FORM 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-K
For the
fiscal year ended December 31, 2008
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
Securities registered pursuant to Section 12(b) of the Act:
Common stock, $0.01 par value NASDAQ Global
Market System
Preferred Stock Purchase Rights NASDAQ Global Market
System
ARRIS Group, Inc. is a well-known seasoned issuer.
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.
Except as set forth in Item 10, ARRIS Group, Inc. is
unaware of any delinquent filers pursuant to Item 405 of
Regulation S-K.
ARRIS Group, Inc. is a large accelerated filer and is not a
shell company.
The aggregate market value of ARRIS Group, Inc.s Common
Stock held by non-affiliates as of June 30, 2008 was
approximately $1.0 billion (computed on the basis of the
last reported sales price per share of such stock of $8.45 on
the NASDAQ Global Market System). For these purposes, directors,
officers and 10% shareholders have been assumed to be affiliates.
As of January 31, 2009, 123,078,767 shares of ARRIS
Group, Inc.s Common Stock were outstanding.
Portions of ARRIS Group, Inc.s Proxy Statement for its
2009 Annual Meeting of Stockholders are incorporated by
reference into Part III.
PART I
As used in this Annual Report, we, our,
us, the Company, and ARRIS
refer to ARRIS Group, Inc. and our consolidated subsidiaries.
General
Our principal executive offices are located at 3871 Lakefield
Drive, Suwanee, Georgia 30024, and our telephone number is
(678) 473-2000.
We also maintain a website at www.arrisi.com. On our website we
provide links to copies of the annual, quarterly and current
reports that we file with the Securities and Exchange
Commission, any amendments to those reports, and all Company
press releases. Investor presentations also frequently are
posted on our website. Copies of our code of ethics and the
charters of our board committees also are available on our
website. We will provide investors copies of these documents in
electronic or paper form upon request, free of charge.
Glossary
of Terms
Below are commonly used acronyms in our industry and their
meanings:
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Acronym
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Terminology
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AdVOD
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Linear and Demand Oriented Advertising
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ARPU
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Average Revenue Per User
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Cable VoIP
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Cable Voice over Internet Protocol
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CAM
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Cable Access Module
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CBR
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Constant Bit Rate
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CLEC
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Competitive Local Exchange Carrier
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CMTS
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Cable Modem Termination System
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CPE
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Customer Premises Equipment
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CWDM
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Coarse Wave Division Multiplexing
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DBS
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Digital Broadcast Satellite
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DOCSIS®
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Data Over Cable Service Interface Specification
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DPI
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Digital Program Insertion
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DSG
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DOCSIS Set-Top Gateway
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DSL
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Digital Subscriber Line
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DWDM
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Dense Wave Division Multiplexing
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EMTA
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Embedded Multimedia Terminal Adapter
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eQAM
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Edge Quadrature Amplitude Modulator
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FMC
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Fixed Mobile Convergence
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FPGA
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Field Programmable Gate Arrays
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FTTH
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Fiber to the Home
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FTTP
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Fiber to the Premises
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GAAP
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Generally Accepted Accounting Principles
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GHZ
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Gigahertz
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GPA
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General Purchase Agreements
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HDTV
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High Definition Television
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HFC
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Hybrid Fiber-Coaxial
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IFRS
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International Financial Reporting Standards
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ILEC
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Incumbent Local Exchange Carrier
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Acronym
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Terminology
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IP
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Internet Protocol
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IPTV
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Internet Protocol Television
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Mbps
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Megabits per Second
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MPEG-2
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Moving Picture Experts Group, Standard No. 2
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MPEG-4
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Moving Picture Experts Group, Standard No. 4
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M-CMTS
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Modular CMTS
