NOTES TO THE CONDENSED 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. Equity incentive and compensation plans were assumed by the Registrant and amended to provide that those plans will now provide for the award and issuance of ordinary
shares instead of shares of common stock of ARRIS Group on a one-for-one basis. Shares of treasury stock of ARRIS Group were cancelled in the Combination. 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 19,34, 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 and Network & Cloud (See Note 14
Segment Information
of Notes to the Consolidated Financial Statements for additional details.), specializing in
enabling service providers including cable, telephone, and digital broadcast satellite operators and media programmers to deliver media, voice, 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 reflect all
adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary for a fair presentation of the consolidated financial statements for the periods shown. Certain prior year amounts in the financial
statements have been reclassified to conform to fiscal year 2016 presentation. Interim results of operations are not necessarily indicative of results to be expected from a twelve-month period. These financial statements should be read in
conjunction with the Companys most recent audited consolidated financial statements and notes thereto included in the ARRIS Groups Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the United States
Securities and Exchange Commission (SEC).
Note 2. Impact of Recently Adopted Accounting Standards
Adoption of new accounting standards
In June 2014, the Financial Accounting Standards Board (FASB) issued an
update to its accounting guidance related to share-based compensation. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period, be treated as a performance condition, and
therefore shall not be reflected in determining the fair value of the award at the grant date. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be
achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The guidance is effective for annual and interim periods beginning after December 15, 2015. ARRIS
adopted this update in the first quarter of 2016. The adoption of this guidance did not have a material impact on the Companys consolidated financial position and results of operations.
6
In January 2015, the FASB issued new guidance simplifying income statement presentation by
eliminating the concept of extraordinary items. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. ARRIS adopted this new guidance in the beginning of
the first quarter of 2016. The adoption of this guidance did not have a material impact on the Companys consolidated financial position and results of operations.
In February 2015, the FASB issued new guidance related to consolidations. The new guidance amends certain requirements for determining whether a variable interest entity must be consolidated. The
amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. ARRIS adopted this new guidance in the beginning of the first quarter of 2016. The
adoption of this guidance did not have a material impact on the Companys consolidated financial position and results of operations.
In April 2015, the FASB issued new guidance to determine whether fees for purchasing cloud computing services (or hosted software solutions) are considered internal-use software or should be considered a
service contract. A cloud computing agreement that includes a software license should be accounted for in the same manner as internal-use software if the customer has contractual right to take possession of the software during the hosting period
without significant penalty and it is feasible to either run the software on the customers hardware or contract with another vendor to host the software. Arrangements that dont meet the requirements for internal-use software should be
accounted for as a service contract. As a result, all software licenses within the scope of this guidance will be accounted for consistently with other licenses of intangible assets. This guidance is effective for interim and annual periods
beginning after December 15, 2015. ARRIS adopted this guidance prospectively in the beginning of the first quarter of 2016 and it did not have a significant impact on our consolidated financial statements.
In March 2016, the FASB issued new guidance which eliminates the requirement that when an existing cost method investment qualifies for
use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Under the new guidance, at the point an investment qualifies for the equity method, any
unrealized gain or loss on available-for-sale securities in accumulated other comprehensive income (loss) will be recognized through earnings. The standard is effective for interim and annual reporting periods beginning after December 15, 2016,
although early adoption is permitted. We early adopted this standard during the three months ended March 31, 2016. None of our available-for-sale or cost investments qualified for use of the equity method during the quarter.
Accounting standards issued but not yet effective
In May 2014, the FASB issued an accounting standard update, Revenue from
Contracts with Customers. The standard requires an entity should recognize revenue to depict the transfer 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 August 2015, the FASB delayed the effective date of this standard by one year to reporting periods beginning after December 15, 2017, but permit companies the option to adopt the standard one year earlier (that is, as
of the original effective date). On March 30, 2016, the FASB issued updated guidance Revenue from Contracts with Customers (Principal versus Agent Considerations), to clarify the implementation guidance on principal versus agent
considerations. On April 14, 2016, the FASB issued updated guidance, Revenue from Contracts with Customers (Identifying Performance Obligations and Licensing), to clarify the implementation guidance on identifying performance obligations
and licensing. On May 9, 2016, the FASB issued updated guidance, Revenue from Contracts with Customers (Narrow-Scope Improvements and Practical Expedients), to clarify the implementation guidance on assessing collectability, presentation
of sales taxes, noncash consideration and completed contracts and contract modifications at transition. The standard can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the
date of adoption. The Company is currently assessing the potential impact of this update on its consolidated financial statements.
In July 2015, the 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
7
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. Early adoption is permitted. The adoption of this guidance is not expected to
have a material impact on the Companys consolidated financial position and results of operations.
In August 2014, the
FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around managements responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise
substantial doubt about an entitys ability to continue as a going concern, and if those conditions exist to provide related footnote disclosures. The new standard is effective for fiscal years ending after December 15, 2016, and interim
periods within those fiscal years beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Companys consolidated financial statements.
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.
In March 2016, the FASB issued new guidance which makes several modifications to Accounting for share-based payments related to the
accounting for forfeitures, employer tax withholding, the financial statement presentation of excess tax benefits or deficiencies, and the statement of cash flows presentation for certain components of share-based awards. The standard is effective
for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. We are currently assessing how the adoption of this standard will impact our Consolidated Financial Statements.
Note 3. Business Acquisitions
Acquisition of Pace
On
January 4, 2016, ARRIS completed the 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.
In
connection with the Combination, (i) ARRIS, a company incorporated in England and Wales and wholly-owned subsidiary of ARRIS Group, agreed to acquire all of the outstanding ordinary shares of Pace by means of court-sanctioned scheme of arrangement
(the Scheme) under English law and (ii) ARRIS Group entered into a Merger Agreement (the Merger Agreement), dated April 22, 2015, among ARRIS Group, ARRIS, ARRIS US Holdings, Inc. (formerly Archie U.S. Holdings LLC), a
Delaware corporation and wholly-owned subsidiary of ARRIS (US Holdco) and Archie U.S. Merger LLC, a Delaware limited liability company and wholly-owned subsidiary of US Holdco (Merger Sub), whereby Merger Sub would be merged
with and into ARRIS Group, with ARRIS Group surviving as an indirect wholly-owned subsidiary of ARRIS.
The Combination
combines the strengths of both companies on a global scalebroadening ARRISs worldwide CPE leadership with a competitive stake in satellite communications; and expanding its cable pay TV, cloud, network, home, and services
portfolio.
