UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

ARRIS GROUP, INC.

A Delaware Corporation
IRS Employer Identification No. 58-2588724
SEC File Number 000-31254

ARRIS Group, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

ARRIS Group, Inc. is a large accelerated filer and is not a shell company. ARRIS Group, Inc. is not required to file Interactive Data Files.

As of July 31, 2009, 125,085,460 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.

 

 

ARRIS GROUP, INC.
FORM 10-Q
For the Three and Six Months Ended June 30, 2009

INDEX

				Page
Part I. Financial Information
Item 1.		Financial Statements (unaudited)
		a)  Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008			1
		b)  Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008			2
		c)  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008			3
		d)  Notes to the Consolidated Financial Statements			4
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3.		Quantitative and Qualitative Disclosures on Market Risk			26
Item 4.		Controls and Procedures			27
Part II. Other Information
Item 1.		Legal Proceedings			28
Item 1A.		Risk Factors			30
Item 4.		Submission of Matters to a Vote of Security Holders			35
Item 6.		Exhibits			36
Signatures					37
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ARRIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (unaudited)

		June 30, 2009				December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents		$	476,846			$	409,894
Short-term investments, at fair value			47,195				17,371
Total cash, cash equivalents and short-term investments			524,041				427,265
Restricted cash			4,552				5,673
Accounts receivable (net of allowances for doubtful accounts of $3,672 in 2009 and $3,988 in 2008)			128,482				159,443
Other receivables			5,904				4,749
Inventories (net of reserves of $18,921 in 2009 and $18,811 in 2008)			115,944				129,752
Prepaids			7,700				8,004
Current deferred income tax assets			41,166				44,004
Other current assets			12,361				19,782
Total current assets			840,150				798,672
Property, plant and equipment (net of accumulated depreciation of $101,527 in 2009 and $100,313 in 2008)			60,048				59,204
Goodwill			231,684				231,684
Intangibles (net of accumulated amortization of $171,888 in 2009 and $153,362 in 2008)			208,822				227,348
Investments			10,317				14,681
Noncurrent deferred income tax assets			3,870				12,157
Other assets			6,251				6,576
		$	1,361,142			$	1,350,322
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	48,859			$	75,863
Accrued compensation, benefits and related taxes			20,753				27,024
Accrued warranty			5,185				5,652
Deferred revenue			43,727				44,461
Current portion of long-term debt			148				146
Current deferred income tax liability			248				1,059
Other accrued liabilities			35,852				25,410
Total current liabilities			154,772				179,615
Long-term debt, net of current portion			205,710				211,870
Accrued pension			19,665				18,820
Noncurrent income taxes payable			12,386				9,607
Noncurrent deferred income tax liabilities			33,999				41,598
Other noncurrent liabilities			15,094				15,343
Total liabilities			441,626				476,853
Stockholders’ equity:
Preferred stock, par value $1.00 per share, 5.0 million shares authorized; none issued and outstanding			—				—
Common stock, par value $0.01 per share, 320.0 million shares authorized; 124.7 million and 123.1 million shares issued and outstanding in 2009 and 2008, respectively			1,379				1,362
Capital in excess of par value			1,169,223				1,159,097
Treasury stock at cost, 13 million shares in 2009 and 2008			(75,960	)			(75,960	)
Accumulated deficit			(166,711	)			(202,502	)
Unrealized loss on marketable securities			(161	)			(274	)
Unfunded pension losses			(8,070	)			(8,070	)
Cumulative translation adjustments			(184	)			(184	)
Total stockholders’ equity			919,516				873,469
		$	1,361,142			$	1,350,322

See accompanying notes to the consolidated financial statements.

ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data and percentages)

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008 (1)				2009				2008
Net sales		$	278,521			$	281,110			$	532,039			$	554,616
Cost of sales			161,241				188,226				319,249				376,484
Gross margin			117,280				92,884				212,790				178,132
Gross margin %			42.1	%			33.0	%			40.0	%			32.1	%
Operating expenses:
Selling, general and administrative expenses			39,128				37,046				74,471				74,028
Research and development expenses			30,143				27,662				58,538				55,784
Restructuring charges			592				175				712				580
Amortization of intangible assets			9,263				12,454				18,526				25,708
Total operating expenses			79,126				77,337				152,247				156,100
Operating income			38,154				15,547				60,543				22,032
Other expense (income):
Interest expense			4,278				4,291				8,765				8,312
Loss (gain) on investments			(512	)			171				(215	)			173
Interest income			(363	)			(1,702	)			(748	)			(4,387	)
Loss (gain) on foreign currency			1,570				350				2,528				(640	)
Gain on debt retirement			—				—				(4,152	)			—
Other expense (income), net			(522	)			65				(624	)			29
Income from continuing operations before income taxes			33,703				12,372				54,989				18,545
Income tax expense			10,794				4,543				19,198				6,887
Net income		$	22,909			$	7,829			$	35,791			$	11,658
Net income per common share:
Basic		$	0.18			$	0.06			$	0.29			$	0.09
Diluted			0.18				0.06				0.28				0.09
Weighted average common shares:
Basic			124,412				122,741				123,849				126,752
Diluted			128,054				124,651				126,482				128,190

See accompanying notes to the consolidated financial statements.

ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

		Six Months Ended June 30,
		2009				2008
Operating activities:
Net income		$	35,791			$	11,658
Depreciation			9,962				10,095
Amortization of intangible assets			18,526				25,708
Stock compensation expense			7,454				5,391
Deferred income tax provision (benefit)			3,927				(993	)
Amortization of deferred finance fees			368				381
Provision for doubtful accounts			(10	)			214
Loss (gain) on disposal of fixed assets			30				(2	)
Loss (gain) on investments			(215	)			173
Excess tax benefits from stock-based compensation plans			(556	)			—
Non-cash interest expense			5,536				5,262
Gain on debt retirement			(4,152	)			—
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
Accounts receivable			30,971				(10,284	)
Other receivables			(1,820	)			(4,737	)
Inventory			13,808				(11,210	)
Income taxes payable/recoverable			1,932				(5,629	)
Accounts payable and accrued liabilities			(22,863	)			20,310
Prepaids and other, net			9,465				(5,402	)
Net cash provided by operating activities			108,154				40,935
Investing activities:
Purchases of property, plant and equipment			(10,868	)			(11,792	)
Cash paid for acquisition, net of cash acquired			(200	)			(4,419	)
Cash proceeds from sale of property, plant and equipment			1				237
Purchases of short-term investments			(58,766	)			(16,887	)
Sales of short-term investments			33,937				72,480
Net cash provided by (used in) investing activities			(35,896	)			39,619
Financing activities:
Payment of debt and capital lease obligations			(10,628	)			(35,196	)
Repurchase of common stock			—				(75,960	)
Excess tax benefits from stock-based compensation plans			556				—
Employer repurchase of shares to satisfy minimum tax withholdings			(2,180	)			(1,035	)
Proceeds from issuance of common stock, net			6,946				(1,894	)
Net cash used in financing activities			(5,306	)			(114,085	)
Net increase (decrease) in cash and cash equivalents			66,952				(33,531	)
Cash and cash equivalents at beginning of period			409,894				323,797
Cash and cash equivalents at end of period		$	476,846			$	290,266

See accompanying notes to the consolidated financial statements.

ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1. Organization and Basis of Presentation

ARRIS Group, Inc. (together with its consolidated subsidiaries, except as the context otherwise indicates, “ARRIS” or the “Company”), is an international communications technology company, headquartered in Suwanee, Georgia. ARRIS operates in three business segments, Broadband Communications Systems, Access, Transport & Supplies, and Media & Communications Systems, specializing in integrated broadband network solutions that include products, systems and software for content and operations management (including video on demand, or VOD), and professional services. ARRIS is a leading developer, manufacturer and supplier of telephony, data, video, construction, rebuild and maintenance equipment for the broadband communications industry. In addition, ARRIS is a leading supplier of infrastructure products used by cable system operators to build-out and maintain hybrid fiber-coaxial (“HFC”) networks. The Company provides its customers with products and services that enable reliable, high-speed, two-way broadband transmission of video, telephony, and data.

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. 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 recently audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the United States Securities and Exchange Commission (“SEC”).

Note 2. Impact of Recently Issued Accounting Standards

In May 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 165, Subsequent Events. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective for the interim and annual periods ended after June 15, 2009, and, accordingly, the Company has adopted this statement in second quarter ended June 30, 2009. SFAS 165 requires that public entities evaluate subsequent events through the date that the financial statements are issued. The Company has evaluated subsequent events through the time of filing these financial statements with the SEC.

In April 2009, the FASB issued three FASB Staff Positions (“FSP”) intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides additional guidelines for estimating fair value in accordance with FAS 157. FSP FAS 115-2 and FAS 124-2, Recognition of Other-Than-Temporary Impairments, amends the other-than-temporary impairment guidance in SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, for debt securities and the presentation and disclosure requirements of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, increases the frequency of fair value disclosures. ARRIS adopted the aforementioned FSPs in the quarter ended June 30, 2009 and the adoption did not have a significant impact on its consolidated financial statements.

In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (including Partial Cash Settlement). The FSP requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The resulting debt discount is accreted over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. Retrospective application to all periods presented is required except for instruments that were not outstanding during any of the periods that will be presented in the annual financial statements for the period of adoption but were outstanding during an earlier period. The adoption of FSP APB 14-1 on January 1, 2009 impacted the accounting treatment of the Company’s 2% convertible senior subordinated notes due 2026, which were issued on November 6, 2006. Upon adoption, the Company recorded an adjustment to increase additional paid-in capital as of the November 6, 2006 issuance date by approximately $87.3 million. The Company is accreting the resulting debt discount to interest expense over the estimated seven year life of the convertible notes, which represents the first redemption date of November 15, 2013 when the Company may redeem the notes at its election or the note holders may require their redemption. The Company recorded a pre-tax adjustment of approximately $23.0 million to retained earnings that represents the debt discount accretion during the years ending December 31, 2006, 2007 and 2008 and will recognize additional non-cash interest expense of $11.1 million, $11.9 million, $12.9 million, $13.9 million and $11.2 million during the years ending December 31, 2009, 2010, 2011, 2012 and 2013, respectively, for accretion of the debt discount, to the extent that the convertible notes remain outstanding. As a result of the adoption of FSP APB 14-1, the Company reduced income from continuing operations and net income for the three and six months ended June 30, 2009 by $2.7 million and $5.5 million and reduced basic and diluted earnings per share by $0.02 per share and $0.04 per share, respectively.

The following tables present the effect of the adoption of FSP APB 14-1 on the Company’s affected financial statement line items for the three and six months ended June 30, 2008 and as of December 31, 2008 (in thousands, except per share data):

		Three Months Ended June 30, 2008												Six Months Ended June 30, 2008
		As												As
		Originally				As				Increase				Originally				As				Increase
		Reported				Adjusted				(Decrease)				Reported				Adjusted				(Decrease)
Statement of Operations:
Interest expense		$	1,722			$	4,291			$	2,569			$	3,226			$	8,312			$	5,086
Income from continuing operations before income taxes			14,941				12,372				2,569				23,631				18,545				(5,086	)
Income tax expense			5,504				4,543				(961	)			8,789				6,887				(1,902	)
Net income			9,437				7,829				(1,608	)			14,842				11,658				(3,184	)
Basic net income per share:
Income from continuing operations before income taxes		$	0.12			$	0.10			$	(0.02	)		$	0.18			$	0.15			$	(0.03	)
Basic net income per share		$	0.08			$	0.06			$	(0.02	)		$	0.12			$	0.09			$	(0.03	)
Diluted net income per share:
Income from continuing operations before income taxes		$	0.12			$	0.10			$	(0.02	)		$	0.18			$	0.14			$	(0.04	)
Diluted net income per share		$	0.08			$	0.06			$	(0.02	)		$	0.12			$	0.09			$	(0.03	)

		As of December 31, 2008
		As Originally				As				Increase
		Reported				Adjusted				(Decrease)
Balance Sheet:
Noncurrent deferred income tax assets		$	11,514			$	12,157			$	643
Other assets			8,294				6,576				(1,718	)
Long-term debt, net of current portion			276,137				211,870				(64,267	)
Noncurrent deferred income tax liabilities			17,565				41,598				24,033
Capital in excess of par value			1,105,998				1,159,097				53,099
Accumulated deficit			(188,562	)			(202,502	)			(13,940	)

Note 3. Investments

ARRIS’ investments as of June 30, 2009 and December 31, 2008 consisted of the following (in thousands):

		Fair Value
		As of June 30,				As of December 31,
		2009				2008
Current Assets:
Commercial paper		$	—			$	15,771
Auction rate securities			4,939				—
Certificates of deposit			10,320				—
U.S. Government agency bonds			30,336				—
Variable rate demand notes			1,600				1,600
Total classified as current assets			47,195				17,371
Noncurrent Assets:
Cash surrender value of company owned life insurance			4,714				4,527
Auction rate securities			—				4,908
Mutual funds			22				22
Money market funds			438				437
Corporate obligations			20				20
Investment in private company			4,000				4,000
SERP investments			1,123				767
Total classified as noncurrent assets			10,317				14,681
Total		$	57,512			$	32,052

The amortized cost basis of the Company’s investments approximates fair value. The unrealized gains and losses at June 30, 2009 and December 31, 2008 were not material.

