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 and was subsequently renamed ARRIS Global Limited. 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
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 Company’s 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 Company’s most recent audited consolidated
financial statements and notes thereto included in the ARRIS Group’s 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 Company’s 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 Company’s 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 Company’s 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 customer’s hardware or contract with another vendor to host the software. Arrangements that don’t 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 has been assessing its systems and processes in preparation for this change in standard. The Company is currently assessing the potential impact of this update on its consolidated financial
statements.
7
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 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 Company’s 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
management’s responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s 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 Company’s 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. The Company is currently assessing how the adoption of this
standard will impact our Consolidated Financial Statements.
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 our Consolidated Financial Statements.
In October 2016, the FASB issued new guidance for
intra-entity transfer of assets other than inventory that would require 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. The Company is currently assessing the potential impact of this standard on its consolidated financial statements.
8
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 scale—broadening ARRIS’s 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 $1,066.2 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 has been preliminarily assigned to our reporting units as of September 30, 2016. The Company will finalize the allocations in the fourth
quarter of 2016, prior to the close of the measurement period. Goodwill is not expected to be deductible for income tax purposes.
The
following table summarizes the fair value of consideration transferred for 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 Pace’s
shares and equity awards outstanding.
|
|
|
(2)
|
Stock consideration represents the conversion of each of Pace’s 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 Company’s shares at the date of Combination.
|
|
|
(3)
|
Non-cash consideration represents $0.3 million settlement of preexisting payables and receivables between Pace and ARRIS.
|
9
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
|
|
|
|
771
|
|
|
|
427,642
|
|
|
Prepaids
|
|
|
38,197
|
|
|
|
108
|
|
|
|
38,305
|
|
|
Other current assets
|
|
|
53,618
|
|
|
|
(516
|
)
|
|
|
53,102
|
|
|
Property, plant & equipment
|
|
|
71,816
|
|
|
|
1,081
|
|
|
|
72,897
|
|
|
Intangible assets
|
|
|
1,324,800
|
|
|
|
(64,440
|
)
|
|
|
1,260,360
|
|
|
Noncurrent deferred income tax assets
|
|
|
74,171
|
|
|
|
(5,876
|
)
|
|
|
68,295
|
|
|
Other assets
|
|
|
7,112
|
|
|
|
(7
|
)
|
|
|
7,105
|
|
|
Accounts payable and other current liabilities
|
|
|
(800,538
|
)
|
|
|
7,896
|
|
|
|
(792,642
|
)
|
|
Deferred revenue
|
|
|
(4,805
|
)
|
|
|
—
|
|
|
|
(4,805
|
)
|
|
Short-term borrowings
|
|
|
(263,795
|
)
|
|
|
—
|
|
|
|
(263,795
|
)
|
|
Other accrued liabilities
|
|
|
(122,919
|
)
|
|
|
(14,759
|
)
|
|
|
(137,678
|
)
|
|
Noncurrent deferred income tax liabilities
|
|
|
(465,166
|
)
|
|
|
46,342
|
|
|
|
(418,824
|
)
|
|
Other noncurrent liabilities
|
|
|
(99,422
|
)
|
|
|
17,171
|
|
|
|
(82,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
1,019,787
|
|
|
|
(12,229
|
)
|
|
|
1,007,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,054,015
|
|
|
$
|
12,229
|
|
|
$
|
1,066,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
As previously reported as of March 31, 2016
|
As a result of measurement period changes for intangible assets, the impact to previously recorded amortization for the first and second quarters of 2016 was an increase of $4.6 million and a decrease of
$8.4 million, respectively. Additionally, we recorded a decrease to the provisional fair value of warranty obligations, resulting in a decrease of previously recorded warranty expense of approximately $0.7 million for the first and second quarter of
2016, respectively. These adjustments have been recorded prospectively in the third quarter of 2016.
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.
The $1,260.4 million of acquired intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair value
|
|
|
Estimated Weighted
Average Life (years)
|
|
|
Customer contracts and relationships
|
|
$
|
635,200
|
|
|
|
9.8
|
|
|
Technology and patents
|
|
|
539,960
|
|
|
|
6.0
|
|
|
In-process research and development
|
|
|
6,400
|
|
|
|
indefinite
|
|
|
Trademarks and tradenames
|
|
|
62,400
|
|
|
|
3.0
|
|
|
Backlog
|
|
|
16,400
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated preliminary fair value of intangible assets
|
|
$
|
1,260,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
10
The Company incurred acquisition related (adjustment) costs of $(0.2) million and $28.8
million during the three and nine months ended September 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.
