The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated
Balance Sheets to the total of the same such amounts show above (in thousands). Amounts included in restricted cash represent those required to be set aside by contractual agreements, such as rent deposits with landlords, deposits with certain
government agencies and cash collateral with certain financial institutions.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
)
Note 1. Organization and
Basis of Presentation
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 (CPE), Network & Cloud (N&C) and Enterprise Networks (Enterprise) (See Note 15
Segment Information
for additional details), specializing in enabling service providers
including cable, telephone, and digital broadcast satellite operators and media programmers to deliver media, voice, 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 (IPTV) distribution
systems, broadband access infrastructure platforms, associated data and voice CPE 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 consolidated financial statements include the accounts of the Company and its wholly owned foreign
and domestic subsidiaries and consolidated venture in which the Company owns more than 50% of the outstanding voting shares of the entity. All intercompany accounts and transactions have been eliminated.
The accompanying financial data as of June 30, 2018 and for the three and six months ended June 30, 2018 and June 30, 2017 has been prepared by
the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with
generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2017 Consolidated Balance Sheet was derived from audited financial
statements but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These
Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Companys Annual Report on Form
10-K
for the fiscal year
ended December 31, 2017.
In the opinion of management, all normal recurring adjustments necessary to present fairly the consolidated balance sheet
as of June 30, 2018, the consolidated statements of operations, the statements of comprehensive income (loss), and the statements of cash flows for the six months ended June 30, 2018 and June 30, 2017 as applicable, have been made.
Certain prior year amounts in the financial statements and notes have been reclassified to conform to the fiscal year 2018 presentation. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative
of the operating results for the full fiscal year or any future periods.
Note 2. Impact of Recently Adopted Accounting Standards
Adoption of new accounting standards
In May 2014, the FASB issued an accounting standard update, Revenue from Contracts with Customers. The
standard requires an entity to recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB issued several amendments to the standard since 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
6
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 adopted the standard using the modified retrospective method on January 1, 2018. (See Note 3
Revenue from Contracts with Customers
for additional details).
In January 2016, the FASB issued an update to amend certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Under
this standard, certain equity investments are measured at fair value with changes recognized in current period earnings as opposed to other comprehensive income (loss). This guidance is effective for interim and annual reporting periods in fiscal
years beginning after December 15, 2017. ARRIS adopted the standard on January 1, 2018 by recording a cumulative-effect adjustments as of the beginning of the year. The adoption of this guidance did not have a material impact on the
Companys consolidated financial position and results of operations.
In August 2016, the FASB issued amended guidance on the classification of
certain cash receipts and payments in the statement of cash flows. The primary purpose of the amended guidance is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The amended guidance adds
or clarifies guidance on eight cash flow issues, including debt prepayment or debt extinguishment costs, settlement of
zero-coupon
debt instruments or certain other debt instruments, contingent consideration
payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in
securitization transactions and separately identifiable cash flows and application of the predominance principle. The guidance is effective for the Company beginning January 1, 2018 for both interim and annual reporting periods, with early
adoption permitted. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. ARRIS adopted this update as of
January 1, 2018. The adoption of this guidance did not have a material impact on the Companys consolidated financial position and results of operations.
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. ARRIS adopted this update retrospectively as of January 1, 2018. The adoption of this guidance did not have a material
impact on the Companys consolidated financial position and results of operations.
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 is effective for the Company in the first quarter of fiscal 2018. ARRIS adopted this update as of January 1, 2018. The adoption of this guidance did not have a material impact on the Companys consolidated financial
position and results of operations.
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 is effective for interim and annual periods beginning after December 15, 2017 (January 1, 2018 for the Company). ARRIS adopted this update as of January 1, 2018. The
adoption of this guidance did not have any impact on the Companys consolidated financial position and results of operations.
Accounting
standards issued but not yet effective
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 new standard requires a modified retrospective transition through a cumulative-effect
adjustment as of the beginning of the earliest period presented in the financial statements, although the FASB recently approved an option for transition relief to not
7
restate or make required disclosures under the new standard in comparative periods in the period of adoption. Along with that transition relief, the FASB also recently approved a practical
expedient for lessors to allow for the combined presentation of lease and
non-lease
revenues when certain conditions are met.
The Company has established a project management team to analyze the impact of this standard, including its current accounting policies and practices to
identify potential impacts that would result from the application of this standard. The Companys adoption process of the new standard is ongoing, including evaluating and quantifying the impact on its consolidated financial statements,
identifying the population of leases (and embedded leases), implementing a selected technology solution and collecting and validating lease data. The Company expects its lease obligations designated as operating leases (as disclosed in Note 23 to
the audited consolidated financial statements in its most recent Annual Report on Form
10-K)
will be reported on the consolidated balance sheets upon adoption.
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 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.
In February 2018, the FASB issued an accounting
standard which allows companies to reclassify stranded tax effects resulting from the U.S. 2017 Tax Cuts and Jobs Act, from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of
the election. The accounting standard is effective in the first quarter of fiscal 2020, and earlier adoption is permitted. The Company is currently assessing the potential impact of the adoption of this standard on its Consolidated Financial
Statements.
Note 3. Revenue from Contracts with Customers
On January 1, 2018, the Company adopted the new accounting standard
Revenue from Contracts
with Customers
using the modified retrospective
transition method. The Company has elected to apply the new standard to contracts that were considered open as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the
new accounting standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under previous guidance. Upon adoption, an initial cumulative effect adjustment of $1.8 million increase
was recorded to opening accumulated deficit and a $2.7 million increase in shareholders equity attributable to noncontrolling interest.
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. Revenue is recognized when performance obligations in a contract are
satisfied through the transfer of control of the good or service at an amount of consideration expected to receive. The following are required before revenue is recognized.
|
|
|
Identify the contract with the customer. A variety of arrangements are considered contracts; however, these are
usually the Master Purchase Agreement and amendments or customer purchase orders.
|
8
|
|
|
Identify the performance obligations in the contract. Performance obligations are identified as promised goods or
services in an arrangement that are distinct.
|
|
|
|
Determine the transaction price. Transaction price is the amount of consideration the Company expects in exchange
for transferring the promised goods or services. The consideration may include fixed or variable amounts or both.
|
|
|
|
Allocate the transaction price to the performance obligations. The transaction price is allocated to the
performance obligations on a relative standalone selling price basis.
|
|
|
|
Recognize revenue as the performance obligations are satisfied. Revenue is recognized when transfer of control of
the promised goods or services has occurred. This is either at a point in time or over time.
|
Revenue is deferred for any performance
obligations in which payment is received or due prior to the transfer of control of the good or service.
Equipment
For the N&C and CPE
segments, the Company provides customers with equipment that can be placed within various stages of a broadband system that enable 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 is recognized when control of the product has transferred to the customer. This is generally at a point in
time when products have been shipped, right to payment has normally been obtained, and risk of loss has been transferred. 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 recognized.
ARRISs equipment
deliverables typically include proprietary operating system software, which isnt considered separately identifiable. Therefore, ARRISs equipment deliverables are considered one distinct performance obligation.
Multiple Performance Obligation Arrangements
Certain customer transactions may include multiple performance obligations based on the bundling of
equipment, software and services. When a multiple performance obligation arrangement exists, the transaction price is allocated to the performance obligations, and revenue is recognized on a relative standalone selling price basis upon transfer of
control.
To determine the standalone selling price (SSP), the Company first looks to establish SSP through an observable price when the good
or service is sold separately in similar circumstances. If SSP cannot be established through an observable price, the Company will estimate the SSP considering market conditions, customer specific factors, and customer class. The Company typically
uses a combination of approaches to estimate SSP.
Software Sold Without Tangible Equipment
ARRIS sells functional intellectual property
(IP) licenses that typically do not meet the criteria to be recognized over time. Revenue from a functional IP license is most commonly recognized upon delivery of the license/software to the customer.
Standalone Services
Installation, training, and professional and support services are recognized as control of the services transfer to the
customer. This is either over time or at a point in time depending on the details of the arrangement and the timing of when the customer can direct the use of and obtain substantially all the remaining benefits from the services provided. Each
performance obligation that is recognized over time will be measured based on progress to complete satisfaction of the performance obligation. The objective, when measuring progress, is to depict our performance in transferring control of the goods
or services. Based on specific facts and circumstances, we use output methods (milestones reached, time elapsed, units produced) or input methods (resources consumed, labor hours expended, costs incurred relevant to the entire project) to measure
our progress toward satisfying the performance obligation. The support services will be recognized over time using a time elapsed method (i.e. ratably).
Incentives
Customer incentive programs that include consideration, primarily rebates/credits to be used against future product purchases and
certain volume discounts, are classified as variable consideration and reduce the overall transaction price.
