NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
)
Note 1.
Organization and Basis of Presentation
On January 4, 2016, ARRIS Group, Inc. (ARRIS Group) completed its
combination (the Combination) with Pace plc, a company incorporated in England and Wales (Pace). In connection with the Combination, (i) ARRIS International plc (the Registrant), a company incorporated in
England and Wales, acquired all of the outstanding ordinary shares of Pace (the Pace Acquisition) and (ii) a wholly-owned subsidiary of the Registrant was merged with and into ARRIS Group (the Merger), with ARRIS Group
surviving the Merger as an indirect wholly-owned subsidiary of the Registrant. Under the terms of the Combination, (a) Pace shareholders received 132.5 pence in cash and 0.1455 ordinary shares of the Registrant for each Pace Share they held,
and (b) ARRIS Group stockholders received one ordinary share of the Registrant for each share of ARRIS Group common stock they held. Following the Combination, ARRIS Group became an indirect wholly-owned subsidiary of the Registrant and Pace
became a direct wholly-owned subsidiary of the Registrant. The ordinary shares of the Registrant trade on the NASDAQ under the symbol ARRS.
The Registrant is deemed to be the successor to ARRIS Group pursuant to Rule
12g-3(a)
under the Securities Exchange Act of 1934, as amended (the Exchange
Act), and the ordinary shares of the Registrant are deemed to be registered under Section 12(b) of the Exchange Act.
ARRIS International plc (together with its consolidated subsidiaries and consolidated venture, except as the context otherwise indicates,
ARRIS or the Company) is a global media entertainment and data communications solutions provider, headquartered in Suwanee, Georgia. The Company operates in two business segments, Customer Premises Equipment (CPE)
and Network & Cloud (N&C) (See Note 14
Segment Information
for additional details), specializing in enabling service providers including cable, telephone, and digital broadcast satellite operators and media
programmers to deliver media, voice, and IP data services to their subscribers. ARRIS is a leader in
set-tops,
digital video and Internet Protocol Television distribution systems, broadband access
infrastructure platforms, and associated data and voice Customer Premises Equipment. The Companys solutions are complemented by a broad array of services including technical support, repair and refurbishment, and systems design and
integration.
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 March 31, 2017 and for the three months ended March 31, 2017 and March 31, 2016 has been prepared
by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with
generally accepted accounting principles in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2016 Consolidated Balance Sheet was derived from audited financial statements,
but does not include all disclosures required by 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, 2016.
In the opinion of management, all normal recurring adjustments necessary to present fairly the consolidated balance sheet as of
March 31, 2017 ; the consolidated statements of operations, the statements of comprehensive income (loss), and the statements of cash flows for the three months ended March 31, 2017 and March 31, 2016 as applicable, have been made. The results
of operations for the three months ended March 31, 2017 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
The Company has evaluated subsequent events through the date that the financial statements were issued.
Note 2. Impact of Recently Adopted Accounting Standards
Adoption of
new accounting standards
In July 2015, the Financial Accounting Standards Board (FASB) issued updated guidance related to the simplification of the measurement of inventory. This standard update applies to inventory that is
measured using
first-in,
first-out
or average cost methods. The standard update requires entities to measure inventory at the lower of cost and net realizable value. Net
realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This standard update is effective for fiscal years beginning after
December 15, 2016. ARRIS adopted this update as of January 1, 2017. The adoption of this guidance did not have any impact on the Companys consolidated financial position and results of operations.
In March 2016, the FASB issued guidance, Improvements to Employee Share-Based Payment Accounting, which simplifies the accounting for
share-based payment transactions. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement. In addition, the new standard includes provisions that impact the classification of awards as either equity
or liabilities and the classification of excess tax benefits on the cash flow statements. ARRIS adopted this guidance in the first quarter of 2017. Upon adoption, using the modified retrospective transition method, the Company recorded a
cumulative-effect adjustment for previously unrecognized excess tax benefits of $8.9 million, decreasing opening accumulated deficit and increasing
non-current
deferred tax assets. Applying the guidance
prospectively, an income tax expense of approximately $0.4 million was recognized in the quarter ended March 31, 2017. Also as a result of the adoption of this guidance, the Company made an accounting policy election to continue to
estimate the number of forfeitures expected to occur and has applied the amendments in this guidance relating to classification on the statement of cash flows prospectively, as such no prior periods have been adjusted. Following adoption, the
primary impact on the Consolidated Financial Statements will be the recognition of excess tax benefits in the provision for income taxes rather than additional
paid-in
capital, which will likely result in
increased volatility in the reported amounts of income tax expense and net income. The tax effects will be treated as discrete items. The actual impact of adopting this standard on the effective tax rate will vary depending on ARRISs share
price during fiscal 2017.
6
In October 2016, the FASB issued new guidance for intra-entity transfer of assets other than
inventory that requires companies to immediately recognize income tax effects of intercompany transactions in their income statements, eliminating the current exception that allows companies to defer the income tax effects of certain intercompany
transactions. The new guidance will be effective for public business entities in fiscal years beginning after December 15, 2017. Early adoption is only permitted as of the beginning of an annual reporting period. ARRIS adopted this
update as of January 1, 2017. Upon adoption, using the modified retrospective transition method, the Company recorded a cumulative-effect adjustment for previously recognized prepaid income taxes, increasing opening accumulated deficit by $2.0
million and non-current deferred tax assets by $4.5 million, and decreasing other current prepaid asset by $2.5 million. Applying the guidance prospectively, an income tax expense of approximately $8.0 million was recognized in the quarter
ended March 31, 2017. Also as a result of the adoption of this guidance, any future inter-company sale transactions of assets other than inventory will result in either income tax expense or benefit in the period of the transaction.
Accounting standards issued but not yet effective
In May 2014, the FASB issued accounting standard update, Revenue from
Contracts with Customers. The standard requires an entity to recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB issued several amendments to the standard
since their initial issuance, including delaying its effective date to reporting periods beginning after December 15, 2017, but permitting companies the option to adopt the standard one year earlier, as well as clarifications on identifying
performance obligations and accounting for licenses of intellectual property, among others.
There are two permitted
transition methods under the new standard, the full retrospective method or the modified retrospective method. Under the full retrospective method, the standard would be applied to each prior reporting period presented and the cumulative effect of
applying the standard would be recognized at the earliest period shown on the face of the financial statements being presented. Under the modified retrospective method, the cumulative effect of applying the standard would be recognized at the date
of the initial application of the standard and the effect of the prior periods would be calculated and shown through a change in retained earnings. ARRIS currently anticipates adopting the standard using the modified retrospective method on
January 1, 2018.
The Company has a cross-functional team that is analyzing the impact of the standard on our revenue
streams and contract portfolio to identify potential differences that would arise from applying the requirements of the new standard. To date, the Company has identified major revenue streams, performed an analysis of a sample of contracts to
evaluate the impact of the standard, and begun the drafting of our accounting policies and evaluating the new disclosure requirements. ARRIS is in the process of implementing changes to its systems, business processes and controls to support the
adoption of the new standard.
At this stage, the Company is currently evaluating the potential impact of this standard on its
consolidated financial statements. The actual impact of adoption will be based on open contracts existing at December 31, 2017 and is subject to the finalization of our transition method. While the Company has not finalized its evaluation, in
certain instances, the Company will recognize revenue earlier under the new standard. For example, ARRIS will recognize revenue earlier for certain software license contracts that the Company enters into with its customers. Likewise, the Company
will recognize revenue earlier for certain arrangements with Value Added Resellers (VARs) currently accounted for utilizing the sell-through method.