Note 4. Fair Value Measurements

As defined in SFAS No. 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

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 fair value hierarchy gives the lowest priority to Level 3 inputs.

The following table presents the Company’s investment assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 at June 30, 2009(in thousands):

		Level 1				Level 2				Level 3				Total
Current investments		$	—			$	42,256			$	—			$	42,256
Noncurrent investments			460				5,857				—				6,317
Auction rate securities			—				—				4,939				4,939
Foreign currency contracts			174				—				—				174
Total		$	634			$	48,113			$	4,939			$	53,686

Substantially all of the Company’s short-term investments and long-term investments instruments are classified within Level 1 or Level 2 of the fair value hierarchy as they are valued using quoted market prices, market prices for similar securities, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include the Company’s investment in money market funds and mutual funds. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include the Company’s U.S. government agency bonds, variable rate demand notes, cash surrender value of company owned life insurance, corporate obligations and certificates of deposit. Such instruments are classified within Level 2 of the fair value hierarchy. See Note 3 for further information on the Company’s investments.

The table below includes a roll-forward of the Company’s auction rate securities that have been classified as a Level 3 in the fair value hierarchy (in thousands):

		Level 3
Estimated fair value January 1, 2009		$	4,909
First quarter 2009 change in fair value			15
Second quarter 2009 change in fair value			15
Estimated fair value June 30, 2009		$	4,939

ARRIS had $5.0 million invested in a single issue of an auction rate security at June 30, 2009 and December 31, 2008. As of June 30, 2009, there was no active market for this auction rate security or comparable securities due to current market conditions. Therefore, until such a market becomes active, the auction rate security is classified as Level 3 within the fair value hierarchy. Due to the current market conditions and the failure of the security to reprice, beginning in the second quarter of 2008, the Company has recorded changes in the fair value of the instrument as an impairment charge in the Statement of Operations in the loss (gain) on investments line. The security was held as of June 30, 2009 as a short-term investment, classified as a trading security, with a fair market value of $4.9 million, which includes the fair value of the put option described below. The Company may not be able to liquidate this security until a successful auction occurs, or, alternatively, beginning June 30, 2010 through July 2, 2012, when the Company has the option to sell the security to a major financial institution. This security is a single student loan issue rated AAA and is substantially guaranteed by the federal government. ARRIS will continue to evaluate the fair value of its investment in this auction rate security for any further impairment.

All of the Company’s foreign currency contracts are over-the-counter instruments. There is an active market for these instruments, and therefore, they are classified as Level 1 in the fair value hierarchy. ARRIS does not enter into currency contracts for trading purposes. The Company has a master netting agreement with the primary counterparty to the derivative instruments. This agreement allows for the net settlement of assets and liabilities arising from different transactions with the same counterparty.

Note 5. Derivative Instruments and Hedging Activities

ARRIS has certain international customers who are billed in their local currency. Changes in the monetary exchange rates may adversely affect the Company’s results of operations and financial condition. When appropriate, ARRIS enters into various derivative transactions to enhance its ability to manage the volatility relating to these typical business exposures. The Company does not hold or issue derivative instruments for trading or other speculative purposes. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, The Company’s derivative instruments are recorded on the Consolidated Balance Sheets at their fair values. The Company’s derivative instruments 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’ derivatives is 12 months. As of January 1, 2009, derivative instruments which are subject to master netting arrangements are not offset in the Consolidated Balance Sheets.

The fair values of ARRIS’ derivative instruments recorded in the Consolidated Balance Sheet as of June 30, 2009 were as follows (in thousands):

Asset Derivatives

Liability Derivatives

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives Not Designated as Hedging Instruments:

Foreign exchange contracts

Other current assets

$

174

Other accrued liabilities

$

2,393

Prior to the adoption of SFAS No. 161 on January 1, 2009, the Company recorded its derivative instruments on a net basis on the Consolidated Balance Sheet. As of December 31, 2008, the fair value of the instruments was recorded as a net asset of $391 thousand, comprised of an asset of $1,094 thousand offset with a liability of $703 thousand.

The change in the fair values of ARRIS’ derivative instruments recorded in the Consolidated Statements of Operations during the three and six months ended June 30, 2009 and 2008 were as follows (in thousands):

				Three Months Ended						Six Months Ended
				June 30,						June 30,
		Statement of Operations Location		2009				2008		2009				2008
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts		Loss (gain) on foreign currency		$	2,755			$(606)		$	1,675			$	962

Note 6. Pension Benefits

Components of Net Periodic Pension Benefit Cost

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
						(in thousands)
Service cost		$	245			$	190			$	490			$	380
Interest cost			530				470				1,060				939
Expected gain on plan assets			(281	)			(354	)			(563	)			(709	)
Amortization of prior service cost			115				119				231				239
Amortization of net loss			119				—				238				—
Net periodic pension cost		$	728			$	425			$	1,456			$	849

Employer Contributions

No minimum funding contributions are required in 2009 under the Company’s defined benefit plan. However, the Company made voluntary contributions to the plan of approximately $581 thousand and $612 thousand for the three and six months ended June 30, 2009, respectively. The Company may make additional voluntary contributions in the second half of 2009. During the three and six months ended June 30, 2008, the Company made voluntary contributions to the plan of approximately $31 thousand and $60 thousand, respectively.

Note 7. Guarantees

Warranty

ARRIS provides warranties of various lengths to customers based on the specific product and the terms of individual agreements. The Company provides for the estimated cost of product warranties based on historical trends, the embedded base of product in the field, failure rates, and repair costs at the time revenue is recognized. Expenses related to product defects and unusual product warranty problems are recorded in the period that the problem is identified. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its suppliers, the estimated warranty obligation could be affected by changes in ongoing product failure rates, material usage and service delivery costs incurred in correcting a product failure, as well as specific product failures outside of ARRIS’ baseline experience. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions (which could be material) would be recorded to the warranty liability. ARRIS evaluates its warranty obligations on an individual product basis.