9
Value Added Resellers (VAR), Distribution Channels
and Retail
ARRIS recognizes revenue upon
transfer of control of the goods or services to the VAR, Distributors and Retail customers. Sales through retail and distribution channels are made primarily under agreements or commitments allowing for limited rights of return, primarily for stock
rotation purposes, and include various sales incentive programs, such as
back-end
rebates, discounts, marketing development funds, price protection, and volume incentives.
Enterprise sales distributors are granted rights of stock rotation that are limited to contractually specified percentage of the distributors aggregate
purchase volume. These stock rotation rights are subject to expiration 180 days from the time of product shipment by us to the distributor. Upon shipment of the product, ARRIS reduces revenue for an estimate of potential future stock
rotation returns related to the current period product revenue. ARRIS analyzes historical returns, channel inventory levels, current economic trends and changes in customer demand for our products when evaluating the adequacy of the allowance for
sales returns, namely stock rotation returns.
Regarding the various sales incentive programs, the Company can reasonably estimate its backend rebates,
discounts and similar incentives due to an established sales history with its customers and records the estimated reserves and allowances at the time the related revenue is recognized. The Company recognizes marketing development funds at the later
of when the related revenue is recognized, or the program is offered to the channel partner. ARRISs sales incentives to its channel partners are recorded as a reduction to revenue.
ARRISs estimated allowances for returns due to stock rotation and various sales incentive programs can vary from actual results that could materially
impact our financial position and results of operations. Based on the relevant facts and circumstances, the Company believes the methodologies applied to calculate these reserves fairly represents our expected results at the point in time in which
they are made.
Disaggregation of Revenue
The
following table summarizes the revenues from contracts with customers by major product line for the three and six months ended June 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30, 2018
|
|
|
Six months ended
June 30, 2018
|
|
CPE:
|
|
|
|
|
|
|
|
|
Broadband CPE
|
|
$
|
405,082
|
|
|
$
|
728,367
|
|
Video CPE
|
|
|
603,049
|
|
|
|
1,154,990
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
1,008,131
|
|
|
|
1,883,357
|
|
|
|
|
|
|
|
|
|
|
Network & Cloud:
|
|
|
|
|
|
|
|
|
Networks
|
|
|
479,386
|
|
|
|
932,387
|
|
Software and services
|
|
|
70,110
|
|
|
|
155,373
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
549,496
|
|
|
|
1,087,760
|
|
|
|
|
|
|
|
|
|
|
Enterprise Networks:
|
|
|
|
|
|
|
|
|
Enterprise Networks
|
|
|
172,240
|
|
|
|
342,154
|
|
Other:
|
|
|
|
|
|
|
|
|
Other
|
|
|
(3,327
|
)
|
|
|
(9,021
|
)
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
1,726,540
|
|
|
$
|
3,304,250
|
|
|
|
|
|
|
|
|
|
|
Customer Premises Equipment The CPE segments product solutions include Broadband products, such as DSL and DOCSIS
gateways and modems, and Video products, such as video gateways, clients and
set-tops,
that enable service providers to offer voice, video and high-speed data services to residential and business subscribers.
Network & Cloud The N&C segments product solutions include cable modem termination system, video infrastructure, distribution
and transmission equipment and cloud solutions that enable facility-based service providers to construct a
state-of-the-art
residential and metro distribution network. The portfolio also includes a full suite of global services that offer technical support, professional services and system integration offerings to enable solution sales of ARRISs
end-to-end
product portfolio.
Enterprise Networks 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
enterprisesincluding hospitality, education, smart cities, government, venues, service providers and more.
10
The following table summarizes the revenues from contracts with customers by geographic areas for the three and
six months ended June 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2018
|
|
|
|
CPE
|
|
|
N&C
|
|
|
Enterprise
|
|
|
Other
(1)
|
|
|
Total
|
|
Domestic U.S.
|
|
$
|
540,452
|
|
|
$
|
345,828
|
|
|
$
|
111,967
|
|
|
$
|
(4,404
|
)
|
|
$
|
993,843
|
|
Americas, excluding U.S.
|
|
|
220,350
|
|
|
|
105,981
|
|
|
|
1,770
|
|
|
|
(8
|
)
|
|
|
328,093
|
|
Asia Pacific
|
|
|
29,081
|
|
|
|
39,578
|
|
|
|
23,477
|
|
|
|
(39
|
)
|
|
|
92,097
|
|
EMEA
|
|
|
218,248
|
|
|
|
58,109
|
|
|
|
35,026
|
|
|
|
1,124
|
|
|
|
312,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
467,679
|
|
|
|
203,668
|
|
|
|
60,273
|
|
|
|
1,077
|
|
|
|
732,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
1,008,131
|
|
|
$
|
549,496
|
|
|
$
|
172,240
|
|
|
$
|
(3,327
|
)
|
|
$
|
1,726,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2018
|
|
|
|
CPE
|
|
|
N&C
|
|
|
Enterprise
|
|
|
Other
(1)
|
|
|
Total
|
|
Domestic U.S.
|
|
$
|
1,014,614
|
|
|
$
|
672,311
|
|
|
$
|
207,682
|
|
|
$
|
(7,606
|
)
|
|
$
|
1,887,001
|
|
Americas, excluding U.S.
|
|
|
376,213
|
|
|
|
199,881
|
|
|
|
7,622
|
|
|
|
(5
|
)
|
|
|
583,711
|
|
Asia Pacific
|
|
|
51,205
|
|
|
|
95,343
|
|
|
|
53,102
|
|
|
|
(39
|
)
|
|
|
199,611
|
|
EMEA
|
|
|
441,325
|
|
|
|
120,225
|
|
|
|
73,748
|
|
|
|
(1,371
|
)
|
|
|
633,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
868,743
|
|
|
|
415,449
|
|
|
|
134,472
|
|
|
|
(1,415
|
)
|
|
|
1,417,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
1,883,357
|
|
|
$
|
1,087,760
|
|
|
$
|
342,154
|
|
|
$
|
(9,021
|
)
|
|
$
|
3,304,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Adjustments include acquisition accounting impacts related to deferred revenue
|
Impact of New Revenue Guidance on Financial Statement Line Items
The following table compares the reported condensed balance sheet and statement of operations, as of and for the three and six months ended June 30, 2018,
to the
pro-forma
amounts had the previous guidance been in effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As reported
June 30, 2018
|
|
|
Pro forma as if previous
accounting guidance was in effect
|
|
Assets
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,183,360
|
|
|
$
|
1,163,234
|
|
Other current assets
|
|
|
196,014
|
|
|
|
195,950
|
|
Deferred income taxes
|
|
|
146,443
|
|
|
|
140,831
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deferred revenue (current and
non-current)
|
|
$
|
181,823
|
|
|
$
|
190,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30, 2018
|
|
|
Six Months
Ended June 30, 2018
|
|
|
|
As reported
|
|
|
Pro-forma
|
|
|
As reported
|
|
|
Pro-forma
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,726,540
|
|
|
$
|
1,714,584
|
|
|
$
|
3,304,250
|
|
|
$
|
3,275,727
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
1,227,785
|
|
|
$
|
1,227,785
|
|
|
$
|
2,329,812
|
|
|
$
|
2,329,876
|
|
Income tax (benefit) expense
|
|
|
(9,944
|
)
|
|
|
(6,964
|
)
|
|
|
(6,454
|
)
|
|
|
(843
|
)
|
Consolidated net income (loss)
|
|
|
34,799
|
|
|
|
19,863
|
|
|
|
17,766
|
|
|
|
(16,432
|
)
|
Net loss attributable to
non-controlling
interest
|
|
|
(955
|
)
|
|
|
(1,540
|
)
|
|
|
(4,388
|
)
|
|
|
(5,130
|
)
|
Net income (loss) attributable to ARRIS International plc
|
|
|
35,754
|
|
|
|
21,403
|
|
|
|
22,154
|
|
|
|
(11,302
|
)
|
Net income (loss) per ordinary share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
(0.06
|
)
|
Diluted
|
|
$
|
0.19
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
(0.06
|
)
|
11
Pro-forma
net sales were $12.0 million and $28.5 lower than actual
net sales in the statements of operations for the three and six months ended June 30, 2018, respectively, largely due to license revenue that is currently being recognized upon delivery of the license as opposed to recognizing ratably over the
license term.
Other
Contract Assets and
Liabilities
When payments from customers are received in advance of performance, the Company records a contract liability (deferred revenue). When the Company fulfills performance obligations prior to being able to invoice the customer, a
contract asset (unbilled receivables) is recorded. Additionally, the balances for these are calculated at the contract level on a net basis.
The unbilled
receivables are included in Accounts Receivable on the unaudited Consolidated Balance Sheets. As of June 30, 2018, the Company has unbilled receivables of $37.2 million.
The changes in the contract asset account relate to license revenue is now being recognized upon delivery instead of being recognized ratably over the license
term.