With regard to revenue and earnings of Pace since the acquisition date, as of the third quarter of 2016 the Company has made significant
progress in integrating the acquired Pace operations and have undergone a business transformation which impacts the ability to provide separate reporting for Pace. As a result, the Company believes that disclosure related to amounts of revenues and
earnings of Pace since the acquisition date is now impractical.
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 Company’s income tax provision. The unaudited pro forma combined results of operations are
provided for illustrative purposes only and are not indicative of the Company’s actual consolidated results.
Unaudited
pro forma net income (loss) for the three and nine months ended September 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 ($0.2) million and ($6.5)
million for the three months ended September 30, 2016 and 2015, respectively, and ($146.5) million and $193.0 million for the nine months ended September 30, 2016 and 2015, respectively. These additional adjustments exclude the income tax
impact.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,725,145
|
|
|
$
|
1,713,789
|
|
|
$
|
5,069,895
|
|
|
$
|
5,251,873
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ARRIS International plc
|
|
|
48,291
|
|
|
|
6,276
|
|
|
|
49,810
|
|
|
|
(86,593
|
)
|
|
|
|
|
|
|
|
Net income (loss) per share
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
|
$
|
0.03
|
|
|
$
|
0.26
|
|
|
$
|
(0.44
|
)
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
0.03
|
|
|
$
|
0.26
|
|
|
$
|
(0.44
|
)
|
|
|
(1)
|
Calculated based on net income (loss) attributable to shareowners of ARRIS International plc.
|
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 had 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.
11
ActiveVideo acquisition
In April 2015, the Company and Charter Communications Inc. formed a venture, A-C Acquisition, LLC (“A-C Venture”) with ARRIS’s and Charter’s 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 Company’s Cloud TV reporting unit, within the
Company’s N&C reportable segment.
Note 4. Goodwill and Intangible Assets
Goodwill
As of
September 30, 2016, the Company has preliminarily recorded incremental goodwill of $1,066.2 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 September 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 September 30, 2016 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
Network &
Cloud
|
|
|
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 (preliminarily assigned)
|
|
|
762,552
|
|
|
|
303,692
|
|
|
|
1,066,244
|
|
|
Other
|
|
|
1,086
|
|
|
|
2,274
|
|
|
|
3,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2016
|
|
$
|
1,446,220
|
|
|
$
|
637,347
|
|
|
$
|
2,083,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Intangibles
The gross carrying amount and accumulated amortization of the Company’s intangible assets as of September 30, 2016 and December 31, 2015 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
$
|
1,565,412
|
|
|
$
|
582,194
|
|
|
$
|
983,218
|
|
|
$
|
930,212
|
|
|
$
|
468,414
|
|
|
$
|
461,798
|
|
|
Developed technology, patents & licenses
|
|
|
1,249,519
|
|
|
|
517,849
|
|
|
|
731,670
|
|
|
|
704,137
|
|
|
|
361,719
|
|
|
|
342,418
|
|
|
Trademarks, trade and domain names
|
|
|
83,472
|
|
|
|
36,217
|
|
|
|
47,255
|
|
|
|
21,072
|
|
|
|
20,740
|
|
|
|
332
|
|
|
Backlog
|
|
|
16,400
|
|
|
|
16,400
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
$
|
2,914,803
|
|
|
$
|
1,152,660
|
|
|
$
|
1,762,143
|
|
|
$
|
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
|
|
$
|
2,924,903
|
|
|
$
|
1,152,660
|
|
|
$
|
1,772,243
|
|
|
$
|
1,661,321
|
|
|
$
|
850,873
|
|
|
$
|
810,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2016, in-process R&D of $2.2 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 cost of goods sold and operating expenses. The following table presents the amortization of intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Cost of sales
|
|
$
|
529
|
|
|
$
|
201
|
|
|
$
|
1,562
|
|
|
$
|
390
|
|
|
Selling, general and administrative expenses
|
|
|
950
|
|
|
|
950
|
|
|
|
2,849
|
|
|
|
2,532
|
|
|
Amortization of intangible assets
|
|
|
89,042
|
|
|
|
57,132
|
|
|
|
297,417
|
|
|
|
171,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90,521
|
|
|
$
|
58,283
|
|
|
|
301,828
|
|
|
$
|
173,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated total amortization expense for each of the next five fiscal years is as follows (in thousands):
|
|
|
|
|
|
|
2016 (for the remaining three months)
|
|
$
|
93,728
|
|
|
2017
|
|
|
363,698
|
|
|
2018
|
|
|
313,136
|
|
|
2019
|
|
|
269,959
|
|
|
2020
|
|
|
261,010
|
|
|
Thereafter
|
|
|
460,612
|
|
13
Note 5. Investments
ARRIS’s investments consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
|
As of December 31, 2015
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
67,567
|
|
|
$
|
15,470
|
|
|
Noncurrent Assets:
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
14,475
|
|
|
|
4,036
|
|
|
Equity method investments
|
|
|
27,327
|
|
|
|
24,452
|
|
|
Cost method investments
|
|
|
11,287
|
|
|
|
16,646
|
|
|
Other investments
|
|
|
27,825
|
|
|
|
24,408
|
|
|
|
|
|
|
|
|
|
|
|
|
Total classified as non-current assets
|
|
|
80,914
|
|
|
|
69,542
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
148,481
|
|
|
$
|
85,012
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities –
ARRIS’s 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 September 30, 2016 and December 31, 2015 were not material.