The Company offers extended warranties and support service agreements on certain products. Revenue from these agreements is deferred at the time of the sale and recognized on a straight-line basis over the contract period. Costs of services performed under these types of contracts are charged to expense as incurred, which approximates the timing of the revenue stream.

Information regarding the changes in ARRIS’ aggregate product warranty liabilities (including short-term and long-term) for the six months ended June 30, 2009 was as follows:

		(in thousands)
Balance at December 31, 2008		$	10,184
Accruals related to warranties (including changes in estimates)			3,304
Settlements made (in cash or in kind)			(4,318	)
Balance at June 30, 2009		$	9,170

Note 8. Restructuring

The Company’s restructuring activities are accounted for in accordance with Statement of Financial Accounting Standards No 146, Accounting for Costs Associated with Exit or Disposal Activities.

During the first quarter of 2004, ARRIS consolidated two facilities in Georgia, giving the Company the ability to house many of its core technology, marketing, and corporate headquarters functions in a single building. This consolidation resulted in a restructuring charge of approximately $6.2 million in 2004 related to lease commitments and the write-off of leasehold improvements and other fixed assets. ARRIS expects the remaining payments to be made by the end of the third quarter of 2009.

		(in thousands)
Balance as of December 31, 2008		$	545
Q1 2009 payments			(396	)
Q1 2009 adjustments to accrual			41
Q2 2009 payments			( 192	)
Q2 2009 adjustments to accrual			86
Balance as of June 30, 2009		$	84

In the fourth quarter of 2007, the Company initiated a restructuring plan related to its acquisition of C-COR, Incorporated (“C-COR”). ARRIS acquired remaining restructuring accruals of approximately $658 thousand representing C-COR contractual obligations that related to excess leased facilities. These payments will be paid over their remaining lease terms through 2014, unless terminated earlier.

		(in thousands)
Balance as of December 31, 2008		$	494
Q1 2009 payments			(93	)
Q1 2009 adjustments to accrual			72
Q2 2009 payments			(93	)
Q2 2009 adjustments to accrual			73
Balance as of June 30, 2009		$	453

During the second quarter of 2009, ARRIS consolidated two facilities in Colorado. The consolidation allows the Company to combine its sales force and create a unified presence in the Denver area business community. This consolidation resulted in a restructuring charge of approximately $212 thousand in 2009 related to lease commitments and the write-off of leasehold improvements and other fixed assets. ARRIS expects the remaining payments to be made by the second quarter of 2010.

		(in thousands)
Balance as of May 2009		$	212
Q2 2009 payments			(74	)
Balance as of June 30, 2009		$	138

Note 9. Inventories

Inventories are stated at the lower of average cost, approximating first-in, first-out, or market. The components of inventory were as follows, net of reserves (in thousands):

		June 30,				December 31,
		2009				2008
Raw material		$	17,791			$	19,247
Work in process			4,395				4,814
Finished goods			93,758				105,691
Total net inventories		$	115,944			$	129,752

Note 10. Property, Plant and Equipment

Property, plant and equipment, at cost, consisted of the following (in thousands):

		June 30,				December 31,
		2009				2008
Land		$	2,612			$	2,612
Building and leasehold improvements			21,964				20,048
Machinery and equipment			136,999				136,857
			161,575				159,517
Less: Accumulated depreciation			(101,527	)			(100,313	)
Total property, plant and equipment, net		$	60,048			$	59,204

Note 11. Long-Term Obligations

Debt, capital lease obligations and other long-term liabilities consist of the following (in thousands):

		June 30,				December 31,
		2009				2008
2.00% convertible senior notes due 2026 (net of discount of $55,402 in 2009 and $64,267 in 2008)		$	205,648			$	211,733
2.00% Pennsylvania Industrial Development Authority debt, net of current portion			62				137
Total long-term debt			205,710				211,870
Other long-term liabilities:
Deferred compensation		$	5,118			$	4,896
Accrued warranty			3,985				4,532
Deferred revenue			2,925				2,671
Landlord funded leasehold improvements			1,124				1,308
Other noncurrent liabilities			1,942				1,936
Total other noncurrent liabilities		$	15,094			$	15,343

On November 6, 2006, the Company issued $276.0 million of 2% convertible senior notes due 2026. The notes are convertible, at the option of the holder, based on an initial conversion rate, subject to adjustment, of 62.1504 shares per $1,000 base amount (which represents an initial conversion price of approximately $16.09 per share of our common stock), into cash up to the principal amount and, if applicable, shares of the Company’s common stock, cash or a combination thereof. The notes may be converted during any calendar quarter in which the closing price of ARRIS’ common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120% of the conversion price in effect at that time (which, based on the current conversion price would be $19.31) and upon the occurrence of certain other events. Upon conversion, the holder will receive the principal amount in cash and an additional payment, in either cash or stock at the option of the Company. The additional payment will be based on a formula which calculates the difference between the initial conversion rate ($16.09) and the market price at the date of the conversion. As of August 7, 2009, the notes could not be converted by the holders thereof. Interest is payable on May 15 and November 15 of each year. The Company may redeem the notes at any time on or after November 15, 2013, subject to certain conditions. In addition, the holders may require the Company to purchase all or a portion of their convertible notes on or after November 13, 2013.

The Company paid approximately $7.8 million of finance fees related to the issuance of the notes. Of the $7.8 million, $2.5 million were attributed to the equity component of the convertible debt instrument. The portion related to the debt issuance costs are being amortized over seven years. The remaining balance of unamortized financing costs from these notes as of June 30, 2009 and December 31, 2008 was $3.1 million, and $3.7 million, respectively. See Note 2 of the Notes to the Consolidated Financial Statements for information on the adoption of FSP APB 14-1.

As of June 30, 2009 and December 31, 2008, the face value of the outstanding notes was $261.0 million and $276.0 million, respectively. During the first quarter of 2009, the Company acquired $15.0 million face value of the notes for approximately $10.6 million. The Company also wrote off approximately $0.2 million of deferred finance fees associated with the portion of the notes acquired. As a result, the Company realized a gain of approximately $4.2 million on the retirement of the notes.

The Company has not paid cash dividends on its common stock since its inception.