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MSO
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Multiple Systems Operator
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MTA
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Multimedia Terminal Adapter
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NGNA
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Next Generation Network Architecture
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nPVR
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Network Personal Video Recorder
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NSM
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Network Service Manager
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NIU
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Network Interface Unit
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PCS
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Post Contract Support
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PCT
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Patent Convention Treaty
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PSTN
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Public-Switched Telephone Network
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QAM
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Quadrature Amplitude Modulation
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QoS
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Quality of Service
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RF
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Radio Frequency
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RGU
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Revenue Generating Unit
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SDV
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Switched Digital Video
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SLA
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Service Level Agreement
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STB
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Set Top Box
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VAR
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Value-Added Reseller
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VOD
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Video on Demand
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VoIP
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Voice over Internet Protocol
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VPN
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Virtual Private Network
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VSOE
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Vendor-Specific Objective Evidence
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Overview
We are a global communications technology company specializing
in the design and engineering of broadband network solutions. We
are a leading developer, manufacturer and supplier of cable
telephony, video and high-speed data products, as well as
outside plant construction and maintenance equipment for cable
system operators. We provide products and equipment principally
to cable system operators and, more specifically, to Multiple
System Operators (MSOs). Our products allow MSOs and
other broadband service providers to deliver a full range of
integrated voice, video and high-speed data services to their
subscribers. Our core strategy is to lead network operators
through the transition to Internet Protocol-based networks by
leveraging our extensive global installed base of products and
experienced workforce to deliver network solutions that meet the
business needs of our customers.
We operate our business in three segments:
1) Broadband Communications Systems (BCS)
2) Access, Transport and Supplies (ATS)
3) Media & Communications Systems
(MCS)
A detailed description of each segment is contained below in
Our Principal Products.
2
Industry
Overview
In recent years, the technology offered by cable system
operators has evolved significantly. Historically, cable system
operators offered only one-way analog video service. In order to
increase revenues and better position themselves competitively,
MSOs have aggressively upgraded their networks, spending over
100 billion dollars during the past decade, to support and
deliver enhanced voice, digital video and data services, such as
high-speed data, telephony, digital video and video on demand.
By offering bundled packages of broadband services, these MSOs
are seeking to gain a competitive edge over telephone companies
and Digital Broadcast Satellite (DBS) providers, and
to create additional revenue streams. Delivery of enhanced
services also has helped MSOs offset slowing basic video
subscriber growth and reduce their subscriber churn. To compete
effectively against the DBS providers and telephone companies,
MSOs have been upgrading and rebuilding their networks to offer
digital video, which enables them to provide more channels and
better picture quality than analog video. These upgrades to
digital video also allow MSOs to roll out High Definition
Television (HDTV) and new interactive services such
as Video on Demand (VOD). VOD services require video
storage equipment and servers, systems to manage increasing
amounts of various types of content and complementary devices
capable of transporting, multiplexing and modulating signals to
individual subscribers over a network. Additionally, the
delivery of HDTV channels requires significantly more bandwidth
than the equivalent number of standard definition channels. This
demand for additional bandwidth is the key driver behind many of
the changes being made to the cable operators network, and
the MSO investment in the products provided by ARRIS. One of the
most significant changes that has been occurring over the past
few years is a transition to an all-digital network.
The transition to an all-digital network will reduce
the amount of channel capacity dedicated to inefficient analog
video by using digitized signals on the HFC plant. In most
cases, this transition is being implemented in several steps by
starting with digital simulcasting. Digital
simulcasting makes all channels available in digital format, in
addition to simultaneously broadcasting the same channels in
analog format for analog-only cable subscribers. This has
necessitated even more growth and improvement in the MSOs
transmission network to handle increased complexity and growth
in network traffic. We are a leading provider of equipment
enabling transmission of voice, video and data traffic within
the MSOs networks.
Another method being used by operators to more efficiently
utilize the existing HFC capacity is to deploy Switched Digital
Video (SDV). SDV provides the ability to transition
from a broadcast video paradigm to a narrowcast video paradigm,
in which a portion of the digital video broadcast programs is
over-subscribed across a set of downstream channels. Only those
channels which are actively being watched by consumers are
switched onto the HFC network by a smart EdgeQAM.