The following table summarizes the changes in deferred revenue for the six months ended of June 30, 2018 (in thousands)
|
|
|
|
|
Opening balance at January 1, 2018
|
|
$
|
168,757
|
|
Deferral of revenue
|
|
|
106,506
|
|
Recognition of unearned revenue
|
|
|
(92,470
|
)
|
Other
|
|
|
(970
|
)
|
|
|
|
|
|
Balance at June 30, 2018
|
|
$
|
181,823
|
|
|
|
|
|
|
As of the end of the current reporting period, the aggregate amount of the transaction price allocated to performance
obligations that are unsatisfied that have a duration of one year or more was $64.8 million. The majority of ARRIS contracts that have performance obligations that are unsatisfied are part of contracts have a duration of one year or less.
Practical Expedients
Sales commissions are
incremental contract acquisition costs which are expected to be recovered. The Company has elected to recognize these expenses as incurred due to the amortization period of these costs being one year or less.
Costs to obtain or fulfill a contract are incremental costs that are expected to be recovered. The Company has elected to recognize these expenses as incurred
due to the amortization period of these costs being one year or less. Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained are recognized in expense when incurred.
The Company has elected not to adjust the promised amount of consideration for the effects of a significant financing component when it expects, at contract
inception, that the period between when ARRIS transfers a promised good or service to a customer, and when the customer pays will be one year or less.
The Company has elected the expedient that states an entity does not need to evaluate whether shipping and handling activities are promised services to its
customers. If revenue is recognized for the related good before the shipping and handling activities occur, the related costs of those shipping and handling activities are accrued.
The Company has also elected to exclude from the transaction price certain types of taxes collected from a customer and remitted to a third-party (e.g.,
governmental agency), including sales, use and value-added taxes. As a result, revenue is presented net of these taxes.
12
Additionally, the Company has elected for contracts that were modified before the beginning of the earliest
reporting period to reflect the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price.
Note 4. Business Acquisition
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 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 $308.2 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 reporting unit as of June 30, 2018. The Company will finalize the assignment
during the measurement period. A portion of the goodwill is 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 a $2.4 million settlement of
preexisting payables and receivables between Ruckus Networks and ARRIS.
|
Total consideration excludes $61.5 million paid 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 (a)
|
|
|
Adjustments
|
|
|
Amounts Recognized
as of Acquisition
Date (as adjusted)
|
|
Total estimated consideration transferred
|
|
$
|
761,013
|
|
|
$
|
|
|
|
$
|
761,013
|
|
Cash and cash equivalents
|
|
|
18,958
|
|
|
|
|
|
|
|
18,958
|
|
Accounts receivable, net
|
|
|
32,940
|
|
|
|
(7,910
|
)
|
|
|
25,030
|
|
Inventories
|
|
|
48,897
|
|
|
|
(461
|
)
|
|
|
48,436
|
|
Prepaids & other
|
|
|
4,836
|
|
|
|
(1,005
|
)
|
|
|
3,831
|
|
Property, plant & equipment
|
|
|
33,500
|
|
|
|
2,014
|
|
|
|
35,514
|
|
Intangible assets
|
|
|
472,500
|
|
|
|
22,200
|
|
|
|
494,700
|
|
Other assets
|
|
|
39,528
|
|
|
|
(37,872
|
)
|
|
|
1,656
|
|
Accounts payable and accrued liabilities
|
|
|
(17,216
|
)
|
|
|
2,350
|
|
|
|
(14,866
|
)
|
Other current liabilities
|
|
|
(9,666
|
)
|
|
|
(1,988
|
)
|
|
|
(11,654
|
)
|
Deferred revenue
|
|
|
(47,718
|
)
|
|
|
970
|
|
|
|
(46,748
|
)
|
Noncurrent deferred income tax liabilities
|
|
|
(92,233
|
)
|
|
|
(7,643
|
)
|
|
|
(99,876
|
)
|
Other noncurrent liabilities
|
|
|
(41,347
|
)
|
|
|
39,137
|
|
|
|
(2,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
442,979
|
|
|
|
9,792
|
|
|
|
452,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
318,034
|
|
|
|
(9,792
|
)
|
|
$
|
308,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
As previously reported as of December 31, 2017
|
13
As a result of measurement period changes for intangible assets, the Company recorded a decrease to previously
recorded amortization for quarters ended December 31, 2017 and March 31, 2018 of $1.8 million and $1.0 million, respectively. These adjustments have been recorded prospectively in the first six months of 2018.
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 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, 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
$494.7 million of acquired intangible assets are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Preliminary
Estimated
Fair value
|
|
|
Estimated Weighted
Average Life (years)
|
|
Technology and patents
|
|
$
|
217,900
|
|
|
|
5.4
|
|
Customer contracts and relationships
|
|
|
195,400
|
|
|
|
10.0
|
|
Tradenames
|
|
|
55,400
|
|
|
|
indefinite
|
|
Trademarks and tradenames
|
|
|
10,700
|
|
|
|
10.0
|
|
Backlog
|
|
|
15,300
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Total estimated fair value of intangible assets
|
|
$
|
494,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of trade accounts receivable is $25.0 million with the gross contractual amount being $26.2 million.
The Company expects $1.2 million to be uncollectible.
The Company incurred acquisition related costs of $0.6 million and $0.7 million
during the three and six months ended June 30, 2018, respectively. 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 $343.8 million to our consolidated results
for the six months ended June 30, 2018.
Note 5. Goodwill and Intangible Assets
Goodwill
As of June 30, 2018, the Company has
preliminarily recorded goodwill of $308.2 million related to the Ruckus Networks acquisition. The Company is in the process of assigning the assets and liabilities acquired to each of its identified reporting units and as such, the
determination of this goodwill by reporting unit is incomplete as of June 30, 2018. The Company intends to finalize the assignment of the goodwill from the Ruckus Networks acquisition during fiscal year 2018.
14
The changes in the carrying amount of goodwill for the year to date period ended June 30, 2018 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
N & C
|
|
|
Enterprise
|
|
|
Total
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in year 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired, net
|
|
|
|
|
|
|
|
|
|
|
(9,792
|
)
|
|
|
(9,792
|
)
|
Impairment
|
|
|
|
|
|
|
(3,400
|
)
|
|
|
|
|
|
|
(3,400
|
)
|
Other
|
|
|
(6,143
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
$
|
1,380,537
|
|
|
$
|
570,398
|
|
|
$
|
308,242
|
|
|
$
|
2,259,177
|
|
Goodwill
|
|
|
1,380,537
|
|
|
|
1,003,654
|
|
|
|
308,242
|
|
|
|
2,692,433
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(433,256
|
)
|
|
|
|
|
|
|
(433,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
$
|
1,380,537
|
|
|
$
|
570,398
|
|
|
$
|
308,242
|
|
|
$
|
2,259,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2018, the Company recorded measurement period adjustments of $9.8 million
related to Ruckus acquisition and $6.1 million of currency translation on
non-USD
denominated goodwill.
In
addition, during the six months ended June 30, 2018, the Company recorded partial impairment of goodwill of $3.4 million related to our Cloud TV reporting unit, respectively, of which $1.2 million is attributable to the noncontrolling
interest. This impairment was a result of the indirect effect of a change in accounting principle related to the adoption of new accounting standard
Revenue from Contracts
with Customers
, resulting in changes in the composition and
carrying amount of the net assets of our Cloud TV reporting unit. The partial impairment was included in impairment of goodwill on the Consolidated Statements of Operations.
Intangible Assets
The gross carrying amount and
accumulated amortization of the Companys acquired intangible assets as of June 30, 2018 and December 31, 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Definite-lived intangible assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,761,898
|
|
|
$
|
866,141
|
|
|
$
|
895,757
|
|
|
$
|
1,672,470
|
|
|
$
|
780,655
|
|
|
$
|
891,815
|
|
Developed technology, patents & licenses
|
|
|
1,479,200
|
|
|
|
873,420
|
|
|
|
605,780
|
|
|
|
1,521,893
|
|
|
|
771,200
|
|
|
|
750,693
|
|
Trademarks, trade and domain names
|
|
|
75,672
|
|
|
|
53,016
|
|
|
|
22,656
|
|
|
|
87,472
|
|
|
|
41,885
|
|
|
|
45,587
|
|
Backlog
|
|
|
15,300
|
|
|
|
14,500
|
|
|
|
800
|
|
|
|
35,000
|
|
|
|
5,833
|
|
|
|
29,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
$
|
3,332,070
|
|
|
$
|
1,807,077
|
|
|
$
|
1,524,993
|
|
|
$
|
3,316,835
|
|
|
$
|
1,599,573
|
|
|
$
|
1,717,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames
|
|
|
55,400
|
|
|
|
|
|
|
|
55,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process
research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,100
|
|
|
|
|
|
|
|
54,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
55,400
|
|
|
|
|
|
|
|
55,400
|
|
|
|
54,100
|
|
|
|
|
|
|
|
54,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,387,470
|
|
|
$
|
1,807,077
|
|
|
$
|
1,580,393
|
|
|
$
|
3,370,935
|
|
|
$
|
1,599,573
|
|
|
$
|
1,771,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
As of June 30, 2018, the Company preliminarily recorded intangible assets (other than goodwill) of
$494.7 million related to the Ruckus Networks acquisition.
