ARRIS GROUP, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarter ended September 30, 2006
of
ARRIS GROUP, INC.
A Delaware Corporation
IRS Employer Identification No. 58-2588724
SEC File Number 000-31254
3871 Lakefield Drive
Suwanee, GA 30024
(678) 473-2000
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.
As of October 31, 2006, 107,818,166 shares of the registrants Common Stock, $0.01 par value, were
outstanding.
ARRIS GROUP, INC.
FORM 10-Q
For the Three and Nine Months Ended September 30, 2006
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ARRIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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September 30, |
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December 31, |
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2006 |
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2005 |
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(unaudited) |
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ASSETS |
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Current assets: |
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|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
179,971 |
|
|
$ |
75,286 |
|
Short-term investments, at fair value |
|
|
30,000 |
|
|
|
54,250 |
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short-term investments |
|
|
209,971 |
|
|
|
129,536 |
|
Restricted cash |
|
|
6,126 |
|
|
|
6,073 |
|
Accounts receivable (net of allowances for doubtful
accounts of $2,832 in 2006 and $3,729 in 2005) |
|
|
120,740 |
|
|
|
83,540 |
|
Other receivables |
|
|
5,621 |
|
|
|
286 |
|
Inventories, net |
|
|
101,062 |
|
|
|
113,909 |
|
Prepaid assets |
|
|
3,751 |
|
|
|
10,945 |
|
Other current assets |
|
|
2,435 |
|
|
|
4,331 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
449,706 |
|
|
|
348,620 |
|
Property, plant and equipment (net of accumulated
depreciation of $75,938 in 2006 and $69,309 in 2005) |
|
|
25,338 |
|
|
|
25,557 |
|
Goodwill |
|
|
150,569 |
|
|
|
150,569 |
|
Intangibles (net of accumulated amortization of $106,775
in 2006 and $106,200 in 2005) |
|
|
345 |
|
|
|
920 |
|
Investments |
|
|
3,438 |
|
|
|
3,321 |
|
Other assets |
|
|
641 |
|
|
|
416 |
|
|
|
|
|
|
|
|
|
|
$ |
630,037 |
|
|
$ |
529,403 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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|
|
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Accounts payable |
|
$ |
44,440 |
|
|
$ |
35,920 |
|
Accrued compensation, benefits and related taxes |
|
|
19,630 |
|
|
|
20,424 |
|
Accrued warranty |
|
|
8,582 |
|
|
|
8,479 |
|
Other accrued liabilities |
|
|
28,371 |
|
|
|
20,633 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
101,023 |
|
|
|
85,456 |
|
Accrued pension |
|
|
11,947 |
|
|
|
12,636 |
|
Other long-term liabilities |
|
|
5,589 |
|
|
|
5,594 |
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|
|
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Total liabilities |
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|
118,559 |
|
|
|
103,686 |
|
Stockholders equity: |
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Preferred stock, par value $1.00 per share, 5.0 million
shares authorized; none issued and outstanding |
|
|
|
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|
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|
Common stock, par value $0.01 per share, 320.0 million
shares authorized; 107.8 million and 105.6 million
shares issued and outstanding in 2006 and 2005,
respectively |
|
|
1,086 |
|
|
|
1,069 |
|
Capital in excess of par value |
|
|
747,721 |
|
|
|
732,405 |
|
Accumulated deficit |
|
|
(233,519 |
) |
|
|
(305,555 |
) |
Unrealized gain on marketable securities |
|
|
1,219 |
|
|
|
1,077 |
|
Unfunded pension losses |
|
|
(4,618 |
) |
|
|
(4,618 |
) |
Unrealized gain (loss) on derivatives |
|
|
(227 |
) |
|
|
1,523 |
|
Cumulative translation adjustments |
|
|
(184 |
) |
|
|
(184 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
511,478 |
|
|
|
425,717 |
|
|
|
|
|
|
|
|
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$ |
630,037 |
|
|
$ |
529,403 |
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|
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|
See accompanying notes to the consolidated financial statements.
1
ARRIS
GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data and percentages)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
228,646 |
|
|
$ |
200,957 |
|
|
$ |
656,980 |
|
|
$ |
499,082 |
|
Cost of sales |
|
|
165,467 |
|
|
|
145,979 |
|
|
|
473,554 |
|
|
|
366,230 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gross margin |
|
|
63,179 |
|
|
|
54,978 |
|
|
|
183,426 |
|
|
|
132,852 |
|
Gross margin % |
|
|
27.6 |
% |
|
|
27.4 |
% |
|
|
27.9 |
% |
|
|
26.6 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
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|
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|
Selling, general and administrative expenses |
|
|
21,524 |
|
|
|
20,070 |
|
|
|
64,523 |
|
|
|
53,803 |
|
Research and development expenses |
|
|
16,066 |
|
|
|
15,954 |
|
|
|
50,460 |
|
|
|
45,091 |
|
Restructuring and impairment charges |
|
|
4 |
|
|
|
34 |
|
|
|
347 |
|
|
|
430 |
|
Amortization of intangibles |
|
|
138 |
|
|
|
218 |
|
|
|
575 |
|
|
|
993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
37,732 |
|
|
|
36,276 |
|
|
|
115,905 |
|
|
|
100,317 |
|
Operating income |
|
|
25,447 |
|
|
|
18,702 |
|
|
|
67,521 |
|
|
|
32,535 |
|
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
27 |
|
|
|
11 |
|
|
|
50 |
|
|
|
2,033 |
|
Loss on debt retirement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,372 |
|
Loss (gain) on investments |
|
|
32 |
|
|
|
(60 |
) |
|
|
29 |
|
|
|
15 |
|
Interest income |
|
|
(2,756 |
) |
|
|
(777 |
) |
|
|
(6,357 |
) |
|
|
(2,099 |
) |
Loss (gain) in foreign currency |
|
|
201 |
|
|
|
288 |
|
|
|
(943 |
) |
|
|
145 |
|
Other expense |
|
|
68 |
|
|
|
83 |
|
|
|
269 |
|
|
|
366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
27,875 |
|
|
|
19,157 |
|
|
|
74,473 |
|
|
|
29,703 |
|
Income tax expense |
|
|
1,328 |
|
|
|
307 |
|
|
|
2,562 |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
26,547 |
|
|
|
18,850 |
|
|
|
71,911 |
|
|
|
29,461 |
|
Income (loss) from discontinued operations |
|
|
15 |
|
|
|
(30 |
) |
|
|
124 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,562 |
|
|
$ |
18,820 |
|
|
$ |
72,035 |
|
|
$ |
29,517 |
|
|
|
|
|
|
|
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|
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|
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|
|
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|
Net income per common share
|
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|
|
|
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|
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Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.25 |
|
|
$ |
0.18 |
|
|
$ |
0.67 |
|
|
$ |
0.31 |
|
Income from discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.25 |
|
|
$ |
0.18 |
|
|
$ |
0.67 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
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|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.24 |
|
|
$ |
0.18 |
|
|
$ |
0.66 |
|
|
$ |
0.31 |
|
Income from discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.24 |
|
|
$ |
0.18 |
|
|
$ |
0.66 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
Weighted average common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
107,678 |
|
|
|
104,434 |
|
|
|
107,007 |
|
|
|
93,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
109,090 |
|
|
|
107,049 |
|
|
|
109,311 |
|
|
|
95,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
2
ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
|
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|
|
|
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|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,035 |
|
|
$ |
29,517 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
7,235 |
|
|
|
7,941 |
|
Amortization of intangibles |
|
|
575 |
|
|
|
993 |
|
Equity compensation expense |
|
|
7,068 |
|
|
|
4,341 |
|
Excess tax benefits from stock-based compensation plans |
|
|
(538 |
) |
|
|
|
|
Amortization of deferred finance fees |
|
|
|
|
|
|
305 |
|
Provision for doubtful accounts |
|
|
(248 |
) |
|
|
(355 |
) |
Gain related to previously written off receivables |
|
|
(1,573 |
) |
|
|
|
|
Loss (gain) on disposal of fixed assets |
|
|
(2 |
) |
|
|
131 |
|
Loss on investments |
|
|
32 |
|
|
|
75 |
|
Loss on debt retirement |
|
|
|
|
|
|
2,372 |
|
Impairment of long-lived assets |
|
|
|
|
|
|
291 |
|
Gain on discontinued product lines |
|
|
(124 |
) |
|
|
(56 |
) |
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(37,515 |
) |
|
|
(39,525 |
) |
Other receivables |
|
|
(5,335 |
) |
|
|
(467 |
) |
Inventory |
|
|
12,847 |
|
|
|
2,824 |
|
Accounts payable and accrued liabilities |
|
|
15,590 |
|
|
|
(7,249 |
) |
Other, net |
|
|
7,162 |
|
|
|
(10,242 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
77,209 |
|
|
|
(9,104 |
) |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(7,080 |
) |
|
|
(7,555 |
) |
Cash proceeds from sale of property, plant and equipment |
|
|
22 |
|
|
|
40 |
|
Cash paid for acquisition, net of cash acquired |
|
|
|
|
|
|
(89 |
) |
Purchases of short-term investments |
|
|
(51,900 |
) |
|
|
(51,250 |
) |
Disposals of short-term investments |
|
|
76,150 |
|
|
|
83,032 |
|
Purchases of equity investments |
|
|
|
|
|
|
(259 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
17,192 |
|
|
|
23,919 |
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Excess tax benefits from stock-based compensation plans |
|
|
538 |
|
|
|
|
|
Proceeds from issuance of common stock and other |
|
|
9,746 |
|
|
|
8,307 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
10,284 |
|
|
|
8,307 |
|
Net increase in cash and cash equivalents |
|
|
104,685 |
|
|
|
23,122 |
|
Cash and cash equivalents at beginning of period |
|
|
75,286 |
|
|
|
25,072 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
179,971 |
|
|
$ |
48,194 |
|
|
|
|
|
|
|
|
Noncash
investing and financing activities |
|
|
|
|
|
|
|
|
Net tangible
assets acquired, excluding cash |
|
$ |
|
|
|
|
799 |
|
Investment
in acquired company |
|
|
|
|
|
|
(1,325 |
) |
Net
liabilities assumed |
|
|
|
|
|
|
(76 |
) |
Intangible
assets acquired |
|
|
|
|
|
|
691 |
|
|
|
|
|
|
|
|
Cash paid
for acquisition, net of cash acquired |
|
$ |
|
|
|
|
89 |
|
|
|
|
|
|
|
|
Equity
issued in exchange for 4½%
convertible subordinate notes due 2008 |
|
$ |
|
|
|
$ |
75,000 |
|
|
|
|
|
|
|
|
Equity
issued for make-whole interest payment
4½%
convertible
subordinated notes due 2008 |
|
$ |
|
|
|
$ |
2,372 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
3
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 one business segment, Communications,
providing a range of customers with network and system products and services, primarily hybrid
fiber-coax networks and systems, for the communications industry. ARRIS is a leading developer,
manufacturer and supplier of telephony, data, video, construction, rebuild and maintenance
equipment for the broadband communications industry. 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. Additionally, certain prior period
amounts have been reclassified to conform to the 2006 financial statement presentation. Interim
results of operations are not necessarily indicative of results to be expected from a twelve-month
period. These financial statements should be read in conjunction with the Companys most recently
audited consolidated financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2005, as filed with the United States Securities and
Exchange Commission (SEC).