The amortized cost basis of the Company’s investments approximates fair value.
The contractual maturities of the
Company’s available-for-sale securities as of September 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):
|
|
|
|
|
|
|
Within one year
|
|
$
|
67,567
|
|
|
After one year through five years
|
|
|
10,010
|
|
|
After ten years
|
|
|
4,465
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
82,042
|
|
|
|
|
|
|
|
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 Company’s ability and intent to hold the investment until recovery.
During the three and nine months ended September 30, 2016, ARRIS concluded that two private company investments had indicators of impairment that resulted in an other-than-temporary charge of $2.9
million and $7.9 million, respectively. 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 management’s intended holding period, the security’s 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
14
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 liability’s 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.
The following table presents the Company’s investment assets (excluding equity and cost method
investments) and derivatives measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Certificates of deposit
|
|
$
|
–
|
|
|
$
|
43,252
|
|
|
$
|
–
|
|
|
$
|
43,252
|
|
|
Corporate bonds
|
|
|
–
|
|
|
|
29,254
|
|
|
|
–
|
|
|
|
29,254
|
|
|
Short-term bond fund
|
|
|
5,071
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,071
|
|
|
Corporate obligations
|
|
|
–
|
|
|
|
3
|
|
|
|
–
|
|
|
|
3
|
|
|
Money markets
|
|
|
71
|
|
|
|
–
|
|
|
|
–
|
|
|
|
71
|
|
|
Mutual funds
|
|
|
132
|
|
|
|
–
|
|
|
|
–
|
|
|
|
132
|
|
|
Other investments
|
|
|
–
|
|
|
|
4,259
|
|
|
|
–
|
|
|
|
4,259
|
|
|
Interest rate derivatives – liability derivatives
|
|
|
–
|
|
|
|
(23,838
|
)
|
|
|
–
|
|
|
|
(23,838
|
)
|
|
Foreign currency contracts – asset position
|
|
|
–
|
|
|
|
1,122
|
|
|
|
–
|
|
|
|
1,122
|
|
|
Foreign currency contracts – liability position
|
|
|
–
|
|
|
|
(7,776
|
)
|
|
|
–
|
|
|
|
(7,776
|
)
|
|
|
|
|
|
|
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 September 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.
15
The Company believes the face value of the debt as of September 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 enters into a variety of derivative financial instruments. Management’s 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 FASB’s 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
Company’s net leverage ratio. Based on the Company’s interest rates as of September 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 nine months of 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 Company’s
variable-rate debt based on one-month LIBOR to an aggregate fixed rate of 2.73% per annum based on the Company’s interest rates as of September 30, 2016. This fixed rate could vary by up 50 basis points or down by 25 basis points
based on future changes to the Company’s 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.
16
The Company’s 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 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 nine months ended September 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 Company’s variable-rate debt. Over the next 12 months, the Company estimates that an additional $5.9 million may be reclassified as an increase to interest expense.
The table below presents the impact the Company’s derivative financial instruments had on the Accumulated Other Comprehensive Income
and Statement of Operations for the three and nine months ended September 30, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain(Loss) Reclassified
from AOCI into Income
|
|
Three Months
Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Gain (loss) Recognized in OCI on Derivatives (Effective Portion)
|
|
Interest
expense
|
|
$
|
5,681
|
|
|
$
|
(12,504
|
)
|
|
$
|
(18,756
|
)
|
|
$
|
(18,505
|
)
|
|
Amounts Reclassified from Accumulated OCI into Income (Effective Portion)
|
|
Interest
expense
|
|
|
1,998
|
|
|
|
1,906
|
|
|
|
5,678
|
|
|
|
5,585
|
|
The following table indicates the location on the Consolidated Balance Sheets in which the Company’s
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 September 30, 2016 and
December 31, 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
Derivatives designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
– liability derivatives
|
|
Other accrued liabilities
|
|
|
(5,859
|
)
|
|
|
(4,489
|
)
|
|
|
|
|
|
|
Interest rate derivatives
– liability derivatives
|
|
Other noncurrent liabilities
|
|
|
(17,979
|
)
|
|
|
(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 Company’s default on the indebtedness. As of September 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 $24.7 million. As of September 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.