This is a very cost-effective mechanism to reduce the number of
channels required for broadcast digital video, freeing up
capacity for other services such as more HDTV or data services.
Demand for bandwidth capacity of cable systems is increasing as
content providers (such as Google, Yahoo, YouTube, Hulu,
MySpace, Facebook, Blockbuster, Netflix, ABC, CBS, NBC, movie
and music studios, and gaming vendors) increasingly offer
personalized content across multiple venues. For example,
broadcast network shows and user-generated content, such as
video downloads, personalized web pages, and video and photo
sharing, have become commonplace on the Internet. Likewise,
certain cable operators are experimenting with offering more
content through the use of network personal video recorders
(nPVRs) which, once copyright issues are resolved,
are expected to add more traffic to the networks. Another
bandwidth intensive service being offered by a major cable
operator allows cable video subscribers to re-start programs on
demand if they miss the beginning of a television show
(time-shifted television). Television today has thus
become more interactive and personalized, thereby increasing the
demand on a service providers network. Further, the
Internet has raised the bar on personalization with viewers
increasingly looking for similar experience across
multiple screens television, PC and phone, further
increasing the challenges in delivering broadband content.
Cable operators are offering enhanced broadband services,
including high definition television, digital video, interactive
and on demand video services, high-speed data and Voice over
Internet Protocol (VoIP). As these enhanced
broadband services continue to attract new subscribers, we
expect that cable operators will continue to invest in their
networks to expand network capacity and support increased
customer demand for personalized services. In the access
portion, or
last-mile,
of the network, operators will need to upgrade headends, hubs,
nodes,
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and radio frequency distribution equipment. While many domestic
cable operators have substantially completed the initial network
upgrades necessary to provide enhanced broadband services, they
will need to take a scalable approach to continue upgrades as
new services are deployed. In addition, many international cable
operators have not yet completed the initial upgrades necessary
to offer such enhanced broadband services and are expected to
continue purchasing equipment to complete these upgrades.
Data and VoIP services provided by the MSOs are governed by a
set of technical specifications promulgated by
CableLabs®
in North America and
tComLabs®
in Europe. While the specifications developed by these two
bodies necessarily differ in a few details in order to
accommodate the differences in HFC network architectures between
North America and Europe, a significant feature set is common.
The primary data standard specification for cable operators in
North America is entitled Data over Cable System Interface
Specification
(DOCSIS®).
Release 2.0 of
DOCSIS®
is the current governing standard for data services in North
America. The parallel release for European operators is
Euro-DOCSIS®
Release 2.0.
DOCSIS®
2.0 builds upon the capabilities of
DOCSIS®
1.1 and adds additional throughput in the upstream portion of
the cable plant from the consumer out to the
Internet. In addition to the
DOCSIS®
standards that govern data transmission,
CableLabs®
has defined the
PacketCabletm
specifications for VoIP. These specifications define the
interfaces between network elements such as cable modem
termination systems, or CMTSs, multimedia terminal adapters, or
MTAs, gateways and call management servers to provide high
quality IP telephony service over the HFC network.
The growing market strength of telecommunications service
providers fiber-to-the-home (FTTH) services is
mounting a significant threat to cable MSOs. As a competitive
response, a new standard, DOCSIS 3.0 has been developed and
commercial deployments commenced in 2008. DOCSIS 3.0 allows MSOs
to provide higher data rates to compete with fibers
capability. DOCSIS 3.0 is also a key enabler of Video over IP
where multiple channels can now be used to deliver video over a
common network infrastructure. MSOs are beginning to investigate
Video over IP as an alternative and are engaging the vendor
community, including ARRIS, in discussions. ARRIS designs and
manufactures DOCSIS 3.0 CMTS, cable modems and EMTAs.
MSOs have benefited from the use of standard technologies like
DOCSIS®
1.1, 2.0 and 3.0 and
PacketCabletm.