In February 2016, the FASB issued new guidance that will require lessees to recognize most leases on their balance sheets as a
right-of-use
asset with a corresponding lease liability, and lessors to recognize a net lease investment. Additional qualitative and quantitative disclosures will also
be required. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, although early adoption is permitted. The Company is currently assessing the potential impact of this update on its consolidated
financial statements.
7
In August 2016, the FASB issued amended guidance on the classification of certain cash
receipts and payments in the statement of cash flows. The primary purpose of the amended guidance is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The amended guidance adds or clarifies
guidance on eight cash flow issues, including debt prepayment or debt extinguishment costs, settlement of
zero-coupon
debt instruments or certain other debt instruments, contingent consideration payments made
after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization
transactions and separately identifiable cash flows and application of the predominance principle. The guidance is effective for the Company beginning January 1, 2018 for both interim and annual reporting periods, with early adoption permitted.
Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. The Company is currently assessing the potential impact
of the adoption of this guidance on its Consolidated Financial Statements.
In November 2016, the FASB issued new guidance
that requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as
restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period
and
end-of-period
total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periods beginning after December 15, 2017 and early
adoption is permitted. The amendment should be adopted retrospectively. The Company is currently evaluating how the adoption of this standard will have on its consolidated financial statements.
In January 2017, the FASB issued an accounting standard update that clarifies the definition of a business to help companies evaluate
whether acquisition or disposal transactions should be accounted for as asset groups or as businesses. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2019 on a prospective basis. The impact
of this accounting standard update will be facts and circumstances dependent, but the Company expects that in some situations transactions that were previously accounted for as business combinations or disposal transactions will be accounted for as
asset purchases or asset sales under the accounting standard update.
In January 2017, the FASB issued an accounting standard
update that removes Step two of the goodwill impairment test, which requires the assessment of fair value of individual assets and liabilities of a reporting unit to measure goodwill impairments. Goodwill impairment will now be the amount by which a
reporting units carrying value exceeds its fair value. The accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2021 on a prospective basis, and early adoption is permitted. Given current
circumstances, the Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements. Nevertheless, the Company will continue to monitor the potential impact of the new guidance on the
Companys consolidated financial statements.
In March 2017, the FASB issued an accounting standard update that requires
entities to disaggregate the service cost component from the other components of net periodic benefit costs and present it with other current compensation costs for related employees in the income statement, and present the other components
elsewhere in the income statement and outside of income from operations if that subtotal is presented. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. The accounting
standard update will be effective for the Company in the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently evaluating how the adoption of this standard will have on its consolidated financial statements.
Note 3. Business Acquisition
Acquisition of Pace
On
January 4, 2016, ARRIS completed its previously announced acquisition of Pace, a leading international technology solutions provider, for approximately $2,074 million, including $638.8 million in cash and issuance of 47.7 million
shares of ARRIS International plc (formerly ARRIS International Limited) (New ARRIS) ordinary shares and $0.3 million of
non-cash
consideration.
The Company completed the accounting for the aforementioned business combination during the fourth quarter of 2016.
8
Pending acquisition of Ruckus Wireless and ICX Switch business
On February 22, 2017, ARRIS, Broadcom Corporation, and a subsidiary of Broadcom entered into a Stock and Asset Purchase Agreement
(Purchase Agreement), pursuant to which, upon the terms and subject to the satisfaction or waiver of the conditions in the Purchase Agreement, ARRIS will acquire Brocade Communication Systems Inc.s Ruckus Wireless and ICX Switch
product lines (the Ruckus Networks) for approximately $800 million in cash, subject to adjustment as provided in the Purchase Agreement. The acquisition is subject to the completion of the acquisition of Brocade by Broadcom.
This acquisition of these product lines will expand ARRISs leadership in converged wired and wireless networking
technologies beyond the home into the education, public venue, enterprise, hospitality, and MDU segments. ARRIS plans to establish a dedicated business segment within the Company focused on innovative wireless networking and wired switching
technology to address evolving and emerging needs across a number of vertical markets.
Note 4. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill for the year to date period ended March 31, 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
N & C
|
|
|
Total
|
|
Goodwill
|
|
$
|
1,391,171
|
|
|
$
|
1,003,654
|
|
|
$
|
2,394,825
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
1,391,171
|
|
|
$
|
624,998
|
|
|
$
|
2,016,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in year 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation and other
|
|
|
1,843
|
|
|
|
|
|
|
|
1,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
$
|
1,393,014
|
|
|
$
|
624,998
|
|
|
$
|
2,018,012
|
|
Goodwill
|
|
|
1,393,014
|
|
|
|
1,003,654
|
|
|
|
2,396,668
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
$
|
1,393,014
|
|
|
$
|
624,998
|
|
|
$
|
2,018,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
The gross carrying amount and accumulated amortization of the Companys acquired intangible assets as of March 31, 2017 and December 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
Definite-lived intangible assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,575,351
|
|
|
$
|
663,736
|
|
|
$
|
911,615
|
|
|
$
|
1,572,947
|
|
|
$
|
624,719
|
|
|
$
|
948,228
|
|
Developed technology, patents & licenses
|
|
|
1,250,893
|
|
|
|
623,144
|
|
|
|
627,749
|
|
|
|
1,248,719
|
|
|
|
571,808
|
|
|
|
676,911
|
|
Trademarks, trade and domain names
|
|
|
62,872
|
|
|
|
26,049
|
|
|
|
36,823
|
|
|
|
83,472
|
|
|
|
41,433
|
|
|
|
42,039
|
|
Backlog
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,400
|
|
|
|
16,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
$
|
2,889,116
|
|
|
$
|
1,312,929
|
|
|
$
|
1,576,187
|
|
|
$
|
2,921,538
|
|
|
$
|
1,254,360
|
|
|
$
|
1,667,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
5,900
|
|
|
|
|
|
|
|
5,900
|
|
|
|
5,900
|
|
|
|
|
|
|
|
5,900
|
|
In-process
research and development
|
|
|
4,100
|
|
|
|
|
|
|
|
4,100
|
|
|
|
4,100
|
|
|
|
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
10,000
|
|
|
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,899,116
|
|
|
$
|
1,312,929
|
|
|
$
|
1,586,187
|
|
|
$
|
2,931,538
|
|
|
$
|
1,254,360
|
|
|
$
|
1,677,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
As of March 31, 2017, certain fully amortized intangible assets have been eliminated
from both the gross and accumulated amortization amounts.
Amortization expense is reported in the consolidated statements of
operations within cost of goods sold and operating expenses. The following table presents the amortization of acquired intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cost of sales
|
|
$
|
711
|
|
|
$
|
324
|
|
Selling, general & administrative expense
|
|
|
949
|
|
|
|
949
|
|
Amortization of acquired intangible assets (1)
|
|
|
93,646
|
|
|
|
98,493
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,306
|
|
|
$
|
99,766
|
|
|
|
|
|
|
|
|
|
|
(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):
|
|
|
|
|
2017 (for the remaining nine months)
|
|
$
|
276,400
|
|
2018
|
|
|
316,908
|
|
2019
|
|
|
270,876
|
|
2020
|
|
|
259,145
|
|
2021
|
|
|
124,359
|
|
Thereafter
|
|
|
328,499
|
|
Note 5. Investments
ARRISs investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
|
As of December 31, 2016
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
90,673
|
|
|
$
|
115,553
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
5,101
|
|
|
|
15,391
|
|
Equity method investments
|
|
|
26,458
|
|
|
|
22,688
|
|
Cost method investments
|
|
|
4,091
|
|
|
|
6,841
|
|
Other investments
|
|
|
29,385
|
|
|
|
28,012
|
|
|
|
|
|
|
|
|
|
|
Total classified as
non-current
assets
|
|
|
65,035
|
|
|
|
72,932
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
155,708
|
|
|
$
|
188,485
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
ARRISs investments in debt and marketable equity securities are categorized as
available-for-sale
and are carried at fair value. Realized
gains and losses on
available-for-sale
securities are included in net income. Unrealized gains and losses on
available-for-sale
securities are included in the Consolidated Balance Sheets as a component of accumulated other comprehensive income (loss).