Note 2. Impact of Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. Effective for
the fiscal year ending 2006, the Company will be required to fully recognize the funded status of
its defined benefit plan and provide required disclosures. Effective for the fiscal year ending
2008, the Company will be required to measure each plans assets and liabilities as of the end of
the fiscal year instead of the Companys current measurement date of September 30. The Company is
currently evaluating the impact of adopting SFAS No. 158 on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. This Statement provides guidance
with respect to other accounting pronouncements that require or permit fair value measurements, the
FASB having previously concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new fair value
measurements; however, for some entities, the application of SFAS No. 157 will change current
practice. The provisions of SFAS No. 157 are effective as of January 1, 2008. The Company is
currently evaluating the impact of adopting SFAS No. 157 on its financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, which provides interpretive guidance regarding the consideration given to prior year
misstatements when determining materiality in current year financial statements. SAB No. 108 is
effective for fiscal years ending after November 15, 2006. When applicable, the Company will
evaluate the impact of SAB No. 108 on its consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109, Accounting for Income Taxes, which
clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Interpretation requires that the Company
recognize in the financial statements the impact of certain tax positions, based on the technical
merits of the position. FIN 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are
4
effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the change in
accounting principle recorded as an adjustment to opening retained earnings. The Company is
currently evaluating the impact of adopting FIN 48 on its financial statements.
In June 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation). This standard allows companies to present in
their statements of income any taxes assessed by a governmental authority that are directly imposed
on revenue-producing transactions between a seller and a customer, such as sales, use, value-added
and some excise taxes, on either a gross (included in revenue and costs) or a net (excluded from
revenue) basis. This standard is effective for interim periods beginning after December 15, 2006.
The Company presents these transactions on a net basis, and therefore the adoption of this standard
will have no impact on its financial statements.
Note 3. Stock-Based Compensation
The Company elected to early adopt the fair value recognition provisions of SFAS No. 123R,
Share-Based Payments, on July 1, 2005, using the modified prospective approach. Prior to the
adoption date, ARRIS used the intrinsic value method for valuing its awards of stock options and
restricted stock and recorded the related compensation expense, if any, in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. With the
exception of some stock options subject to variable accounting, no other stock-based employee or
director compensation cost for stock options was reflected in net income (loss) prior to July 1,
2005, as all options granted had exercise prices equal to the market value of the underlying common
stock on the date of grant. The Company records equity compensation expense related to its
restricted stock awards and director stock units over the related service periods.
The following table compares the nine months ended September 30, 2006 and 2005, had the Company
applied the provisions of SFAS No. 123R in the first and second quarters of 2005:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
(in thousands, except per share data) |
|
|
|
(unaudited) |
|
|
|
2006 |
|
|
2005 |
|
Net income as reported |
|
$ |
72,035 |
|
|
$ |
29,517 |
|
Add: Stock-based employee compensation included in reported net income, net of taxes |
|
|
7,068 |
|
|
|
4,341 |
|
Deduct: Total stock-based employee compensation expense determined under fair value
based methods for all awards, net of taxes |
|
|
(7,068 |
) |
|
|
(14,237 |
)* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, pro forma |
|
$ |
72,035 |
|
|
$ |
19,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.67 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
0.67 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.66 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
0.66 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes approximately $5.7 million of expense related to the acceleration of
out-of-the-money options in the second quarter of 2005. |
5
Note 4. Pension Benefits
Components of Net Periodic Pension Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
|
|
(unaudited) |
|
Service cost |
|
$ |
130 |
|
|
$ |
114 |
|
|
$ |
390 |
|
|
$ |
344 |
|
Interest cost |
|
|
370 |
|
|
|
353 |
|
|
|
1,108 |
|
|
|
1,060 |
|
Expected gain on plan assets |
|
|
(282 |
) |
|
|
(261 |
) |
|
|
(844 |
) |
|
|
(784 |
) |
Amortization of prior service cost |
|
|
120 |
|
|
|
119 |
|
|
|
358 |
|
|
|
358 |
|
Amortization of net (gain) loss |
|
|
2 |
|
|
|
(34 |
) |
|
|
6 |
|
|
|
(103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
340 |
|
|
$ |
291 |
|
|
$ |
1,018 |
|
|
$ |
875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer Contributions
No minimum funding contributions are required in 2006; however, the Company made a voluntary
contribution of $1.6 million during the third quarter 2006. During the three and nine months ended
September 30, 2006, the total contributions to the plan, including the voluntary and recurring
contributions, were $1.7 million and $1.7 million, respectively, compared to contributions of $0.8
million and $0.8 million for the same periods in 2005.
Note 5. 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 against 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 the cash is collected 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 for the nine
months ended September 30, 2006 is as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
8,479 |
|
Accruals related to warranties (including changes in estimates) |
|
|
2,910 |
|
Settlements made (in cash or in kind) |
|
|
(2,807 |
) |
|
|
|
|
Balance at September 30, 2006 (unaudited) |
|
$ |
8,582 |
|
|
|
|
|
Note 6. Restructuring and Impairment Charges
During 2001, the Company announced a restructuring plan to outsource the functions of most of its
manufacturing facilities. As of September 30, 2006, approximately $0.4 million related to lease
commitments remained in an accrual to be paid. ARRIS expects the remaining payments to be made by
the end of October 2007 (end of lease).
6
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 $6.2 million in the first
quarter of 2004 related to lease commitments and the write-off of leasehold improvements and other
fixed assets. As of September 30, 2006, approximately $2.2 million related to the lease
commitments remained in the restructuring accrual to be paid. ARRIS expects the remaining payments
to be made by the second quarter of 2009 (end of lease).
|
|
|
|
|
|
|
(in thousands) |
|
Balance as of December 31, 2005 |
|
$ |
3,121 |
|
First quarter payments |
|
|
(380 |
) |
First quarter adjustments to accrual |
|
|
228 |
|
Second quarter payments |
|
|
(404 |
) |
Second quarter adjustments to accrual |
|
|
(5 |
) |
Third quarter payments |
|
|
(395 |
) |
Third quarter adjustments to accrual |
|
|
|
|
|
|
|
|
Balance as of September 30, 2006 (unaudited) |
|
$ |
2,165 |
|
|
|
|
|
Note 7. Inventories
Inventories are stated at the lower of average cost, approximating first-in, first-out, or market.
The cost of finished goods is comprised of material, labor, and overhead.
The components of inventory are as follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
|
|
|
|
Raw material |
|
$ |
904 |
|
|
$ |
788 |
|
Finished goods |
|
|
100,158 |
|
|
|
113,121 |
|
|
|
|
|
|
|
|
Total net inventories |
|
$ |
101,062 |
|
|
$ |
113,909 |
|
|
|
|
|
|
|
|
Note 8. Property, Plant and Equipment
Property, plant and equipment, at cost, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
|
|
|
|
Land |
|
$ |
1,822 |
|
|
$ |
1,822 |
|
Building and leasehold improvements |
|
|
11,388 |
|
|
|
11,126 |
|
Machinery and equipment |
|
|
88,066 |
|
|
|
81,918 |
|
|
|
|
|
|
|
|
|
|
|
101,276 |
|
|
|
94,866 |
|
Less: Accumulated depreciation |
|
|
(75,938 |
) |
|
|
(69,309 |
) |
|
|
|
|
|
|
|
Total property, plant and equipment, net |
|
$ |
25,338 |
|
|
$ |
25,557 |
|
|
|
|
|
|
|
|
Note 9. Goodwill and Intangible Assets
The Companys goodwill and indefinite lived intangible assets are reviewed annually for impairment
or more frequently if impairment indicators arise. The annual valuation is performed during the
fourth quarter of each year and is based upon managements analysis including an independent
valuation. Separable intangible assets that are not deemed to have an indefinite life are
amortized over their useful lives. Each of the Companys intangible assets has an amortization
period of three years.
7
The carrying amount of goodwill at both September 30, 2006 and December 31, 2005 was $150.6
million.