Note 12. Comprehensive Income

Total comprehensive income represents the net change in stockholders’ equity during a period from sources other than transactions with stockholders. For ARRIS, the components of comprehensive income include the unrealized gain (loss) on marketable securities. The components of comprehensive income for the three and six months ended June 30, 2009 and 2008 are as follow (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Net income		$	22,909			$	7,829			$	35,791			$	11,658
Changes in the following equity accounts:
Unrealized (loss)/gain on marketable securities			211				(85	)			113				46
Comprehensive income		$	23,120			$	7,744			$	35,904			$	11,704

Note 13. Segment Information

The “management approach” required under SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, has been followed in order to present our 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 for evaluating segment performance and deciding how to allocate resources to segments.

The Company manages its business under three segments: Broadband Communications Systems (“BCS”), Access, Transport & Supplies (“ATS”), and Media & Communications Systems (“MCS”). A detailed description of each segment is contained in our December 31, 2008 Form 10-K under Item 1 in “Our Principal Products.”

The Broadband Communications Systems segment’s product solutions include Headend and Subscriber Premises equipment that enable cable operators to provide Voice over IP, Video over IP and high-speed data services to residential and business subscribers.

The Access, Transport & Supplies segment’s product lines cover all components of a hybrid fiber coax network, radio frequency over glass (RFoG) networks and ethernet passive optical networks (EPON) including managed and scalable headend and hub equipment, optical nodes, radio frequency products, transport products and supplies.

The Media & Communications Systems segment provides content and operations management systems, including products for Video on Demand, Ad Insertion, Digital Advertising, Service Assurance, Service Fulfillment, Mobile Workforce Management and Fixed/Mobile converged communications.

The table below presents information about the Company’s reporting segments for the three and six month periods ended June 30, 2009 and 2008 (in thousands):

		BCS				ATS				MCS				Total
Three Months Ended June 30, 2009
Net sales		$	211,770			$	43,467			$	23,284			$	278,521
Gross margin			92,713				9,815				14,752				117,280
Amortization of intangible assets			—				5,654				3,609				9,263
Three Months Ended June 30, 2008
Net sales		$	190,412			$	76,967				13,731			$	281,110
Gross margin			61,487				23,870				7,527				92,884
Amortization of intangible assets			—				6,612				5,842				12,454
Six Months Ended June 30, 2009
Net sales		$	405,901			$	86,457			$	39,681			$	532,039
Gross margin			171,635				19,082				22,073				212,790
Amortization of intangible assets			—				11,308				7,218				18,526

		BCS				ATS				MCS				Total
Six Months Ended June 30, 2008
Net sales		$	380,049			$	149,861			$	24,706			$	554,616
Gross margin			119,478				45,746				12,908				178,132
Amortization of intangible assets			—				13,464				12,244				25,708

The Company’s goodwill by reportable segment as of June 30, 2009 did not change from December 31, 2008.

Note 14. Sales Information

The Company had two customers (including their affiliates, as applicable) with sales of more than 10% during the three and six months ended June 30, 2009. Over the past year, certain customers’ beneficial ownership may have changed as a result of mergers and acquisitions. Therefore, the revenue for ARRIS’ customers for prior periods has been adjusted to include the affiliates under current common control. A summary of sales to these customers for the three and six month periods ended June 30, 2009 and 2008 are set forth below (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Comcast		$	96,658			$	46,727			$	161,868			$	80,953
% of sales			34.7	%			16.6	%			30.4	%			14.6	%
Time Warner Cable		$	52,883			$	75,298			$	101,967			$	146,219
% of sales			19.0	%			26.8	%			19.2	%			26.4	%

No other customer provided more than 10% of total sales for the three and six months ended June 30, 2009 or 2008.

ARRIS sells its products primarily in United States. The Company’s international revenue is generated from Asia Pacific, Europe, Latin America and Canada. The Asia Pacific market primarily includes China, Hong Kong, Japan, Korea, Singapore and Taiwan. The European market primarily includes Austria, Belgium, France, Germany, the Netherlands, Poland, Portugal, Spain and Switzerland. The Latin American market primarily includes Argentina, Brazil, Chile, Columbia, Mexico, and Puerto Rico. Sales to international customers were approximately $73.7 million, or 26.5% of total sales, for the three months ended June 30, 2009. International sales during the same period in 2008 were $87.0 million, or 30.9% of total sales. For the six months ended June 30, 2009 and 2008 sales to international customers were $141.2 million and $171.8 million, or 26.5% and 31.0%, respectively.

Note 15. 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								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Basic:
Net income		$	22,909			$	7,829			$	35,791			$	11,658
Weighted average shares outstanding			124,412				122,741				123,849				126,752
Basic earnings per share		$	0.18			$	0.06			$	0.29			$	0.09
Diluted:
Net income		$	22,909			$	7,829			$	35,791			$	11,658
Weighted average shares outstanding			124,412				122,741				123,849				126,752
Net effect of dilutive equity awards			3,642				1,910				2,633				1,438
Total			128,054				124,651				126,482				128,190
Diluted earnings per share		$	0.18			$	0.06			$	0.28			$	0.09

Excluded from the dilutive securities described above are employee stock options to acquire approximately 3.3 million shares and 5.4 million shares, for the three and six months ended June 30, 2009, respectively. During the same periods in 2008, approximately 7.1 million shares and 7.7 million shares, respectively, were excluded from the dilutive securities above. These exclusions were made because, as a result of the exercise price of such securities, they were antidilutive.

Note 16. Income Taxes

In the first half of 2009 and 2008, the Company recorded income tax expense of $19.2 million and $6.9 million, respectively. Below is a summary of the components of the tax expense in each period (in millions, except for percentages):

		Six Months Ended June 30,
		2009												2008
		Income				Income								Income				Income
		Before				Tax				Effective				Before				Tax				Effective
		Tax				Expense				Tax Rate				Tax				Expense				Tax Rate
Non-Discrete Items		$	50.8			$	16.3				32.1	%		$	18.5			$	6.9				37.3	%
Discrete Accounting Events			4.2				1.4				33.3	%			—				—				—
Discrete Tax Events —
Valuation Allowances / FIN 48 Reserves			—				1.5								—				—
Total		$	55.0			$	19.2				34.9	%		$	18.5			$	6.9				37.3	%

•

In the second quarter of 2009, there was no tax or accounting discrete events. In the first quarter of 2009, the Company reported a discrete accounting gain of $4.2 million on the repurchase of convertible debt. Income tax expense of $1.4 million was recorded on the gain, reflecting a tax rate of 33.3%. Additionally, during the first quarter, the Company identified $1.5 million of discrete tax expense relating to adjustments of FIN 48 allowances.