In-process
research and development of $4.1 million was reclassified to become a definite-lived asset upon completion of the associated
research and development efforts during the three months ended June 30, 2018.
Amortization expense is reported in the consolidated statements of
operations within cost of sales and operating expenses. The following table presents the amortization of acquired intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of sales
|
|
$
|
889
|
|
|
$
|
711
|
|
|
$
|
1,779
|
|
|
$
|
1,422
|
|
Selling, general and administrative expenses
|
|
|
986
|
|
|
|
949
|
|
|
|
1,983
|
|
|
|
1,899
|
|
Amortization of acquired intangible assets
(1)
|
|
|
90,485
|
|
|
|
91,012
|
|
|
|
205,193
|
|
|
|
184,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
92,360
|
|
|
$
|
92,672
|
|
|
$
|
208,955
|
|
|
$
|
187,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Reflects amortization expense for the intangible assets acquired through business combinations.
|
The estimated total amortization expense for finite-lived intangibles for each of the next five fiscal years is as follows (in
thousands):
|
|
|
|
|
2018 (for the remaining six months)
|
|
$
|
180,112
|
|
2019
|
|
|
333,202
|
|
2020
|
|
|
321,357
|
|
2021
|
|
|
186,571
|
|
2022
|
|
|
149,312
|
|
Thereafter
|
|
|
354,439
|
|
Note 6. Investments
ARRISs investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
|
As of December 31, 2017
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
46,698
|
|
|
$
|
23,874
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
5,662
|
|
|
|
5,718
|
|
Equity method investments
|
|
|
21,402
|
|
|
|
22,021
|
|
Cost method investments
|
|
|
10,092
|
|
|
|
10,092
|
|
Other investments
|
|
|
32,746
|
|
|
|
33,251
|
|
|
|
|
|
|
|
|
|
|
Total classified as
non-current
assets
|
|
|
69,902
|
|
|
|
71,082
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
116,600
|
|
|
$
|
94,956
|
|
|
|
|
|
|
|
|
|
|
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
debt securities are included in the Consolidated Balance Sheets as a component of accumulated other comprehensive income (loss).
The amortized costs and fair value of
available-for-sale
securities were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
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.)
|
|
$
|
46,698
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
46,698
|
|
|
$
|
12,809
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,809
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,003
|
|
|
|
86
|
|
|
|
(24
|
)
|
|
|
11,065
|
|
Corporate obligations
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Money markets
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Mutual funds
|
|
|
86
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
82
|
|
|
|
65
|
|
|
|
14
|
|
|
|
|
|
|
|
79
|
|
Other investments
|
|
|
5,805
|
|
|
|
285
|
|
|
|
(561
|
)
|
|
|
5,529
|
|
|
|
4,941
|
|
|
|
744
|
|
|
|
(97
|
)
|
|
|
5,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,640
|
|
|
$
|
285
|
|
|
$
|
(565
|
)
|
|
$
|
52,360
|
|
|
$
|
28,869
|
|
|
$
|
844
|
|
|
$
|
(121
|
)
|
|
$
|
29,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The following table represents the breakdown of the
available-for-sale
investments with gross unrealized losses and the duration that those losses had been unrealized (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
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.)
|
|
$
|
46,698
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
46,698
|
|
|
$
|
|
|
Corporate obligations
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
Money markets
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
Mutual funds
|
|
|
82
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
(4
|
)
|
Other investments
|
|
|
5,529
|
|
|
|
(561
|
)
|
|
|
|
|
|
|
|
|
|
|
5,529
|
|
|
|
(561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,360
|
|
|
$
|
(565
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
52,360
|
|
|
$
|
(565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018, for fixed income securities that were in unrealized loss positions, the Company has determined that
(i) it does not have the intent to sell any of these investments, and (ii) it is more likely than not that it will not be required to sell any of these investments before recovery of the entire amortized cost basis.
The sale and/or maturity of
available-for-sale
securities resulted in the
following activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Proceeds from sales
|
|
$
|
549
|
|
|
$
|
58,416
|
|
|
$
|
11,549
|
|
|
$
|
150,301
|
|
Gross gains
|
|
|
|
|
|
|
2
|
|
|
|
5
|
|
|
|
12
|
|
Gross losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of the Companys
available-for-sale
securities as of June 30, 2018 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):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Within 1 year
|
|
$
|
46,698
|
|
|
$
|
46,698
|
|
After 1 year through 5 years
|
|
|
|
|
|
|
|
|
After 5 years through 10 years
|
|
|
|
|
|
|
|
|
After 10 years
|
|
|
5,942
|
|
|
|
5,662
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,640
|
|
|
$
|
52,360
|
|
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 three and six months ended June 30, 2018, ARRIS concluded that no other-than-temporary impairment losses existed.
17
For the three and six months ended June 30, 2017, the Company concluded that one private company had
indicators of impairment, as the cost basis exceeded the fair value of the investments resulting in other-than-temporary impairment charges of $2.8 million. These charges are reflected in the Consolidated Statements of Operations.
Classification of securities as current or
non-current
is dependent upon managements intended holding period,
the securitys maturity date and liquidity consideration based on market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as
non-current.
Note 7. Fair Value Measurement
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. U.S GAAP establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. To increase consistency and comparability in fair value measurements,
the FASB has established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. An asset or liabilitys categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by U.S GAAP are as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
The following table presents the Companys investment assets (excluding equity and cost method investments) and derivatives measured at fair value on a
recurring basis as of June 30, 2018 and December 31, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit
(non-U.S.)
|
|
$
|
|
|
|
$
|
46,698
|
|
|
$
|
|
|
|
$
|
46,698
|
|
Corporate obligations
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
14
|
|
Money markets
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
Mutual funds
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
Other investments
|
|
|
|
|
|
|
5,529
|
|
|
|
|
|
|
|
5,529
|
|
Interest rate derivatives asset derivatives
|
|
|
|
|
|
|
21,077
|
|
|
|
|
|
|
|
21,077
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(377
|
)
|
|
|
|
|
|
|
(377
|
)
|
Foreign currency contracts asset position
|
|
|
|
|
|
|
4,598
|
|
|
|
|
|
|
|
4,598
|
|
Foreign currency contracts liability position
|
|
|
|
|
|
|
(166
|
)
|
|
|
|
|
|
|
(166
|
)
|
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit
(non-U.S.)
|
|
$
|
|
|
|
$
|
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
|
)
|
In addition to the financial instruments included in the above table, certain nonfinancial assets and liabilities are measured
at fair value on a nonrecurring basis in accordance with applicable authoritative guidance. This includes items such as nonfinancial assets and liabilities initially measured at fair value in a business combination (but not measured at fair value in
subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are measured at fair value when
there is an indication of impairment and are recorded at fair value only when any impairment is recognized.
18
During the six months ended June 30, 2018, the Company recorded partial impairment of goodwill of
$3.4 million related to our Cloud TV reporting unit, of which $1.2 million is attributable to the noncontrolling interest, respectively. 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
for further discussion.
The Company believes the principal amount of debt as of June 30,
2018 approximated fair value because of interest-bearing rates that are adjusted periodically, analysis of recent market conditions, prevailing interest rates, and other Company specific factors. The Company has classified the debt as a Level 2
item within the fair value hierarchy.
Note 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 related to certain of these exposures, the Company enters 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 specific 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 these swaps as of June 30, 2018 was $1,075.0 million and each swap matures on March 31,
2020. During the six months ended June 30, 2018, the Company entered into new forward-starting interest rate swap arrangements which effectively will convert $1,075.0 million of the Companys variable-rate debt based on
one-month
LIBOR to an aggregate fixed
19
rate of 2.63% plus a leverage-based margin for the period beginning March 31, 2020 and ending June 30, 2022. ARRIS has designated these swaps as cash flow hedges, and the objective of
these hedges is to manage the variability of cash flows in the interest payments related to the portion of the variable-rate debt designated as being hedged.
The Companys objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate
movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in
exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective
portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted
transaction affects earnings. During 2018, such derivatives were used to hedge the variable cash flows associated with debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three
and six months ended June 30, 2018, approximately $0.1 million and $0.4 million 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 $7.2 million may be reclassified as a decrease to interest expense.