The estimated goodwill of $1,072.9 million arising from the acquisition is attributable to the workforce of the
acquired business, strategic opportunities and synergies that are expected to arise from the acquisition of Pace. Goodwill will be assigned to our reporting units prior to the close of the measurement period. The goodwill is not expected to be
deductible for income tax purposes.
8
The following table summarizes the fair value of consideration transferred for Pace (in
thousands):
|
|
|
|
|
Cash Consideration
(1)
|
|
$
|
638,789
|
|
Stock Consideration
(2)
|
|
|
1,434,690
|
|
Non-cash Consideration
(3)
|
|
|
323
|
|
|
|
|
|
|
Total consideration transferred
|
|
$
|
2,073,802
|
|
|
|
|
|
|
|
(1)
|
Cash consideration represents the cash payment of 132.5 pence (converted to $1.95 at an exchange rate of 1.4707 as of January 4, 2016) for each of Paces shares
and equity awards outstanding.
|
|
(2)
|
Stock consideration represents 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.
|
|
(3)
|
Non-cash consideration represents $0.3 million settlement of preexisting payables and receivables between Pace and ARRIS.
|
The following is a summary of the preliminary 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
|
|
$
|
2,073,802
|
|
|
|
|
|
|
$
|
2,073,802
|
|
Cash and cash equivalents
|
|
|
298,671
|
|
|
|
|
|
|
|
298,671
|
|
Accounts and other receivables
|
|
|
481,176
|
|
|
|
|
|
|
|
481,176
|
|
Inventories
|
|
|
426,871
|
|
|
|
770
|
|
|
|
427,641
|
|
Prepaids
|
|
|
38,197
|
|
|
|
(6,131
|
)
|
|
|
32,066
|
|
Other current assets
|
|
|
53,618
|
|
|
|
|
|
|
|
53,618
|
|
Property, plant & equipment
|
|
|
71,816
|
|
|
|
9,880
|
|
|
|
81,696
|
|
Intangible assets
|
|
|
1,324,800
|
|
|
|
(24,240
|
)
|
|
|
1,300,560
|
|
Noncurrent deferred income tax assets
|
|
|
74,171
|
|
|
|
(11,771
|
)
|
|
|
62,400
|
|
Other assets
|
|
|
7,112
|
|
|
|
(7
|
)
|
|
|
7,105
|
|
Accounts payable and other current liabilities
|
|
|
(800,538
|
)
|
|
|
776
|
|
|
|
(799,762
|
)
|
Deferred revenue
|
|
|
(4,805
|
)
|
|
|
|
|
|
|
(4,805
|
)
|
Short-term borrowings
|
|
|
(263,795
|
)
|
|
|
|
|
|
|
(263,795
|
)
|
Other accrued liabilities
|
|
|
(122,919
|
)
|
|
|
(13,459
|
)
|
|
|
(136,378
|
)
|
Noncurrent deferred income tax liabilities
|
|
|
(465,166
|
)
|
|
|
10,946
|
|
|
|
(454,220
|
)
|
Other noncurrent liabilities
|
|
|
(99,422
|
)
|
|
|
14,396
|
|
|
|
(85,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
1,019,787
|
|
|
|
(18,840
|
)
|
|
|
1,000,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,054,015
|
|
|
|
18,840
|
|
|
$
|
1,072,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
As previously reported as of March 31, 2016
|
The Company recorded $6.5 million and $(0.3) million of incremental amortization and depreciation expense, respectively, during the three months ended June 30, 2016 as a result of measurement period
changes related to intangible assets and property, plant and equipment valuations.
The Combination is being accounted for
using the acquisition method of accounting in accordance with the guidance in ASC 805,
Business Combinations
, 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 final accounting for the business combination may differ materially from that presented in these unaudited consolidated financial statements.
9
The $1,300.6 million of acquired intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair value
|
|
|
Estimated Weighted
Average Life (years)
|
|
Customer contracts and relationships
|
|
$
|
644,700
|
|
|
|
9.8
|
|
Technology and patents
|
|
|
562,360
|
|
|
|
6.0
|
|
In-process research and development
|
|
|
6,500
|
|
|
|
indefinite
|
|
Trademarks and tradenames
|
|
|
70,700
|
|
|
|
3.0
|
|
Backlog
|
|
|
16,300
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
Total estimated preliminary fair value of intangible assets
|
|
$
|
1,300,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of trade accounts receivable is $452.3 million with the gross contractual amount being
$454.3 million. The Company expects $2.0 million to be uncollectible.
The Company incurred acquisition related costs of $1.1
million and $29.0 million during the three and six months ended June 30, 2016, 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 and restructuring costs. The Company also assumed $240.2 million of debt in conjunction with the Combination, and this debt was subsequently repaid in January 2016.
The Pace business contributed revenues of approximately $1,028.4 million to our consolidated results from the date of acquisition through
June 30, 2016.
The following unaudited pro forma summary presents consolidated information of the Company as if the
acquisition of Pace occurred on January 1, 2015, the beginning of the annual period. The pro forma adjustments primarily relate to the additional depreciation expense on property, plant and equipment and amortization of acquired intangibles
assets, interest expense related to new financing arrangements and the estimated impact on the Companys income tax provision. The unaudited pro forma combined results of operations are provided for illustrative purposes only and are not
indicative of the Companys actual consolidated results.
Unaudited pro forma net income (loss) for the three and six
months ended June 30, 2016 and 2015 was adjusted to include (exclude) certain acquisition-related nonrecurring adjustments, including income tax related to stock transfer, retention bonus, executive severances, acceleration of restricted stock,
acquisition related costs, and fair value adjustments to acquisition date inventory, deferred revenue and deferred costs. These adjustments in the aggregate were ($21.7) million and ($13.3) million for the three months ended June 30, 2016 and
2015, respectively, and ($146.4) million and $199.8 million for the six months ended June 30, 2016 and 2015, respectively. These additional adjustments exclude the income tax impact.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June
30,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,730,044
|
|
|
$
|
1,890,150
|
|
|
$
|
3,344,750
|
|
|
$
|
3,538,084
|
|
|
|
|
|
|
Net income (loss) attributable to ARRIS International plc
|
|
|
99,661
|
|
|
|
65,025
|
|
|
|
1,518
|
|
|
|
(98,306
|
)
|
|
|
|
|
|
Net income (loss) per share
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.52
|
|
|
$
|
0.33
|
|
|
$
|
0.01
|
|
|
$
|
(0.51
|
)
|
Diluted
|
|
$
|
0.52
|
|
|
$
|
0.33
|
|
|
$
|
0.01
|
|
|
$
|
(0.51
|
)
|
|
(1)
|
Calculated based on net income (loss) attributable to shareowners of ARRIS International plc.
|
10
These pro forma results are based on estimates and assumptions, which the Company believes
are reasonable.