17
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 September 30, 2016, the Company had option collars
with notional amounts totaling 45 million euros which mature throughout 2016 and 2017, forward contracts with notional amounts totaling 55 million euros which mature throughout 2016 and 2017, forward contracts with a total notional amount
of 60 million Australian dollars which mature throughout 2016 and 2017, forward contracts with notional amounts totaling 25 million Canadian dollars which mature throughout 2016 and forward contracts with notional amounts totaling
580.7 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 Company’s 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 Company’s 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 ARRIS’s derivatives is currently less than 15 months.
The following table indicates the location on the Consolidated Balance Sheets in which the Company’s derivative assets and
liabilities not designated as hedging instruments have been recognized and the related fair values of those derivatives as of September 30, 2016 and December 31, 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
Derivatives not designated as
hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
– asset derivatives
|
|
Other current assets
|
|
$
|
1,122
|
|
|
$
|
6,495
|
|
|
|
|
|
|
|
Foreign exchange contracts
– asset derivatives
|
|
Other assets
|
|
|
–
|
|
|
|
569
|
|
|
|
|
|
|
|
Foreign exchange contracts
– liability derivatives
|
|
Other accrued liabilities
|
|
|
(7,696
|
)
|
|
|
(23,632
|
)
|
|
|
|
|
|
|
Foreign exchange contracts
– liability derivatives
|
|
Other noncurrent liabilities
|
|
|
(80
|
)
|
|
|
(739
|
)
|
The change in the fair values of ARRIS’s derivatives not designated as hedging instruments recorded
in the Consolidated Statements of Operations during the three and nine months ended September 30, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
|
Statement of Operations Location
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Derivatives Not Designated
as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
Loss (gain) on foreign currency
|
|
|
$
|
4,691
|
|
|
$
|
7,551
|
|
|
$
|
16,638
|
|
|
$
|
(5,477
|
)
|
18
Note 8. Pension Benefits
Components of Net Periodic Pension Cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
|
Three Months Ended September 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
|
Nine Months Ended September 30, 2015
|
|
|
|
|
U.S
|
|
|
Taiwan
|
|
|
U.S
|
|
|
Taiwan
|
|
|
Service cost
|
|
$
|
–
|
|
|
$
|
519
|
|
|
$
|
–
|
|
|
$
|
555
|
|
|
Interest cost
|
|
|
1,313
|
|
|
|
452
|
|
|
|
1,287
|
|
|
|
495
|
|
|
Expected gain on plan assets
|
|
|
(596
|
)
|
|
|
(203
|
)
|
|
|
(630
|
)
|
|
|
(132
|
)
|
|
Amortization of net loss (gain)
|
|
|
408
|
|
|
|
(1,897
|
)
|
|
|
627
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
1,125
|
|
|
$
|
(1,129
|
)
|
|
$
|
1,284
|
|
|
$
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer Contributions
The Company made funding contributions to its U.S. pension plan of $5.0 million and $5.2 million in the three and nine months ended September 30, 2016, respectively. During the three months and nine
months ended September 30, 2016, the Company made funding contributions of $0.3 million and $10.7 million related to its Taiwan pension plan.
The Company has established two rabbi trusts to fund the Company’s pension obligations under the non-qualified plan of the Executive Chairman and certain executive officers. The balance of these
rabbi trust assets as of September 30, 2016 was approximately $21.1 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’s 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.
19
Information regarding the changes in ARRIS’s aggregate product warranty liabilities for
the nine months ended September 30, 2016 was as follows (in thousands):
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
49,027
|
|
|
Warranty reserve at acquisition
|
|
|
45,123
|
|
|
Accruals related to warranties (including changes in estimates)
|
|
|
42,878
|
|
|
Settlements made (in cash or in kind)
|
|
|
(36,433
|
)
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
100,595
|
|
|
|
|
|
|
|
Note 10. Inventories
The components of inventory were as follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Raw material
|
|
$
|
80,846
|
|
|
$
|
60,287
|
|
|
Work in process
|
|
|
2,415
|
|
|
|
3,076
|
|
|
Finished goods
|
|
|
514,844
|
|
|
|
338,229
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
598,105
|
|
|
$
|
401,592
|
|
|
|
|
|
|
|
|
|
|
|
Note 11. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Land
|
|
$
|
68,562
|
|
|
$
|
68,562
|
|
|
Building and leasehold improvements
|
|
|
159,358
|
|
|
|
141,171
|
|
|
Machinery and equipment
|
|
|
462,830
|
|
|
|
407,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690,750
|
|
|
|
616,843
|
|
|
Less: Accumulated depreciation
|
|
|
(338,370
|
)
|
|
|
(304,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
352,380
|
|
|
$
|
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
|
|
|
90,509
|
|
|
|
1,365
|
|
|
|
91,874
|
|
|
Cash payments / adjustments
|
|
|
(56,053
|
)
|
|
|
(150
|
)
|
|
|
(56,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2016
|
|
$
|
34,459
|
|
|
$
|
1,302
|
|
|
$
|
35,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
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.