One of the fastest growing services, based on
DOCSIS®
and
PacketCabletm
standards, offered by the MSOs is cable telephony. Cable
telephony allows MSOs to offer their customers local and long
distance residential telephone service. Constant bit rate, or
CBR, technology was the technology of choice for telephone
services until late 2004. Rapid maturation of VoIP technology in
2003 and 2004 resulted in
PacketCabletm
certified Internet protocol technology as the technology of
choice for offering next-generation cable IP telephony services
and, as a result, 2005 became a breakout year for the deployment
of IP based voice services in the cable market.
PacketCabletm
certified Voice over IP, or Cable VoIP, permits cable operators
to utilize the ubiquitous IP protocol to deliver toll-quality
cable telephony services. The broad adoption of Cable VoIP by
the MSOs could potentially cannibalize the deployment of
data-only cable modems, as the customer premises devices that
support VoIP also offer high-speed data access on the same
equipment. We are a leading supplier of both head-end and
customer premises equipment for VoIP services over cable. The
demand for single family residential Voice over IP subscriber
devices (EMTA) has continued to grow at a steady
rate since the technology was first introduced in 2003. Cable
operators worldwide have adopted VoIP as the primary method to
offer voice services. Price pressures are strong in this market
and therefore revenue growth is lower than unit growth. However,
because of our current leadership position in this market, we
expect to be able to maintain cost leadership and to lead in
innovations which could expand the size of the market by
creating demand in commercial, enterprise and multiple-dwelling
unit applications.
Our
Strategy
Our long-term business strategy Convergence Enabled
includes the following key elements:
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Maintain a strong capital structure, mindful of our 2013 debt
maturity, share repurchase opportunities and other capital needs
including mergers and acquisitions.
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Grow our current business into a more complete portfolio
including a strong video product suite. Continue to invest in
the evolution toward enabling true network convergence onto an
all IP platform.
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Continue to expand our product/service portfolio through
internal developments, partnerships and acquisitions.
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Expand our international business and begin to consider
opportunities in markets other than cable.
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Continue to invest in and evolve the ARRIS talent pool to
implement the above strategies.
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To fulfill our strategy, we develop technology, facilitate its
implementation, and enable operators to put their subscribers in
control of their entertainment, information, and communication
needs. Through a set of business solutions that respond to
specific market needs, we are integrating our products,
software, and services solutions to work with our customers as
they address Internet Protocol telephony deployment, high speed
data deployment, high definition television content expansion,
on demand video rollout, operations management, network
integration, and business services opportunities.
Specific aspects of our strategy include, through both internal
development effort and acquisitions:
Providing a Comprehensive Line of Broadband
Products. We offer a full range of high speed
data, voice and video products including IP based headend and
subscriber premises equipment, fiber optic transmission and
radio frequency products with up to one gigahertz bandwidth
capacity to transmit both radio frequency and optical signals in
both directions over hybrid fiber coax networks between
the headend and the home.
Offering a Unified Video Platform for On Demand
Services. We offer a Unified Video Delivery
Platform that allows network operators to offer a full line of
on demand services such as switched digital video, video on
demand, dynamic digital advertising, and network based-personal
video recorders, from a single server and software management
system. Using open industry standards, we help network operators
build new systems and transition existing facilities.
Providing Integrated Software Solutions to Enhance Content
and Operations Management. Our
applications-oriented Internet Protocol (IP)
software allows cable operators to automate and proactively
manage their networks to maximize quality of service and return
on investment. Cable operators need enhanced network visibility,
flexibility, and scalability to provide the latest services to
their customers. Our modular, interoperable applications provide
network operators with the subscriber management, content
management, and network optimization and service assurance tools
needed to efficiently manage and operate their networks.