The amortized costs and fair value of
available-for-sale
securities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Amortized
Costs
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Amortized
Costs
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Certificates of deposit (foreign)
|
|
$
|
59,563
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
59,563
|
|
|
$
|
87,372
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
87,372
|
|
Corporate bonds
|
|
|
31,094
|
|
|
|
35
|
|
|
|
(19
|
)
|
|
|
31,110
|
|
|
|
34,175
|
|
|
|
35
|
|
|
|
(77
|
)
|
|
|
34,133
|
|
Short-term bond fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,046
|
|
|
|
69
|
|
|
|
(69
|
)
|
|
|
5,046
|
|
Corporate obligations
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Mutual funds
|
|
|
101
|
|
|
|
7
|
|
|
|
|
|
|
|
108
|
|
|
|
94
|
|
|
|
28
|
|
|
|
(21
|
)
|
|
|
101
|
|
Other investments
|
|
|
4,823
|
|
|
|
202
|
|
|
|
(90
|
)
|
|
|
4,935
|
|
|
|
4,192
|
|
|
|
530
|
|
|
|
(487
|
)
|
|
|
4,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,639
|
|
|
$
|
244
|
|
|
$
|
(109
|
)
|
|
$
|
95,774
|
|
|
$
|
130,936
|
|
|
$
|
662
|
|
|
$
|
(654
|
)
|
|
$
|
130,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 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 (foreign)
|
|
$
|
59,563
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
59,563
|
|
|
$
|
|
|
Corporate bonds
|
|
|
31,110
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
31,110
|
|
|
|
(19
|
)
|
Short-term bond fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate obligations
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
Mutual funds
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
Other investments
|
|
|
4,935
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
4,935
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,774
|
|
|
$
|
(109
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
95,774
|
|
|
$
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
Fair
value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
Certificates of deposit (foreign)
|
|
$
|
87,372
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
87,372
|
|
|
$
|
|
|
Corporate bonds
|
|
|
34,133
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
34,133
|
|
|
|
(77
|
)
|
Short-term bond fund
|
|
|
5,046
|
|
|
|
(69
|
)
|
|
|
|
|
|
|
|
|
|
|
5,046
|
|
|
|
(69
|
)
|
Corporate obligations
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
Mutual funds
|
|
|
101
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
(21
|
)
|
Other investments
|
|
|
4,235
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
4,235
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
130,944
|
|
|
$
|
(654
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
130,944
|
|
|
$
|
(654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017, for fixed income securities that were in unrealized loss positions, the
Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is 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 March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Proceeds from sales
|
|
$
|
91,885
|
|
|
$
|
2,093
|
|
Gross gains
|
|
|
10
|
|
|
|
26
|
|
Gross losses
|
|
|
|
|
|
|
|
|
The contractual maturities of the Companys
available-for-sale
securities as of March 31, 2017 are shown below. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations
without prepayment penalties (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Within 1 year
|
|
$
|
90,657
|
|
|
$
|
90,673
|
|
After 1 year through 5 years
|
|
|
|
|
|
|
|
|
After 5 year through 10 years
|
|
|
|
|
|
|
|
|
After 10 years
|
|
|
4,982
|
|
|
|
5,101
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,639
|
|
|
$
|
95,774
|
|
Other-than-temporary investment impairments
In making this determination, ARRIS evaluates
its investments for any other-than-temporary impairment on a quarterly basis considering all available evidence, including changes in general market conditions, specific industry and individual entity data, the financial condition and the
near-term
prospects of the entity issuing the security, and the Companys ability and intent to hold the investment
11
until recovery. For the three months ended March 31, 2017, ARRIS concluded that one private company had indicators of impairment, as the cost basis exceeded the fair value of the investment,
resulting in other-than-temporary impairment charge of $2.8 million. These charges are reflected in the Consolidated Statements of Operations.
For the year ended December 31, 2016, the Company concluded that two private companies had indicators of impairment, as the cost basis exceeded the fair value of the investments, resulting in
other-than-temporary impairment charges of $12.3 million.
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 6.
Fair Value Measurement
Fair value is based on the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. U.S GAAP establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In
order to increase consistency and comparability in fair value measurements, the FASB has established a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. An asset or
liabilitys categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by U.S GAAP are as follows:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or
liabilities.
Level 2: Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is
available.
The following table presents the Companys investment assets (excluding equity and cost method investments)
and derivatives measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit (foreign)
|
|
$
|
|
|
|
$
|
59,563
|
|
|
$
|
|
|
|
$
|
59,563
|
|
Corporate bonds
|
|
|
|
|
|
|
31,110
|
|
|
|
|
|
|
|
31,110
|
|
Corporate obligations
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Mutual funds
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
Other investments
|
|
|
|
|
|
|
4,935
|
|
|
|
|
|
|
|
4,935
|
|
Interest rate derivatives asset derivatives
|
|
|
|
|
|
|
9,130
|
|
|
|
|
|
|
|
9,130
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(7,018
|
)
|
|
|
|
|
|
|
(7,018
|
)
|
Foreign currency contracts asset position
|
|
|
|
|
|
|
3,159
|
|
|
|
|
|
|
|
3,159
|
|
Foreign currency contracts liability position
|
|
|
|
|
|
|
(4,941
|
)
|
|
|
|
|
|
|
(4,941
|
)
|
|
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit (foreign)
|
|
$
|
|
|
|
$
|
87,372
|
|
|
$
|
|
|
|
$
|
87,372
|
|
Corporate bonds
|
|
|
|
|
|
|
34,133
|
|
|
|
|
|
|
|
34,133
|
|
Short-term bond fund
|
|
|
5,046
|
|
|
|
|
|
|
|
|
|
|
|
5,046
|
|
Corporate obligations
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Money markets
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Mutual funds
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Other investments
|
|
|
|
|
|
|
4,235
|
|
|
|
|
|
|
|
4,235
|
|
Interest rate derivatives asset derivatives
|
|
|
|
|
|
|
7,860
|
|
|
|
|
|
|
|
7,860
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(9,006
|
)
|
|
|
|
|
|
|
(9,006
|
)
|
Foreign currency contracts asset position
|
|
|
|
|
|
|
7,369
|
|
|
|
|
|
|
|
7,369
|
|
Foreign currency contracts liability position
|
|
|
|
|
|
|
(3,671
|
)
|
|
|
|
|
|
|
(3,671
|
)
|
12
In addition to the financial instruments included in the above table, certain nonfinancial
assets and liabilities are measured at fair value on a nonrecurring basis in accordance with applicable authoritative guidance. This includes items such as nonfinancial assets and liabilities initially measured at fair value in a business
combination (but not measured at fair value in subsequent periods) and nonfinancial long-lived asset groups measured at fair value for an impairment assessment. In general, nonfinancial assets including goodwill, other intangible assets and property
and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized. As of March 31, 2017, the Company had not recorded any impairment related to such assets
and had no other material nonfinancial assets or liabilities requiring adjustments or write-downs to their current fair value.