The gross carrying amount and accumulated amortization of the Companys intangible assets, other
than goodwill, as of September 30, 2006 and December 31, 2005 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 (unaudited) |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
Gross |
|
|
Accumulated |
|
|
Book |
|
|
Gross |
|
|
Accumulated |
|
|
Book |
|
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
|
Amount |
|
|
Amortization |
|
|
Value |
|
Existing technology acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arris Interactive L.L.C |
|
$ |
51,500 |
|
|
$ |
(51,500 |
) |
|
|
|
|
|
$ |
51,500 |
|
|
$ |
(51,500 |
) |
|
$ |
|
|
Cadant, Inc. |
|
|
53,000 |
|
|
|
(53,000 |
) |
|
|
|
|
|
|
53,000 |
|
|
|
(53,000 |
) |
|
|
|
|
Com21 |
|
|
1,929 |
|
|
|
(1,929 |
) |
|
|
|
|
|
|
1,929 |
|
|
|
(1,527 |
) |
|
|
402 |
|
cXm Broadband |
|
|
691 |
|
|
|
(346 |
) |
|
|
345 |
|
|
|
691 |
|
|
|
(173 |
) |
|
|
518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
107,120 |
|
|
$ |
(106,775 |
) |
|
$ |
345 |
|
|
$ |
107,120 |
|
|
$ |
(106,200 |
) |
|
$ |
920 |
|
|
|
|
|
|
Amortization expense recorded on the intangible assets listed in the above table for the three
and nine months ended September 30, 2006 was $0.1 million and $0.6 million, respectively, and
compares to expense of $0.2 million and $1.0 million, respectively, for the same periods in 2005.
The estimated remaining amortization expense for the next five fiscal years is as follows (in
thousands):
|
|
|
|
|
2006 |
|
$ |
57 |
|
2007 |
|
$ |
230 |
|
2008 |
|
$ |
58 |
|
2009 |
|
$ |
|
|
2010 |
|
$ |
|
|
Note 10. Long-Term Obligations
As of both September 30, 2006 and December 31, 2005, the Company had approximately $6.1 million
outstanding under letters of credit, which are cash collateralized and classified as restricted
cash on the Consolidated Balance Sheets.
As of September 30, 2006, the Company had approximately $17.5 million of other long-term
liabilities, which included $11.9 million related to its accrued pension, $3.4 million related to
its deferred compensation obligations, and deferred rental expense of $2.2 million related to
landlord funded leasehold improvements. As of December 31, 2005, the Company had approximately
$18.2 million of other long-term liabilities, which included $12.6 million related to its accrued
pension, $3.2 million related to its deferred compensation obligations, $2.3 million related to
deferred rental expense for landlord funded leasehold improvements, and $0.1 million related to
security deposits received.
The Company has not paid cash dividends on its common stock since its inception. In 2002, to
implement its shareholder rights plan, the Companys Board of Directors declared a dividend
consisting of one right for each share of its common stock outstanding. Each right represents the
right to purchase one one-thousandth of a share of its Series A Participating Preferred Stock and
becomes exercisable only if a person or group acquires beneficial ownership of 15% or more of its
common stock or announces a tender or exchange offer for 15% or more of its common stock or under
other similar circumstances.
8
Note 11. 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 total
comprehensive income include the unrealized gain on marketable securities, unrealized gain (loss)
on derivative instruments qualifying for hedge accounting, and foreign currency translation
adjustments. The components of comprehensive income for the three and nine months ended September
30, 2006 and 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
|
|
|
|
(unaudited) |
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net income |
|
$ |
26,562 |
|
|
$ |
18,820 |
|
|
$ |
72,035 |
|
|
$ |
29,517 |
|
Changes in the following equity accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities |
|
|
54 |
|
|
|
137 |
|
|
|
142 |
|
|
|
269 |
|
Unrealized gain (loss) on derivative
instruments |
|
|
616 |
|
|
|
991 |
|
|
|
(1,750 |
) |
|
|
991 |
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
Comprehensive income |
|
$ |
27,232 |
|
|
$ |
19,948 |
|
|
$ |
70,427 |
|
|
$ |
30,776 |
|
|
|
|
Note 12. Sales Information
The Companys four largest customers (including their affiliates, as applicable) are Comcast, Cox
Communications, Liberty Media International and Time-Warner Cable. Over the past year, the
affiliates included in revenue have changed as a result of mergers and acquisitions. Therefore,
the revenue for ARRIS customers for prior periods has been adjusted to include, on a comparable
basis, the affiliates currently understood to be under common control. A summary of sales to these
customers for the three and nine month periods ended September 30, 2006 and 2005 are set forth
below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
|
|
|
|
(unaudited) |
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Comcast |
|
$ |
98,841 |
|
|
$ |
50,447 |
|
|
$ |
248,017 |
|
|
$ |
106,105 |
|
% of sales |
|
|
43.2 |
% |
|
|
25.1 |
% |
|
|
37.8 |
% |
|
|
21.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liberty Media International |
|
|
19,730 |
|
|
|
25,930 |
|
|
|
70,106 |
|
|
|
74,480 |
|
% of sales |
|
|
8.6 |
% |
|
|
12.9 |
% |
|
|
10.7 |
% |
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cox Communications |
|
|
20,645 |
|
|
|
33,953 |
|
|
|
73,486 |
|
|
|
88,328 |
|
% of sales |
|
|
9.0 |
% |
|
|
16.9 |
% |
|
|
11.2 |
% |
|
|
17.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Warner Cable |
|
|
17,087 |
|
|
|
23,197 |
|
|
|
57,765 |
|
|
|
60,499 |
|
% of sales |
|
|
7.5 |
% |
|
|
11.5 |
% |
|
|
8.8 |
% |
|
|
12.1 |
% |
No other customer provided more than 10% of total sales for the three and nine months ended
September 30, 2006 and 2005.
The Company operates globally and offers products and services that are sold to cable system
operators and telecommunications providers. The Companys products and services are focused in two
categories: Broadband and Supplies & Customer Premises Equipment (CPE). Service revenue is
included in these categories and is immaterial. Consolidated revenue by principal product and
service for the three and nine months ended September 30, 2006 and 2005 were as follows (in
thousands):
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Broadband |
|
$ |
87,636 |
|
|
$ |
81,263 |
|
|
$ |
271,823 |
|
|
$ |
222,148 |
|
Supplies & CPE |
|
|
141,010 |
|
|
|
119,694 |
|
|
|
385,157 |
|
|
|
276,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
228,646 |
|
|
$ |
200,957 |
|
|
$ |
656,980 |
|
|
$ |
499,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARRIS sells its products primarily in the United States. The Companys international revenue is
generated from Asia Pacific, Europe, Latin America and Canada. The Asia Pacific market primarily
includes China, Japan, Korea, Singapore, and Taiwan. The European market primarily includes
Austria, Belgium, France, Germany, the Netherlands, Norway, Poland, Portugal, Spain, Sweden and
Switzerland. The Latin American market primarily includes Argentina, Brazil, Chile, Mexico, and
Puerto Rico. Sales to international customers were approximately $54.4 million, or 23.8% of total
sales and $163.5 million, or 24.9% of total sales for the three and nine months ended September 30,
2006. International sales during the same periods in 2005 were $52.4 million, or 26.1% of total
sales, and $132.3 million, or 26.5% of total sales.
As of September 30, 2006, ARRIS held approximately $2.7 million of assets in Ireland (related to
its Com21 facility), comprised of $1.8 million of cash, $0.8 million of fixed assets and $0.1
million of other current assets. As of December 31, 2005, ARRIS held approximately $2.2 million of
assets in Ireland, comprised of $1.3 million of cash and $0.9 million of fixed assets.
Note 13. 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 |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
26,547 |
|
|
$ |
18,850 |
|
|
$ |
71,911 |
|
|
$ |
29,461 |
|
Income (loss) from discontinued
operations |
|
|
15 |
|
|
|
(30 |
) |
|
|
124 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,562 |
|
|
$ |
18,820 |
|
|
$ |
72,035 |
|
|
$ |
29,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
107,678 |
|
|
|
104,434 |
|
|
|
107,007 |
|
|
|
93,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.25 |
|
|
$ |
0.18 |
|
|
$ |
0.67 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
26,547 |
|
|
$ |
18,850 |
|
|
$ |
71,911 |
|
|
$ |
29,461 |
|
Income (loss) from discontinued
operations |
|
|
15 |
|
|
|
(30 |
) |
|
|
124 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
26,562 |
|
|
$ |
18,820 |
|
|
$ |
72,035 |
|
|
$ |
29,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
107,678 |
|
|
|
104,434 |
|
|
|
107,007 |
|
|
|
93,768 |
|
Net effect of dilutive equity awards |
|
|
1,412 |
|
|
|
2,615 |
|
|
|
2,304 |
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
109,090 |
|
|
|
107,049 |
|
|
|
109,311 |
|
|
|
95,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.24 |
|
|
$ |
0.18 |
|
|
$ |
0.66 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our long-term goal is to continue to increase our position as a leading worldwide provider of
broadband access products and services. Our primary market and focus is cable providers, or MSOs.