The operations of the acquired business were extensive and complex and the initial accounting for the
business combination is incomplete at the end of the reporting period. Provisional amounts are reported for those items which are incomplete. At the time the financial statements were issued, 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, warranty obligations
and other accrued liabilities based on facts that existed as of the date of the acquisition. During the measurement period, the Company will adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about
facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and ARRIS will record those adjustments to the financial statements. The Company will
recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount are determined.
ActiveVideo acquisition
In April 2015, the Company and Charter
Communications Inc. formed a venture, A-C Acquisition, LLC (A-C Venture) with ARRISs and Charters ownership percentage of the venture being 65% and 35%, respectively. On April 30, 2015, A-C Venture acquired 100% of the
outstanding shares in ActiveVideo Networks, Inc. (ActiveVideo). The consideration for the acquisition was $98 million in cash. ActiveVideo, headquartered in San Jose, California, is a software company that uses cloud-based technology to
bring advanced user interfaces and services to cable and IPTV set-top boxes, as well as connected consumer electronic devices. Goodwill arising from the acquisition is attributable to the workforce of the acquired business, future technology, future
customer relationships, and strategic opportunities that are expected to arise from the acquisition. No tax deductible goodwill existed as of the acquisition date. Subsequent to the acquisition date, ActiveVideo converted to a limited liability
company creating tax basis in goodwill essentially equal to its book basis. The total goodwill was assigned to the Companys Cloud TV reporting unit, within the Companys N&C reportable segment.
Note 4. Goodwill and Intangible Assets
Goodwill
As of June 30, 2016, the Company has preliminarily recorded
incremental goodwill of $1,072.9 million related to the Pace 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 incremental
goodwill by reporting unit is incomplete as of June 30, 2016. The Company intends to finalize the assignment of the goodwill from the Pace acquisition during fiscal year 2016.
The changes in the carrying amount of goodwill for the year to date period ended June 30, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
Network &
Cloud
|
|
|
Unassigned
|
|
|
Total
|
|
Goodwill
|
|
$
|
682,582
|
|
|
$
|
710,037
|
|
|
$
|
|
|
|
$
|
1,392,619
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
682,582
|
|
|
$
|
331,381
|
|
|
$
|
|
|
|
$
|
1,013,963
|
|
Changes in year 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired
|
|
|
|
|
|
|
|
|
|
|
1,072,855
|
|
|
|
1,072,855
|
|
Other
|
|
|
|
|
|
|
2,256
|
|
|
|
766
|
|
|
|
3,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
682,582
|
|
|
|
712,293
|
|
|
|
1,073,621
|
|
|
|
2,468,496
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
(378,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2016
|
|
$
|
682,582
|
|
|
$
|
333,636
|
|
|
$
|
1,073,622
|
|
|
$
|
2,089,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Intangibles
The gross carrying amount and accumulated amortization of the Companys intangible assets as of June 30, 2016 and December 31, 2015 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Book
Value
|
|
Definite-lived intangible assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,574,912
|
|
|
$
|
544,572
|
|
|
$
|
1,030,340
|
|
|
$
|
930,212
|
|
|
$
|
468,414
|
|
|
$
|
461,798
|
|
Developed technology, patents & licenses
|
|
|
1,271,752
|
|
|
|
469,008
|
|
|
|
802,744
|
|
|
|
704,137
|
|
|
|
361,719
|
|
|
|
342,418
|
|
Trademarks, trade and domain names
|
|
|
91,772
|
|
|
|
32,361
|
|
|
|
59,411
|
|
|
|
21,072
|
|
|
|
20,740
|
|
|
|
332
|
|
Backlog
|
|
|
16,300
|
|
|
|
16,031
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
$
|
2,954,736
|
|
|
$
|
1,061,972
|
|
|
$
|
1,892,764
|
|
|
$
|
1,655,421
|
|
|
$
|
850,873
|
|
|
$
|
804,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
5,900
|
|
|
|
|
|
|
$
|
5,900
|
|
|
$
|
5,900
|
|
|
|
|
|
|
$
|
5,900
|
|
In-process R&D
|
|
|
4,200
|
|
|
|
|
|
|
|
4,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
$
|
10,100
|
|
|
|
|
|
|
$
|
10,100
|
|
|
$
|
5,900
|
|
|
|
|
|
|
$
|
5,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,964,836
|
|
|
$
|
1,061,972
|
|
|
$
|
1,902,864
|
|
|
$
|
1,661,321
|
|
|
$
|
850,873
|
|
|
$
|
810,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2016, in-process R&D of $2.3 million was written off
related to projects for which development efforts were abandoned subsequent to the Pace acquisition.
Amortization expense is
reported in the consolidated statements of operations within operating expenses under the caption Amortization of intangible assets. The estimated total amortization expense for each of the next five fiscal years is as follows (in
thousands):
|
|
|
|
|
2016 (for the remaining six months)
|
|
$
|
192,015
|
|
2017
|
|
|
371,628
|
|
2018
|
|
|
321,066
|
|
2019
|
|
|
275,145
|
|
2020
|
|
|
266,173
|
|
Thereafter
|
|
|
466,737
|
|
Note 5. Investments
ARRIS investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
|
As of December 31, 2015
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
21,881
|
|
|
$
|
15,470
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
14,445
|
|
|
|
4,036
|
|
Equity method investments
|
|
|
23,287
|
|
|
|
24,452
|
|
Cost method investments
|
|
|
13,037
|
|
|
|
16,646
|
|
Other investments
|
|
|
26,980
|
|
|
|
24,408
|
|
|
|
|
|
|
|
|
|
|
Total classified as non-current assets
|
|
|
77,749
|
|
|
|
69,542
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
99,630
|
|
|
$
|
85,012
|
|
|
|
|
|
|
|
|
|
|
12
Available-for-sale securities
ARRIS 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). Realized and unrealized gains and losses in total and by individual investment as of June 30, 2016 and December 31, 2015 were not
material. The amortized cost basis of the Companys investments approximates fair value.