Integrating Products, Content and Operations Management
Systems, and Services for End-to-End
Solutions. We integrate our expertise in
products, content and operations management systems, and
professional services to offer customer-focused applications for
expanding network capacity, combining video on demand
programming with dynamic advertisements, coordinating management
of network devices and services with technicians in the field,
controlling network traffic and verifying subscriber usage
levels, and managing the full lifecycle for deploying voice over
Internet services.
Expansion via Strategic Acquisitions. To
further our strategy we recently acquired C-COR Incorporated.,
in a cash and stock transaction valued at approximately
$680.4 million. The transaction closed on December 14,
2007. As a result of this acquisition, we now have substantially
greater scale and critical mass, as well as greater product
breadth and enhanced customer diversity. As the cable system
industry has continued to consolidate, supplier scale and
product breadth have become increasingly important. On a
combined basis, we expect our increased product breadth and
greater scale to be strategically relevant to our customers,
thereby giving us an opportunity to capture a larger share of
their spending. The combination of our industry-leading voice,
data and video products together with leading access,
transmission, video and software solutions better position the
combined business than either company individually. Our new
organization has an impressive global footprint with excellent
customer and product line diversity and an even stronger
international presence both in terms of sales and staff
presence. The ability to offer end-to-end solutions should
enable us to optimize customer relationships and derive greater
product pull through. We expect to regularly consider
acquisitions opportunities that could cost effectively expand
our technology portfolio or strengthen our market presence or
opportunities.
5
Our
Principal Products
A broadband cable system consists of three principal components:
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Headend. The headend is a central point in the
cable system where signals are received via satellite and other
sources. Interfaces that connect the Internet and public
switched telephone networks are located in the headend. The
headend organizes, processes and retransmits those signals
through the distribution network to subscribers. Larger networks
include both primary headends and a series of secondary headends
or hubs.
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Distribution Network. The distribution network
consists of fiber optic and coaxial cables and associated
optical and electronic equipment that take the combined signals
from the headend and transmits them throughout the cable system
to optical nodes and ultimately the subscriber premises. The
distribution network also collects requests and transmissions
from subscribers and transports them back to the headend for
processing and transmission.
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Subscriber Premises. Cable drops extend from
multi taps to subscribers homes and connect to a
subscribers television set, set-top box, telephony network
interface device or high speed cable modem.
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We provide cable system operators with a comprehensive product
offering for the headend, distribution network and subscriber
premises. We divide our product offerings into three segments:
Broadband Communications Systems (BCS):
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VoIP and High Speed Data products
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CMTS
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2-Line Residential EMTA
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Multi-line
E-MTA for
Residential and Commercial Services
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Wireless Gateway EMTA
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High-speed data Cable Modems
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Video / IP headend products
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CMTS
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Universal EdgeQAM
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Access, Transport and Supplies (ATS):
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HFC plant equipment products, including
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Headend and hub products
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Optical nodes
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Radio frequency products and
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Transport products
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Infrastructure products for fiber optic or coaxial networks
built under or above ground, including
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Cable and strand
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Vaults
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Conduit
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Drop materials
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Tools
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Connectors
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Test equipment
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Media & Communications Systems
(MCS):
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Content and Operations management systems, including products for
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Video on Demand
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Ad Insertion
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Digital Advertising
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Operations management systems, including products for
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Service Assurance
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Service Fulfillment
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Mobile Workforce Management
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Fixed Mobile Convergence Network, including product for
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Mobility Application Server (MAS) for continuity of
services across wireless and Packetcable Networks
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Voice Call Continuity (VCC)% Application Server for
continuity of services in IP Multimedia Subsystem
(IMS) Networks
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Broadband
Communication Systems
Voice
over IP and Data Products
Headend The heart of a Voice over IP or data
headend is a CMTS. A CMTS, along with a call agent, a gateway,
and provisioning systems, provides the ability to integrate the
Public-Switched Telephone Network, or PSTN, and high-speed data
services over a HFC network. The CMTS provides the software and
hardware to allow IP traffic from the Internet, or traffic used
in VoIP telephony, to be converted for use on HFC networks. The
CMTS is also responsible for initializing and monitoring all
cable modems and EMTAs connected to the HFC network. We provide
two products, the
C4®CMTS
and the
C3tm
CMTS, used in the cable operators headend that provide
VoIP and high-speed data services to residential or business
subscribers. The CMTS is a highly complex, reliable, real-time
sensitive element of a carrier-grade broadband network,
responsible for ensuring the quality of the services provided.