To achieve this goal, we have implemented a long-term business strategy that includes the following
key elements:
|
|
|
Transition to VoIP with an Everything IP, Everywhere philosophy and build on current
market successes; |
|
|
|
|
Leverage our current voice and data business; |
|
|
|
|
Strengthen and grow our supplies infrastructure distribution channel; |
|
|
|
|
Expand our existing product/services portfolio through internal developments,
partnerships and acquisitions; and |
|
|
|
|
Maintain and improve an already strong capital and expense structure. |
Below is a summary of some of our key year-to-date highlights and trends:
|
|
|
Our sales, net income, cash from operating activities, and
earnings per share have improved significantly as
compared to the same period in 2005. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
(in millions) |
|
|
2006 |
|
2005 |
|
Increase |
Sales |
|
$ |
657.0 |
|
|
$ |
499.1 |
|
|
$ |
157.9 |
|
Net income |
|
$ |
72.0 |
|
|
$ |
29.5 |
|
|
$ |
42.5 |
|
Cash provided by (used in) operating activities |
|
$ |
77.2 |
|
|
$ |
(9.1 |
) |
|
$ |
86.3 |
|
|
|
|
The VoIP market continued to grow as MSOs continued their rollout of IP telephony. We
leveraged our existing market position in IP-based telephony with product offerings to
increase sales of both EMTA and CMTS products. |
|
|
|
|
We expect demand for CMTS products will continue to increase in future periods as new
services and competition between our customers and their competitors intensifies the need
to provide ever faster download speeds requiring added CMTS capacity and features. |
|
|
|
|
In the third quarter of 2006, we announced that we commenced shipping our C4 CMTS to
Time Warner, a key new account for this product. |
|
|
|
|
We experienced substantial growth in EMTA unit sales and revenues year over year and we
anticipate continued growth in the fourth quarter of 2006. The rate of future growth for
EMTA sales is expected to be lower than what we have experienced to date as many of our
customers have now passed through the initial launch stage. Our ultimate level of sales of
EMTAs will be affected by, but not limited to, such factors as the success our customers
have marketing IP telephony to their subscribers in the future, the success our customers
have retaining their IP telephony subscribers in the future, competitive factors affecting
our market share including price, and the timing and success of new product introductions. |
|
|
|
|
Sales of our CBR products, consistent with the expectation that we previously disclosed,
decreased significantly year over year and quarter over quarter as this product line nears
the end of its life. We anticipate sales of CBR products to further decline in 2007 as end
of life purchase orders are expected to be substantially fulfilled. |
|
|
|
|
Gross margin percentage in the third quarter of 2006 was 27.6%, which compares to 29.0%
in the second quarter of 2006. The decrease, consistent with the expectation that we
previously disclosed, reflects a change in product mix as we sold less CBR product (which
earns a higher than the company average gross margin) and more EMTAs (which earn a lower
than the company average gross margin). Partially offsetting the mix impact was an
increase in margins related to our EMTA products as we sold more of our new cost reduced
product. We anticipate that our gross margins as a percent of sales will improve in the
fourth quarter of 2006 as compared to the third quarter as we expect to sell
proportionately more of our cost reduced 500-series EMTAs (which earn higher gross margins than the
400-series). The ultimate result is |
11
|
|
|
dependent upon several factors including, but not limited to: product mix, attainment of
cost reductions, and competitive price pressure. |
|
|
|
|
We anticipate that we will utilize all, or the vast majority,
of our non-equity
compensation related federal and state net operating Losses (NOLs) in 2006. As a result,
we expect that in 2007 we will begin to record income tax expense at a full rate of
approximately 38.5%. Depending upon our actual results for 2006, it is possible we may
have insufficient non-equity compensation related NOLs to shelter all of our 2006 income.
As a result, we may incur a higher tax expense in the fourth quarter of 2006 than we have
predicted. |
|
|
|
|
In the fourth quarter of 2006, we will be further analyzing the valuation allowance we
have recorded to reduce our deferred tax assets to zero. We first recorded a valuation
allowance in 2001 and have continued to adjust it so that the current
value of our deferred
tax assets remains zero. At the end of 2005, we continued to be in a three year cumulative
loss position. Our projected income for the full year 2006 is expected to result in a
three year cumulative positive net income position entering 2007. As a result, we
anticipate that we may reverse a significant portion of our valuation allowance in the
fourth quarter of 2006. At the end of the third quarter 2006, the valuation allowance was
approximately $65.0 million. For further detail, see Income Taxes section below. |
Significant Customers
The Companys four largest customers (including their affiliates, as applicable) are Comcast, Cox
Communications, Liberty Media International and Time-Warner Cable. Over the past year, the
affiliates included in revenue have changed as a result of mergers and acquisitions. Therefore,
the revenue for ARRIS customers for prior periods has been adjusted to include, on a comparable
basis, the affiliates currently understood to be under common control. A summary of sales to these
customers for the three and nine month periods ended September 30, 2006 and 2005, are set forth
below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
|
|
|
|
(unaudited) |
|
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Comcast |
|
$ |
98,841 |
|
|
$ |
50,447 |
|
|
$ |
248,017 |
|
|
$ |
106,105 |
|
% of sales |
|
|
43.2 |
% |
|
|
25.1 |
% |
|
|
37.8 |
% |
|
|
21.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liberty Media International |
|
|
19,730 |
|
|
|
25,930 |
|
|
|
70,106 |
|
|
|
74,480 |
|
% of sales |
|
|
8.6 |
% |
|
|
12.9 |
% |
|
|
10.7 |
% |
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cox Communications |
|
|
20,645 |
|
|
|
33,953 |
|
|
|
73,486 |
|
|
|
88,328 |
|
% of sales |
|
|
9.0 |
% |
|
|
16.9 |
% |
|
|
11.2 |
% |
|
|
17.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time-Warner Cable |
|
|
17,087 |
|
|
|
23,197 |
|
|
|
57,765 |
|
|
|
60,499 |
|
% of sales |
|
|
7.5 |
% |
|
|
11.5 |
% |
|
|
8.8 |
% |
|
|
12.1 |
% |
No other customer provided more than 10% of total sales for the three and nine months ended
September 30, 2006 and 2005.
12
Comparison of Operations for the Three and Nine Months Ended September 30, 2006 and 2005
Net Sales
The table below sets forth our net sales for the three and nine months ended September 30, 2006 and
2005, for each of our product categories (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
Increase Between 2006 and 2005 |
|
|
|
Three Months |
|
|
Nine Months |
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Product Category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband |
|
$ |
87.6 |
|
|
$ |
81.3 |
|
|
$ |
271.8 |
|
|
$ |
222.2 |
|
|
$ |
6.3 |
|
|
|
7.7 |
|
|
$ |
49.6 |
|
|
|
22.3 |
|
Supplies & CPE |
|
|
141.0 |
|
|
|
119.7 |
|
|
|
385.2 |
|
|
|
276.9 |
|
|
|
21.3 |
|
|
|
17.8 |
|
|
|
108.3 |
|
|
|
39.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
228.6 |
|
|
$ |
201.0 |
|
|
$ |
657.0 |
|
|
$ |
499.1 |
|
|
$ |
27.6 |
|
|
|
13.7 |
|
|
$ |
157.9 |
|
|
|
31.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth our domestic and international sales for the three and nine months
ended September 30, 2006 and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
|
Increase Between 2006 and 2005 |
|
|
|
Three Months |
|
|
Nine Months |
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
Ended September 30 |
|
|
Ended September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Domestic |
|
$ |
174.2 |
|
|
$ |
148.6 |
|
|
$ |
493.5 |
|
|
$ |
366.8 |
|
|
$ |
25.6 |
|
|
|
17.2 |
|
|
$ |
126.7 |
|
|
|
34.5 |
|
International |
|
|
54.4 |
|
|
|
52.4 |
|
|
|
163.5 |
|
|
|
132.3 |
|
|
|
2.0 |
|
|
|
3.8 |
|
|
|
31.2 |
|
|
|
23.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales |
|
$ |
228.6 |
|
|
$ |
201.0 |
|
|
$ |
657.0 |
|
|
$ |
499.1 |
|
|
$ |
27.6 |
|
|
|
13.7 |
|
|
$ |
157.9 |
|
|
|
31.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband Net Sales 2006 vs. 2005
During the three and nine months ended September 30, 2006, sales of our Broadband products
increased by approximately 7.7% and 22.3%, respectively, as compared to the same periods from the
prior year. These increases in Broadband sales resulted from several components:
|
|
|
Sales of our CMTS product increased in the three and nine months ended September 30,
2006 as compared to the same periods in 2005; most notable was an increase in CMTS volume
to Comcast, among various other customers. It is also noteworthy that
we continued to gain
acceptance by new customers for our flagship C4 CMTS. In the third
quarter 2006, we began
shipping the C4 to Time Warner Cable. |
|
|
|
|
Sales of our CBR voice products were down in the third quarter of 2006 as compared to
the third quarter 2005 and also declined for the first nine months of 2006 as compared to
the same period in 2005 as customers migrate to our newer VoIP products. |
Sales of our Broadband products in the third quarter 2006 declined by $11.2 million from the
second quarter 2006. As expected, we sold less CBR product which was partially offset by
increased sales of CMTS equipment. We expect sales of CBR products will continue to decline in
the fourth quarter of 2006 and during 2007 as customers complete their last time purchases of
CBR products and the business migrates to a sustaining service business.
Supplies & CPE Net Sales 2006 vs. 2005
Supplies & CPE product sales increased by approximately 17.8% and 39.1% in the three and nine month
periods ended September 30, 2006, as compared to the same periods in 2005. These increases
reflect:
|
|
|
Increased sales of our EMTA product as operators ramped up deployment of VoIP. In the
three and nine months ended September 30, 2006, we sold 1.3 million and 3.5 million EMTAs,
respectively, in comparison to approximately 0.9 million and 1.8 million in the three and
nine months 2005, respectively. |
13
Consolidated Backlog and Book-to-Bill Ratio
Our order backlog was $122.0 million and book-to-bill ratio was 0.88 in the third quarter 2006,
both of which declined modestly from the second quarter 2006. Two factors are contributing to
this decline. First, we continue to fulfill orders which span multiple quarters for last time buys
of our CBR product. Second, we continue to observe a shortening of the lead times for orders.