The contractual maturities
of the Companys available-for-sale securities as of June 30, 2016 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, 2016
|
|
Within one year
|
|
$
|
21,881
|
|
After one year through five years
|
|
|
10,047
|
|
After ten years
|
|
|
4,398
|
|
|
|
|
|
|
Total
|
|
|
36,326
|
|
|
|
|
|
|
Other-than-temporary investment impairments
In making this determination, ARRIS evaluates
its investments for any other-than-temporary impairment on a quarterly basis considering all available evidence, including changes in general market conditions, specific industry and individual entity data, the financial condition and the
near-term
prospects of the entity issuing the security, and the Companys ability and intent to hold the investment until recovery.
During the second quarter of 2016, ARRIS concluded that one private company investment had indicators of impairment that resulted in an other-than-temporary charge of $5.0 million. For the year ended
December 31, 2015, ARRIS concluded that one private company investment had indicators of impairment that resulted in an other-than-temporary impairment charge of $0.2 million. These charges are reflected Loss on Investments 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 6. Fair Value Measurement
Fair value is defined as the amount 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. The 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 the 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.
13
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, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
2,621
|
|
|
$
|
|
|
|
$
|
2,621
|
|
Corporate bonds
|
|
|
|
|
|
|
24,236
|
|
|
|
|
|
|
|
24,236
|
|
Short-term bond fund
|
|
|
5,070
|
|
|
|
|
|
|
|
|
|
|
|
5,070
|
|
Corporate obligations
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Money markets
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
Mutual funds
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
Other investments
|
|
|
|
|
|
|
4,058
|
|
|
|
|
|
|
|
4,058
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(31,518
|
)
|
|
|
|
|
|
|
(31,518
|
)
|
Foreign currency contracts asset position
|
|
|
|
|
|
|
2,084
|
|
|
|
|
|
|
|
2,084
|
|
Foreign currency contracts liability position
|
|
|
|
|
|
|
(6,680
|
)
|
|
|
|
|
|
|
(6,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
4,208
|
|
|
$
|
|
|
|
$
|
4,208
|
|
Corporate bonds
|
|
|
|
|
|
|
6,257
|
|
|
|
|
|
|
|
6,257
|
|
Short-term bond fund
|
|
|
5,005
|
|
|
|
|
|
|
|
|
|
|
|
5,005
|
|
Corporate obligations
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Money markets
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
209
|
|
Mutual funds
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
Other investments
|
|
|
|
|
|
|
3,695
|
|
|
|
|
|
|
|
3,695
|
|
Interest rate derivatives liability derivatives
|
|
|
|
|
|
|
(10,759
|
)
|
|
|
|
|
|
|
(10,759
|
)
|
Foreign currency contracts asset position
|
|
|
|
|
|
|
7,064
|
|
|
|
|
|
|
|
7,064
|
|
Foreign currency contracts liability position
|
|
|
|
|
|
|
(24,371
|
)
|
|
|
|
|
|
|
(24,371
|
)
|
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 June 30, 2016, 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 face value of the debt as of June 30, 2016 approximated the fair value because of interest-bearing rates that are adjusted periodically, analysis of recent market conditions, prevailing interest rates, and other Company specific
factors. The Company has classified the debt as a Level 2 item within the fair value hierarchy.
Note 7. Derivative Instruments and
Hedging Activities
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
14
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. ARRIS 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 June 30, 2016, 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.
During the first half of 2016, ARRIS entered into eight $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 $400 million of the Companys variable-rate debt based on one-month LIBOR to an aggregate fixed rate of 2.75% per annum based on the Companys interest
rates as of June 30, 2016. 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.
15
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 2016, 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, 2016, the Company did not have amounts
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 $7.8 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 and six months ended June 30, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Loss Recognized in OCI on Derivatives (Effective Portion)
|
|
$
|
(9,263
|
)
|
|
$
|
(1,057
|
)
|
|
$
|
(24,438
|
)
|
|
$
|
(6,001
|
)
|
Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
|
Interest
expense
|
|
|
|
Interest
expense
|
|
|
|
Interest
expense
|
|
|
|
Interest
expense
|
|
Amounts Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
|
1,938
|
|
|
|
1,841
|
|
|
|
3,679
|
|
|
|
3,679
|
|
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, the fair value hierarchy level applicable to each derivative type and the related fair values of those derivatives of June 30, 2016 and December 31,
2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
|
As of December 31, 2015
|
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
Derivatives designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
liability derivatives
|
|
|
Other accrued liabilities
|
|
|
$
|
(7,765
|
)
|
|
|
Other accrued liabilities
|
|
|
$
|
(4,489
|
)
|
|
|
|
|
|
Interest rate derivatives
liability derivatives
|
|
|
Other noncurrent liabilities
|
|
|
|
(23,753
|
)
|
|
|
Other noncurrent liabilities
|
|
|
|
(6,270
|
)
|
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 June 30, 2016 the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for
nonperformance risk, related to these agreements was $32.7 million. As of June 30, 2016, 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 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, 2016, the Company had option collars with
notional amounts totaling 55 million euros which mature throughout 2016 and 2017, forward contracts with notional amounts totaling 70 million euros which mature throughout 2016
16
and 2017, forward contracts with a total notional amount of 95 million Australian dollars which mature throughout 2016 and 2017, forward contracts with notional amounts totaling 50 million
Canadian dollars which mature throughout 2016 and forward contracts with notional amounts totaling 327.6 million South African rand which mature throughout 2016 and 2017.
As part of the Pace acquisition, the Company paid the former Pace shareholders 132.5 pence per share in cash consideration, which is approximately 434.3 million British pounds, in the aggregate, as of
January 4, 2016. As such, the Company entered into foreign currency forward contracts to purchase British pounds and sell U.S. Dollars to mitigate the volatility related to fluctuations in the foreign exchange rate prior to the closing period.
As of December 31, 2015, the Company had forward contracts with notional amounts totaling 385 million British pounds which matured on March 31, 2016. The contracts fixed the British pound to U.S. dollar forward exchange rate at various
rates. These foreign currency forward contracts were effectively terminated upon the close of the Pace acquisition in January 2016 and cash settled upon maturity on March 31, 2016, which included a loss of $1.6 million in the first quarter
of 2016.
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 less than 15 months.