The Company believes the principal amount of debt as of March 31, 2017 approximated fair value because of interest-bearing rates
that are adjusted periodically, analysis of recent market conditions, prevailing interest rates, and other Company specific factors. The Company has classified the debt as a Level 2 item within the fair value hierarchy.
Note 7. Derivative Instruments and Hedging Activities
Overview
ARRIS is exposed to financial market risk, primarily related to
foreign currency and interest rates. These exposures are actively monitored by management. To manage the volatility relating to certain of these exposures, the Company enters into a variety of derivative financial instruments. Managements
objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in foreign currency and interest rates. ARRISs policies and practices are to use derivative financial instruments
only to the extent necessary to manage exposures. ARRIS does not hold or issue derivative financial instruments for trading or speculative purposes.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has
elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the
exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to
variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives also may be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge
accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a
fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not
apply or the Company elects not to apply hedge accounting. In accordance with the FASBs fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are
subject to master netting agreements on a net basis by counterparty portfolio.
Cash Flow Hedges of Interest Rate Risk
In April 2013, ARRIS Group entered into senior secured credit facilities having variable interest rates with Bank of America, N.A. and
various other institutions, which are comprised of (i) a Term Loan A Facility of $1.1 billion, (ii) a Term Loan B Facility of $825 million and (iii) a Revolving Credit Facility of
$250 million. In June 2015, ARRIS Group amended and restated its existing credit agreement to improve the terms and conditions of the credit agreement, extend the maturities of certain loan facilities, increase the amount of the revolving
credit facility, and add a new Term Loan
A-1
Facility to fund the acquisition of Pace. As a result of exposure to interest rate movements, ARRIS Group entered into various interest rate swap
arrangements, which effectively converted $625 million of its variable-rate debt based on
one-month
LIBOR to an aggregate fixed rate. The aggregated fixed rate changes as certain swaps mature and other
swaps begin and could vary up by 50 basis points or down by 25 basis points based on future changes to the Companys net leverage ratio. Based on the Companys interest rates as of March 31, 2017, the aggregate fixed rate for swaps in
effect and outstanding through December 29, 2017 is 3.15% per annum, and the aggregate fixed rate for swaps in effect and outstanding from December 29, 2017 through March 31, 2020 is 4.00% per annum. ARRIS Group 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.
13
During 2016, ARRIS entered into nine $50 million interest rate swap arrangements as a
result of the additional exposure from the new Term Loan
A-1
Facility. These arrangements effectively converted $450 million of the Companys variable-rate debt based on
one-month
LIBOR to an aggregate fixed rate of 2.73% per annum based on the Companys interest rates as of March 31, 2017. This fixed rate could vary by up 50 basis points or down by 25 basis points based
on future changes to the Companys net leverage ratio. Each of these swaps matures on March 31, 2020. ARRIS has designated these swaps as cash flow hedges, and the objective of these hedges is to manage the variability of cash flows in the
interest payments related to the portion of the variable-rate debt designated as being hedged.
The Companys objectives
in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management
strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying
notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow
hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2017, such derivatives were used to hedge the variable cash
flows associated with debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2017, the Company did not have expenses related to hedge
ineffectiveness in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be
reclassified to interest expense as interest payments are made on the Companys variable-rate debt. Over the next 12 months, the Company estimates that an additional $1.2 million may be reclassified as an increase to interest expense.
The table below presents the impact the Companys derivative financial instruments had on the Accumulated Other
Comprehensive Income and Statement of Operations for the three months ended March 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain(Loss)
Reclassified
from AOCI into
Income
|
|
Three months ended
March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Gain (loss) Recognized in OCI on Derivatives (Effective Portion)
|
|
Interest
expense
|
|
$
|
2,054
|
|
|
$
|
(15,175
|
)
|
Amounts Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
Interest
expense
|
|
|
1,204
|
|
|
|
1,741
|
|
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 of March 31, 2017 and December 31, 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Derivatives designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
asset derivatives
|
|
|
Other current assets
|
|
|
|
1,131
|
|
|
|
222
|
|
|
|
|
|
Interest rate derivatives
asset derivatives
|
|
|
Other assets
|
|
|
|
7,999
|
|
|
|
8,043
|
|
|
|
|
|
Interest rate derivatives
liability derivatives
|
|
|
Other accrued liabilities
|
|
|
|
(2,344
|
)
|
|
|
(2,989
|
)
|
|
|
|
|
Interest rate derivatives
liability derivatives
|
|
|
Other noncurrent liabilities
|
|
|
|
(4,674
|
)
|
|
|
(6,421
|
)
|
Credit-risk-related Contingent Features
ARRIS has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the
underlying indebtedness is accelerated by the lender due to the Companys default on the indebtedness. As of March 31, 2017 and December 31, 2016, the fair value of derivatives, which includes accrued interest but excludes
any adjustment for nonperformance risk, related to these agreements was a net asset position of $2.0 million and a net liability position of $1.4 million, respectively. As of March 31, 2017, the Company has not posted any collateral
related to these agreements nor has it required any of its counterparties to post collateral related to these or any other agreements.
14
Non-designated
hedges of foreign currency risk
The Company has U.S. dollar functional currency entities that bill certain international customers in their local currency and foreign
functional currency entities that procure in U.S. dollars. ARRIS also has certain predictable expenditures for international operations in local currency. Additionally, certain intercompany transactions are denominated in foreign currencies and
subject to revaluation. To mitigate the volatility related to fluctuations in the foreign exchange rates for certain exposures, ARRIS has entered into various foreign currency contracts. As of March 31, 2017, the Company had option collars with
notional amounts totaling 35 million euros which mature in throughout 2017, forward contracts with notional amounts totaling 30 million euros which mature throughout 2017, forward contracts with a total notional amount of 50 million
Australian dollars which mature throughout 2017, forward contracts with notional amounts totaling 35 million Canadian dollars which mature throughout 2017, forward contracts with notional amounts totaling 80 million British pounds which
mature throughout 2017 and forward contracts with notional amounts totaling 567.2 million South African rand which mature throughout 2017 and 2018.
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 13 months.
The following table indicates the location on the Consolidated
Balance Sheets in which the Companys derivative assets and liabilities not designated as hedging instruments have been recognized and the related fair values of those derivatives as of March 31, 2017 and December 31, 2016 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Derivatives not designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
asset derivatives
|
|
|
Other current assets
|
|
|
$
|
3,104
|
|
|
$
|
7,369
|
|
|
|
|
|
Foreign exchange contracts
asset derivatives
|
|
|
Other assets
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
liability derivatives
|
|
|
Other accrued liabilities
|
|
|
|
(4,941
|
)
|
|
|
(3,671
|
)
|
The change in the fair values of ARRISs derivatives not designated as hedging instruments recorded
in the Consolidated Statements of Operations during the three months ended March 31, 2017 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March
31,
|
|
|
|
Statement of Operations Location
|
|
|
2017
|
|
|
2016
|
|
Derivatives not designated as
hedging instruments
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
Loss on foreign currency
|
|
|
$
|
6,707
|
|
|
$
|
17,455
|
|
Note 8. Pension Benefits
Components of Net Periodic Pension Cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
|
Non-U.S.