Gross Margin
The table below sets forth our gross margin for the three and nine months ended September 30, 2006
and 2005, for each of our product categories (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin $ |
|
|
Increase (Decrease) Between 2006 and 2005 |
|
|
|
Three Months |
|
|
Nine Months |
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
Ended September 30 |
|
|
Ended September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Product Category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband |
|
$ |
40.5 |
|
|
$ |
28.4 |
|
|
$ |
124.8 |
|
|
$ |
81.9 |
|
|
$ |
12.1 |
|
|
|
42.6 |
|
|
$ |
42.9 |
|
|
|
52.4 |
|
Supplies & CPE |
|
|
22.7 |
|
|
|
26.6 |
|
|
|
58.6 |
|
|
|
51.0 |
|
|
|
(3.9 |
) |
|
|
(14.7 |
) |
|
|
7.6 |
|
|
|
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
63.2 |
|
|
$ |
55.0 |
|
|
$ |
183.4 |
|
|
$ |
132.9 |
|
|
$ |
8.2 |
|
|
|
14.9 |
|
|
$ |
50.5 |
|
|
|
38.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth our gross margin percentages for the three and nine months ended
September 30, 2006 and 2005, for each of our product categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin % |
|
Increase (Decrease) Between 2006 and 2005 |
|
|
Three Months |
|
Nine Months |
|
Three Months |
|
Nine Months |
|
|
Ended September 30, |
|
Ended September 30, |
|
Ended September 30 |
|
Ended September 30 |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
Percentage Points |
Product Category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband |
|
|
46.2 |
% |
|
|
34.9 |
% |
|
|
45.9 |
% |
|
|
36.8 |
% |
|
|
11.3 |
|
|
|
9.1 |
|
Supplies & CPE |
|
|
16.1 |
% |
|
|
22.2 |
% |
|
|
15.2 |
% |
|
|
18.4 |
% |
|
|
(6.1 |
) |
|
|
(3.2 |
) |
Total |
|
|
27.6 |
% |
|
|
27.4 |
% |
|
|
27.9 |
% |
|
|
26.6 |
% |
|
|
0.2 |
|
|
|
1.3 |
|
Broadband Gross Margin 2006 vs. 2005
The increase in Broadband gross margin dollars and percentages for the three and nine months ended
September 30, 2006 was related primarily to the following factors:
|
|
|
Gross margin dollars were affected by the quarter-over-quarter and year-over-year
increase in Broadband sales, in particular our CMTS sales. |
|
|
|
|
Gross margin percentages on Broadband products, in particular on CMTS products,
increased as a result of product cost reductions. In the first half of 2005, our next
generation DOCSIS 2.0 CMTS was in the process of being cost reduced. The initial margin
percentages for this product were lower than historical margins due to higher initial
product costs. |
Despite the increases mentioned above, gross margin dollars of $40.5 million in the third quarter
2006 declined as compared to the second quarter 2006 gross margin dollars of $45.4 million. This
decrease was the result of the decline in sales quarter over quarter, primarily due to the
phase-out of our legacy CBR equipment.
Supplies & CPE Gross Margin 2006 vs. 2005
Supplies & CPE gross margin dollars for the three months ended September 30, 2006 decreased as
compared to the same period in 2005; however, the year-to-date period in 2006 represented an
increase over the gross margin dollars in 2005. These changes in gross margin dollars were related
to the following factors:
|
|
|
Despite the increase in sales volume of EMTAs in the third quarter 2006 as compared to
2005, the gross margin dollars were negatively impacted by the mix of specific models of
EMTAs sold, resulting in a lower gross margin percentage year over year. |
14
|
|
|
The significant increase in sales of our EMTAs in the nine months ended September 30, 2006
as compared to the same period in 2005 resulted in the year-over-year increase in gross
margin dollars. |
Supplies & CPE gross margin percentages for the three and nine months ended September 30, 2006
decreased as compared to the same periods in 2005 as a result of the higher mix of EMTA sales in
2006. As previously disclosed, in late 2005 and early 2006 we negotiated long term contracts with
some of our major customers. In order to secure these contracts, we elected to reduce the price of
our 400-series EMTA in advance of the availability of our 500-series cost reduced EMTA. This had
the effect of suppressing our Supplies & CPE gross margin percentage in the first nine months of
2006. Commencing in the third quarter of 2006, as we began to replace shipments of the 400-series
product with the lower cost 500-series product, our gross margin percentage began to improve. We
anticipate a substantially larger portion of our shipment in the fourth quarter will be the
500-series. Virtually all EMTA product shipped in the first quarter of 2007 is expected to be
500-series.
Gross margin dollars and percentages in the Supplies & CPE category in the third quarter 2006
increased sequentially over the second quarter 2006 as the proportion of 500-series EMTAs increased
in the sales mix. Third quarter 2006 gross margin dollars increased by $4.4 million, as the gross
margin percentage increased by 1.0 percentage point as compared to the second quarter of 2006.
Operating Expenses
The table below provides detail regarding our operating expenses (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
Increase (Decrease) Between 2006 and 2005 |
|
|
|
Three Months |
|
|
Nine Months |
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
Ended September 30 |
|
|
Ended September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
SG&A |
|
$ |
21.5 |
|
|
$ |
20.1 |
|
|
$ |
64.5 |
|
|
$ |
53.8 |
|
|
$ |
1.4 |
|
|
|
7.0 |
|
|
$ |
10.7 |
|
|
|
19.9 |
|
Research &
development |
|
|
16.1 |
|
|
|
16.0 |
|
|
|
50.5 |
|
|
|
45.1 |
|
|
|
0.1 |
|
|
|
0.6 |
|
|
|
5.4 |
|
|
|
12.0 |
|
Restructuring &
impairment |
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
(0.1 |
) |
|
|
(25.0 |
) |
Amortization of
intangibles |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.6 |
|
|
|
1.0 |
|
|
|
(0.1 |
) |
|
|
(50.0 |
) |
|
|
(0.4 |
) |
|
|
(40.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
37.7 |
|
|
$ |
36.3 |
|
|
$ |
115.9 |
|
|
$ |
100.3 |
|
|
$ |
1.4 |
|
|
|
3.9 |
|
|
$ |
15.6 |
|
|
|
15.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General, and Administrative, or SG&A, Expenses
The increase in SG&A expense for the three and nine months ended September 30, 2006 includes:
|
|
|
Equity compensation expense associated with the adoption of SFAS No. 123R beginning July
1, 2005. |
|
|
|
|
Higher variable compensation related to an increase in commissions, bonuses, slightly
higher staffing level, taxes and other fringe benefits. |
|
|
|
|
Higher legal and accounting professional fees. |
|
|
|
|
Partially offsetting these increases was a reduction in bad debt expense related to the
recovery of previously written off receivables. This contributed to
lower expenses of $1.6
million for the nine months ended September 30, 2006 as compared to the same period in
2005. |
Research & Development Expenses
The increase in R&D expense for the three and nine months ended September 30, 2006 includes:
|
|
|
Previously disclosed technology licensing fees of $2.4 million during the second quarter
2006. As discussed below, this fee was related to a joint development project on Fixed
Mobile Convergence with UTStarcom. |
|
|
|
|
Higher variable compensation related to an increase in bonuses, slightly higher staffing
level, taxes and other fringe benefits. |
|
|
|
|
Included in the year-to-date 2005 expenses was a benefit of approximately $1.2 million
representing funding received from a customer related to development work that ARRIS
performed for the customer |
15
|
|
|
over the preceding 18 months. The expense incurred to perform the work was charged to
research and development in the periods it was performed. The customer provided progress
payments over the time period. The payments were recorded as a liability until the work was
completed and no contingency existed for the potential return of the payments to the
customer. This occurred in the second quarter 2005, at which time the payments were
recognized as an offset to research and development expense. |
We continue to aggressively invest in research and development. Our primary focus is on products
that allow MSOs to capture new revenues, in particular, high-speed data, VoIP, and Video over IP.
We also continue to place emphasis on reducing product costs.
We have invested $50.5 million in research and development through the first nine months of 2006.
Key products we launched this year include: our Keystone D5 Digital Multimedia Termination System,
two multiline EMTAs, a T1/E1 MTA, and our FlexPath wideband products including a wideband modem.
In the second quarter, we completed the introduction of the 500-series EMTA, including versions
that fully comply with European Union mandated hazardous materials standards known as RoHS.
In addition, we commenced development of our next generation DOCSIS 3.0 and Modular CMTS products
to be introduced over the next two years. These new products will comply with the latest
CableLabsÒ standards and provide many advanced features such as wideband data services (>
100 Mbps) and a variety of commercial services. These products will be backward compatible with our
current C4 CMTS platform, affording our current C4 customers investment protection as they upgrade
to advanced capabilities through simple card replacements. This will enable us to mine our
installed base as these new products become available.
In April 2006, we announced that we entered into a joint development, licensing and supply
agreement with UTStarcom that will enable the fourth component of the quadruple play for cable MSOs
worldwide. The joint solution will allow customers with Wi-Fi enabled handsets to seamlessly roam
between their cellular and Wi-Fi connections, or a service commonly referred to as fixed mobile
convergence, or FMC. As part of this agreement, we expect to invest up to $5.0 million in license
fees over three years to acquire certain technologies. In the second quarter of 2006, we
recognized R&D expense of approximately $2.4 million related to this agreement, with the remaining
license fees expected to be expensed in 2007 and 2008.
Restructuring and Impairment Charges
On a quarterly basis, we review our existing restructuring accruals and make adjustments if
necessary. As a result of these evaluations, we recorded an increase to a restructuring accrual of
$4 thousand and $347 thousand during the three and nine months ended September 30, 2006,
respectively, which compares to an increase of $34 thousand and $430 thousand, respectively, during
the same periods in 2005. These adjustments were primarily related to changes in estimates
associated with real estate leases. See Note 6 of Notes to the Consolidated Financial Statements.
Amortization of Intangibles
Intangibles amortization expense for the three and nine months ended September 30, 2006 was $0.1
million and $0.6 million, respectively, and compares to expense of $0.2 million and $1.0 million,
respectively, for the same periods in 2005. Our intangible expense represents the amortization of
existing technology acquired as a result of the Com21 acquisition in the third quarter 2003 and the
cXm Broadband acquisition in the second quarter 2005.
Other Expense (Income):
Interest Expense
Interest expense for the three and nine months ended September 30, 2006 was immaterial as we
remained long-term debt-free in 2006. This compares to interest expense of $0.0 million and $2.0
million for the three and nine months ended September 30, 2005, respectively, which was related to
the $75.0 million of convertible subordinated notes (Notes) that were outstanding until the
second quarter 2005.
16
Loss on Debt Retirement
In May 2005, the Company called the remaining $75.0 million of the Notes for redemption and the
holders of the Notes elected to convert the notes into 15.0 million shares of common stock rather
than have the Notes redeemed. The Company made a make-whole interest payment of approximately 0.3
million shares resulting in a charge of $2.4 million during the second quarter 2005.
