended December 31, 2017.
Products currently under development may fail to realize
anticipated benefits.
Rapidly changing technologies, evolving industry standards, frequent new product introductions and relatively short product
life cycles characterize the markets for our products. The technology applications that we currently are developing are subject to technological, supply chain, product development and other related risks that could delay successful delivery. The
market in which we operate is subject to a rapid rate of technological change, reflected in increased development and manufacturing complexity and increasingly demanding customer requirements, all of which can result in unforeseen delivery problems.
Even if the products in development are successfully brought to market, they may be late, may not be widely used or we may not be able to capitalize successfully on the developed technology. To compete successfully, we must quickly design, develop,
manufacture and sell new or enhanced products that provide increasingly higher levels of performance and reliability. However, we may not be able to develop or introduce these products successfully if such products:
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are not cost-effective;
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are not brought to market in a timely manner;
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fail to achieve market acceptance; or
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fail to meet industry certification standards.
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Furthermore, our competitors may develop similar or
alternative technologies that, if successful, could have a material adverse effect on us. Our strategic alliances are generally based on business relationships that have not been the subject of written agreements expressly providing for the alliance
to continue for a significant period of time and the loss of any such strategic relationship could have a material adverse effect on our business and results of operations.
Defects within our products could have a material impact on our results.
Many of our products are complex technology that include both hardware and software components. It is not unusual for software, especially in earlier versions,
to contain bugs that can unexpectedly interfere with expected operations. While we employ rigorous testing prior to the shipment of our products, defects, including those resulting from components we purchase, can still occur from time to time.
Product defects, including hardware failures, could impact our reputation with our customers which may result in fewer sales. In addition, depending on the number of products affected, the cost of fixing or replacing such products could have a
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material impact on our operating results. In some cases, we are dependent on a sole supplier for components used in our products. Defects in sole-sourced components subject us to additional risk
of being able to quickly address any product issues or failures experienced by our customers as a result of the component defect and could delay our ability to deliver new products until the defective components are corrected or a new supplier is
identified and qualified. This could increase our costs in resolving the product issue, result in decreased sales of the impacted product, or damage our reputation with customers, any of which could have the effect of negatively impacting our
operating results.
Hardware or software defects could also permit unauthorized users to gain access to our customers networks and/or a
consumers home network. In addition to potentially damaging our reputation with customers, such defects may also subject us to claims for damages under agreements with our customers and subject us to fines by regulatory authorities.
We offer warranties of various lengths to our customers on many of our products and have established warranty reserves based on, among other things, our
historic experience, failure rates and cost to repair. In the event of a significant
non-recurring
product failure, the amount of the warranty reserve may not be sufficient. From time to time we may also make
repairs on defects that occur outside of the provided warranty period. Such costs would not be covered by the established reserves and, depending on the volume of any such repairs, may have a material adverse effect on our results from operations or
financial condition.
Our success depends on our ability to attract and retain qualified personnel in all facets of our operations.
Competition for qualified personnel is intense, and we may not be successful in attracting and retaining key personnel, which could impact our ability to
maintain and grow our operations. Our future success will depend, to a significant extent, on the ability of our management to operate effectively. In the past, competitors and others have attempted to recruit our employees and their attempts may
continue. The loss of services of any key personnel, the inability to attract and retain qualified personnel in the future or delays in hiring required personnel, particularly engineers and other technical professionals, could negatively affect our
business.
Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our failure to offer high
quality support and services would have a material adverse effect on our sales and results of operations.
Once our products are deployed, our
channel partners and end customers depend on our support organization to resolve any issues relating to our products. A high level of support is important for the successful marketing and sale of our products. In many cases, our channel partners
provide support directly to our
end-customers.
We do not have complete control over the level or quality of support provided by our channel partners. These channel partners may also provide support for other
third-party products, which may potentially distract resources from support for our products. If we and our channel partners do not effectively assist our end customers in deploying our products, succeed in helping our end customers quickly resolve
post-deployment issues or provide effective ongoing support, it would adversely affect our ability to sell our products to existing
end-customers
and could harm our reputation with potential end customers. In
some cases, we guarantee a certain level of performance to our channel partners and end customers, which could prove to be resource-intensive and expensive for us to fulfill if unforeseen technical problems were to arise.