The following table indicates the location on the Consolidated Balance Sheets in which the Companys derivative assets and liabilities not designated as hedging instruments have been recognized and
the related fair values of those derivatives as of June 30, 2016 and December 31, 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
|
As of December 31, 2015
|
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
Derivatives not designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
asset derivatives
|
|
|
Other current assets
|
|
|
$
|
1,097
|
|
|
|
Other current assets
|
|
|
$
|
6,495
|
|
|
|
|
|
|
Foreign exchange contracts
asset derivatives
|
|
|
Other assets
|
|
|
|
987
|
|
|
|
Other assets
|
|
|
|
569
|
|
|
|
|
|
|
Foreign exchange contracts
liability derivatives
|
|
|
Other accrued liabilities
|
|
|
|
(6,181
|
)
|
|
|
Other accrued liabilities
|
|
|
|
(23,632
|
)
|
|
|
|
|
|
Foreign exchange contracts
liability derivatives
|
|
|
Other noncurrent liabilities
|
|
|
|
(499
|
)
|
|
|
Other noncurrent liabilities
|
|
|
|
(739
|
)
|
The change in the fair values of ARRISs derivatives not designated as hedging instruments recorded
in the Consolidated Statements of Operations during the three and six months ended June 30, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June
30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
Statement of Operations Location
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Derivatives Not Designated
as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
(Gain) loss on foreign currency
|
|
|
$
|
(5,507
|
)
|
|
$
|
(2,719
|
)
|
|
$
|
11,948
|
|
|
$
|
(13,028
|
)
|
17
Note 8. Pension Benefits
Components of Net Periodic Pension Cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
|
Three Months Ended June 30, 2015
|
|
|
|
U.S
|
|
|
Taiwan
|
|
|
U.S
|
|
|
Taiwan
|
|
Service cost
|
|
$
|
|
|
|
$
|
173
|
|
|
$
|
|
|
|
$
|
185
|
|
Interest cost
|
|
|
438
|
|
|
|
151
|
|
|
|
429
|
|
|
|
165
|
|
Expected gain on plan assets
|
|
|
(199
|
)
|
|
|
(68
|
)
|
|
|
(210
|
)
|
|
|
(44
|
)
|
Amortization of net loss (gain)
|
|
|
136
|
|
|
|
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
375
|
|
|
$
|
256
|
|
|
$
|
428
|
|
|
$
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
|
Six Months Ended June 30, 2015
|
|
|
|
U.S
|
|
|
Taiwan
|
|
|
U.S
|
|
|
Taiwan
|
|
Service cost
|
|
$
|
|
|
|
$
|
346
|
|
|
$
|
|
|
|
$
|
370
|
|
Interest cost
|
|
|
875
|
|
|
|
302
|
|
|
|
858
|
|
|
|
330
|
|
Expected gain on plan assets
|
|
|
(397
|
)
|
|
|
(136
|
)
|
|
|
(420
|
)
|
|
|
(88
|
)
|
Amortization of net loss (gain)
|
|
|
272
|
|
|
|
(1,897
|
)
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
750
|
|
|
$
|
(1,385
|
)
|
|
$
|
856
|
|
|
$
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer Contributions
The Company estimates it will make minimum funding contributions of $0.7 million in 2016. During the three months ended June 30, 2016, the Company did not make any minimum funding contribution
to its Taiwan pension plan. During the six months ended June 30, 2016, the Company made a minimum funding contribution of $9.6 million related to its Taiwan pension plan.
The Company has established two rabbi trusts to fund the Companys pension obligations under the non-qualified plan of the Chief Executive Officer and certain executive officers. The balance of
these rabbi trust assets as of June 30, 2016 was approximately $20.6 million and is included in Investments on the Consolidated Balance Sheets.
Note 9. Product Warranties
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 ARRIS 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.
18
Information regarding the changes in ARRIS aggregate product warranty liabilities for
the six months ended June 30, 2016 was as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
49,027
|
|
Warranty reserve at acquisition
|
|
|
62,317
|
|
Accruals related to warranties (including changes in estimates)
|
|
|
34,543
|
|
Settlements made (in cash or in kind)
|
|
|
(26,663
|
)
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
119,224
|
|
|
|
|
|
|
Note 10. Inventories
The components of inventory were as follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw material
|
|
$
|
95,476
|
|
|
$
|
60,287
|
|
Work in process
|
|
|
3,530
|
|
|
|
3,076
|
|
Finished goods
|
|
|
548,491
|
|
|
|
338,229
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
647,497
|
|
|
$
|
401,592
|
|
|
|
|
|
|
|
|
|
|
Note 11. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
68,562
|
|
|
$
|
68,562
|
|
Building and leasehold improvements
|
|
|
160,215
|
|
|
|
141,171
|
|
Machinery and equipment
|
|
|
457,110
|
|
|
|
407,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
685,887
|
|
|
|
616,843
|
|
Less: Accumulated depreciation
|
|
|
(318,191
|
)
|
|
|
(304,532
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
367,696
|
|
|
$
|
312,311
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2016 the Company wrote off $4.0 million related to the discontinuance and
divestiture of certain product lines.
Note 12. Restructuring 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, 2015
|
|
$
|
3
|
|
|
$
|
87
|
|
|
$
|
90
|
|
Restructuring charges
|
|
|
83,493
|
|
|
|
266
|
|
|
|
83,759
|
|
Cash payments / adjustments
|
|
|
(48,476
|
)
|
|
|
(89
|
)
|
|
|
(48,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2016
|
|
$
|
35,020
|
|
|
$
|
264
|
|
|
$
|
35,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and termination benefits
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.
19
The estimated cost of severance expense recorded during 2016 for the restructuring plan was
approximately $83.8 million. This amount is included in the Consolidated Statement of Operations in the line item titled Integration, acquisition and restructuring costs The restructuring plan affected approximately 1,250 positions
across the company. The remaining liability is expected to be paid by the end of fourth quarter of 2016.
Contractual
obligations
ARRIS has restructuring accruals representing contractual obligations that relate to excess leased facilities and equipment. 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 2018. 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. As of the cease-use date, the fair value of this restructuring liability totaled $0.3 million.
The Company
anticipates further restructuring during 2016 as it continues to integrate the Pace operations, but at a lower rate than the first half of 2016.
Integration
Integration expenses of $6.4 million and $18.5 million,
respectively, were recorded during the three and six months ended June 30, 2016, related to outside services and other integration related activities.