Loss (Gain) in Foreign Currency
During the three and nine months ended September 30, 2006, we recorded foreign currency losses
(gains) of approximately $0.2 million and $(0.9) million, respectively, and compares to losses of
$0.3 million and $0.1 million, respectively, for the same periods in 2005. The losses (gains) are
primarily driven by the fluctuation of the value of the euro as compared to the U.S. dollar, as we
had several European customers whose receivables and revenues are denominated in euros. We have
implemented a hedging strategy to mitigate the monetary exchange fluctuations, and have entered
into forward contracts based on forecasted Euro-denominated sales..
Interest Income
Interest income during the three and nine months ended September 30, 2006 was $2.8 million and $6.4
million, respectively. During the same periods in 2005, interest income was $0.8 million and $2.1
million, respectively. The income reflects interest earned on cash, cash equivalents and short
term investments, which increased year over year by approximately $115.6 million, thus resulting in
higher interest income.
Other Expense
Other expense for the three and nine months ended September 30, 2006 was $0.1 million and $0.3
million, respectively. During the same periods in 2005, the other expense was approximately $0.1
million and $0.4 million, respectively.
Income Taxes
The Company records its quarterly income tax provision in accordance with APB 28, Interim Financial
Reporting and FIN 18, Accounting for Income Taxes in Interim Periods. In accordance with these
standards, the Company determines its current income tax provision based upon a comparison of its
year-to-date actual results to its estimated results for the calendar year. The Company determines
its deferred tax provision, prior to its assessment of changes to its valuation allowance, based
upon the actual change in its deferred tax assets for the period.
As of September 30, 2006, the Company continued to maintain a full valuation allowance on its net
deferred tax assets. The Company continually reviews the adequacy of the valuation allowance and
recognizes the benefits of deferred tax assets only as the reassessment indicates that it is more
likely than not that the deferred tax assets will be recognized in accordance with SFAS No. 109,
Accounting for Income Taxes. At the end of 2005, we continued to be in a three year cumulative
loss position and as such, it was not considered likely that we would be able to recover these
deferred tax assets in the foreseeable future. Applying such standard as of September 30, 2006,
the Company does not believe it is more likely than not that the deferred tax assets will be
recognized. In reaching this determination, the Company believes that its history of cumulative
losses over the past three calendar years outweighs other positive evidence that it is more likely
than not that the Companys deferred tax assets will be recognized. Should the Company meet its
current projections for the fourth quarter 2006, it will enter 2007 with cumulative profits for the
preceeding three calendar years. As a result, sufficient evidence may exist at year end 2006 to
conclude that it is more likely than not that the Company will recognize the future benefit of its
deferred tax assets. Except for that portion of the Companys valuation allowance related to net
operating loss carryforwards resulting from stock option exercises and restricted stock award
deductions (collectively, share-based payments), the treatment of which is more fully described
below, the release of the valuation allowance in connection with a change in judgment with respect
to the recovery of a particular deferred tax asset will be recorded as a benefit to the Companys
income tax provision.
As of December 31, 2005, the Companys total federal net operating loss carryforwards of $114.3
million included tax deductions of approximately $26.1 million related to share-based payments.
The income tax benefits
17
associated with the recognition of the share-based payment portion of the net operating loss
carryforward will be credited to stockholders equity when such portion of the net operating loss
carryforwards is utilized. The portion of the net operating loss carryforwards related to
share-based payments will be utilized after all other deductions comprising the total net operating
loss carryover are utilized.
Hypothetically, if the Company were to continue to generate taxable income at the same rate that it
did in the first nine months of 2006, the Company would begin to pay tax, on a cash basis, at an
effective rate of about 38.5% at some point during the first half of 2007. Further, in computing
income tax expense under the guidance of SFAS No. 109, the benefit of the net operating losses,
excluding those attributable to share-based payments, are to be fully utilized before the benefit
of any share-based payments is utilized. The benefit of the net operating losses not related to
share-based payments are recorded as a component of the income tax provision, while the benefit of
the share-based payments are recorded as an increase in stockholders equity. As a result, the
Company would begin to record income tax expense at an effective rate of about 38.5% before it has
utilized all of its net operating losses on a cash tax basis, most likely in the first quarter of
2007.
Financial Liquidity and Capital Resources
Overview
One of our key strategies is to maintain and improve our capital structure. The key metrics we
focus on are summarized in the table below:
Liquidity & Capital Resources Data
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2006 |
|
2005 |
|
|
(in millions, except DSO and turns) |
Key Working Capital Items |
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities |
|
$ |
77.2 |
|
|
$ |
(9.1 |
) |
Cash, cash equivalents, and short-term investments |
|
$ |
210.0 |
|
|
$ |
94.4 |
|
Accounts receivable, net |
|
$ |
120.7 |
|
|
$ |
95.8 |
|
Days Sales Outstanding (DSOs), annualized |
|
|
43 |
|
|
|
42 |
|
Inventory |
|
$ |
101.1 |
|
|
$ |
90.1 |
|
Inventory turns, annualized |
|
|
5.9 |
|
|
|
5.3 |
|
Inventory & Accounts Receivable
We place a strong emphasis on working capital management, particularly with respect to accounts
receivable and inventory. We use turns to evaluate inventory management and days sales
outstanding, or DSOs, to evaluate accounts receivable management.
Our
accounts receivable absolute dollars and DSOs increased
year-over-year and quarter-over-quarter
as a result of higher sales and proportionately more sales occurring later in the quarter and
therefore not due from our customers at September 30, 2006. We believe this trend may continue.
Summary of Current Liquidity Position and Potential for Future Capital Raising
We believe our current liquidity position, including approximately $210.0 million of cash, cash
equivalents, and short-term investments on hand as of September 30, 2006, together with the
prospects for continued generation of cash from operations, are adequate for our short- and
medium-term business needs. However, a key part of our overall long-term strategy is likely to
involve additional acquisitions, and we regularly review acquisition opportunities. Either in
order to be prepared to make acquisitions generally, or in connection with particular acquisitions,
we may raise capital through private or public share, debt or convertible debt offerings. We
believe we have the ability to access the capital markets upon commercially reasonable terms.
18
Commitments
Our contractual obligations are disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2005. There has been no material change to our contractual obligations during the
first nine months of 2006.
Cash Flow
Below is a table setting forth the key line items of our Consolidated Statements of Cash Flows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Cash provided by (used in) operating activities |
|
$ |
77.2 |
|
|
$ |
(9.1 |
) |
Cash provided by investing activities |
|
|
17.2 |
|
|
|
23.9 |
|
Cash provided by financing activities |
|
|
10.3 |
|
|
|
8.3 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
$ |
104.7 |
|
|
$ |
23.1 |
|
|
|
|
|
|
|
|
Operating Activities:
Below are the key line items affecting cash from operating activities (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Net income after non-cash adjustments |
|
$ |
84.5 |
|
|
$ |
45.6 |
|
(Increase)/Decrease in accounts receivable |
|
|
(37.5 |
) |
|
|
(39.5 |
) |
(Increase)/Decrease in inventory |
|
|
12.8 |
|
|
|
2.8 |
|
All other net |
|
|
17.4 |
|
|
|
(18.0 |
) |
|
|
|
|
|
|
|
Cash provided by (used in) operating activities |
|
$ |
77.2 |
|
|
$ |
(9.1 |
) |
|
|
|
|
|
|
|
Investing Activities:
Below are the key line items affecting investing activities (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Capital expenditures |
|
$ |
(7.1 |
) |
|
$ |
(7.6 |
) |
Purchases of short-term investments |
|
|
(51.9 |
) |
|
|
(51.3 |
) |
Disposals of short-term investments |
|
|
76.2 |
|
|
|
83.0 |
|
Other |
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
Cash provided by investing activities |
|
$ |
17.2 |
|
|
$ |
23.9 |
|
|
|
|
|
|
|
|
Capital Expenditures
Capital expenditures are mainly for test equipment and computing equipment. We anticipate
investing an aggregate of approximately $10.0 million in fiscal year 2006.
Purchases/Disposals of Short-Term Investments
This represents purchases and disposals of auction rate securities held as short-term investments.
19
Other
This represents cash investments we made in 2005 in cXm Broadband, a private company.
Financing Activities:
Below are the key line items affecting our financing activities (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Excess tax benefits from stock-based compensation plans |
|
$ |
0.5 |
|
|
$ |
|
|
Proceeds from issuance of stock and other |
|
|
9.8 |
|
|
|
8.3 |
|
|
|
|
|
|
|
|
Cash provided by financing activities |
|
$ |
10.3 |
|
|
$ |
8.3 |
|
|
|
|
|
|
|
|
Cash provided from financing activities for both quarters presented is primarily related to the
exercise of stock options by employees.
Interest Rates
As of September 30, 2006 and 2005, we did not have any floating rate indebtedness or outstanding
interest rate swap agreements.
Foreign Currency
A significant portion of our products are manufactured or assembled in Mexico, Taiwan, China, the
Philippines, and other foreign countries. Our sales into international markets have been and are
expected in the future to be an important part of our business. These foreign operations are
subject to the usual risks inherent in conducting business abroad, including risks with respect to
currency exchange rates, economic and political destabilization, restrictive actions and taxation
by foreign governments, nationalization, the laws and policies of the United States affecting
trade, foreign investment and loans, and foreign tax laws.
We have certain international customers who are billed in their local currency. We use a hedging
strategy and enter into forward or currency option contracts based on forecasted Euro-denominated
sales.
As of September 30, 2006, we had 7.4 million euros of option contracts outstanding that expire in
2006 and 8.8 million euros of option contracts that expire in 2007. During the third quarter of
2006, we recognized a net loss of $0.2 million related to option contracts expiring in the quarter.
Financial Instruments
In the ordinary course of business, we, from time to time, will enter into financing arrangements,
such as letters of credit, with customers. These agreements could include the granting of extended
payment terms that result in longer collection periods for accounts receivable and slower cash
inflows from operations and/or could result in the deferral of revenue.
ARRIS executes letters of credit in favor of certain landlords and vendors to guarantee performance
on lease and insurance contracts. As of September 30, 2006 and December 31, 2005, we had
approximately $4.1 million outstanding at the end of each period under letters of credit that were
cash collateralized. The cash collateral is reported as restricted cash. Additionally, we have a
cash collateral account agreement with our financial institution of $2.0 million as security
against potential losses with respect to our foreign currency hedging activities.