The table below presents the impact the Companys derivative financial instruments had on Consolidated Statement of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
Gain(Loss)
Reclassified from
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
AOCI into Income
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)
|
|
|
Interest expense
|
|
|
$
|
5,280
|
|
|
$
|
(2,787
|
)
|
|
$
|
14,381
|
|
|
$
|
(733
|
)
|
Amounts Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
|
Interest expense
|
|
|
|
(551
|
)
|
|
|
590
|
|
|
|
(248
|
)
|
|
|
1,795
|
|
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
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Interest rate derivatives asset derivatives
|
|
Other current assets
|
|
|
7,132
|
|
|
|
3,590
|
|
Interest rate derivatives asset derivatives
|
|
Other assets
|
|
|
13,945
|
|
|
|
6,566
|
|
Interest rate derivatives liability derivatives
|
|
Other accrued liabilities
|
|
|
|
|
|
|
(3,053
|
)
|
Interest rate derivatives liability derivatives
|
|
Other noncurrent liabilities
|
|
|
(377
|
)
|
|
|
(971
|
)
|
Credit-risk-related Contingent Features
Each of ARRISs agreements with its derivative counterparties contains a provision where the Company could be declared in default on its derivative
obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Companys default on the indebtedness. As of June 30, 2018 and December 31, 2017, the fair value of derivatives, which
includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was a net asset position of $20.7 million and $6.1 million, respectively. As of June 30, 2018, the Company has not posted any
collateral related to these agreements nor has it required any of its counterparties to post collateral related to these or any other agreements.
Non-designated
hedges of foreign currency risk
The Company has U.S. dollar functional currency entities that bill
certain international customers in their local currency and foreign functional currency entities that procure in U.S. dollars. ARRIS also has certain predictable expenditures for international operations in local currency. Additionally, certain
intercompany
20
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 June 30, 2018, the Company had forward contracts with notional amounts totaling 30 million euros which mature throughout 2018, forward contracts with a total notional amount of
30 million Australian dollars which mature throughout 2018 and 2019, forward contracts with notional amounts totaling 15 million Canadian dollars which mature throughout 2018, forward contracts with notional amounts totaling
40 million British pounds which mature throughout 2018 and forward contracts with notional amounts totaling 479.2 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 Operations. The maximum time frame for ARRISs derivatives is currently 12 months.
The following table indicates the
location on the Consolidated Balance Sheets in which the Companys derivative assets and liabilities not designated as hedging instruments have been recognized and the related fair values of those derivatives (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Foreign exchange contracts asset derivatives
|
|
Other current assets
|
|
$
|
4,598
|
|
|
$
|
405
|
|
Foreign exchange contracts liability derivatives
|
|
Other accrued liabilities
|
|
|
(166
|
)
|
|
|
(8,202
|
)
|
Foreign exchange contracts liability derivatives
|
|
Other non-current liabilities
|
|
|
|
|
|
|
(600
|
)
|
The change in the fair values of ARRISs derivatives not designated as hedging instruments recorded in the Consolidated
Statements of Operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Location
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Foreign exchange contracts
|
|
(Gain) loss on foreign currency
|
|
$
|
(16,350
|
)
|
|
$
|
9,612
|
|
|
$
|
(8,882
|
)
|
|
$
|
16,319
|
|
Note 9. Pension Benefits
Components of Net Periodic Pension Cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
Three months ended June 30,
|
|
|
Three months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
158
|
|
|
$
|
154
|
|
Interest cost
|
|
|
345
|
|
|
|
434
|
|
|
|
101
|
|
|
|
113
|
|
Return on assets (expected)
|
|
|
(62
|
)
|
|
|
(224
|
)
|
|
|
(68
|
)
|
|
|
(75
|
)
|
Amortization of net actuarial loss(gain)
|
|
|
253
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
536
|
|
|
$
|
348
|
|
|
$
|
191
|
|
|
$
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S. Pension Plans
|
|
|
|
Six months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
317
|
|
|
$
|
308
|
|
Interest cost
|
|
|
691
|
|
|
|
867
|
|
|
|
202
|
|
|
|
226
|
|
Return on assets (expected)
|
|
|
(124
|
)
|
|
|
(448
|
)
|
|
|
(137
|
)
|
|
|
(150
|
)
|
Amortization of net actuarial loss(gain)
|
|
|
506
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
1,073
|
|
|
$
|
695
|
|
|
$
|
382
|
|
|
$
|
384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Employer Contributions
All the amounts in the tables above, other than service costs, were recorded in Other (income) expense, net on the unaudited Consolidated Statements of
Operations.
No minimum funding contributions are required in 2018 under the Companys U.S. defined benefit plan. During the three and six months
ended June 30, 2018, the Company made a minimum funding contribution of $0.3 million and $1.4 million, respectively, related to its Taiwan pension plan. During the three and six months ended June 30, 2017, the Company made a
minimum funding contribution of $0.3 and $0.6 million, respectively, related to its Taiwan pension plan.
In late 2017, the Company commenced the
process of terminating its 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.
Note 10. Guarantees
Warranty
ARRIS provides warranties of various lengths to
customers based on the specific product and the terms of individual agreements. The Company provides for the estimated cost of product warranties based on historical trends, the embedded base of product in the field, failure rates, and repair costs
at the time revenue is recognized. Expenses related to product defects and unusual product warranty problems are recorded in the period that the problem is identified. While the Company engages in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of its suppliers, the estimated warranty obligation could be affected by changes in ongoing product failure rates, material usage and service delivery costs incurred in correcting a product
failure, as well as specific product failures outside of ARRISs baseline experience. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions (which could be material) would be recorded to the
warranty liability.
The Company offers extended warranties and support service agreements on certain products. Revenue from these agreements is deferred
at the time of the sale and recognized on a straight-line basis over the contract period. Costs of services performed under these types of contracts are charged to expense as incurred, which approximates the timing of the revenue stream.
Information regarding the changes in ARRISs aggregate product warranty liabilities for the six months ended June 30, 2018 was as follows (in
thousands):
|
|
|
|
|
Balance at December 31, 2017
|
|
$
|
76,089
|
|
Accruals related to warranties (including changes in assumptions)
|
|
|
15,378
|
|
Settlements made (in cash or in kind)
|
|
|
(23,010
|
)
|
|
|
|
|
|
Balance at June 30, 2018
|
|
$
|
68,457
|
|
|
|
|
|
|
The decline in the warranty accrual resulted from lower sales volume of CPE products, accompanied by settlement of warranty
claims for amounts less than their previously recorded value.
Note 11. Inventories
The components of inventory were as follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Raw material
|
|
$
|
150,399
|
|
|
$
|
149,328
|
|
Work in process
|
|
|
7,602
|
|
|
|
5,416
|
|
Finished goods
|
|
|
645,216
|
|
|
|
670,467
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
803,217
|
|
|
$
|
825,211
|
|
|
|
|
|
|
|
|
|
|
22
Note 12. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Land
|
|
$
|
26,652
|
|
|
$
|
68,562
|
|
Buildings and leasehold improvements
|
|
|
204,579
|
|
|
|
205,534
|
|
Machinery and equipment
|
|
|
453,702
|
|
|
|
466,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
684,933
|
|
|
|
740,421
|
|
Less: Accumulated depreciation
|
|
|
(384,942
|
)
|
|
|
(367,954
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
299,991
|
|
|
$
|
372,467
|
|
|
|
|
|
|
|
|
|
|
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. The assets have been reclassified as held for sale and were measured at their carrying amount. Total assets held for sale at June 30, 2018 were
$58.1 million, which is reported in the Consolidated Balance Sheets as a component of Other current assets. The sale is expected to close in the second half of 2018.
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
|
|
|
Total
|
|
Balance at December 31, 2017
|
|
$
|
4,379
|
|
|
$
|
3,302
|
|
|
$
|
7,681
|
|
Restructuring charges
|
|
|
31,664
|
|
|
|
119
|
|
|
|
31,783
|
|
Cash payments / adjustments
|
|
|
(7,794
|
)
|
|
|
(826
|
)
|
|
|
(8,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
$
|
28,249
|
|
|
$
|
2,595
|
|
|
$
|
30,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and termination benefits
In the second quarter of 2018, ARRIS recorded restructuring charges
of $21.2 million which included $15.5 million related to severance and employee termination benefits for approximately 150 employees as well as $5.7 million related to additional termination benefits associated with the planned sale
of the factory in Taiwan. These initiatives affected all segments, with the exception of Enterprise Networks during the period. The liability for the plan is expected to be paid in 2018.
In the first quarter of 2018, ARRIS recorded restructuring charges of $10.5 million related to severance and employee termination benefits for 850
employees, including the planned sale of the factory in Taiwan. This initiative affected all segments. The liability for the plan is expected to be paid in 2018.
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 has been materially settled as of June 30, 2018.