•

In the first half of 2008, the Company recorded income tax expense at the applicable federal rate and state rates. There was no discrete tax or accounting events pursuant to the guidance of APB Opinion 28, Interim Financial Reporting and FIN 18, Accounting for Income Taxes in Interim Periods. However, the tax rate for the first half of 2008 did not include any benefit from research and development tax credits as legislation to extend the credit was not enacted until the fourth quarter of 2008.

The Company anticipates that the effective tax rate for full year 2009 for non-discrete items will be approximately 32% — 33%.

Note 17. Contingencies

From time to time, ARRIS is involved in claims, disputes, litigation or legal proceedings incidental to the ordinary course of its business, such as employment matters, environmental proceedings, contractual disputes and intellectual property disputes. Except as described below, ARRIS is not party to any proceedings that are, or reasonably could be expected to be, material to its business, results of operations or financial condition.

Commencing in 2005, Rembrandt Technologies, LP filed a series of lawsuits against several MSO’s alleging infringement of eight patents related to the cable systems operators’ use of data transmission, video, cable modem, voice-over-internet, and other technologies and applications. On July 14, 2009 ARRIS reached and signed a settlement with Rembrandt. As of June 30, 2009, the Company had accrued for the settlement related to the patent infringement.

In 2007, Adelphia Recovery Trust (“Trust”) contacted ARRIS asserting that ARRIS may have received transfers from Adelphia Cablevision, LLC (“Cablevision”) during the year prior to its filing of a Chapter 11 petition on June 25, 2002 (the “Petition Date”), and that said transfers may be voidable. Cablevision sent similar letters to other parties. In the event a suit is commenced, ARRIS intends to contest the case vigorously. To date, ARRIS has received no further communication from Cablevision. No estimate can be made of the possible range of loss, if any, associated with a resolution of these assertions.

In January and February 2008, Verizon Services Corp. filed separate lawsuits against Cox and Charter alleging infringement of eight patents. In the Verizon v. Cox suit, the jury issued a verdict in favor of Cox, finding non-infringement in all patents and invalidating two of Verizon’s patents. Verizon has filed a notice of appeal. The Charter suit is still pending, with trial anticipated for 2010. It is premature to assess the likelihood of a favorable outcome of the Charter case or Cox appeal; though the Cox outcome at trial increases the likelihood of a favorable Charter outcome. In the event of an unfavorable outcome, ARRIS may be required to indemnify Charter and Cox, pay royalties and/or cease utilizing certain technology.

Acacia Media Technologies Corp. sued Charter and Time Warner Cable, Inc. for allegedly infringing several U.S. Patents. The case has been bifurcated, where the case for invalidity of the patents will be tried first, and only if one or more patents are found to be valid, then the case for infringement will be tried. Both customers requested C-COR’s, as well as other vendors’, support under the indemnity provisions of the purchase agreements (related to video-on-demand products). It is premature to assess the likelihood of a favorable outcome. In the event of an unfavorable outcome, ARRIS may be required to indemnify the defendants, pay royalties and /or cease using certain technology.

V-Tran Media Technologies has filed a number of lawsuits against 21 different parties, including suits against Comcast, Charter, Verizon, Time Warner and numerous smaller MSOs, for infringement on two patents related to television broadcast systems for selective transmission. Both patents expired in June 2008. The defendants recently received a favorable Markman Ruling and are seeking dismissal of the suit. Both patents expired in June 2008. C-COR manufactured products that allegedly infringed on the patents. It is premature to assess the likelihood of a favorable outcome. In the event of an unfavorable outcome, ARRIS may be required to indemnify the defendants or pay royalties. Since the patents have expired, it is unlikely ARRIS will be prohibited from using the technology.

In February 2008, several former employees of a former subsidiary of C-COR, filed a class action Fair Labor Standards Act suit against the former subsidiary and C-COR alleging that the plaintiffs were not properly paid for overtime. The proposed class could include 1,000 cable installers and field technicians. ARRIS is actively contesting the suit. The opt-in period for substantially all of the plaintiffs ended July 31, 2009. To date, approximately 203 people have opted-in. ARRIS intends to defend this vigorously. It is premature to assess the likelihood of a favorable outcome or estimate the possible range of loss associated with the resolution of this case.

On March 11, 2009, ARRIS filed a declaratory judgment action against British Telecom (BT) seeking to invalidate the BT patents and seeking a declaration that neither the ARRIS products, nor their use by ARRIS’s customers infringe any of the BT patents. This action arose from the assertion by BT (via their agent, IPValue), that the ARRIS products or their use by ARRIS’s customers infringed four BT patents.

On July 31, 2009, ARRIS filed a contempt motion in the U.S. District Court for the District of Delaware against SeaChange International related to a patent owned by ARRIS. In its motion, ARRIS is seeking further damages and the enforcement of the permanent injunction entered by the Court against certain of SeaChange products in 2006. The original finding of infringement was affirmed by the Federal Circuit in 2006, and the patent claims (with one exception) recently were upheld by the U.S. Patent Office in a re-examination process initiated by SeaChange. In response, on August 3, 2009, SeaChange filed a complaint seeking a declaratory judgment from the Court to declare that its products are non-infringing with respect to the patent.

From time to time third parties approach ARRIS or an ARRIS customer, seeking that ARRIS or its customer consider entering into a license agreement for such patents. Such invitations cause ARRIS to dedicate time to study such patents and enter into discussions with such third parties regarding the merits and value, if any, of the patents. These discussions, may materialize into license agreements or patents asserted against ARRIS or its customers. If asserted against our customers, our customers may seek indemnification from ARRIS. It is not possible to determine the impact of any such ongoing discussions on ARRIS’s business financial conditions.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a global communications technology company specializing in the design and engineering of broadband network solutions. We are a leading developer, manufacturer and supplier of cable telephony, video and high-speed data products, as well as outside plant construction and maintenance equipment for cable system operators. We provide products and equipment principally to cable system operators and, more specifically, to Multiple System Operators (“MSOs”). Our products allow MSOs and other broadband service providers to deliver a full range of integrated voice, video and high-speed data services to their subscribers. Our core strategy is to lead network operators through the transition to Internet Protocol-based networks by leveraging our extensive global installed base of products and experienced workforce to deliver network solutions that meet the business needs of our customers.