Note 13. Indebtedness
The following is a summary of indebtedness and
financing lease obligations as of June 30, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2016
|
|
|
As of December 31, 2015
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Term loan A
|
|
$
|
49,500
|
|
|
$
|
49,500
|
|
Term loan A-1
|
|
|
40,000
|
|
|
|
|
|
Account receivable financing program
|
|
|
11,549
|
|
|
|
|
|
Financing lease obligation
|
|
|
803
|
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
Current obligations
|
|
|
101,852
|
|
|
|
50,258
|
|
Current deferred financing fees and debt discount
|
|
|
(7,635
|
)
|
|
|
(6,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
94,217
|
|
|
|
43,591
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Term loan A
|
|
|
891,000
|
|
|
|
915,750
|
|
Term loan A-1
|
|
|
750,000
|
|
|
|
|
|
Term loan B
|
|
|
543,813
|
|
|
|
543,812
|
|
Revolver
|
|
|
|
|
|
|
|
|
Financing lease obligation
|
|
|
58,272
|
|
|
|
58,676
|
|
|
|
|
|
|
|
|
|
|
Noncurrent obligations
|
|
|
2,243,085
|
|
|
|
1,518,238
|
|
Noncurrent deferred financing fees and debt discount
|
|
|
(21,702
|
)
|
|
|
(21,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,221,383
|
|
|
|
1,496,243
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,315,600
|
|
|
$
|
1,539,834
|
|
|
|
|
|
|
|
|
|
|
20
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 June 30, 2016
|
Term Loan A
|
|
LIBOR + 1.75 %
|
|
2.21%
|
Term Loan A-1
|
|
LIBOR + 1.75 %
|
|
2.21%
|
Term Loan B
|
|
LIBOR
(1)
+ 2.75 %
|
|
3.50%
|
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 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 3.75:1 (with a scheduled decrease to 3.50:1 in the first quarter of 2017). As of June 30 2016, ARRIS was in compliance with all covenants under the Amended Credit
Agreement.
During the three and six months ended June 30, 2016, the Company made mandatory prepayments of approximately $22.4
and $34.8 million related to the senior secured credit facilities. In addition, the Company repaid $240.2 million of debt assumed in the Pace acquisition in the first quarter of 2016.
Account Receivable Financing Program
In connection with the Combination
on January 4, 2016, ARRIS assumed an accounts receivable financing program (the AR Financing Program or the Program) which was entered into by Pace on June 30, 2015. Under this Program, the Company assigns trade receivables
on a revolving basis of up to $50 million to the lender and the lender advances 95% of the receivable value to the Company. The remaining 5% is remitted to ARRIS upon receipt of cash from the customer. As of June 30, 2016, we had approximately $11.5
million outstanding under this program.
The AR Financing Program is accounted for as secured borrowings and amounts
outstanding are included in the current portion of long-term debt on the consolidated balance sheet. The Company pays certain transaction fees and interest of 1.23% on the outstanding balance in connection with this Program.
21
Other
As of June 30, 2016, the scheduled maturities of the contractual debt obligations for the next five years are as follows (in thousands):
|
|
|
|
|
2016 (for the remaining six months)
|
|
$
|
44,750
|
|
2017
|
|
|
89,500
|
|
2018
|
|
|
89,500
|
|
2019
|
|
|
89,500
|
|
2020
|
|
|
1,961,063
|
|
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 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.
22
The table below represents information about the Companys reportable segments for the
three and six months ended June 30, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
$
|
1,170,254
|
|
|
$
|
837,964
|
|
|
$
|
2,261,082
|
|
|
$
|
1,659,638
|
|
N&C
|
|
|
563,493
|
|
|
|
422,124
|
|
|
|
1,087,730
|
|
|
|
815,624
|
|
Other
|
|
|
(3,703
|
)
|
|
|
(11
|
)
|
|
|
(4,062
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,730,044
|
|
|
|
1,260,077
|
|
|
|
3,344,750
|
|
|
|
2,475,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
177,545
|
|
|
|
150,308
|
|
|
|
309,509
|
|
|
|
301,759
|
|
N&C
|
|
|
183,298
|
|
|
|
117,595
|
|
|
|
340,282
|
|
|
|
211,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
|
360,843
|
|
|
|
267,903
|
|
|
|
649,791
|
|
|
|
513,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and unallocated costs
|
|
|
(174,435
|
)
|
|
|
(147,011
|
)
|
|
|
(360,461
|
)
|
|
|
(288,902
|
)
|
Amortization of intangible assets
|
|
|
(109,883
|
)
|
|
|
(56,783
|
)
|
|
|
(208,375
|
)
|
|
|
(113,930
|
)
|
Integration, acquisition, restructuring and other
|
|
|
(43,137
|
)
|
|
|
(12,566
|
)
|
|
|
(134,057
|
)
|
|
|
(13,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
33,388
|
|
|
|
51,543
|
|
|
|
(53,102
|
)
|
|
|
97,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
19,102
|
|
|
|
28,454
|
|
|
|
38,728
|
|
|
|
41,821
|
|
Loss on investments
|
|
|
6,389
|
|
|
|
1,410
|
|
|
|
8,348
|
|
|
|
3,119
|
|
Interest income
|
|
|
(1,185
|
)
|
|
|
(558
|
)
|
|
|
(1,968
|
)
|
|
|
(1,279
|
)
|
(Gain) loss on foreign currency
|
|
|
(9,801
|
)
|
|
|
(6,659
|
)
|
|
|
2,440
|
|
|
|
(6,639
|
)
|
Other expense ( income), net
|
|
|
5,219
|
|
|
|
934
|
|
|
|
4,869
|
|
|
|
7,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
13,664
|
|
|
$
|
27,962
|
|
|
$
|
(105,519
|
)
|
|
$
|
52,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six month periods ended June 30, 2016 and 2015, the compositions of our corporate and
unallocated costs that are reflected in the consolidated statement of operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended June 30,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Corporate and unallocated costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
41,277
|
|
|
$
|
14,947
|
|
|
$
|
88,665
|
|
|
$
|
29,688
|
|
Selling, general and administrative expenses
|
|
|
88,598
|
|
|
|
89,166
|
|
|
|
183,971
|
|
|
|
175,273
|
|
Research and development expenses
|
|
|
44,560
|
|
|
|
42,898
|
|
|
|
87,825
|
|
|
|
83,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
174,435
|
|
|
$
|
147,011
|
|
|
$
|
360,461
|
|
|
$
|
288,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15. Sales Information
ARRIS sells its products primarily in the United States. The Companys international revenue is generated from Asia Pacific, Canada, Europe, and Latin America. Sales to customers outside of
United States were approximately 28.0% and 29.1%, for the three months ended June 30, 2016 and 2015, respectively. For the six months ended June 30, 2016 and 2015, sales to customers outside of United States were approximately 26.2% and 27.9%,
respectively.