Many of our service provider and large enterprise end customers have more complex networks and require higher levels of support than our smaller end
customers. If our support organization fails to meet the requirements of our service provider or large enterprise end customers, it may be more difficult to execute on our strategy to increase our sales to large end customers. In addition, given the
extent of our international operations, our support organization faces challenges, including those associated with delivering support, training and documentation in languages other than English. As a result of these factors, our failure to maintain
high quality support and services would have a material adverse effect on our business, operating results and financial condition.
We are dependent
on a limited number of suppliers, and inability to obtain adequate and timely delivery of supplies could have a material adverse effect on our business.
Many components, subassemblies and modules necessary for the manufacture or integration of our products are obtained from a sole supplier or a limited group of
suppliers. Likewise, we have only a limited number of potential suppliers for certain materials and hardware used in our products, and a number of our agreements with suppliers are short-term in nature. Our reliance on sole or limited suppliers,
particularly foreign suppliers, and our reliance on subcontractors involves several risks including a potential inability to obtain an adequate supply of required components, subassemblies, modules and other materials and reduced control over
pricing,
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quality and timely delivery of components, subassemblies, modules and other products. An inability to obtain adequate deliveries or any other circumstance that would require us to seek
alternative sources of supply could affect our ability to ship products on a timely basis which could damage relationships with current and prospective customers and potentially have a material adverse effect on our business. Our ability to ship
products could also be impacted by country laws and/or union labor disruptions. Disputes of this nature may have a material impact on our financial results.
Where we rely on third parties to manufacture our products, our ability to supply products to our customers may be disrupted.
We outsource the majority of the manufacturing of our products to third-party manufacturers. Our reliance on these third-party manufacturers reduces our
control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs, and product supply and timing. Any manufacturing disruption by these third-party manufacturers could severely impair our
ability to fulfill orders. Our reliance on outsourced manufacturers also yields the potential for infringement or misappropriation of our intellectual property. If we are unable to manage our relationships with these third-party manufacturers
effectively, or if these third-party manufacturers suffer delays or disruptions for any reason, experience increased manufacturing lead-times, capacity constraints or quality control problems in their manufacturing operations, or fail to meet our
future requirements for timely delivery, our ability to ship products to our customers may be severely impaired, and our business and operating results could be seriously harmed.
These manufacturers typically fulfill our supply requirements on the basis of individual orders. We do not have long term contracts with our third-party
manufacturers that guarantee capacity, the continuation of particular pricing terms or the extension of credit limits. Accordingly, our third-party manufacturers are not obligated to continue to fulfill our supply requirements, which could result in
supply shortages, and the prices we are charged for manufacturing services could be increased on short notice. In addition, as a result of fluctuating global financial market conditions, natural disasters or other causes, it is possible that any of
our manufacturers could experience interruptions in production, cease operations or alter our current arrangements. If our manufacturers are unable or unwilling to continue manufacturing our products in required volumes, we will be required to
identify one or more acceptable alternative manufacturers. It is time-consuming and costly and could be impractical to begin to use new manufacturers, and changes in our third-party manufacturers may cause significant interruptions in supply if the
new manufacturers have difficulty manufacturing products to our specification. As a result, our ability to meet our scheduled product deliveries to our customers could be adversely affected, which could cause the loss of sales to existing or
potential customers, delayed revenue or an increase in our costs. Any production interruptions for any reason, such as a natural disaster, epidemic, capacity shortages or quality problems, at one of our manufacturers would negatively affect sales of
our product lines manufactured by that manufacturer and adversely affect our business and operating results.
We are subject to the economic,
political and social instability risks associated with doing business in certain foreign countries.