In first quarter of 2016, ARRIS completed its
acquisition of Pace. ARRIS initiated restructuring plans as a result of the combination that focuses on the rationalization of personnel, facilities and systems across the ARRIS organization. The estimated cost recorded during 2016 was approximately
$96.3 million. The restructuring plan affected approximately 1,545 employees across the company. The remaining liability is expected to be settled in 2018.
23
This amount is included in the Consolidated Statement of Operations in the line item titled Integration,
acquisition, restructuring and other costs.
Contractual obligations
ARRIS has accruals representing contractual obligations that
relate to excess leased facilities. A liability for such costs is recognized and measured initially at fair value on the
cease-use
date based on remaining lease rentals, adjusted for the effects of any prepaid
or deferred items recognized, reduced by the estimated sublease rentals that could be reasonably obtained even if it is not the intent to sublease. The fair value of these liabilities is based on a net present value model using a credit-adjusted
risk-free rate. The liability will be paid out over the remainder of the leased properties terms, which continue through 2021. Actual sublease terms may differ from the estimates originally made by the Company. Any future
changes in the estimates or in the actual sublease income could require future adjustments to the liabilities, which would impact net income in the period the adjustment is recorded.
During the year ended December 31, 2017, the Company exited three facilities and recorded a charge of $5.7 million.
Acquisition
During the three and six months ended
June 30, 2018, acquisition expenses were approximately $0.6 million and $0.7 million, respectively. During the three and six months ended June 30, 2017, acquisition expenses were approximately $2.3 million and
$4.7 million, respectively. These expenses related to the acquisition of the Ruckus Networks and consisted of banker and other fees.
Integration
Integration expenses of approximately $1.1 million and $4.0 million were recorded during the three and six months ended June 30, 2018,
respectively. Integration expenses of approximately $0.3 million and $1.6 million were recorded during the three months and six months ended June 30, 2017, respectively. These expenses related to integration-related outside services
following the Ruckus Networks and Pace acquisitions.
Note 14. Indebtedness
The following is a summary of indebtedness and lease financing obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
|
As of December 31, 2017
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Term A loan
|
|
$
|
19,550
|
|
|
$
|
19,550
|
|
Term
A-1
loan
|
|
|
62,500
|
|
|
|
62,500
|
|
Term
B-3
loan
|
|
|
5,450
|
|
|
|
5,450
|
|
Lease finance obligation
|
|
|
958
|
|
|
|
870
|
|
|
|
|
|
|
|
|
|
|
Current obligations
|
|
|
88,458
|
|
|
|
88,370
|
|
Current deferred financing fees and debt discount
|
|
|
(4,749
|
)
|
|
|
(4,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
83,709
|
|
|
|
83,559
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Term A loan
|
|
|
356,787
|
|
|
|
366,562
|
|
Term
A-1
loan
|
|
|
1,140,625
|
|
|
|
1,171,875
|
|
Term
B-3
loan
|
|
|
532,738
|
|
|
|
535,463
|
|
Revolver
|
|
|
|
|
|
|
|
|
Lease finance obligation
|
|
|
60,530
|
|
|
|
61,032
|
|
|
|
|
|
|
|
|
|
|
Noncurrent obligations
|
|
|
2,090,680
|
|
|
|
2,134,932
|
|
Noncurrent deferred financing fees and debt discount
|
|
|
(16,328
|
)
|
|
|
(18,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,074,352
|
|
|
|
2,116,244
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,158,061
|
|
|
$
|
2,199,803
|
|
|
|
|
|
|
|
|
|
|
24
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-3
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 remained 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, 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.
Interest rates on borrowings under the senior secured credit facilities are set forth in
the table below.
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
|
As of June 30, 2018
|
|
Term A Loan
|
|
|
LIBOR + 1.75
|
%
|
|
|
3.84
|
%
|
Term
A-1
Loan
|
|
|
LIBOR + 1.75
|
%
|
|
|
3.84
|
%
|
Term
B-3
Loan
|
|
|
LIBOR + 2.25
|
%
|
|
|
4.34
|
%
|
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 A Loan, Term
A-1
Loan, Term
B-3
Loan 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 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 June 30, 2018, ARRIS was in compliance with all covenants under the Credit
Agreement.
25
During the three and six months ended June 30, 2018, the Company made mandatory payments of approximately
$21.9 million and $43.8 million, respectively, related to the senior secured credit facilities.
Other
As of June 30, 2018, the scheduled maturities of the contractual debt obligations for the next five years are as follows (in thousands):
|
|
|
|
|
2018 (for the remaining six months)
|
|
$
|
43,750
|
|
2019
|
|
|
87,500
|
|
2020
|
|
|
87,500
|
|
2021
|
|
|
87,500
|
|
2022
|
|
|
1,297,738
|
|
Thereafter
|
|
|
513,662
|
|
Note 15. 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.
As of
January 1, 2018, the Company has changed the composition of its measurement of segment profit and loss (direct contribution) used by the Companys chief operating decision maker. Beginning in 2018, the Company charges bonus, equity
compensation and certain other costs which are now directly aligned with each of its segments within its measurement of segment profit and loss (direct contribution). These costs historically were included as part of Corporate and Unallocated
Costs. Consequently, the Companys segment information for the 2017 period has been restated to reflect such change.
Our CODM manages the
Company under three segments:
|
|
|
Customer Premises Equipment (CPE)
The CPE segments product
solutions include
set-top
boxes, gateways, and subscriber premises equipment that enable service providers to offer voice, video and high-speed data services to residential and business subscribers.
|
|
|
|
Network
& Cloud (N&C)
The
N&C segments product solutions include cable modem termination system, video infrastructure, distribution and transmission equipment and cloud solutions that enable facility-based service providers to construct a
state-of-the-art
residential and metro distribution network. The portfolio also includes a full suite of global services that offer
technical support, professional services and system integration offerings to enable solutions sales of ARRISs
end-to-end
product portfolio.
|
|
|
|
Enterprise Networks (Enterprise)
The Enterprise 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 enterprisesincluding hospitality,
education, smart cities, government, venues, service providers and more.
|
These operating segments were determined based on the nature
of the products and services offered. The measures that are used to assess the reportable segments operating performance are sales and direct contribution. Direct contribution is defined as gross margin less direct operating expense. The
Corporate and Unallocated Costs category of expenses include corporate sales and marketing, home office general and administrative expenses. Corporate and Unallocated Costs also includes corporate sales and marketing for the
CPE and N&C segments. Marketing and sales expense 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.
26
The table below represents information about the Companys reportable segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
$
|
1,008,131
|
|
|
$
|
1,155,883
|
|
|
$
|
1,883,357
|
|
|
$
|
2,210,939
|
|
N&C
|
|
|
549,496
|
|
|
|
510,972
|
|
|
|
1,087,760
|
|
|
|
941,408
|
|
Enterprise
|
|
|
172,240
|
|
|
|
|
|
|
|
342,154
|
|
|
|
|
|
Other
(1)
|
|
|
(3,327
|
)
|
|
|
(2,685
|
)
|
|
|
(9,021
|
)
|
|
|
(5,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,726,540
|
|
|
|
1,664,170
|
|
|
|
3,304,250
|
|
|
|
3,147,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
85,723
|
|
|
|
113,852
|
|
|
|
135,484
|
|
|
|
222,764
|
|
N&C
|
|
|
201,282
|
|
|
|
172,658
|
|
|
|
429,820
|
|
|
|
284,758
|
|
Enterprise
|
|
|
17,774
|
|
|
|
|
|
|
|
43,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
|
304,779
|
|
|
|
286,510
|
|
|
|
608,606
|
|
|
|
507,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and unallocated costs
|
|
|
(146,577
|
)
|
|
|
(130,172
|
)
|
|
|
(305,722
|
)
|
|
|
(251,527
|
)
|
Amortization of intangible assets
|
|
|
(90,485
|
)
|
|
|
(91,012
|
)
|
|
|
(205,193
|
)
|
|
|
(184,657
|
)
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
(3,400
|
)
|
|
|
|
|
Integration, acquisition, restructuring and other
|
|
|
(22,844
|
)
|
|
|
(9,690
|
)
|
|
|
(36,499
|
)
|
|
|
(19,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
44,873
|
|
|
|
55,636
|
|
|
|
57,792
|
|
|
|
51,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
23,647
|
|
|
|
23,344
|
|
|
|
46,173
|
|
|
|
43,027
|
|
(Gain) loss on investments
|
|
|
(844
|
)
|
|
|
3,609
|
|
|
|
(317
|
)
|
|
|
8,139
|
|
Interest income
|
|
|
(1,792
|
)
|
|
|
(1,788
|
)
|
|
|
(3,324
|
)
|
|
|
(3,709
|
)
|
(Gain) loss on foreign currency
|
|
|
(824
|
)
|
|
|
9,373
|
|
|
|
4,009
|
|
|
|
14,113
|
|
Other expense (income), net
|
|
|
(169
|
)
|
|
|
926
|
|
|
|
(61
|
)
|
|
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
24,855
|
|
|
$
|
20,172
|
|
|
$
|
11,312
|
|
|
$
|
(10,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Adjustments related acquisition accounting impacts related to deferred revenue
|
The compositions of our corporate and unallocated costs that are reflected in the consolidated statement of operations were as follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Corporate and unallocated costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
17,383
|
|
|
$
|
13,549
|
|
|
$
|
54,181
|
|
|
$
|
28,022
|
|
Selling, general and administrative expenses
|
|
|
100,820
|
|
|
|
92,191
|
|
|
|
194,491
|
|
|
|
175,846
|
|
Research and development expenses
|
|
|
28,374
|
|
|
|
24,432
|
|
|
|
57,050
|
|
|
|
47,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
146,577
|
|
|
$
|
130,172
|
|
|
$
|
305,722
|
|
|
$
|
251,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16. Sales Information
Revenues from external customers are attributed to individual countries on an
end-customer
basis, based on domicile of
the purchasing entity, if known, or the location of the customers headquarters if the specific purchasing entity within the customer is unknown. ARRIS sells a majority its products in the United States. The Companys
non-U.S.