Short-Term Investments
We hold short-term investments consisting of debt securities classified as available-for-sale,
which are stated at estimated fair value. These debt securities include U.S. treasury notes, state
and municipal bonds, asset-backed
20
securities, auction rate securities, corporate bonds, commercial paper, and certificates of
deposit. These investments are on deposit with a major financial institution.
Investments
We offered a deferred compensation arrangement, which allowed certain employees to defer a portion
of their earnings and defer the related income taxes. As of December 31, 2004, the plan was frozen
and no further contributions are allowed. The deferred earnings are invested in a rabbi trust,
and are accounted for in accordance with Emerging Issues Task Force Issue No. 97-14, Accounting for
Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. A
rabbi trust is a funding vehicle used to protect deferred compensation benefits from various events
(but not from bankruptcy or insolvency). At September 30, 2006 and December 31, 2005, ARRIS had an
accumulated unrealized gain related to the rabbi trust of approximately $1.2 million and $1.1
million, respectively, included in other comprehensive income.
Capital Expenditures
Capital expenditures are made at a level designed to support the strategic and operating needs of
the business. ARRIS capital expenditures were $7.1 million in the first nine months of 2006 as
compared to $7.6 million during the same period in 2005. ARRIS had no significant commitments for
capital expenditures at September 30, 2006. Management expects to invest an aggregate of
approximately $10.0 million in capital expenditures for the fiscal year 2006.
Adoption of SFAS No. 123R, Share-Based Payment
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R,
Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation,
supercedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS 123R is effective for public
companies for interim or annual periods beginning after June 15, 2005. As revised, this statement
requires all companies to measure compensation cost for all share-based payments (including
employee stock options) at fair value. We early adopted SFAS 123R on July 1, 2005, using the
modified prospective method. Prior to the adoption date, ARRIS used the intrinsic value method for
valuing its awards of stock options and restricted stock and recorded the related compensation
expense, if any, in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations.
Prior to the adoption of SFAS No. 123R, ARRIS used the Black-Scholes option valuation model to
estimate the fair value of an option on the date of grant for pro forma purposes. Upon adoption of
SFAS No. 123R, ARRIS continued to use the Black-Scholes model; however, it engaged an independent
third party to assist the Company in determining the Black-Scholes weighted average inputs utilized
in the valuation of options granted subsequent to July 1, 2005. Prior to the adoption of SFAS No.
123R, the Company estimated the expected volatility based exclusively on historical stock prices of
ARRIS common stock over a period of time. Under SFAS No. 123R, the volatility factors are based
upon a combination of historical volatility over a period of time and estimates of implied
volatility based on traded option contracts on ARRIS common stock. The change in estimating
volatility was made because the Company felt that the inclusion of the implied volatility factor
was a more accurate estimate of the stocks future performance. The expected term of the awards
granted are based upon a weighted average life of exercise activity of the grantee population. The
risk-free interest rate is based upon the U.S. treasury strip yield at the grant date, using a
remaining term equal to the expected life. The expected dividend yield is 0%, as the Company has
not paid cash dividends on its common stock since its inception. In calculating the stock
compensation expense, ARRIS applies an estimated pre-vesting forfeiture rate based upon historical
rates.
In May 2005, the ARRIS Board of Directors approved the acceleration of outstanding options with
exercise prices equal to $9.06 and above. All of these options were out-of-the-money at the time
of acceleration, as the closing stock price on May 5, 2005 was $7.67. The acceleration covered
options to purchase approximately 1.4 million shares of common stock, but did not involve any
options held by directors or executive officers. The purpose of the acceleration was to reduce the
expense that would be associated with these options in accordance with the provisions of SFAS No.
123R, Share-Based Payment, once adopted. The acceleration resulted in incremental stock-based
employee compensation of approximately $5.7 million in the pro forma expense for the nine months
ended September 30, 2005.
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As of September 30, 2006, there was approximately $17.7 million of total unrecognized compensation
cost related to unvested share-based awards granted under the Companys incentive plans. This
compensation cost is expected to be recognized over a weighted-average period of 2.8 years.
Critical Accounting Estimates
The accounting and financial reporting policies of the Company are in conformity with U.S.
generally accepted accounting principles. The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Management has discussed the development and
selection of the Companys critical accounting estimates with the audit committee of the Companys
Board of Directors and the audit committee has reviewed the Companys related disclosures. Our
critical accounting policies and estimates are disclosed extensively in our Form 10-K for the year
ended December 31, 2005, as filed with the SEC. Our critical accounting estimates have not changed
in any material respect nor have we adopted any new critical policies during the nine months ended
September 30, 2006.
Forward-Looking Statements
We make numerous forward-looking statements throughout this report, including statements with
respect to expected changes in sales levels of different products, product development plans,
expense levels, income tax expense impacts, acquisitions and liquidity. Frequently these
statements are introduced with words such as may, expect, likely, will, believe,
estimate, project, anticipate, intend, plan, continue, could be, or predict.
Actual results may differ materially from those suggest by the forward-looking statements that we
make for a number of reasons including those described in Part II, Item 1A, Risk Factors of this
Report.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rates and foreign currency rates. The
following discussion of our risk-management activities includes forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from those projected in the
forward-looking statements.
We have an investment portfolio of auction rate securities that are classified as
available-for-sale securities. Although these securities have maturity dates of 15 to 30 years,
they have characteristics of short-term investments as the interest rates reset every 28 or 35 days
and we have the potential to liquidate them in an auction process. Due to the short duration of
these investments, a movement in market interest rates would not have a material impact on our
operating results.
A significant portion of our products are manufactured or assembled in China, Ireland, Mexico, the
Philippines, Taiwan, and other countries outside the United States. Our sales into international
markets have been and are expected in the future to be an important part of our business. These
foreign operations are subject to the usual risks inherent in conducting business abroad, including
risks with respect to currency exchange rates, economic and political destabilization, restrictive
actions and taxation by foreign governments, nationalization, the laws and policies of the United
States affecting trade, foreign investment and loans, and foreign tax laws.
We have certain international customers who are billed in their local currency. Changes in the
monetary exchange rates may adversely affect our results of operations and financial condition. To
manage the volatility relating to these typical business exposures, we may enter into various
derivative transactions, when appropriate. We do not hold or issue derivative instruments for
trading or other speculative purposes. The euro and the yen are the predominant currencies of
those customers who are billed in their local currency. Taking into account the effects of foreign
currency fluctuations of the euro and the yen versus the dollar, a hypothetical 10% weakening of
the U.S. dollar (as of September 30, 2006) would provide a gain on foreign currency of
approximately $0.6 million. Conversely, a hypothetical 10% strengthening of the U.S. dollar would
provide a loss on foreign currency of approximately $0.6 million. As of September 30, 2006, we had
no material contracts, other than accounts receivable and derivative instruments, denominated in
foreign currencies.
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We regularly review our accounts receivable in foreign currency and enter into derivative contracts
when appropriate. As of September 30, 2006, we had option collars outstanding with notional amounts
totaling 16.2 million euros, which mature through 2007.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and
principal financial officer evaluated the effectiveness of our disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) as of the
end of the period covered by this report (the Evaluation Date). Based on that evaluation, such
officers concluded that, as of the Evaluation Date, our disclosure controls and procedures were
effective as contemplated by the Act.
(b) Changes in Internal Control over Financial Reporting. Our principal executive officer and
principal financial officer evaluated the changes in our internal control over financial reporting
that occurred during the most recent fiscal quarter. Based on that evaluation, our principal
executive officer and principal financial officer concluded that there had been no change in our
internal control over financial reporting during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
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Item 1A. Risk Factors
Our business is dependent on customers capital spending on broadband communication systems, and
reductions by customers in capital spending would adversely affect our business.
Our performance has been largely dependent on customers capital spending for constructing,
rebuilding, maintaining or upgrading broadband communications systems. Capital spending in the
telecommunications industry is cyclical. A variety of factors will affect the amount of capital
spending, and therefore, our sales and profits, including:
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general economic conditions; |
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availability and cost of capital; |
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other demands and opportunities for capital; |
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regulations; |
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demands for network services; |
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competition and technology; |
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real or perceived trends or uncertainties in these factors; and |
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acceptance of new services offered by our customers. |
Developments in the industry and in the capital markets over the past several years reduced access
to funding for our customers in the past and caused delays in the timing and scale of deployments
of our equipment, as well as the postponement or cancellation of certain projects by our customers.
In addition, we and other vendors received notification from several customers that they were
canceling projects, scaling back projects or delaying orders to allow them to reduce inventory
levels which were in excess of their then current deployment requirements.
Several of our customers have accumulated significant levels of debt. In addition, the bankruptcy
filing of Adelphia in June 2002 has further heightened concerns in the financial markets about the
domestic cable industry. This concern, coupled with the current uncertainty and volatility in the
capital markets, has affected the market values of domestic cable operators and may restrict their
access to capital. Even if the financial health of our customers improves, we cannot assure you
that these customers will be in a position to purchase new equipment at levels we have seen in the
past.
The markets in which we operate are intensely competitive, and competitive pressures may adversely
affect our results of operations.
The markets for broadband communication systems are extremely competitive and dynamic, requiring
the companies that compete in these markets to react quickly and capitalize on change. This will
require us to retain skilled and experienced personnel as well as deploy substantial resources
toward meeting the ever-changing demands of the industry. We compete with national and
international manufacturers, distributors and wholesalers including many companies larger than
ARRIS. Our major competitors include:
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Big Band Networks; |
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Cisco Systems, Inc.; |
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Motorola, Inc.; and |
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TVC Communications, Inc. |
The rapid technological changes occurring in the broadband markets may lead to the entry of new
competitors, including those with substantially greater resources than ours. Because the markets
in which we compete are characterized by rapid growth and, in some cases, low barriers to entry,
smaller niche market companies and start-up ventures also may become principal competitors in the
future. Actions by existing competitors and the entry of new competitors may have an adverse
effect on our sales and profitability. The broadband communications industry is further
characterized by rapid technological change. In the future, technological advances could lead to
the obsolescence of some of our current products, which could have a material adverse effect on our
business.