For the three months ended March 31,
2018, approximately 43% of our sales were made outside of the United States. In addition, a significant portion of our products are manufactured or assembled in Brazil, Mexico and Taiwan. As a result, we are exposed to risk of international
operations, including:
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fluctuations in currency exchange rates;
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inflexible employee contracts or labor laws in the event of business downturns;
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compliance with United States and foreign laws concerning trade and employment practices;
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the challenges inherent in consistently maintaining compliance with the Foreign Corrupt Practice Act and similar laws in other jurisdictions;
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the imposition of government controls;
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difficulties in obtaining or complying with export license requirements;
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labor unrest, including strikes, and difficulties in staffing;
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economic boycott for doing business in certain countries;
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coordinating communications among and managing international operations;
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changes in tax and trade laws that increase our local costs;
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exposure to heightened corruption risks; and
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reduced protection for intellectual property rights.
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Political instability and military and terrorist
activities may have significant impacts on our customers spending in these regions and can further enhance many of the risks identified above. Any of these risks could impact our sales, interfere with the operation of our facilities and result
in reduced production, increased costs, or both, which could have an adverse effect on our financial results.
We depend on channel partners to sell
our products in certain regions and are subject to risks associated with these arrangements.
We utilize distributors, value-added resellers,
system integrators, and manufacturers representatives to sell our products to certain customers and in certain geographic regions to improve our access to these customers and regions and to lower our overall cost of sales and post-sales
support. Our sales through channel partners are subject to a number of risks, including:
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ability of our selected channel partners to effectively sell our products to end customers;
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our ability to continue channel partner arrangements into the future since most are for a limited term and subject to mutual agreement to extend;
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a reduction in gross margins realized on sale of our products;
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compliance by our channel partners with our policies and procedures as well as applicable laws; and
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a diminution of contact with end customers which, over time, could adversely impact our ability to develop new products that meet customers evolving requirements.
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We depend on cloud computing infrastructure operated by third-parties and any disruption in these operations could adversely affect our business.
For our service offerings, in particular our
Wi-Fi-related
cloud
services, we rely on third-parties to provide cloud computing infrastructure that offers storage capabilities, data processing and other services. We currently operate our cloud-dependent services using Amazon Web Service (AWS) or Google
Compute Engine (GCE). We cannot easily switch our AWS or GCE operations to another cloud provider. Any disruption of or interference with our use of these cloud services would impact our operations and our business could be adversely
impacted.
Problems faced by our third-party cloud services, with the telecommunications network providers with whom we or they contract, or with the
systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our end customers. If AWS and GCE are unable to keep up with our needs for capacity, this could have an
adverse effect on our business. Any changes in third-party cloud services or any errors, defects, disruptions, or other performance problems with our applications could adversely affect our reputation and may damage our end customers stored
files or result in lengthy interruptions in our services. Interruptions in our services might adversely affect our reputation and operating results, cause us to issue refunds or service credits, subject us to potential liabilities, or result in
contract terminations.
We and our end customers may be subject to complex and evolving U.S. and foreign laws and regulations regarding privacy,
data protection and other matters and violations of these laws and regulations may result in claims, changes to our business practices, monetary penalties, increased costs of operations, and/or other harms to our business.
There has been an increase in laws in Europe, the U.S. and elsewhere imposing requirements for the handling of personal data, including data of employees,
consumers and business contacts as well as privacy-related matters. For example, several U.S. states have adopted legislation requiring companies to protect the security of personal information that they collect from consumers over the Internet, and
more states may adopt similar legislation in the future. Foreign data protection, privacy, and other laws and regulations can be more restrictive than those in the U.S. In 2016 the EU Parliament approved the EU General Data Protection
Regulation (GDPR) which replaces the Data Protection Directive 95/46/EC. GDPR was designed to harmonize data privacy laws across Europe, to protect and empower all EU citizens data privacy and to reshape the way
organizations across the region approach data privacy. Compliance with the GDPR will require changes to existing products, designs of future products, internal and external software systems, including our web sites, and changes to many company
processes and policies. Failure to comply with GDPR, which is effective in May of 2018, could cause significant penalties and loss of business.
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In addition, some countries are considering legislation requiring local storage and processing of data that, if
enacted, could increase the cost and complexity of offering our solutions or maintaining our business operations in those jurisdictions. The introduction of new solutions or expansion of our activities in certain jurisdictions may subject us to
additional laws and regulations. Our channel partners and end customers also may be subject to such laws and regulations in the use of our products and services.
These U.S. federal and state and foreign laws and regulations, which often can be enforced by private parties or government entities, are constantly evolving.