revenue is generated from Asia Pacific, Canada, Europe, Middle East and Latin America. Sales to customers outside of United States were approximately 42.4% and 42.9% of total sales for the three and six
months ended June 30, 2018, respectively. For the three and six months ended June 30, 2017, sales to customers outside of United States were approximately 32.6% and 33.9%, respectively.
27
The table below set forth our sales based on geography of our customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
U.S.
|
|
$
|
993,843
|
|
|
$
|
1,121,079
|
|
|
$
|
1,887,001
|
|
|
$
|
2,079,556
|
|
Non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas, excluding U.S.
|
|
|
328,093
|
|
|
|
256,260
|
|
|
|
583,711
|
|
|
|
548,861
|
|
Asia Pacific
|
|
|
92,097
|
|
|
|
108,458
|
|
|
|
199,611
|
|
|
|
160,373
|
|
EMEA
|
|
|
312,507
|
|
|
|
178,373
|
|
|
|
633,927
|
|
|
|
358,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
non-U.S.
|
|
|
732,697
|
|
|
|
543,091
|
|
|
|
1,417,249
|
|
|
|
1,067,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
1,726,540
|
|
|
$
|
1,664,170
|
|
|
$
|
3,304,250
|
|
|
$
|
3,147,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 17. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for the periods
indicated (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ARRIS International plc
|
|
$
|
35,754
|
|
|
$
|
30,336
|
|
|
$
|
22,154
|
|
|
$
|
(8,762
|
)
|
Weighted average shares outstanding
|
|
|
184,216
|
|
|
|
186,803
|
|
|
|
184,376
|
|
|
|
188,291
|
|
Basic earnings (loss) per share
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
|
$
|
0.12
|
|
|
$
|
(0.05
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ARRIS International plc
|
|
$
|
35,754
|
|
|
$
|
30,336
|
|
|
$
|
22,154
|
|
|
$
|
(8,762
|
)
|
Weighted average shares outstanding
|
|
|
184,216
|
|
|
|
186,803
|
|
|
|
184,376
|
|
|
|
188,291
|
|
Net effect of dilutive equity awards
|
|
|
1,453
|
|
|
|
2,199
|
|
|
|
1,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
185,669
|
|
|
|
189,002
|
|
|
|
186,288
|
|
|
|
188,291
|
|
Diluted earnings (loss) per share
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
|
$
|
0.12
|
|
|
$
|
(0.05
|
)
|
Potential dilutive shares include stock options, unvested restricted and performance awards and warrants.
For the three months ended June 30, 2018 and 2017, approximately 2.0 million and 3.4 million of the equity-based awards were excluded from the
computation of diluted earnings per share. For the six months ended June 30, 2018 approximately 1.9 million of the equity-based awards were excluded from the computation of diluted earnings per share. For the six months ended June 30,
2017, all the equity-based awards were excluded from the computation of diluted earnings per share. These exclusions are made if the Company has net losses, of which have an anti-dilutive effect.
During the six months ended June 30, 2018, the Company issued 1.5 million ordinary shares related to the vesting of restricted shares, as compared
to 2.6 million shares for the twelve months ended December 31, 2017.
The warrants have a dilutive effect in those periods in which the average
market price of the shares exceeds the current effective conversion price (under the treasury stock method) and are not subject to performance conditions. There is no vesting in the first half of 2018. The dilutive effect of these vested shares was
immaterial.
The Company has not paid cash dividends on its shares since its inception. Any future determination to pay dividends will be at the
discretion of the Board of Directors and will be dependent on then-existing conditions, including the Companys financial condition, results of operations, capital requirements, contractual and legal restrictions, business prospects and other
factors that the Board considers relevant. The Credit Agreement governing the Companys senior secured credit facilities contains restrictions on the Companys ability to pay dividends on its ordinary shares.
28
Note 18. Income Taxes
ARRIS is subject to the U.K. statutory tax rate and a territorial corporate tax system. The U.K. statutory rate for 2018 is 19% as compared to 19.25% in 2017.
The statutory rate in the U.K. decreased from 20% to 19% effective April 1, 2017. The Companys statutory rate for 2017 represented the blended rate that was in effect for the year ended December 31, 2017 based on the 20% statutory
rate that was effective for the first quarter of 2017 and the 19% rate effective for the remainder of 2017.
The Tax Cuts and Jobs Act of 2017 (the
Act) enacted on December 22, 2017 introduced significant changes to U.S. income tax law including, but not limited to, a reduction to the U.S. statutory tax rate from 35% to 21%, creation of new taxes on certain foreign-sourced
earnings and certain intercompany payments, introduction of limits on interest deductibility, and increased limitations on certain executive compensation. Since the Act was passed late in the fourth quarter of 2017, and ongoing guidance and
accounting interpretation are expected during 2018, the Company considers the accounting of the impacts of the Act to be incomplete due to additional work necessary to determine
re-measurement
of any changes
to deferred tax assets and liabilities associated with any acquisition accounting adjustments for fair market value adjustments made within the acquisition accounting measurement period; (2) assess any forthcoming guidance; and
(3) finalize its ongoing analysis of final
year-end
data and tax positions. Any subsequent adjustment to these amounts is recorded to tax expense in the quarter of 2018 when the analysis is complete.
As the Company obtains and analyzes more information and interprets the Act and any additional guidance issued by the U.S. Treasury Department, the Internal
Revenue Service (IRS), and other standard-setting bodies, the Company may adjust the provisional amounts. Those adjustments may materially affect the provision for income taxes and effective tax rate in the period in which the adjustments are made.
The only significant adjustments made during the six months ended June 30, 2018 were a direct result of the acquisition accounting adjustments made during the quarters for fair value adjustments. As a result of the change to the fair value
of certain assets and liabilities, the gross deferred tax amounts associated with those assets and liabilities also changed. The fair value adjustments are as of the acquisition date, December 1, 2017, resulting in the gross deferred tax
impacts being measured at the applicable enacted tax rate of 35% on that date. These deferred tax impacts were then remeasured to 21% to reflect the enacted rate as of December 22, 2017. As a result of these acquisition accounting
measurement period adjustments, the Company recorded discrete tax expense of $2.7 million and tax benefit of $5.6 million during the first quarter of 2018 and second quarter of 2018, respectively.
In the fourth quarter of 2017, the Company estimated $(0.2) million tax benefit for the impact of the
one-time
transition tax for the deemed repatriation of the earnings of the ARRIS controlled foreign corporations. The Company expects to finalize this amount during the third quarter of 2018. The Company has recorded current tax on its global intangible
low-taxed
income (GILTI) relative to the 2018 operations and has elected to account for GILTI as period costs when incurred. No other significant adjustments were made during the second quarter of 2018.
The Company will complete our analysis within the measurement period in accordance with Staff Accounting Bulletin No. 118.
The Company reported the
following operating results for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Income (loss) before income taxes
|
|
$
|
24,855
|
|
|
$
|
20,172
|
|
|
$
|
11,312
|
|
|
$
|
(10,858
|
)
|
Income tax (benefit) expense
|
|
|
(9,944
|
)
|
|
|
(8,302
|
)
|
|
|
(6,454
|
)
|
|
|
1,699
|
|
Effective income tax rate
|
|
|
(40.0
|
)%
|
|
|
(44.8
|
)%
|
|
|
(57.1
|
)%
|
|
|
(15.6
|
)%
|
The Companys effective income tax rate fluctuates based on, among other factors, the level and location of income. The
difference between the U.K. federal statutory income tax rate, 19% and 19.25%, respectively, and our effective income tax rate for the 2018 and 2017 periods is primarily due to the benefits of other foreign income tax regimes and the U.S. federal
research and development credits
.