Further, many of our larger competitors are in a better position to withstand any significant
reduction in capital spending by customers in these markets. They often have broader product lines
and market focus and therefore will not be as susceptible to downturns in a particular market. In
addition, several of our competitors have been in
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operation longer than we have been, and therefore they have more long-standing and established
relationships with domestic and foreign broadband service users. We may not be able to compete
successfully in the future, and competition may harm our business.
Acquisitions can involve significant risks.
We routinely consider acquisitions of, or investments in, other businesses, including acquisitions
that could be very significant relative to the size of our business. There are a number of risks
attendant to any acquisition, including the possibility that we will overvalue the assets to be
purchased, that we will not be able to successfully integrate the acquired business or assets, and
that we will not be able to produce the expected level of profitability from the acquired business
or assets. In addition, we might incur substantial indebtedness in order to finance an
acquisition, which could require substantial payments in the future, and we might issue common
stock or other securities to pay for an acquisition, in which event the acquisition may ultimately
prove to be dilutive to our current stockholders. As a result, the impact of any acquisition on
our future performance may not be as favorable as expected and actually may be adverse.
Our business has primarily come from several key customers. The loss of one of these customers or
a significant reduction in services to one of these customers would have a material adverse effect
on our business.
Our four largest customers (including their affiliates, as applicable) are Comcast, Cox
Communications, Liberty Media International, and Time-Warner Cable. For the nine months ended
September 30, 2006, sales to Comcast accounted for approximately 37.8%, sales to Cox Communications
accounted for approximately 11.2% of our total revenues, sales to Liberty Media International
accounted for approximately 10.7%, and sales to Time-Warner Cable accounted for approximately 8.8%.
The loss of any of these customers, or one of our other large customers, or a significant
reduction in the products or services provided to any of them would have a material adverse impact
on our business.
The broadband products that we develop and sell are subject to technological change and a trend
towards open standards, which may impact our future sales and margins.
The broadband products we sell are subject to continuous technological evolution. Further, the
cable industry has and will continue to demand a move towards open standards. The move towards
open standards is expected to increase the number of MSOs who will offer new services, in
particular, telephony. This trend also is expected to increase the number of competitors and drive
capital costs per subscriber deployed down. These factors may adversely impact both our future
revenues and margins.
We have anti-takeover defenses that could delay or prevent an acquisition of our company.
On October 3, 2002, our Board of Directors approved the adoption of a shareholder rights plan
(commonly known as a poison pill). This plan is not intended to prevent a takeover, but is
intended to protect and maximize the value of shareholders interests. This plan could make it
more difficult for a third party to acquire us or may delay that process.
Products currently under development may fail to realize anticipated benefits.
Rapidly changing technologies, evolving industry standards, frequent new product introductions and
relatively short product life cycles characterize the markets for our products. The technology
applications that we are currently developing may not ultimately be successful. Even if the
products in development are successfully brought to market, they may not be widely used or we may
not be able to successfully exploit these technology applications. To compete successfully, we
must quickly design, develop, manufacture and sell new or enhanced products that provide
increasingly higher levels of performance and reliability. However, we may not be able to
successfully develop or introduce these products if our products:
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are not cost-effective; |
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are not brought to market in a timely manner; |
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fail to achieve market acceptance; or |
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fail to meet industry certification standards. |
Furthermore, our competitors may develop similar or alternative new technology applications that,
if successful, could have a material adverse effect on us. Our strategic alliances are based on
business relationships that have not been the subject of written agreements expressly providing for
the alliance to continue for a significant period of time. The loss of a strategic partner could
have a material adverse effect on the progress of new products under development with that partner.
Consolidations in the telecommunications industry could result in delays or reductions in purchases
of products, which would have a material adverse effect on our business.
The telecommunications industry has experienced the consolidation of many industry participants,
and this trend may continue. For instance, in November 2005, Cox Communications announced a
definitive agreement to sell some of its cable television systems to Cebridge Connections. Also,
in April 2005, Adelphia announced that its assets were going to be acquired by Comcast and Time
Warner; this transaction was completed in July 2006. When consolidations occur, it is possible
that the acquirer will not continue using the same suppliers, thereby possibly resulting in an
immediate or future elimination of sales opportunities for us or our competitors, depending upon
who had the business initially. Consolidations also could result in delays in purchasing decisions
by the merged businesses. The purchasing decisions of the merged companies could have a material
adverse effect on our business.
Mergers among the supplier base also have increased, and this trend may continue. For example, in
the fourth quarter of 2005, Cisco Systems, Inc. and Scientific-Atlanta, Inc. announced that Cisco
would acquire Scientific-Atlanta. The acquisition was completed in February of 2006. Larger
combined companies with pooled capital resources may be able to provide solution alternatives with
which we would be put at a disadvantage to compete. The larger breadth of product offerings by
these consolidated suppliers could result in customers electing to trim their supplier base for the
advantages of one-stop shopping solutions for all of their product needs. Consolidation of the
supplier base could have a material adverse effect on our business.
Our success depends in large part on our ability to attract and retain qualified personnel in all
facets of our operations.
Competition for qualified personnel is intense, and we may not be successful in attracting and
retaining key executives, marketing, engineering, technical support and sales personnel, which
could impact our ability to maintain and grow our operations. Our future success will depend, to a
significant extent, on the ability of our management to operate effectively. In the past,
competitors and others have attempted to recruit our employees and in the future, their attempts
may continue. The loss of services of any key personnel, the inability to attract and retain
qualified personnel in the future or delays in hiring required personnel, particularly engineers
and other technical professionals, could negatively affect our business.
We are substantially dependent on contract manufacturers, and an inability to obtain adequate and
timely delivery of supplies could adversely affect our business.
Many components, subassemblies and modules necessary for the manufacture or integration of our
products are obtained from a sole supplier or a limited group of suppliers. Our reliance on sole
or limited suppliers, particularly foreign suppliers, and our reliance on subcontractors involves
several risks including a potential inability to obtain an adequate supply of required components,
subassemblies or modules and reduced control over pricing, quality and timely delivery of
components, subassemblies or modules. Historically, we have not generally maintained long-term
agreements with any of our suppliers or subcontractors. An inability to obtain adequate deliveries
or any other circumstance that would require us to seek alternative sources of supply could affect
our ability to ship products on a timely basis. Any inability to reliably ship our products on
time could damage relationships with current and prospective customers and harm our business.
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Our international operations may be adversely affected by any decline in the demand for broadband
systems designs and equipment in international markets.
Sales of broadband communications equipment into international markets are an important part of our
business. The entire line of our products is marketed and made available to existing and potential
international customers. In addition, United States broadband system designs and equipment are
increasingly being employed in international markets, where market penetration is relatively lower
than in the United States. While international operations are expected to comprise an integral
part of our future business, international markets may no longer continue to develop at the current
rate, or at all. We may fail to receive additional contracts to supply equipment in these markets.
Our international operations may be adversely affected by changes in the foreign laws in the
countries in which our manufacturers and assemblers have plants.
A significant portion of our products are manufactured or assembled in China, Ireland, Mexico, the
Philippines, Taiwan, and other countries outside of the United States. The governments of the
foreign countries in which our products are manufactured may pass laws that impair our operations,
such as laws that impose exorbitant tax obligations or nationalize these manufacturing facilities.
We face risks relating to currency fluctuations and currency exchange.
We may encounter difficulties in converting our earnings from international operations to U.S.
dollars for use in the United States. These obstacles may include problems moving funds out of the
countries in which the funds were earned and difficulties in collecting accounts receivable in
foreign countries where the usual accounts receivable payment cycle is longer.
We are exposed to various market risk factors such as fluctuating interest rates and changes in
foreign currency rates. These risk factors can impact our results of operations, cash flows and
financial position. We manage these risks through regular operating and financing activities and
periodically use derivative financial instruments such as foreign exchange forward contracts. There
can be no assurance that our risk management strategies will be effective.
Our profitability has been, and may continue to be, volatile, which could adversely affect the
price of our stock.
We have experienced several years with significant operating losses. Although we have been
profitable in the past, we may not be profitable or meet the level of expectations of the
investment community in the future, which could have a material adverse impact on our stock price.
In addition, our operating results may be adversely affected by the timing of sales or a shift in
our product mix.
We may face higher costs associated with protecting our intellectual property.
Our future success depends in part upon our proprietary technology, product development,
technological expertise and distribution channels. We cannot predict whether we can protect our
technology or whether competitors can develop similar technology independently. We have received
and may continue to receive from third parties, including some of our competitors, notices claiming
that we have infringed upon third-party patents or other proprietary rights. We are currently a
party in proceedings in federal court and in Texas, in which one of our customers has been sued for
patent infringement and has sued us and several other suppliers for indemnification, and we may
become involved in similar litigation involving other customers. Any of these claims, whether with
or without merit, could result in costly litigation, divert the time, attention and resources of
our management, delay our product shipments, or require us to enter into royalty or licensing
agreements. If a claim of product infringement against us is successful and we fail to obtain a
license or develop non-infringing technology, our business and operating results could be
materially and adversely affected.
Item 6. EXHIBITS
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Exhibit No. |
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Description of Exhibit |
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31.1
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Section 302 Certification of Chief Executive Officer, filed herewith |
31.2
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Section 302 Certification of Chief Financial Officer, filed herewith |
32.1
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Section 906 Certification of Chief Executive Officer, filed herewith |
32.2
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Section 906 Certification of Chief Financial Officer, filed herewith |
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SIGNATURES
Pursuant to the requirements the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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ARRIS GROUP, INC.
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/s/ David B. Potts
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David B. Potts |
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Executive Vice President, Chief
Financial Officer, Chief Accounting
Officer, and Chief Information Officer |
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Dated: November 2, 2006
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