Pension Plans
|
|
|
Three months ended March 31,
|
|
|
Three months ended March 31,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
154
|
|
|
$
|
173
|
|
Interest cost
|
|
|
434
|
|
|
|
438
|
|
|
|
113
|
|
|
|
151
|
|
Return on assets (expected)
|
|
|
(224
|
)
|
|
|
(199
|
)
|
|
|
(75
|
)
|
|
|
(68
|
)
|
Amortization of net actuarial loss(gain)
|
|
|
138
|
|
|
|
194
|
|
|
|
|
|
|
|
(1,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
348
|
|
|
$
|
433
|
|
|
$
|
192
|
|
|
$
|
(1,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Employer Contributions
No minimum funding contributions are required in 2017 under the Companys U.S. defined benefit plan. During the quarter ended March 31, 2017, the Company made a minimum funding contribution of
$0.3 million related to its Taiwan pension plan.
Note 9. Guarantees
Warranty
ARRIS provides warranties of various lengths to customers based
on the specific product and the terms of individual agreements. The Company provides for the estimated cost of product warranties based on historical trends, the embedded base of product in the field, failure rates, and repair costs at the time
revenue is recognized. Expenses related to product defects and unusual product warranty problems are recorded in the period that the problem is identified. While the Company engages in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of its suppliers, the estimated warranty obligation could be affected by changes in ongoing product failure rates, material usage and service delivery costs incurred in correcting a product failure, as
well as specific product failures outside of ARRISs baseline experience. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions (which could be material) would be recorded to the warranty
liability.
The Company offers extended warranties and support service agreements on certain products. Revenue from these
agreements is deferred at the time of the sale and recognized on a straight-line basis over the contract period. Costs of services performed under these types of contracts are charged to expense as incurred, which approximates the timing of the
revenue stream.
Information regarding the changes in ARRISs aggregate product warranty liabilities for the three months
ended March 31, 2017 was as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
88,187
|
|
Accruals related to warranties (including changes in assumptions)
|
|
|
9,586
|
|
Settlements made (in cash or in kind)
|
|
|
(13,052
|
)
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
84,721
|
|
|
|
|
|
|
Note 10. Inventories
The components of inventory were as follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Raw material
|
|
$
|
88,747
|
|
|
$
|
86,243
|
|
Work in process
|
|
|
7,577
|
|
|
|
3,877
|
|
Finished goods
|
|
|
459,940
|
|
|
|
461,421
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
556,264
|
|
|
$
|
551,541
|
|
|
|
|
|
|
|
|
|
|
Note 11. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Land
|
|
$
|
68,562
|
|
|
$
|
68,562
|
|
Buildings and leasehold improvements
|
|
|
177,352
|
|
|
|
163,333
|
|
Machinery and equipment
|
|
|
446,982
|
|
|
|
440,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
692,896
|
|
|
|
672,850
|
|
Less: Accumulated depreciation
|
|
|
(338,846
|
)
|
|
|
(319,473
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
354,050
|
|
|
$
|
353,377
|
|
|
|
|
|
|
|
|
|
|
16
Note 12. Restructuring, Acquisition and Integration
Restructuring
The
following table represents a summary of and changes to the restructuring accrual, which is primarily composed of accrued severance and other employee costs and contractual obligations that related to excess leased facilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance
&
termination benefits
|
|
|
Contractual
obligations and
other
|
|
|
Total
|
|
Balance at December 31, 2016
|
|
$
|
27,886
|
|
|
$
|
2,243
|
|
|
$
|
30,129
|
|
Restructuring charges
|
|
|
3,555
|
|
|
|
2,906
|
|
|
|
6,461
|
|
Cash payments / adjustments
|
|
|
(5,153
|
)
|
|
|
(714
|
)
|
|
|
(5,867
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2017
|
|
$
|
26,288
|
|
|
$
|
4,435
|
|
|
$
|
30,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and termination benefits
In the first quarter of 2017, ARRIS recorded
restructuring charges of $3.6 million related to severance and employee termination benefits for 76 employees. This initiative affected all segments. The liability for the plan is expected to be paid in 2017.
In first quarter of 2016, ARRIS completed its acquisition of Pace. ARRIS initiated restructuring plans as a result of the Acquisition
that focuses on the rationalization of personnel, facilities and systems across the ARRIS organization. The estimated cost recorded during 2016 was approximately $96.3 million. This amount is included in the Consolidated Statement of Operations
in the line item titled Integration, acquisition, restructuring costs and other costs. The restructuring plan affected approximately 1,545 employees across the company. The remaining liability is expected to be paid in 2017.
Contractual obligations
ARRIS has accruals representing contractual obligations that relate to excess leased facilities. A
liability for such costs is recognized and measured initially at fair value on the
cease-use
date based on remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized, reduced
by the estimated sublease rentals that could be reasonably obtained even if it is not the intent to sublease. The fair value of these liabilities is based on a net present value model using a credit-adjusted risk-free rate. The liability will
be paid out over the remainder of the leased properties terms, which continue through 2021. Actual sublease terms may differ from the estimates originally made by the Company. Any future changes in the estimates or in the actual
sublease income could require future adjustments to the liabilities, which would impact net income in the period the adjustment is recorded. During the first quarter of 2017, the Company exited two facilities and recorded a charge of
$2.9 million.
Acquisition
During the three months ended March 31, 2017, acquisition expenses were approximately $2.3 million. These expenses related to the pending acquisition of the Ruckus Wireless and ICX Switch
product lines and consisted of banker and other fees. During the three months ended March 31, 2016, acquisition expenses were approximately $27.8 million. These expenses related banker fees, legal fees and other direct costs of the
Combination.
Integration
Integration expenses of approximately $1.3 million and $12.1 million were recorded during the three months ended March 31, 2017 and 2016, respectively, related to integration-related
outside services following the Combination.
17
Note 13. Indebtedness
The following is a summary of indebtedness and lease financing obligations as of March 31, 2017 and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
|
As of December 31, 2016
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Term A loan
|
|
$
|
49,500
|
|
|
$
|
49,500
|
|
Term
A-1
loan
|
|
|
40,000
|
|
|
|
40,000
|
|
Lease finance obligation
|
|
|
761
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
Current obligations
|
|
|
90,261
|
|
|
|
90,275
|
|
Current deferred financing fees and debt discount
|
|
|
(7,494
|
)
|
|
|
(7,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,767
|
|
|
|
82,734
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Term A loan
|
|
|
853,875
|
|
|
|
866,250
|
|
Term
A-1
loan
|
|
|
720,000
|
|
|
|
730,000
|
|
Term B loan
|
|
|
543,812
|
|
|
|
543,812
|
|
Revolver
|
|
|
|
|
|
|
|
|
Lease finance obligation
|
|
|
57,712
|
|
|
|
57,902
|
|
|
|
|
|
|
|
|
|
|
Noncurrent obligations
|
|
|
2,175,399
|
|
|
|
2,197,964
|
|
Noncurrent deferred financing fees and debt discount
|
|
|
(16,099
|
)
|
|
|
(17,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,159,300
|
|
|
|
2,180,009
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,242,067
|
|
|
$
|
2,262,743
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities
On June 18, 2015, ARRIS Group amended and restated its existing credit agreement dated March 27, 2013 (the Existing Credit Agreement) to improve the terms and conditions of the
credit agreement, extend the maturities of certain loan facilities, increase the amount of the revolving credit facility, and add a new term
A-1
loan facility to fund the acquisition of Pace. The credit
facility under the amended credit agreement (the Amended Credit Agreement) is comprised of (i) a Term Loan A Facility of $990 million, (ii) a Term Loan B Facility of $543.8 million,
(iii) a Revolving Credit Facility of $500 million and (iv) a Term Loan
A-1
Facility of $800 million, was funded upon the closing of the acquisition of Pace in 2016.