The estimated cost of severance expense recorded during 2016 for the restructuring plan was approximately $91.9 million. This amount is
included in the Consolidated Statement of Operations in the line item titled “Integration, acquisition, restructuring and other costs”. The restructuring plan affected approximately 1,500 positions across the Company. The remaining
liability is expected to be paid through 2017.
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 $1.3 million.
The Company anticipates further restructuring during 2016 as it
continues to integrate the Pace operations, but at a lower rate than the first nine months of 2016.
Integration
Integration expenses of $3.1 million and $21.6 million, respectively, were recorded during the three and nine months ended
September 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2016
|
|
|
As of December 31, 2015
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Term loan A
|
|
$
|
49,500
|
|
|
$
|
49,500
|
|
|
Term loan A-1
|
|
|
40,000
|
|
|
|
–
|
|
|
Financing lease obligation
|
|
|
789
|
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
|
|
Current obligations
|
|
|
90,289
|
|
|
|
50,258
|
|
|
Current deferred financing fees and debt discount
|
|
|
(7,527
|
)
|
|
|
(6,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,762
|
|
|
|
43,591
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
Term loan A
|
|
|
878,625
|
|
|
|
915,750
|
|
|
Term loan A-1
|
|
|
740,000
|
|
|
|
–
|
|
|
Term loan B
|
|
|
543,812
|
|
|
|
543,812
|
|
|
Revolver
|
|
|
–
|
|
|
|
–
|
|
|
Financing lease obligation
|
|
|
58,088
|
|
|
|
58,676
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent obligations
|
|
|
2,220,525
|
|
|
|
1,518,238
|
|
|
Noncurrent deferred financing fees and debt discount
|
|
|
(19,883
|
)
|
|
|
(21,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,200,642
|
|
|
|
1,496,243
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,283,404
|
|
|
$
|
1,539,834
|
|
|
|
|
|
|
|
|
|
|
|
21
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 September 30, 2016
|
|
Term Loan A
|
|
LIBOR + 1.75 %
|
|
2.27%
|
|
Term Loan A-1
|
|
LIBOR + 1.75 %
|
|
2.27%
|
|
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 September 30 2016, ARRIS was in compliance with all covenants under the Amended Credit
Agreement.
During the three and nine months ended September 30, 2016, the Company made mandatory prepayments of
approximately $22.4 and $57.2 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 September 30, 2016, there is no outstanding balance under this program.
The AR Financing Program was accounted for as secured borrowings and amounts outstanding were included in the current portion of long-term debt on the consolidated balance sheet. The Company paid certain
transaction fees and interest of 1.23% on the outstanding balance in connection with this Program.
22
Other
As of September 30, 2016, the scheduled maturities of the contractual debt obligations for the next five years are as follows (in thousands):
|
|
|
|
|
|
|
2016 (for the remaining three months)
|
|
$
|
22,375
|
|
|
2017
|
|
|
89,500
|
|
|
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 Company’s chief executive officer has been identified as the CODM.
Our CODM manages the Company
under two segments:
|
|
•
|
|
Customer Premises Equipment (“CPE”)
– The CPE segment’s 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 segment’s 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 ARRIS’s 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 segment’s 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.