In addition, the application and interpretation of these laws and regulations are often uncertain, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices and may be
contradictory with each other. For example, a government entity in one jurisdiction may demand the transfer of information forbidden from transfer by a government entity in another jurisdiction. If our actions were determined to be in violation of
any of these disparate laws and regulations, in addition to the possibility of fines, we could be ordered to change our data practices, which could have an adverse effect on our business and results of operations and financial condition. There is
also a risk that we, directly or as the result of a third-party service provider we use, could be found to have failed to comply with the laws or regulations applicable in a jurisdiction regarding the collection, consent, handling, transfer, or
disposal of personal data, which could subject us to fines or other sanctions, as well as adverse reputational impact.
Compliance with these existing and
proposed laws and regulations can be costly, increase our operating costs and require significant management time and attention, and failure to comply can result in negative publicity and subject us to inquiries or investigations, claims or other
remedies, including fines or demands that we modify or cease existing business practices. Channel partners and end customers may demand or request additional functionality in our products or services that they believe are necessary or appropriate to
comply with such laws and regulations, which can cause us to incur significant additional costs and can delay or impede the development of new solutions. In addition, there is a risk that failures in systems designed to protect private, personal or
proprietary data held by us or our channel partners and end customers using our solutions will allow such data to be disclosed to or seen by others, resulting in application of regulatory penalties, enforcement actions, remediation obligations,
private litigation by parties whose data were improperly disclosed, or claims from our channel partners and end customers for costs or damages they incur.
The planned upgrade of our enterprise resource planning (ERP) software solution could result in significant disruptions to our operations.
We have initiated the process of upgrading our ERP software solution to a newer, cloud-based version. We expect the upgrade to be completed in
2019. Implementation of the upgraded solution will have a significant impact on our business processes and information systems. The transition will require significant change management, meaningful investment in capital and personnel resources,
and coordination of numerous software and system providers and internal business teams. We may experience difficulties as we manage these changes and transitions to the upgraded systems, including loss or corruption of data, delayed shipments,
decreases in productivity as personnel implement and become familiar with new systems and processes, unanticipated expenses (including increased costs of implementation or costs of conducting business), and lost revenues. Difficulties in
implementing the upgraded solution or significant system failures could disrupt our operations, divert managements attention from key strategic initiatives, and have an adverse effect on our capital resources, financial condition, results of
operations, or cash flows. In addition, any delays in completing the upgrade process could exacerbate these transition risks as well as expose us to additional risks in the event that the support for our existing ERP software solution is reduced or
eliminated.
The import of our products is subject to trade regulations and could be impacted by orders prohibiting the importation of products.
The import of our products into the United States and certain other countries is subject to the trade regulations in the countries where they are
imported. Products may be subject to customs duties that we pay to the applicable government agency and then collect from our customers in connection with the sale of the imported products. The amount of the customs duty owed, if any, is based on
classification of the products within the applicable customs regulations. A significant portion of our overall shipments import into the United States, any change to trade regulations may challenge our classifications and the amount of any duty or
tax payable. While we believe that our products have been properly classified, the U.S. Customs Agency or other applicable foreign regulatory agencies, may challenge our classifications and the amount of any duty payable. For example, we currently
have a case pending in the U.S. Court of International Trade regarding the challenge by the U.S. Customs Agency with respect to certain digital television adapters that we import into the United States and believe are duty free. If it is ultimately
determined that a product has been misclassified for customs
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purposes, we may be required to pay additional duties for products previously imported and we may not be successful in collecting the increased duty from the customer that purchased the products.
In addition, we could be required to pay interest and/or fines to the applicable regulator, which amounts could be significant and negatively impact our results of operations. Further, if we do not comply with the applicable trade regulations,
delivery of products to customers may be delayed which could negatively impact our sales and results of operations.
From time to time, we, our customers
and our suppliers, may be subject to proceedings at the U.S. International Trade Commission (the ITC) with respect to alleged infringement of U.S. patents. If the ITC finds a party infringed a U.S. patent, it can issue an exclusion order
barring importation into the United States of the product that infringes, or includes components, of the product that infringes the identified patents. An exclusion order impacting our products could have a material adverse effect on our revenues
and results of operations.