Under the Amended Credit Agreement, the Term Loan A Facility, Term Loan
A-1
Facility and the Revolving Credit Facility will mature on June 18, 2020. The Term Loan B Facility will mature on April 17,
2020. Interest rates on borrowings under the senior secured credit facilities are set forth in the table below.
|
|
|
|
|
|
|
Rate
|
|
As of March 31, 2017
|
Term Loan A
|
|
LIBOR + 1.75 %
|
|
2.73%
|
Term Loan
A-1
|
|
LIBOR + 1.75 %
|
|
2.73%
|
Term Loan B
|
|
LIBOR
(1)
+ 2.75 %
|
|
3.73%
|
Revolving Credit Facility
(2)
|
|
LIBOR + 1.75 %
|
|
Not Applicable
|
|
(1)
|
Includes LIBOR floor of 0.75%
|
|
(2)
|
Includes unused commitment fee of 0.35% and letter of credit fee of 1.75% not reflected in interest rate above.
|
The Amended Credit Agreement provides for adjustments to the interest rates paid on the Term Loan A, Term Loan
A-1,
Term Loan B and Revolving Credit Facility based upon the achievement of certain leverage ratios.
Borrowings under the senior secured credit facilities are secured by first priority liens on substantially all of the assets of ARRIS and certain of its present and future subsidiaries who are or become
parties to, or guarantors under, the Amended Credit Agreement governing the senior secured credit facilities. The Amended Credit Agreement provides terms for mandatory prepayments, optional prepayments and commitment reductions. The Amended Credit
Agreement also includes events of default, which are customary for facilities of this type (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all amounts outstanding under the
credit facilities may be accelerated. The Amended Credit Agreement contains usual and customary limitations on indebtedness, liens, restricted payments, acquisitions and asset sales
18
in the form of affirmative, negative and financial covenants, which are customary for financings of this type, including the maintenance of a minimum interest coverage ratio of 3.50:1 and a
maximum leverage ratio of 3.50:1. As of March 31, 2017, ARRIS was in compliance with all covenants under the Amended Credit Agreement.
During the three months ended March 31, 2017, the Company made mandatory prepayments of approximately $22.4 million related to the senior secured credit facilities.
Subsequent to March 31, 2017, the Company has entered into a Second Amendment (the Second Amendment) to its Amended and
Restated Credit Facility dated June 18, 2015, as previously amended on December 15, 2015 (the Credit Agreement). See Note 23
Subsequent Events
for additional details.
Other
As of
March 31, 2017, the scheduled maturities of the contractual debt obligations for the next four years are as follows (in thousands):
|
|
|
|
|
2017 (for the remaining nine months)
|
|
$
|
67,125
|
|
2018
|
|
|
89,500
|
|
2019
|
|
|
89,500
|
|
2020
|
|
|
1,961,062
|
|
Note 14. Segment Information
The management approach has been used to present the following segment information. This approach is based upon the way the management of the Company organizes segments within an enterprise
for making operating decisions and assessing performance. Financial information is reported on the basis that it is used internally by the chief operating decision maker (CODM) for evaluating segment performance and deciding how to
allocate resources to segments. The Companys chief executive officer has been identified as the CODM.
Our CODM manages
the Company under two segments:
|
|
|
Customer Premises Equipment (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, repair services and system integration offerings to enable solutions sales of ARRISs
end-to-end
product portfolio.
|
These operating segments were determined based on the nature of the products and services offered. The measures that are used to assess
the reportable segments operating performance are sales and direct contribution. Direct contribution is defined as gross margin less direct operating expense. The Corporate and Unallocated Costs category of expenses include
corporate sales and marketing, home office general and administrative expenses, annual bonus and equity compensation. These expenses are not included in the measure of segment direct contribution and as such are reported as Corporate and
Unallocated Costs and are included in the reconciliation to income (loss) before income taxes. A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating
resources.
19
The table below represents information about the Companys reportable segments for the
three months ended March 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net sales to external customers:
|
|
|
|
|
CPE
|
|
$
|
1,055,056
|
|
|
$
|
1,090,828
|
|
N&C
|
|
|
430,436
|
|
|
|
524,237
|
|
Other
|
|
|
(2,387
|
)
|
|
|
(359
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,483,105
|
|
|
|
1,614,706
|
|
|
|
|
|
|
|
|
|
|
Direct contribution:
|
|
|
|
|
|
|
|
|
CPE
|
|
|
118,415
|
|
|
|
131,965
|
|
N&C
|
|
|
131,718
|
|
|
|
156,984
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
|
250,133
|
|
|
|
288,949
|
|
|
|
|
|
|
|
|
|
|
Corporate and unallocated costs
|
|
|
(150,476
|
)
|
|
|
(186,027
|
)
|
Amortization of intangible assets
|
|
|
(93,646
|
)
|
|
|
(98,493
|
)
|
Integration, acquisition, restructuring and other
|
|
|
(10,095
|
)
|
|
|
(90,919
|
)
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(4,084
|
)
|
|
|
(86,490
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
19,683
|
|
|
|
19,626
|
|
Loss on investments
|
|
|
4,530
|
|
|
|
1,959
|
|
(Gain) loss on foreign currency
|
|
|
4,740
|
|
|
|
12,241
|
|
Interest income
|
|
|
(1,922
|
)
|
|
|
(783
|
)
|
Other expense ( income), net
|
|
|
(85
|
)
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(31,030
|
)
|
|
$
|
(119,183
|
)
|
|
|
|
|
|
|
|
|
|
For the three month period ended March 31, 2017 and 2016, 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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Corporate and unallocated costs:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
22,083
|
|
|
$
|
47,388
|
|
Selling, general and administrative expenses
|
|
|
87,025
|
|
|
|
95,373
|
|
Research and development expenses
|
|
|
41,368
|
|
|
|
43,266
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
150,476
|
|
|
$
|
186,027
|
|
|
|
|
|
|
|
|
|
|
Note 15. Sales Information
ARRIS sells its products primarily in the United States. The Companys international revenue is generated from Asia Pacific, Canada, Europe, Middle East and Latin America. Sales to customers outside
of United States were approximately 35.4% and 24.4% of total sales for the three months ended March 31, 2017 and 2016, respectively.
The table below set forth our domestic (U.S.) and international sales for the three months ended March 31, 2017 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Domestic U.S
|
|
$
|
958,477
|
|
|
$
|
1,220,966
|
|
International
|
|
|
|
|
|
|
|
|
Americas, excluding U.S.
|
|
|
292,601
|
|
|
|
236,639
|
|
Asia Pacific
|
|
|
51,915
|
|
|
|
37,369
|
|
EMEA
|
|
|
180,112
|
|
|
|
119,732
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
$
|
524,628
|
|
|
$
|
393,740
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
1,483,105
|
|
|
$
|
1,614,706
|
|
|
|
|
|
|
|
|
|
|
20
Note 16. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for the periods indicated (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31
|
|
|
|
2017
|
|
|
2016
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net loss attributable to ARRIS International plc.
|
|
$
|
(39,098
|
)
|
|
$
|
(202,573
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
189,796
|
|
|
|
191,743
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
(0.21
|
)
|
|
$
|
(1.06
|
)
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net loss attributable to ARRIS International plc.
|
|
$
|
(39,098
|
)
|
|
$
|
(202,573
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
189,796
|
|
|
|
191,743
|
|
Net effect of dilutive shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
189,796
|
|
|
|
191,743
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
(0.21
|
)
|
|
$
|
(1.06
|
)
|
|
|
|
|
|
|
|
|
|
Potential dilutive shares include stock options, unvested restricted and performance awards and warrants.