23
The table below represents information about the Company’s reportable segments for the
three and nine months ended September 30, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended
September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Net sales to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
$
|
1,230,811
|
|
|
$
|
811,731
|
|
|
$
|
3,491,893
|
|
|
$
|
2,471,369
|
|
|
N&C
|
|
|
504,107
|
|
|
|
409,619
|
|
|
|
1,591,837
|
|
|
|
1,225,243
|
|
|
Other
|
|
|
(9,773
|
)
|
|
|
66
|
|
|
|
(13,835
|
)
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,725,145
|
|
|
|
1,221,416
|
|
|
|
5,069,895
|
|
|
|
3,696,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CPE
|
|
|
191,938
|
|
|
|
141,427
|
|
|
|
501,448
|
|
|
|
443,186
|
|
|
N&C
|
|
|
162,867
|
|
|
|
121,211
|
|
|
|
503,149
|
|
|
|
333,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total
|
|
|
354,805
|
|
|
|
262,638
|
|
|
|
1,004,597
|
|
|
|
776,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and unallocated costs
|
|
|
(163,619
|
)
|
|
|
(137,194
|
)
|
|
|
(524,081
|
)
|
|
|
(426,097
|
)
|
|
Amortization of intangible assets
|
|
|
(89,042
|
)
|
|
|
(57,132
|
)
|
|
|
(297,417
|
)
|
|
|
(171,062
|
)
|
|
Integration, acquisition, restructuring and other costs
|
|
|
(10,831
|
)
|
|
|
(7,531
|
)
|
|
|
(144,888
|
)
|
|
|
(20,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
91,313
|
|
|
|
60,781
|
|
|
|
38,211
|
|
|
|
158,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
20,104
|
|
|
|
14,749
|
|
|
|
58,832
|
|
|
|
56,570
|
|
|
Loss on investments
|
|
|
5,058
|
|
|
|
3,446
|
|
|
|
13,406
|
|
|
|
6,565
|
|
|
Interest income
|
|
|
(804
|
)
|
|
|
(513
|
)
|
|
|
(2,772
|
)
|
|
|
(1,792
|
)
|
|
Loss on foreign currency
|
|
|
5,729
|
|
|
|
10,843
|
|
|
|
8,169
|
|
|
|
4,204
|
|
|
Other expense ( income), net
|
|
|
6,723
|
|
|
|
(2,827
|
)
|
|
|
11,592
|
|
|
|
5,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
54,503
|
|
|
$
|
35,083
|
|
|
$
|
(51,016
|
)
|
|
$
|
87,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine month periods ended September 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 September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Corporate and unallocated costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
28,524
|
|
|
$
|
14,753
|
|
|
$
|
117,189
|
|
|
$
|
44,440
|
|
|
Selling, general and administrative expenses
|
|
|
92,584
|
|
|
|
84,250
|
|
|
|
276,556
|
|
|
|
259,524
|
|
|
Research and development expenses
|
|
|
42,511
|
|
|
|
38,191
|
|
|
|
130,336
|
|
|
|
122,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
163,619
|
|
|
$
|
137,194
|
|
|
$
|
524,081
|
|
|
$
|
426,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15. Sales Information
ARRIS sells its products primarily in the United States. The Company’s international revenue is generated from Asia Pacific, Canada, Europe, and Latin America. Sales to customers outside of United
States were approximately 28.0% and 27.1%, for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, sales to customers outside of United States were approximately 26.8%
and 27.7%, respectively.
24
The table below sets forth our domestic (U.S.) and international sales for the three and
nine months ended September 30, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Domestic – U.S
|
|
$
|
1,242,748
|
|
|
$
|
889,900
|
|
|
$
|
3,711,668
|
|
|
$
|
2,674,058
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas, excluding U.S.
|
|
|
227,940
|
|
|
|
203,977
|
|
|
|
708,663
|
|
|
|
651,377
|
|
|
Asia Pacific
|
|
|
90,923
|
|
|
|
33,863
|
|
|
|
212,779
|
|
|
|
103,907
|
|
|
EMEA
|
|
|
163,534
|
|
|
|
93,676
|
|
|
|
436,785
|
|
|
|
267,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
482,397
|
|
|
|
331,516
|
|
|
|
1,358,227
|
|
|
|
1,022,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
1,725,145
|
|
|
$
|
1,221,416
|
|
|
$
|
5,069,895
|
|
|
$
|
3,696,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ARRIS International plc.
|
|
$
|
48,162
|
|
|
$
|
26,257
|
|
|
$
|
(70,183
|
)
|
|
$
|
62,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
190,515
|
|
|
|
146,781
|
|
|
|
190,888
|
|
|
|
146,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.25
|
|
|
$
|
0.18
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to ARRIS International plc
|
|
$
|
48,162
|
|
|
$
|
26,257
|
|
|
$
|
(70,183
|
)
|
|
$
|
62,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
190,515
|
|
|
|
146,781
|
|
|
|
190,888
|
|
|
|
146,146
|
|
|
Net effect of dilutive equity awards
|
|
|
993
|
|
|
|
2,532
|
|
|
|
—
|
|
|
|
3,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
191,508
|
|
|
|
149,313
|
|
|
|
190,888
|
|
|
|
149,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.25
|
|
|
$
|
0.18
|
|
|
$
|
(0.37
|
)
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2016, approximately 0.1 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 nine months ended September 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 26.4 thousand and 9.0 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 nine months ended September 30, 2016, the Company issued 1.9 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 Pace’s 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 Company’s 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.