During 2008 we introduced the 16D Cable Access Module
(CAM) and the Router Control Module
(RCM) for the C4 CMTS. The 16D CAM provides eight
times the downstream capacity of its predecessor and DOCSIS 3.0
downstream channel bonding enabling downstream speeds up to
160Mbps. The RCM provides a 10Gigabit per Second interface to
the Internet as well as eight 1Gigabit interfaces which greatly
expands the capacity of the existing installed base of C4 CMTS
and allows cable operators to offer ultra-high speed data
services competitive with telephone company fiber to the home
service.
Subscriber Premises Subscriber
premises equipment includes
DOCSIS®
certified cable modems for high-speed data applications as well
as
Euro-DOCSIS®
certified versions and
PacketCabletm
Certified EMTAs for VoIP applications in both
DOCSIS®
and
Euro-DOCSIS®
networks. The
PacketCabletm
solution builds on
DOCSIS®
and its quality of service enhancements to support lifeline
telephony deployed over HFC networks. Our
Touchstone®
product line provides carrier-grade performance to enable
operators to provide all data, telephony and video services on
the same network using common equipment.
During 2008 we introduced the WBM750 DOCSIS Wideband Cable Modem
and the TM702 DOCSIS Wideband Multimedia Terminal Adapter. Both
units are capable of data speeds up to 100Mbps allowing cable
operators to compete favorably against telephone company fiber
to the home service.
We also introduced the TM604 and TM608, 4-line and 8-line
multiline EMTAs providing four or eight voice lines,
respectively, with internal battery
back-up for
commercial service applications. Commercial Services is a
relatively new and growing area of interest for the MSOs.
7
Video/IP
Products
Headend We market our Video / IP
headend equipment as the
D5tm
Universal Edge QAM. The
D5tm
converts digital video and IP data into radio frequency signals
that can be transmitted on a cable service providers HFC
plant. The
D5tm
Universal Edge QAM is compatible with
DOCSIS®
cable modems as well as MPEG-2 and MPEG-4 set top boxes. The
D5tm
Universal Edge QAM is ideal for service providers deploying
video on demand and switched digital video (SDV) services where
many unicast channels are required. In 2008 we expanded the
capacity of the D5 from 48 ports to 72 ports while maintaining
the same footprint. This increase in capacity enables operators
to offer fifty percent more HDTV channels with the same
installed base.
Access
Transport and Supplies
The traditional hybrid fiber coax network connects a headend to
individual residential and or business users through a
progression of fiber optic and coaxial cables and a variety of
electrical and optical devices that modulate, transmit, receive,
and amplify the radio frequency and optical signals as they move
over the network. The local hybrid fiber coax network consists
of three major components: the headend and hubs, optical nodes,
and the radio frequency plant. We offer product lines for all
three components in a variety of bandwidths, up to and including
one Gigahertz capability, as well as coarse wave division
multiplexing (CWDM) and Dense Wave Division Multiplexing (DWDM),
which provide more capacity per subscriber over existing
infrastructures or provide state-of-the-art capacity for new
networks.
Headend
and Hubs
We offer a broad range of managed and scalable headend and hub
equipment for domestic and international applications. The
benchmark design of our market leading
ARRIS C-COR®
CHPtm
5000 compact headend products with advanced CWDM and DWDM
technologies lower the capital costs of delivering more
bandwidth per subscriber while enabling network operators to
increase their network capacity for advanced services, such as
video on demand, high definition television, high speed
Internet, and voice over Internet Protocol.