For the three months ended March 31, 2017 and 2016, all of the equity-based awards were excluded from the computation of
diluted earnings per share shares. These exclusions are made if the exercise price of these equity-based awards is in excess of the average market price of the shares for the period, or if the Company has net losses, both of which have an
anti-dilutive effect.
During the three months ended March 31, 2017, the Company issued 0.6 million shares of its
ordinary shares related to the vesting of restricted shares, as compared to 2.3 million shares for the twelve months ended December 31, 2016.
The warrants have a dilutive effect in those periods in which the average market price of the shares exceeds the current effective conversion price (under the treasury stock method), and are not subject
to performance conditions. During the fourth quarter of 2016, approximately 2.2 million warrants vested based on the amount of purchases of products and services by the respective customers from the Company. There is no vesting in the first
quarter of 2017. The dilutive effect of these vested shares was immaterial.
In connection with the Combination, ARRIS issued
approximately 47.7 million shares of ARRIS International plc ordinary shares as part of the purchase consideration. The fair value of the 47.7 million shares issued, $1,434.7 million, was determined based on the conversion of each of
Paces shares and equity awards outstanding at a conversion rate of 0.1455 with a value of $30.08 at January 4, 2016, which represents the opening price of the Companys shares at the date of Combination.
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.
21
Note 17. Income Taxes
The Companys effective income tax rate for the three months ended March 31, 2017 is (34.0%), as compared to (72.0%) for the three months ended March 31, 2016. The Companys effective
income tax rate fluctuates based on, among other factors, the level and tax jurisdiction of income. The difference between the U.K. statutory income tax rate of 19.25% and the effective income tax rate for the 2017 and 2016 periods is primarily due
to the benefits of other foreign income tax regimes and the U.S. federal research and development credits. For the three months ended March 31, 2017 and 2016, the Company recorded income tax expense of $10.0 million and $86.0 million,
respectively. The change in income tax expense for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016, was due to a decreased book loss in 2017 when compared to 2016, as well as the impact of
non-recurring
items in each year. The effective income tax rate for the three months ended March 31, 2017 includes an $8.0 million tax expense related to the intra-entity sale of an asset, a
$4.8 million tax benefit related to accrued interest on uncertain tax positions, $1.4 million tax expense related to changes in tax rates, and $0.4 million tax expense related to the vesting of restricted shares. During the quarter
ended March 31, 2016 the Company recorded $55 million of withholding tax expense in connection with the Pace Combination, as well as $2.1 million of expense on expiring net operating losses, both of which were
one-time
items.
On January 4, 2016, ARRIS Group completed the Combination transaction
with Pace, a company incorporated in England and Wales. In connection with the Combination, (i) ARRIS International plc (ARRIS), a company incorporated in England and Wales, acquired all of the outstanding ordinary shares of Pace
(the Pace Acquisition) and (ii) a wholly-owned subsidiary of ARRIS was merged with and into ARRIS Group (the Merger), with ARRIS Group surviving the Merger as an indirect wholly-owned subsidiary of ARRIS. As a result of
the Merger, ARRIS incurred withholding taxes of $55 million. Subsequent to the Merger, ARRIS is subject to the U.K. statutory tax rate and a territorial corporate tax system. The U.K. statutory rate for 2017 is 19.25% as compared to 20% in
2016. The statutory rate in the U.K. decreased from 20% to 19% effective April 1, 2017. The Companys statutory rate for 2017 represents the blended rate that will be in effect for the year ended December 31, 2017 based on the 20% statutory
rate that was effective for the first quarter of 2017 and the 19% rate effective for the remainder of 2017. Prior to the Merger, ARRIS was subject to the U.S. statutory tax rate of 35% and a worldwide corporate tax system.
Note 18. Shareholders Equity
The following table provides a reconciliation of the beginning and ending carrying amounts of total equity, equity attributable to shareholders of ARRIS 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, 2016
|
|
$
|
2,831
|
|
|
$
|
3,314,707
|
|
|
$
|
(132,013
|
)
|
|
$
|
3,291
|
|
|
$
|
3,188,816
|
|
|
$
|
37,921
|
|
|
$
|
3,226,737
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(39,098
|
)
|
|
|
|
|
|
|
(39,098
|
)
|
|
|
(1,933
|
)
|
|
|
(41,031
|
)
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,337
|
|
|
|
7,337
|
|
|
|
(9
|
)
|
|
|
7,328
|
|
Compensation under stock award plans
|
|
|
|
|
|
|
19,415
|
|
|
|
|
|
|
|
|
|
|
|
19,415
|
|
|
|
|
|
|
|
19,415
|
|
Issuance of ordinary shares and other
|
|
|
11
|
|
|
|
(13,742
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,731
|
)
|
|
|
|
|
|
|
(13,731
|
)
|
Provision for warrants
|
|
|
|
|
|
|
2,423
|
|
|
|
|
|
|
|
|
|
|
|
2,423
|
|
|
|
|
|
|
|
2,423
|
|
Repurchase of ordinary shares, net
|
|
|
(40
|
)
|
|
|
|
|
|
|
(83,070
|
)
|
|
|
|
|
|
|
(83,110
|
)
|
|
|
|
|
|
|
(83,110
|
)
|
Cumulative effect adjustment to opening balance (1)
|
|
|
|
|
|
|
|
|
|
|
10,974
|
|
|
|
|
|
|
|
10,974
|
|
|
|
|
|
|
|
10,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2017
|
|
$
|
2,802
|
|
|
$
|
3,322,803
|
|
|
$
|
(243,207
|
)
|
|
$
|
10,628
|
|
|
$
|
3,093,026
|
|
|
$
|
35,979
|
|
|
$
|
3,129,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Cumulative adjustment related to the adoption of accounting standards, see Note 2
Impact of Recently Adopted Accounting Standards
for additional
information.
|
Note 19. Warrants
During 2016, the Company entered into two separate Warrant and Registration Rights Agreements (the Warrants) with certain customers pursuant to which those customers may purchase up to an
aggregate of 14.0 million of ARRISs ordinary shares, (subject to adjustment in accordance with the terms of the Warrants, the Shares).
The Warrants will vest in tranches based on the amount of purchases of products and services by the customers from the Company.
22
At March 31, 2017, approximately 2.2 million warrants are vested and outstanding,
with a weighted average exercise price of $24.56, which vested based on the amount of purchases of products and services by the customers from the Company in 2016.
The table below presents by year, the warrants to purchase ordinary shares that could vest under outstanding Warrant programs with customers, based on achieving certain purchase levels (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Issuable
|
|
|
Exercise Price per Maximum Share Issuable
|
|
|
|
Minimum
|
|
|
Maximum
|
|
|
$22.19
|
|
|
$28.54
|
|
|
Note
1
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2,000
|
|
|
|
7,500
|
|
|
|
5,000
|
|
|
|
2,500
|
|
|
|
|
|
2018
|
|
|
1,000
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
2,500
|
|
|
(1)
|
The exercise price for the 2018 warrants will be determined based upon the lower of 1) the volume-weighted price for the
10-day
trading period preceding January 1, 2018 (the January Price) or 2) the average of $28.54 and the January Price.
|
For Warrants in which an exercise price has been established, the exercise price per Share was established based upon the average volume-weighted price of ARRISs ordinary shares on NASDAQ for the
10-day
trading period preceding the issuance date of the Warrants.