Our stock price has been and may continue to be volatile.
Our ordinary shares are traded on The NASDAQ Global Select Market. The trading price of our shares has been and may continue to be subject to large
fluctuations. Our stock price may increase or decrease in response to a number of events and factors including:
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future announcements concerning us, key customers or competitors;
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variations in operating results from period to period;
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changes in financial estimates and recommendations by securities analysts;
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developments with respect to technology or litigation;
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the operating and stock price performance of our competitors; and
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acquisitions and financings.
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Fluctuations in the stock market, generally, also impact the volatility of our
stock price. General stock market movements may adversely affect the price of our ordinary shares, regardless of our operating performance. Volatility in our stock price will also impact the fair value determination of our outstanding warrants with
customers. A significant increase in our stock price while we are required to
mark-to-market
the fair value of the outstanding warrants to customers may increase the
reduction in revenues we are required to record under the required accounting treatment for the warrants which could have a significant impact on our operating results.
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as
network security breaches, computer software or system errors or viruses or terrorism.
We and our contract manufacturers maintain facilities in
many areas known for seismic activity including the San Francisco Bay area and eastern Asia. A significant natural disaster, such as an earthquake, a fire or a flood, occurring near any of our major facilities, or near the facilities of our contract
manufacturers, could have a material adverse impact on our business, operating results and financial condition. In addition, we have major development and support operations concentrated in India. A natural disaster in this location could have a
material adverse impact on our support operations. In addition, natural disasters, acts of terrorism or war could cause disruptions in our or our customers businesses, our suppliers or manufacturers operations or the economy as a
whole. We also rely on IT systems to operate our business and to communicate among our workforce and with third parties. For example, we use business management and communication software products provided by third parties, such as Oracle, Microsoft
Online, SAP and salesforce.com, and security flaws or outages in such products would adversely affect our operations. Any disruption to these systems, whether caused by a natural disaster or by manmade problems, such as power disruptions, could
adversely affect our business. To the extent that any such disruptions result in delays or cancellations of customer orders or impede our suppliers and/or our manufacturers ability to timely deliver our products and product components,
or the deployment of our products, our business, operating results and financial condition would be adversely affected.
Cyber-security incidents,
including data security breaches or computer viruses, could harm our business by disrupting our delivery of services, damaging our reputation or exposing us to liability.
We receive, process, store and transmit, often electronically, the confidential data of our clients and others. Unauthorized access to our computer systems or
stored data could result in the theft or improper disclosure of confidential information, the deletion or modification of records or could cause interruptions in our operations.
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These cyber-security risks increase when we transmit information from one location to another, including transmissions over the Internet or other electronic networks. Despite implemented security
measures, our facilities, systems and procedures, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, software viruses, misplaced or lost data, programming and/or human errors or other similar
events which may disrupt our delivery of services or expose the confidential information of our clients and others.
In addition, defects in the hardware
or software we develop and sell, or in their implementation by our customers, could also result in unauthorized access to our customers and/or consumers networks. Any security breach involving the misappropriation, loss or other
unauthorized disclosure or use of confidential information of our customers or others, whether by us or a third party, could (i) subject us to civil and criminal penalties, (ii) have a negative impact on our reputation, or
(iii) expose us to liability to our customers, third parties or government authorities. Any of these developments could have a material adverse effect on our business, results of operations and financial condition. We have not experienced any
such incidents that have had material consequences to date. We expect the U.S. and other countries to adopt additional cyber-security legislation that, if enacted, could impose additional obligations upon us that may negatively impact our operating
results.
Regulations related to conflict minerals may adversely affect us.
We are subject to the SEC disclosure obligations relating to our use of
so-called
conflict
mineralscolumbite-tantalite, cassiterite (tin), wolframite (tungsten) and gold. These minerals are present in substantially all of our products. We are required to file a report with the SEC annually covering our use of these materials
and their source.
In preparing these reports, we are dependent upon information supplied by suppliers of products that contain, or potentially contain,
conflict minerals. To the extent that the information that we receive from our suppliers is inaccurate or inadequate or our processes in obtaining that information do not fulfill the SECs requirements, we could face reputational
risks. Further, if in the future we are unable to certify that our products are conflict mineral free, we may face challenges with our customers, which could place us at a competitive disadvantage.