The Companys effective income tax rate for the six months ended June 30, 2018 was impacted by
$1.8 million of expense related to excess book deductions for stock based compensation, $2.3 million of expense related to changes in permanent reinvestment assertions, offset by $1.3 million of benefit related to the release of
uncertain tax positions due to settlement of audits, $2.8 million of benefit related to the effects of tax rate changes in the U.S., and $4.2 million of benefit related to an internal restructuring to move certain Ruckus Networks
intangible property into the U.S.
29
The Companys effective income tax rate for the six months ended June 30, 2017 was impacted by
$8.0 million related to the intra-entity sale of an asset, offset by $4.0 million of benefit related to statute closures for uncertain tax positions and $4.8 million of benefit related to the reversal of interest related to uncertain
tax positions.
Note 19. Shareholders Equity
The following table provides a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to shareholders of ARRIS
International plc and equity attributable to noncontrolling interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
Shares
|
|
|
Capital in
Excess of
Par Value
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total ARRIS
International
plc
stockholders
equity
|
|
|
Non-
controlling
Interest
|
|
|
Total
stockholders
equity
|
|
Balance, December 31, 2017
|
|
$
|
2,768
|
|
|
$
|
3,387,128
|
|
|
$
|
(225,881
|
)
|
|
$
|
4,552
|
|
|
$
|
3,168,567
|
|
|
$
|
15,467
|
|
|
$
|
3,184,034
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
22,154
|
|
|
|
|
|
|
|
22,154
|
|
|
|
(4,388
|
)
|
|
|
17,766
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,200
|
)
|
|
|
(9,200
|
)
|
|
|
26
|
|
|
|
(9,174
|
)
|
Compensation under stock award plans
|
|
|
|
|
|
|
42,759
|
|
|
|
|
|
|
|
|
|
|
|
42,759
|
|
|
|
|
|
|
|
42,759
|
|
Issuance of ordinary shares and other
|
|
|
21
|
|
|
|
(4,982
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,961
|
)
|
|
|
|
|
|
|
(4,961
|
)
|
Repurchase of ordinary shares, net
|
|
|
(67
|
)
|
|
|
|
|
|
|
(124,876
|
)
|
|
|
|
|
|
|
(124,943
|
)
|
|
|
|
|
|
|
(124,943
|
)
|
Contribution from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,257
|
|
|
|
2,257
|
|
Cumulative effect adjustment to opening balance
(1)
|
|
|
|
|
|
|
|
|
|
|
(1,128
|
)
|
|
|
|
|
|
|
(1,128
|
)
|
|
|
2,694
|
|
|
|
1,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018
|
|
$
|
2,722
|
|
|
$
|
3,424,905
|
|
|
$
|
(329,731
|
)
|
|
$
|
(4,648
|
)
|
|
$
|
3,093,248
|
|
|
$
|
16,056
|
|
|
$
|
3,109,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cumulative adjustment related to the adoption of accounting standards.
|
Note 20. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for
sale securities
|
|
|
Derivative
instruments
|
|
|
Pension
obligations
|
|
|
Cumulative
translation
adjustments
|
|
|
Total
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Less AOCI
attributable
to Non-
controlling
Interest
|
|
|
Total ARRIS
International
plc AOCI
|
|
Balance, December 31, 2017
|
|
$
|
662
|
|
|
$
|
5,589
|
|
|
$
|
(8,993
|
))
|
|
$
|
7,243
|
|
|
$
|
4,501
|
|
|
$
|
51
|
|
|
$
|
4,552
|
|
Other comprehensive income before reclassifications
|
|
|
|
|
|
|
11,316
|
|
|
|
|
|
|
|
(19,663
|
)
|
|
|
(8,347
|
)
|
|
|
(26
|
)
|
|
|
(8,373
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(662
|
)
|
|
|
(194
|
)
|
|
|
29
|
|
|
|
|
|
|
|
(827
|
)
|
|
|
|
|
|
|
(827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
(662
|
)
|
|
|
11,122
|
|
|
|
29
|
|
|
|
(19,663
|
)
|
|
|
(9,174
|
)
|
|
|
(26
|
)
|
|
|
(9,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
$
|
|
|
|
$
|
16,710
|
|
|
$
|
(8,964
|
)
|
|
$
|
(12,369
|
)
|
|
$
|
(4,673
|
)
|
|
$
|
25
|
|
|
$
|
(4,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for
sale securities
|
|
|
Derivative
instruments
|
|
|
Pension
obligations
|
|
|
Cumulative
translation
adjustments
|
|
|
Total
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Non-
controlling
Interest
|
|
|
Total ARRIS
International
plc AOCI
|
|
Balance, December 31, 2016
|
|
$
|
137
|
|
|
$
|
671
|
|
|
$
|
(6,810
|
)
|
|
$
|
9,281
|
|
|
$
|
3,279
|
|
|
$
|
12
|
|
|
$
|
3,291
|
|
Other comprehensive income before reclassifications
|
|
|
204
|
|
|
|
(456
|
)
|
|
|
|
|
|
|
(2,046
|
)
|
|
|
(2,298
|
)
|
|
|
28
|
|
|
|
(2,270
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
58
|
|
|
|
1,117
|
|
|
|
15
|
|
|
|
|
|
|
|
1,190
|
|
|
|
|
|
|
|
1,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
262
|
|
|
|
661
|
|
|
|
15
|
|
|
|
(2,047
|
)
|
|
|
(1,108
|
)
|
|
|
28
|
|
|
|
(1,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2017
|
|
$
|
399
|
|
|
$
|
1,332
|
|
|
$
|
(6,795
|
)
|
|
$
|
7,234
|
|
|
$
|
2,171
|
|
|
$
|
40
|
|
|
$
|
2,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 21. Repurchases of ARRIS Shares
The table below sets forth the purchases of ARRIS shares for the quarter ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number of
Shares
Purchased
(1)
|
|
|
Average
Price
Paid
Per
Share
|
|
|
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
|
|
|
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
or Programs
(in
thousands)
|
|
April 2018
|
|
|
894,627
|
|
|
$
|
26.64
|
|
|
|
894,627
|
|
|
|
476,169
|
|
May 2018
|
|
|
393,080
|
|
|
$
|
25.50
|
|
|
|
393,080
|
|
|
|
466,145
|
|
June 2018
(2)
|
|
|
2,663,531
|
|
|
$
|
24.81
|
|
|
|
2,663,403
|
|
|
|
400,057
|
|
(1)
|
An aggregate of 128 shares shown in the table above were subject to equity awards that were cancelled for cash
to satisfy employee minimum tax withholding obligations that arose on the vesting of the applicable restricted stock units.
|
(2)
|
Includes an aggregate of 557,715 shares (approximately $13.7 million) pending settlement as of June 30,
2018.
|
Upon completing the combination in connection with the Pace acquisition, 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, and authorized an additional $300 million for repurchases again
in March 2018.
During the first quarter of 2018, the Company repurchased 1.0 million shares of its ordinary shares for $25.0 million at an
average share price of $25.35. During the second quarter of 2018, the Company repurchased 4.0 million shares of its ordinary shares for $99.9 million at an average share price of $25.29. The remaining authorized amount for share
repurchases under this plan was $400.1 million as of June 30, 2018. Since the end of the second quarter through August 1, 2018, we have repurchased an additional 2.0. million ordinary shares for approximately $50.0 million. The
remaining authorized amount for share repurchases under this plan was $350.0 million as of August 1, 2018. In August 2018, we announced that we intend to purchase a minimum of $400 million of our ordinary shares in 2018, subject to
market conditions.
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 when such company is 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, the Company obtained approval to purchase its own shares. This authority to repurchase shares terminates in January 2021,
unless otherwise reapproved by the Companys shareholders.
31
Note 22. Commitments and Contingencies
Legal Proceedings
The Company accrues a liability for
legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations,
settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Companys views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change,
changes in the Companys accrued liabilities would be recorded in the period in which such determinations are made. Unless noted otherwise, the amount of liability is not probable, or the amount cannot be reasonably estimated; and, therefore,
accruals have not been made.
Due to the nature of the Companys business, it is subject to patent infringement claims, including current suits
against it or one or more of its wholly-owned subsidiaries, or one or more of our customers who may seek indemnification from us, alleging infringement by various Company products and services. The Company believes that it has meritorious defenses
to the allegation made in its pending cases and intends to vigorously defend these lawsuits; however, it is currently unable to determine the ultimate outcome of these or similar matters. Accordingly, with respect to these proceedings, we are
currently unable to reasonably estimate the possible loss or range of possible losses. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. (See Part II, Item 1 Legal
Proceedings for additional details)
32