The Warrants provide for
net Share settlement that, if elected, will reduce the number of Shares issued upon exercise to reflect net settlement of the exercise price. Customers may also request cash settlement of the Warrants upon exercise in lieu of issuing Shares,
however, such cash election is at the discretion of ARRIS. The Warrants will expire by September 30, 2023.
The Warrants
provide for certain adjustments that may be made to the exercise price and the number of Shares issuable upon exercise due to customary anti-dilution provisions based on future corporate events. In addition, in connection with any consolidation,
merger or similar extraordinary event involving the Company, the Warrants will be deemed to represent the right to receive, upon exercise, the same consideration received by the holders of the Companys ordinary shares in connection with such
transaction. Upon a change of control of ARRIS or if ARRIS materially breaches its applicable agreements with customers (and such breach is not cured pursuant to the terms of the agreements), the Warrants will immediately vest for the minimum
threshold of Shares that would otherwise be issuable.
ARRIS has also agreed, if requested by the holders, to register the
Shares issuable upon exercise of the Warrants under the Securities Act of 1933, as amended (the Securities Act) and has also granted piggyback registration rights in the event ARRIS files a registration statement with the
U.S. Securities and Exchange Commission under the Securities Act covering its equity securities, subject to the terms and conditions included in the Warrants.
Because the Warrants contain performance criteria, which includes annual purchase levels and product mix, under which customers must achieve for the Warrants to vest, as detailed above, the final
measurement date for the Warrants is the date on which the Warrants vest. Prior to the final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of Warrants is being recorded as a reduction to
net sales based on the projected number of Warrants expected to vest, the proportion of purchases by customers and its affiliates within the period relative to the aggregate purchase levels required for the Warrants to vest and the then-current fair
value of the related Warrants. To the extent that projections change in the future as to the number of Warrants that will vest, as well as changes in the fair market value of the Warrants, a cumulative
catch-up
adjustment will be recorded in the period in which the estimates change.
The
fair value of the Warrants is determined using the Black-Scholes option pricing model. The assumptions utilized in the Black-Scholes model include the risk-free interest rate, expected volatility, and expected life in years. The risk-free interest
rate over the expected life is equal to the prevailing U.S. Treasury note rate over the same period. Expected volatility is determined utilizing historical volatility over a period of time equal to the expected life of the warrant. Expected life is
equal to the remaining contractual term of the warrant. The dividend yield is assumed to be zero since we have not historically declared dividends and do not have any plans to declare dividends in the future.
For the three month ended March 31, 2017, ARRIS recorded $2.4 million as a reduction to net sales in connection with Warrants.
This transaction is considered an equity contract, and is classified as such.
23
Note 20. Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of taxes, for the three
months ended March 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for
sale securities
|
|
|
Derivative
instruments
|
|
|
Change
related to
pension
liability
|
|
|
Cumulative
translation
adjustments
|
|
|
Total
|
|
Balance as of December 31, 2016
|
|
$
|
137
|
|
|
$
|
671
|
|
|
$
|
(6,810
|
)
|
|
$
|
9,293
|
|
|
$
|
3,291
|
|
Other comprehensive income before reclassifications
|
|
|
96
|
|
|
|
1,420
|
|
|
|
|
|
|
|
4,981
|
|
|
|
6,497
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(3
|
)
|
|
|
832
|
|
|
|
11
|
|
|
|
|
|
|
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income
|
|
|
93
|
|
|
|
2,252
|
|
|
|
11
|
|
|
|
4,981
|
|
|
|
7,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
$
|
230
|
|
|
$
|
2,923
|
|
|
$
|
(6,799
|
)
|
|
$
|
14,274
|
|
|
$
|
10,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for
sale securities
|
|
|
Derivative
instruments
|
|
|
Change
related to
pension
liability
|
|
|
Cumulative
translation
adjustments
|
|
|
Total
|
|
Balance as of December 31, 2015
|
|
$
|
133
|
|
|
$
|
(6,781
|
)
|
|
$
|
(4,195
|
)
|
|
$
|
(1,803
|
)
|
|
$
|
(12,646
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
(232
|
)
|
|
|
(9,933
|
)
|
|
|
|
|
|
|
3,080
|
|
|
|
(7,085
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
12
|
|
|
|
1,140
|
|
|
|
(1,897
|
)
|
|
|
|
|
|
|
(745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current-period other comprehensive income (loss)
|
|
|
(220
|
)
|
|
|
(8,793
|
)
|
|
|
(1,897
|
)
|
|
|
3,080
|
|
|
|
(7,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
$
|
(87
|
)
|
|
$
|
(15,574
|
)
|
|
$
|
(6,092
|
)
|
|
$
|
1,277
|
|
|
$
|
(20,476
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 21. Repurchases of ARRIS Shares
The table below sets forth the purchases of ARRIS shares for the quarter ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number of
Shares
Purchased
(1)
|
|
|
Average Price
Paid Per Share
|
|
|
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or
Programs
|
|
|
Approximate
Dollar Value of
Shares That May
Yet Be Purchased
Under
the Plans
or Programs
(in thousands)
|
|
January 2017
|
|
|
78,263
|
|
|
$
|
28.73
|
|
|
|
|
|
|
|
121,964
|
|
February 2017
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
121,964
|
|
March 2017
|
|
|
3,699,976
|
|
|
$
|
25.57
|
|
|
|
3,266,743
|
|
|
|
338,855
|
|
(1)
|
511,496 shares were subject to equity awards that were cancelled for cash to satisfy minimum tax withholding obligations that arose on the vesting of shares of
restricted stock units.
|
Upon completing the Combination, ARRIS International plc conducted a court-approved
process in accordance with section 641(1)(b) of the U.K. Companies Act 2006, pursuant to which the Company reduced its stated share capital and thereby increased its distributable reserves or excess capital out of which ARRIS may legally pay
dividends or repurchase shares. Distributable reserves are not linked to a U.S. GAAP reported amount.
In early 2016, the
Companys Board of Directors approved a $300 million share repurchase authorization replacing all prior programs. In March 2017, the Board authorized an additional $300 million for share repurchases.
24
During the first quarter of 2017, ARRIS repurchased 3.3 million shares of the
Companys ordinary shares at an average price of $25.44 per share, for aggregate consideration of approximately $83.1 million. The remaining authorized amount for stock repurchases under these plans was $338.9 million as of
March 31, 2017. Unless terminated earlier by a Board resolution, these new plans will expire when ARRIS has used all authorized funds for repurchase.
During the first quarter of 2016, the Company repurchased 6.4 million shares of its ordinary shares for $150.0 million at an average stock price of $23.47.
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)
Note 23. Subsequent Event
On April 26, 2017, ARRIS and certain of ARRISs subsidiaries entered into a Second Amendment (the Second Amendment)
to its Amended and Restated Credit Facility dated June 18, 2015, as previously amended on December 15, 2015 (the Credit Agreement). The Second Amendment provides for a new Term B Loan facility in the principal amount of
$545 million, the proceeds of which (along with cash on hand) were used to repay in full the existing Term B Loan facility. Under the terms of the Second Amendment, the new Term B 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. All other material terms of the Credit Agreement remain unchanged.
25