We operate our business in three segments:

	•		Broadband Communications Systems (“BCS”)
	•		Access, Transport & Supplies (“ATS”)
	•		Media & Communications Systems (“MCS”)

A detailed description of each segment is contained in “Our Principal Products” in our Form 10-K for the year ended December 31, 2008.

Our Strategy and Key Highlights

Our long-term business strategy, “Convergence Enabled,” includes the following key elements:

	•		Maintain a strong capital structure, mindful of our 2013 debt maturity, share repurchase opportunities and other capital needs including mergers and acquisitions.
	•		Grow our current business into a more complete portfolio including a strong video product suite.
	•		Continue to invest in the evolution toward enabling true network convergence onto an all IP platform.
	•		Continue to expand our product/service portfolio through internal developments, partnerships and acquisitions.
	•		Expand our international business and begin to consider opportunities in markets other than cable.
	•		Continue to invest in and evolve the ARRIS talent pool to implement the above strategies.

Our mission is to simplify technology, facilitate its implementation, and enable operators to put their subscribers in control of their entertainment, information, and communication needs. Through a set of business solutions that respond to specific market needs, we are integrating our products, software, and services solutions to work with our customers as they address Internet Protocol telephony deployment, high speed data deployment, Internet Protocol video deployment, network capacity issues, on demand video rollout, operations management, network integration, and business services opportunities.

Below are some key highlights and trends relative to our second quarter and first half of 2009:

Financial Highlights

	•		Earnings per diluted share increased to $0.18 in the second quarter 2009 as compared to $0.06 in the second quarter 2008 despite a 1% decline in sales.
	•		Gross margin percentage increased 9.1 percentage points year over year to 42.1% in the second quarter 2009 reflecting a stronger product mix including notably higher sales of our higher margin CMTS product line.
	•		We ended the second quarter 2009 with $524.0 million of cash, cash equivalents, & short-term investments. We generated approximately $94.3 million of cash from operating activities in the second quarter and $108.2 million during the first half of 2009.

	•		We used $10.6 million of cash in the first quarter to retire $15.0 million principal amount of our convertible debt, which represented a 29% discount. The Company also wrote off approximately $0.2 million of deferred finance fees associated with the portion of the notes retired. We recorded a pre-tax net gain of $4.2 million in the first quarter as a result of the retirement.
	•		We ended the second quarter with an order backlog of approximately $165.7 million and a book-to-bill ratio of 1.04. Both order backlog and book-to-bill are down compared to the second quarter of 2008.

Product Line Highlights

•

Broadband Communications Systems

               CMTS

	•		Downstream port shipments were 32,005 in the second quarter of 2009, 56,521 through the first half of 2009.
	•		Operators continue to focus on deploying DOCSIS 3.0 technology in order to increase overall capacity as well as compete aggressively with higher speed service tiers. The ARRIS solution has been adopted broadly across the industry, with new wins in Korea, CALA, and North America.
	•		Continued improvement in gross margins resulting from both customer and product mix (increased DOCSIS 3.0).
	•		The first live deployment of a DOCSIS 3.0 Upstream Channel Bonding service with JCN in Japan
	•		Solid CMTS market share results in the first quarter in North America and Rest of World.

                CPE

	•		1.2 million and 2.4 million EMTAs were shipped in the second quarter and first half of 2009, down 6% and 16% from first quarter of 2009 and first half of 2008 levels as overall VoIP net subscriber additions have leveled off. We have retained number one market share for 17 consecutive quarters.
	•		We increased shipments of Multi-line Gateways in the second quarter of 2009.
	•		DOCSIS 3.0 CPE shipments increased substantially in second quarter 2009. We expect a continuing transition from deployment of DOCSIS 2.0 to DOCSIS 3.0 CPE throughout the remainder of 2009.

•

Access, Transport & Supplies

	•		Business continues to be impacted by macro economic factors, which resulted in lower sales year over year with a small sequential gain over the first quarter of 2009.
	•		DOCSIS 3.0 bandwidth efficiency improvements allow for network investments to be delayed.
	•		Product mix and lower volumes impacted margins.

•

Media & Communications Systems

	•		Strong WorkAssureTM demand due to significant customer expansions in the US and CALA.
	•		Demand for Assurance products continue to be strong based on:

	•		DOCSIS 3.0 rollouts
	•		A continued focus on Opex management and control

•

Introduced new server platforms for On Demand.

Significant Customers

The vast majority of our sales are to cable system operators worldwide. As the U.S. cable industry continued a trend toward consolidation, the six largest MSOs control approximately 89.9% of the triple play Revenue Generating Units (“RGU”) within the U.S. cable market (according to Dataxis in the first quarter 2009), thereby making our sales to those MSOs critical to our success. Our sales are substantially dependent upon a system operator’s selection of ARRIS’ network equipment, demand for increased broadband services by subscribers, and general capital expenditure levels by system operators. Our two 10% customers (including their affiliates, as applicable) are Comcast and Time Warner Cable. Over the past year, certain customers’ beneficial ownership may have changed as a result of mergers and acquisitions. Therefore, the revenue for ARRIS’ customers for prior periods has been adjusted to include the affiliates currently understood to be under common control. A summary of sales to these customers for the three and six month periods ended June 30, 2009 and 2008 are set forth below (in thousands):

		Three Months Ended June 30								Six Months Ended June 30,
		2009				2008				2009				2008
Comcast		$	96,658			$	46,727			$	161,868			$	80,953
% of sales			34.7	%			16.6	%			30.4	%			14.6	%
Time Warner Cable		$	52,883			$	75,298			$	101,967			$	146,219
% of sales			19.0	%			26.8	%			19.2	%			26.4	%

Comparison of Operations for the Three and Six Months Ended June 30, 2009 and 2008

Net Sales

The table below sets forth our net sales for the three and six months ended June 30, 2009 and 2008, for each of our reporting segments (in thousands):

		Net Sales																Increase (Decrease) Between 2009 and 2008
		For the Three Months								For the Six Months								For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,								Ended June 30								Ended June 30
		2009				2008				2009				2008				$				%				$				%
Business Segment:
BCS		$	211,770			$	190,412			$	405,901			$	380,049			$	21,358				11.2			$	25,852				6.8
ATS			43,467				76,967				86,457				149,861				(33,500	)			(43.5	)			(63,404	)			(42.3	)
MCS			23,284				13,731				39,681				24,706				9,553				69.6				14,975				60.6
Total sales		$	278,521			$	281,110			$	532,039			$	554,616			$	(2,589	)			(0.9	)		$	(22,577	)			(4.1	)