25
Note 17. Warrants
The Company entered into Warrant and Registration Rights Agreements (the “Warrants”) with certain customers pursuant to which customers may purchase up to 14.0 million of ARRIS’s
ordinary shares, (subject to adjustment in accordance with the terms of the Warrants, the “Shares”).
The Warrants
will vest in tranches based on the amount of purchases of products and services by the customer from the Company. The table below presents by year, the ordinary shares issuable 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
1,500
|
|
|
|
4,000
|
|
|
|
3,000
|
|
|
|
1,000
|
|
|
|
–
|
|
|
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 ARRIS’s ordinary shares on NASDAQ for the 10-day trading period preceding the date of the Warrants.
The Warrants provide for net Share settlement that, if elected by the holders, will reduce the number of Shares issued upon exercise to
reflect net settlement of the exercise price. Customers’ may also request cash settlement of the Warrants upon exercise in lieu of issuing Shares, however, such cash election is at the discretion of ARRIS. The Warrants will expire by
September 30, 2023.
The Warrants provide for certain adjustments that may be made to the exercise price and the number
of Shares issuable upon exercise due to customary anti-dilution provisions based on future corporate events. In addition, in connection with any consolidation, merger or similar extraordinary event involving the Company, the Warrants will be deemed
to represent the right to receive, upon exercise, the same consideration received by the holders of the Company’s 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 aggregate purchase levels and product mix, under which customers must achieve for the Warrants to vest, as detailed above, the final measurement date for the Warrants is the date on which the Warrants vest. Prior
to the final measurement, when achievement of the performance criteria has been deemed probable, the estimated fair value of Warrants is being recorded as a reduction to net sales based on the projected number of Warrants expected to vest, the
proportion of purchases by customers and its affiliates within the period relative to the aggregate purchase levels required for the Warrants to vest and the then-current fair value of the related Warrants. To the extent that projections change in
the future as to the number of Warrants that will vest, as well as changes in the fair market value of the Warrants, a cumulative catch-up adjustment will be recorded in the period in which the estimates change. At September 30, 2016, none of
the Warrants had vested.
26
The fair value of the Warrants is determined using the Black-Scholes option pricing model.
For the three and nine months ended September 30, 2016, ARRIS recorded $9.6 million and $13.9 million, respectively, as a reduction to net sales in connection with Warrants.
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(70,183
|
)
|
|
|
—
|
|
|
|
(70,183
|
)
|
|
|
(6,902
|
)
|
|
|
(77,085
|
)
|
|
Other comprehensive loss, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,764
|
)
|
|
|
(8,764
|
)
|
|
|
(3
|
)
|
|
|
(8,767
|
)
|
|
Compensation under stock award plans
|
|
|
—
|
|
|
|
—
|
|
|
|
44,052
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44,052
|
|
|
|
—
|
|
|
|
44,052
|
|
|
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
|
|
|
—
|
|
|
|
26
|
|
|
|
(10,641
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,615
|
)
|
|
|
—
|
|
|
|
(10,615
|
)
|
|
Provision for warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
13,894
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,894
|
|
|
|
—
|
|
|
|
13,894
|
|
|
Repurchase of ordinary shares, net
|
|
|
—
|
|
|
|
(77
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(177,958
|
)
|
|
|
—
|
|
|
|
(178,035
|
)
|
|
|
—
|
|
|
|
(178,035
|
)
|
|
Income tax effect related to exercise of restricted share units
|
|
|
—
|
|
|
|
—
|
|
|
|
4,026
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,026
|
|
|
|
—
|
|
|
|
4,026
|
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,717
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,717
|
)
|
|
|
—
|
|
|
|
(2,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2016
|
|
$
|
—
|
|
|
$
|
2,825
|
|
|
$
|
3,259,143
|
|
|
$
|
—
|
|
|
$
|
(220,296
|
)
|
|
$
|
(21,410
|
)
|
|
$
|
3,020,262
|
|
|
$
|
40,142
|
|
|
$
|
3,060,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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.
27
The Company’s effective tax rate from continuing operations for the three and nine
months ended September 30, 2016 was 16.2% and (51.1)% respectively. The Company’s effective tax rate from continuing operations for the three and nine months ended September 30, 2015 was 33.5% and 34.0% respectively. For the nine
months ended September 30, 2016, the Company recorded income tax expense of $26.1 million. Due to the application of the loss limitation provisions of the
Income Taxes
guidance, the year-to-date tax expense of $26.1 million is expected
to approximate the expense that will be recorded for the full year. In addition, during 2016, the Company recorded $55.0 million of withholding tax expense in connection with the Pace Acquisition, as well as $2.1 million of expense on expiring net
operating losses. The Company also recorded $0.3 million of expense for uncertain tax positions, $0.8 million of benefit relating to the release of valuation allowances and $0.4 million of expense for return to provision adjustments and other
discrete items for the nine months ended September 30, 2016.