23
The table below sets forth our domestic (U.S.) and international sales for the three and six
months ended June 30, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Domestic U.S
|
|
$
|
1,245,622
|
|
|
$
|
893,404
|
|
|
$
|
2,468,302
|
|
|
$
|
1,784,158
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas, excluding U.S.
|
|
|
248,132
|
|
|
|
242,543
|
|
|
|
483,053
|
|
|
|
447,401
|
|
Asia Pacific
|
|
|
87,338
|
|
|
|
36,060
|
|
|
|
124,720
|
|
|
|
70,043
|
|
EMEA
|
|
|
148,952
|
|
|
|
88,070
|
|
|
|
268,675
|
|
|
|
173,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
484,422
|
|
|
|
366,673
|
|
|
|
876,448
|
|
|
|
691,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
1,730,044
|
|
|
$
|
1,260,077
|
|
|
$
|
3,344,750
|
|
|
$
|
2,475,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ARRIS International plc.
|
|
$
|
84,228
|
|
|
$
|
16,758
|
|
|
$
|
(118,345
|
)
|
|
$
|
35,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
190,409
|
|
|
|
146,293
|
|
|
|
191,076
|
|
|
|
145,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.11
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ARRIS International plc
|
|
$
|
84,228
|
|
|
$
|
16,758
|
|
|
$
|
(118,345
|
)
|
|
$
|
35,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
190,409
|
|
|
|
146,293
|
|
|
|
191,076
|
|
|
|
145,823
|
|
Net effect of dilutive equity awards
|
|
|
841
|
|
|
|
2,983
|
|
|
|
|
|
|
|
3,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
191,250
|
|
|
|
149,276
|
|
|
|
191,076
|
|
|
|
149,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.11
|
|
|
$
|
(0.62
|
)
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2016, approximately 2.5 million of the equity-based awards were
excluded from the computation of diluted earnings per share shares because their effect would have been anti-dilutive. During the six months ended June 30, 2016, all of the equity-based awards were excluded from the computation of diluted earnings
per share shares. During the same periods in 2015, approximately 0.6 thousand and 0.3 thousand of the equity-based awards, respectively, were excluded from the dilutive securities above. 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 six months ended June 30, 2016, the Company issued 1.6 million shares of its ordinary shares related to the vesting of restricted shares, as compared to 3.2 million shares for the twelve months
ended December 31, 2015.
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. (See Note 3
Business Acquisition
for additional details)
The Company has not paid cash dividends on its shares since its inception.
Note 17. Warrants
On June 29, 2016, the Company entered into a Warrant
and Registration Rights Agreement (the Warrant) with Comcast Cable Communications Management, LLC (Comcast) pursuant to which Comcast may purchase up to 8.0 million of ARRIS ordinary shares, (subject to adjustment in
accordance with the terms of the Warrant, the Shares).
24
The Warrant will vest in two tranches based on the amount of products and services Comcast
purchases from the Company. Between 1.0 million and 3.0 million shares are issuable under the Warrant based on Comcasts purchases in 2016 and between 1.0 million and 5.0 million are issuable based on purchases made in 2017. In order
for the Warrant to vest above the 1.0 million share threshold in both 2016 and 2017, specified increased purchases are required and a set percentage of the purchases must be for products and services included in ARRIS Network & Cloud
segment for 2016 and 2017, respectively. The exercise price per Share is $22.19, which represents the average volume-weighted price of ARRIS ordinary shares on NASDAQ for the 10-day trading period preceding the date of the Warrant.
The Warrant provides for net Share settlement that, if elected by Comcast, will reduce the number of Shares issued upon
exercise to reflect net settlement of the exercise price. Comcast may also request cash settlement of the Warrant upon exercise in lieu of issuing Shares, however, such cash election is at the discretion of ARRIS. The Warrants will expire
on June 30, 2023.
The Warrant provides 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 Warrant 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
separate Master Supply Agreement with Comcast (and such breach is not cured pursuant to the terms of the Master Supply Agreement), the Warrant will immediately vest for the minimum threshold of Shares that would otherwise be issuable.
ARRIS has also agreed, if requested by Comcast, to register the Shares issuable upon exercise of the Warrant 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 Warrant.
Because the Warrants contain performance
criteria, which includes aggregate purchase levels and product mix, under which Comcast 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 Comcast 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 our 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 our estimates change. At June 30, 2016, none of the Warrants had
vested.
The fair value of the Warrants is determined using the Black-Scholes option pricing model. For the three months ended
June 30, 2016, we recorded $4.3 million as a reduction to net sales in connection with Warrants.