The table below sets forth our domestic and international sales for the three and six months ended June 30, 2009 and 2008 (in thousands):

		Net Sales																Increase (Decrease) Between 2009 and 2008
		For the Three Months								For the Six Months								For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,								Ended June 30								Ended June 30
		2009				2008				2009				2008				$				%				$				%
Domestic		$	204,849			$	194,119			$	390,875			$	382,862			$	10,730				5.5			$	8,013				2.1
International			73,672				86,991				141,164				171,754				(13,319	)			(15.3	)			(30,590	)			(17.8	)
Total sales		$	278,521			$	281,110			$	532,039			$	554,616			$	(2,589	)			(0.9	)		$	(22,577	)			(4.1	)

Broadband Communications Systems (“BCS”) Net Sales 2009 vs. 2008

During the three and six months ended June 30, 2009, sales of our Broadband Communications Systems segment products increased by approximately 11.2% and 6.8%, respectively, as compared to the same periods in 2008. The following factors contributed to the increase in sales:

	•		Higher sales to multiple customers of our CMTS products.
	•		Comcast sales were partially offset by a decrease in EMTA sales to several customers, notably Time Warner Cable and Affiliates.

Access, Transport and Supplies (“ATS”) Net Sales 2009 vs. 2008

Access, Transport and Supplies segment revenue decreased by approximately 43.5% and 42.3%, respectively, as compared to the same periods in 2008. The following factors contributed to the decrease in sales:

	•		The decrease was primarily the result of the reduced spending by cable operators as a result of the slowdown of the US economy, and in particular new housing construction that drives capital equipment spending for plant upgrades and rebuilds by cable operators.
	•		Operators were also able to delay node segmentations by taking advantage of bandwidth efficiency improvements brought about by the implementation of DOCSIS 3.0.

Media & Communications Systems (“MCS”) Net Sales 2009 vs. 2008

Media & Communications Systems revenue increased by approximately 69.6% in the second quarter of 2009 and 60.6% in the first six months of the year, as compared to the same periods in 2008. The following factors contributed to the increase in sales.

	•		Higher demand for our Assurance products.
	•		The impact of the build-up of deferred revenue throughout 2008. The deferred revenue acquired from the C-COR acquisition was marked to fair value at the date of the acquisition and rebuilt through 2008.

Gross Margin

The table below sets forth our gross margin for the three and six months ended June 30, 2009 and 2008, for each of our reporting segments (in thousands):

		Gross Margin $																Increase (Decrease) Between 2009 and 2008
		For the Three Months								For the Six Months								For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,								Ended June 30								Ended June 30
		2009				2008				2009				2008				$				%				$				%
Business Segment:
BCS		$	92,713			$	61,487			$	171,635			$	119,478			$	31,226				50.8			$	52,157				43.7
ATS			9,815				23.870				19,082				45,746				(14,055	)			(58.9	)			(26,664	)			(58.3	)
MCS			14,752				7,527				22,073				12,908				7,225				96.0				9,165				71.0
Total		$	117,280			$	92,884			$	212,790			$	178,132			$	24,396				26.3			$	34,658				19.5

The table below sets forth our gross margin percentages for the three and six months ended June 30, 2009 and 2008, for each of our reporting segments:

		Gross Margin %																Increase (Decrease) Between 2009 and 2008
		For the Three Months								For the Six Months								For the Three Months				For the Six Months
		Ended June 30,								Ended June 30,								Ended June 30				Ended June 30
		2009				2008				2009				2008				Percentage Points
Business Segment:
BCS			43.8	%			32.3	%			42.3	%			31.4	%			11.5				10.9
ATS			22.6	%			31.0	%			22.1	%			30.5	%			(8.4	)			(8.4	)
MCS			63.4	%			54.8	%			55.6	%			52.2	%			8.6				3.4
Total			42.1	%			33.0	%			40.0	%			32.1	%			9.1				7.9

Broadband Communications Systems Gross Margin 2009 vs. 2008

Broadband Communications Systems segment gross margin dollars and gross margin percentage increased year over year:

	•		The increase in gross margin dollars was primarily the result of higher sales due to the successful introduction of our DOCIS 3.0 CMTS in the second half of last year and product mix.
	•		The increase in gross margin percentage primarily reflects product mix, as we sold more CMTS products and fewer EMTA products in the three and six month periods in 2009 as compared to the same periods in 2008. CMTS products carry higher gross margin percentage than the EMTA products.

Access, Transport and Supplies Gross Margin 2009 vs. 2008

The Access, Transport and Supplies segment gross margin dollars and percentage decreased year over year:

	•		The decrease in gross margin dollars was primarily the result of a decrease in sales in both the three and six month periods in 2009.
	•		The decrease in gross margin percentage was primarily the result of both a change in product mix and a decrease in sales. In the three and six month period in 2009, Access and Transport sales decreased proportionally more than the Supplies sales decreased. In addition, our gross margin was negatively

impacted by the decline in the overall volume resulting in a higher manufacturing cost per unit due to the allocation of fixed factory overhead costs as well as lower gross margin on certain headend optics gear.

Media & Communications Systems Gross Margin 2009 vs. 2008

Media & Communications Systems segment gross margin dollars and percentage increased year over year:

	•		The increase in gross margin dollars was primarily the result of increased sales.
	•		The increase in gross margin percentage was primarily the result of product mix. Performance in this segment is variable as revenue recognition is significantly tied to customer acceptances associated with multiple month and quarter projects, and non linear orders for licenses and hardware

Operating Expenses

The table below provides detail regarding our operating expenses (in thousands):

		Operating Expenses																Increase (Decrease) Between 2009 and 2008
		For the Three Months								For the Six Months								For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,								Ended June 30								Ended June 30
		2009				2008				2009				2008				$				%				$				%
SG&A		$	39,128			$	37,046			$	74,471			$	74,028			$	2,082				5.6			$	443				0.6
Research & development			30,143				27,662				58,538				55,784				2,481				9.0				2,754				4.9
Restructuring Charges			592				175				712				580				417				238.3				132				22.8
Amortization of intangibles			9,263				12,454				18,526				25,708				(3,191	)			(25.6	)			(7,182	)			(27.9	)
Total		$	79,126			$	77,337			$	152,247			$	156,100			$	1,789				2.3			$	(3,853	)			(2.5	)