During the nine month period ended September 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.
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 nine months ended September 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
|
|
|
32
|
|
|
|
(12,560
|
)
|
|
|
–
|
|
|
|
2,132
|
|
|
|
(10,396
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
6
|
|
|
|
3,803
|
|
|
|
(2,177
|
)
|
|
|
–
|
|
|
|
1,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
38
|
|
|
|
(8,757
|
)
|
|
|
(2,177
|
)
|
|
|
2,132
|
|
|
|
(8,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2016
|
|
$
|
171
|
|
|
$
|
(15,538
|
)
|
|
$
|
(6,372
|
)
|
|
$
|
329
|
|
|
$
|
(21,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(28
|
)
|
|
|
(11,670
|
)
|
|
|
–
|
|
|
|
(1,000
|
)
|
|
|
(12,698
|
)
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(93
|
)
|
|
|
3,522
|
|
|
|
80
|
|
|
|
–
|
|
|
|
3,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
(121
|
)
|
|
|
(8,148
|
)
|
|
|
80
|
|
|
|
(1,000
|
)
|
|
|
(9,189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2015
|
|
$
|
(96
|
)
|
|
$
|
(11,314
|
)
|
|
$
|
(7,101
|
)
|
|
$
|
(1,725
|
)
|
|
$
|
(20,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 21. Repurchases of ARRIS Shares
The table below sets forth the purchases of ARRIS shares for the quarter ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
July 2016
|
|
|
146,920
|
|
|
$
|
24.15
|
|
|
|
–
|
|
|
$
|
149,997
|
|
|
August 2016
|
|
|
337,791
|
|
|
$
|
27.90
|
|
|
|
337,516
|
|
|
$
|
140,581
|
|
|
September 2016
|
|
|
662,965
|
|
|
$
|
28.10
|
|
|
|
662,484
|
|
|
$
|
121,964
|
|
|
(1)
|
Includes approximately 147,676 shares 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.
|
28
Upon completing the Combination, ARRIS International plc conducted a court-approved process
in accordance with section 641(1)(b) of the UK 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 Company’s
Board of Directors approved a $300 million share repurchase authorization replacing all prior programs. During the third quarter of 2016, ARRIS repurchased 1.0 million shares of the Company’s ordinary shares at an average price of $28.03
per share, for an aggregate consideration of approximately $28.0 million. During the first nine months of 2016, the Company repurchased 7.4 million shares of its common stock for $178.0 million at an average stock price of $24.09. The remaining
authorized amount for stock repurchases under this plan was $122.0 million as of September 30, 2016. Unless terminated earlier by a Board resolution, this new plan will expire when ARRIS has used all authorized funds for repurchase.
Note 22. 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 September 30, 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
2016 (for the remaining three months)
|
|
$
|
8,455
|
|
|
2017
|
|
|
29,004
|
|
|
2018
|
|
|
22,669
|
|
|
2019
|
|
|
17,843
|
|
|
2020
|
|
|
14,304
|
|
|
Thereafter
|
|
|
41,556
|
|
|
Less sublease income
|
|
|
(1,098
|
)
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
132,733
|
|
|
|
|
|
|
|
Total rental expense for all operating leases for the three and nine months ended September 30, 2016
amounted to approximately $8.5 million and $26.3 million, respectively, as compared to approximately $6.7 million and $20.4 million in the same periods in 2015.
Additionally, the Company had contractual obligations of approximately $714.8 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 September 30, 2016 are expected to be satisfied by 2017.
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 Company’s views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the
Company’s 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.
29
Due to the nature of the Company’s business, it is subject to patent infringement
claims, including current suits against it or one or more of its wholly-owned subsidiaries, or one or more of our customers who may seek indemnification from us, alleging infringement by various Company products and services. The Company believes
that it has meritorious defenses to the allegations made in its pending cases and intends to vigorously defend these lawsuits; however, it is currently unable to determine the ultimate outcome of these or similar matters. Accordingly, with respect
to two of the matters listed in Part II, Item 1 “Legal Proceedings”, the Company estimates the aggregate range of loss for which a reasonable estimate can be made, to be between $0 and $10.0 million. This estimate covers only two of the
matters listed in Part II, Item 1 “Legal Proceedings” and we are currently unable to reasonably estimate the possible loss or range of possible loss for each of the remaining identified matters. The results in litigation are
unpredictable and an adverse resolution of one or more of such matters not included in the estimate provided, or if losses are higher than what is currently estimated, it could have a material adverse effect on our business, financial position,
results of operations or cash flows. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. (See Part II, Item 1 “Legal Proceedings” for additional details)
30