25
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Ordinary
Shares
|
|
|
Capital in
Excess
of
Par Value
|
|
|
Treasury
Stock
|
|
|
Retained
Earnings
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Total ARRIS
International plc
stockholders
equity
|
|
|
Non-
controlling
Interest
|
|
|
Total
stockholders
equity
|
|
Balance, December 31, 2015
|
|
$
|
1,790
|
|
|
$
|
|
|
|
$
|
1,777,276
|
|
|
$
|
(331,329
|
)
|
|
$
|
358,823
|
|
|
$
|
(12,646
|
)
|
|
$
|
1,793,914
|
|
|
$
|
47,047
|
|
|
$
|
1,840,961
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118,345
|
)
|
|
|
|
|
|
|
(118,345
|
)
|
|
|
(4,392
|
)
|
|
|
(122,737
|
)
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,327
|
)
|
|
|
(16,327
|
)
|
|
|
|
|
|
|
(16,327
|
)
|
Compensation under stock award plans
|
|
|
|
|
|
|
|
|
|
|
26,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,177
|
|
|
|
|
|
|
|
26,177
|
|
Effect of combination on ARRIS Group
|
|
|
(1,439
|
)
|
|
|
2,173
|
|
|
|
(734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of treasury stock
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
331,329
|
|
|
|
(330,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of ordinary shares for Pace acquisition
|
|
|
|
|
|
|
703
|
|
|
|
1,433,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,434,690
|
|
|
|
|
|
|
|
1,434,690
|
|
Issuance of ordinary shares and other
|
|
|
|
|
|
|
22
|
|
|
|
(7,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,198
|
)
|
|
|
|
|
|
|
(7,198
|
)
|
Provision for warrants
|
|
|
|
|
|
|
|
|
|
|
4,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,283
|
|
|
|
|
|
|
|
4,283
|
|
Repurchase of ordinary shares, net
|
|
|
|
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
(149,939
|
)
|
|
|
|
|
|
|
(150,003
|
)
|
|
|
|
|
|
|
(150,003
|
)
|
Income tax effect related to exercise of restricted share units
|
|
|
|
|
|
|
|
|
|
|
(3,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,294
|
)
|
|
|
|
|
|
|
(3,294
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
(2,717
|
)
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
(2,702
|
)
|
|
|
|
|
|
|
(2,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2016
|
|
$
|
|
|
|
$
|
2,834
|
|
|
$
|
3,227,758
|
|
|
$
|
|
|
|
$
|
(240,424
|
)
|
|
$
|
(28,973
|
)
|
|
$
|
2,961,195
|
|
|
$
|
42,655
|
|
|
$
|
3,003,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combination
Prior to the Combination, the Company accounted for purchases of its outstanding common stock using the treasury share method permitted under U.S. GAAP. Under this method, the Company recorded
purchases of its own outstanding common stock separately as a reduction to shareholders equity based on the cost of the shares acquired. Under U.K. law, when the Company repurchases its outstanding shares, those shares are
cancelled. In the quarter ended March 31, 2016 as part of the Combination, the Company constructively cancelled 35.1 million shares of treasury stock. The impact of the cancellation of all outstanding treasury shares was a decrease in
common stock and retained earnings of $351 thousand and $331.0 million, respectively and balance of treasury stock at cost of $331.3 million was eliminated.
Additionally, effective upon the completion of the Combination, the par value of ARRIS Group outstanding equity shares changed from $0.01 par value to a nominal value of £0.01. The impact of
this change was an increase in Ordinary shares of $0.7 million, and decrease in additional paid-in capital of $0.7 million.
Note 19.
Income Taxes
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 United Kingdom statutory tax rate of 20% and a territorial corporate tax system. Prior to the Merger, ARRIS was subject to the U.S. statutory tax rate of
35% and a worldwide corporate tax system.
The Companys effective tax rate from continuing operations for the three and
six months ended June 30, 2016 were (503.5)% and (16.3)%, respectively. The Companys effective tax rate from continuing operations for the three and six months ended June 30, 2015 were 45.8% and 34.5% respectively. For the six months
ended June 30, 2016, the Company recorded income tax expense of $17.2 million. Due to guidance on Income Taxes related to the loss limitation provisions, the year-to-date tax expense is expected to approximate the expense that will be recorded
for the full year. In addition, during 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, $2.7 million of expense for
discrete uncertain tax positions and $2.1 million of benefit from a release of valuation allowances.
26
During the six month period ended June 30, 2016, the Company changed its permanent
reinvestment assertion as it relates to earnings of certain foreign subsidiaries. As a result of this change, the Company recognized a deferred tax liability of $0.6 million in the six month period ending June 30, 2016.
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 six months ended June 30, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(2
|
)
|
|
|
(17,223
|
)
|
|
|
|
|
|
|
329
|
|
|
|
(16,896
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
1
|
|
|
|
2,593
|
|
|
|
(2,025
|
)
|
|
|
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
(1
|
)
|
|
|
(14,630
|
)
|
|
|
(2,025
|
)
|
|
|
329
|
|
|
|
(16,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2016
|
|
$
|
132
|
|
|
$
|
(21,411
|
)
|
|
$
|
(6,220
|
)
|
|
$
|
(1,474
|
)
|
|
$
|
(28,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for
sale securities
|
|
|
Derivative
instruments
|
|
|
Change
related to
pension
liability
|
|
|
Cumulative
translation
adjustments
|
|
|
Total
|
|
Balance as of December 31, 2014
|
|
$
|
25
|
|
|
$
|
(3,166
|
)
|
|
$
|
(7,181
|
)
|
|
$
|
(725
|
)
|
|
$
|
(11,047
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
|
117
|
|
|
|
(3,791
|
)
|
|
|
|
|
|
|
(270
|
)
|
|
|
(3,944
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(80
|
)
|
|
|
2,324
|
|
|
|
83
|
|
|
|
|
|
|
|
2,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
37
|
|
|
|
(1,467
|
)
|
|
|
83
|
|
|
|
(270
|
)
|
|
|
(1,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2015
|
|
$
|
62
|
|
|
$
|
(4,633
|
)
|
|
$
|
(7,098
|
)
|
|
$
|
(995
|
)
|
|
$
|
(12,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 21. Commitments and Contingencies
Leases:
ARRIS leases office, distribution, and warehouse facilities as
well as equipment under long-term leases expiring at various dates through 2023. Included in these operating leases are certain amounts related to restructuring activities; these lease payments and related sublease income are included in
restructuring accruals on the consolidated balance sheets. Future minimum operating lease payments under non-cancelable leases at June 30, 2016 were as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
2016 (for the remaining six months)
|
|
$
|
16,766
|
|
2017
|
|
|
27,883
|
|
2018
|
|
|
21,618
|
|
2019
|
|
|
16,872
|
|
2020
|
|
|
13,495
|
|
Thereafter
|
|
|
40,811
|
|
Less sublease income
|
|
|
(876
|
)
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
136,569
|
|
|
|
|
|
|
Total rental expense for all operating leases for the three and six months ended June 30, 2016 amounted
to approximately $8.7 million and $17.8 million, respectively, as compared to approximately $7.2 million and $13.7 million in the same periods in 2015.
Additionally, the Company had contractual obligations of approximately $707.4 million under agreements with non-cancelable terms to purchase goods or services over the next year. All contractual
obligations outstanding at the end of prior years were satisfied within a 12 month period, and the obligations outstanding as of June 30, 2016 are expected to be satisfied by 2017.
27
Bank Guarantees
The Company has outstanding bank guarantees, of which certain amounts are collateralized by restricted cash. As of June 30, 2016, the restricted cash associated with the outstanding bank guarantee was
$1.6 million which is reflected in Other Assets on the Consolidated Balance Sheets.
Legal Proceedings
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and
that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new
information is obtained and the Companys views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Companys accrued liabilities would be recorded in the period in which such
determinations are made. Unless noted 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)
28