We have not historically paid cash dividends.
We
have not historically paid cash dividends on our ordinary shares. In addition, our ability to pay dividends is limited by the terms of our credit facilities. Payment of dividends in the future will depend on, among other things, business conditions,
our results of operations, cash requirements, financial condition, contractual restrictions, provisions of applicable law and other factors that our board of directors may deem relevant.
As a result of shareholder voting requirements in the United Kingdom, we have less flexibility with respect to certain aspects of capital management.
Under English law, our directors may issue new ordinary shares up to a maximum amount equal to the allotment authority granted to the directors
under our articles of association or by an ordinary resolution of our shareholders, subject to a five-year limit on such authority. Additionally, subject to specified exceptions, English law grants preemptive rights to existing shareholders to
subscribe for new issuances of shares for cash, but allows shareholders to waive these rights by way of a special resolution with respect to any particular allotment of shares or generally, subject to a five-year limit on such waiver. Our articles
of association contain, as permitted by English law, a provision authorizing our Board to issue new shares for cash without preemptive rights. The authorization of the directors to issue shares without further shareholder approval and the
authorization of the waiver of the statutory preemption rights must both be renewed by the shareholders at least every five years, and we cannot provide any assurance that these authorizations always will be approved, which could limit our ability
to issue equity and, thereby, adversely affect the holders of our ordinary shares. While we do not believe that English laws relating to our capital management will have a material adverse effect on us, situations may arise where the flexibility to
provide certain benefits to our shareholders is not available under English law.
Any attempted takeovers of us will be governed by English law.
As a U.K. incorporated company, we are subject to English law. An English public limited company is potentially subject to the protections
afforded by the U.K. Takeover Code if, among other factors, a majority of its directors are resident within the U.K., the Channel Islands or the Isle of Man. We do not believe that the U.K. Takeover Code applies to us, and, as a result, our articles
of association include measures similar to what may be found in the charters of U.S. companies, including the power for our Board to allot shares where in the opinion of the Board it is necessary to do so in the context of an acquisition of 20% or
more of the issued voting shares in specified circumstances (this power is subject to renewal by our shareholders at least every five years
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and will cease to be applicable if the U.K. Takeover Code is subsequently deemed to be applicable to ARRIS). Further, it could be more difficult for us to obtain shareholder approval for a merger
or negotiated transaction because the shareholder approval requirements for certain types of transactions differ, and in some cases, are greater under English law. The provisions of our articles of association and English law may have an
anti-takeover impact on us and our ordinary shares.
Transfers of our ordinary shares, other than one effected by means of the transfer of
book-entry interests in the Depository Trust Company (DTC), may be subject to U.K. stamp duty.
Substantially all of our outstanding
shares are currently represented by book-entry interests in DTC. Transfers of our ordinary shares within DTC should not be subject to stamp duty or stamp duty reserve tax (SDRT) provided no instrument of transfer is entered into and no
election that applies to our ordinary shares is made or has been made by DTC or Cede, its nominee, under Section 97A of the U.K. Finance Act 1986. In this regard DTC has confirmed that neither DTC nor Cede (its nominee) has made an election
under Section 97A of the Finance Act that would affect our shares issued to Cede. If such an election is or has been made, transfers of our ordinary shares within DTC generally will be subject to SDRT at the rate of 0.5% of the amount or value
of the consideration. Transfers of our ordinary shares held in certificated form generally will be subject to stamp duty at the rate of 0.5% of the consideration given (rounded up to the nearest £5). SDRT will also be chargeable on an
agreement to transfer such shares, although such liability would be discharged if stamp duty is duly paid on the instrument of transfer implementing such agreement within a period of six years from the agreement. Subsequent transfer of our ordinary
shares to an issuer of depository receipts or into a clearance system (including DTC) may be subject to SDRT at a rate of 1.5% of the consideration given or received or, in certain cases, the value of our ordinary shares transferred. The purchaser
or transferee of the ordinary shares generally will be responsible for paying any stamp duty or SDRT payable.