Optical
Nodes
The general function of the optical node in the local hybrid
fiber coax network is to convert information from optical
signals to radio frequency signals for distribution to the home
or business. Our node series offers the performance service,
segmentability, and cost efficiency required to meet the demands
of the most advanced network architectures. Our nodes utilize
space and cost-saving scalable technology that allows network
operators to have a pay-as-they-grow approach in
deploying their infrastructure, minimizing capital expenditures
while maximizing network service availability and performance.
During 2008, we announced the availability of 1 GHz CORWave
closely spaced CWDM downstream optics products.
CORWave the essential delivery of HD SDV, On Demand and business
services on existing MSO fiber networks with superior quality
service levels. CORWave is an extension of the broadly-deployed,
field proven CHP CWDM optics that deliver more capacity over
longer-link distances on existing fiber.
During 2008 we also announced the availability of new
ergonomically designed optical passives in the OM4100 node fiber
tray and field splice enclosure packages within the 1 GHz
CHP CORWave system. The new ARRIS optical passives allow plug
and play features in multiple wavelength systems, which
significantly reduce deployment time with minimum service
interruption.
Radio
Frequency Products
The radio frequency products transmit information between the
optical nodes and subscribers. These products are radio
frequency amplifiers that come in various configurations such as
trunks, bridgers, and line extenders to support both domestic
and international markets. A trunk amplifier moves information
across greater distances in a network and is typically used when
the node serving area is greater than 500 homes or the home
densities are low. A bridger splits the signal and amplifies it
to higher levels in order to send it to a greater number of
destinations. Line extenders move the signal through the last
mile of the plant to the home or business. Representing one of
the largest
8
installed bases in the industry, our amplifiers use drop-in
replacement modules to allow cost and timesaving upgrades for
the operators. Many of these amplifiers are complemented by
optical nodes upgrade kits to provide a wide array of options
for the operators to enhance the capacity of their networks.
Supplies
We offer a variety of products that are used by MSOs to build
and maintain their cable plants. Our products are complemented
by our extensive distribution infrastructure, which is focused
on providing efficient delivery of products from stocking or
drop-ship locations.
We believe the strength of our product portfolio is our broad
offering of trusted name-brand products, strategic proprietary
product lines and our experience in distribution. Our name-brand
products are manufactured to our specifications by manufacturing
partners. These products include taps, line passives, house
passives and premises installation equipment marketed under our
Regal®
brand name;
MONARCH®
aerial and underground plant construction products and
enclosures;
Digicon®
premium F-connectors; and FiberTel fiber optic connectivity
devices and accessories. Through our product selection, we are
able to address substantially all broadband infrastructure
applications, including fiber optics, outside plant
construction, drop and premises installation, and signal
acquisition and distribution.
We also resell products from vendors, which include widely
recognized brands to small specialty manufacturers. Through our
strategic suppliers, we also supply ancillary products like
tools, safety equipment, testing devices and specialty
electronics.
Our customers benefit from our inventory management and
logistics capabilities and services. These services range from
just-in-time
delivery, product kitting, specialized electronic
interfaces, and customized reporting, to more complex and
comprehensive supply chain management solutions. These services
complement our product offerings with advanced channel-to-market
and logistics capabilities, extensive product bundling
opportunities, and an ability to deliver carrier-grade
infrastructure solutions in the passive transmission portions of
the network. The depth and breadth of our inventory and service
capabilities enable us to provide our customers with single
supplier flexibility.
Media &
Communications Systems
Our integrated, application-oriented Internet Protocol solutions
are designed to enable network operators to effectively deploy
and manage revenue-generating, on demand entertainment and
information services. Built on open industry standards, our
solutions can be tailored to the operators
needs from a bundled suite to a point-specific
application. Our solutions provide for an efficient and
cost-effective transition to Internet Protocol-oriented network
services.
On Demand
and Ad Insertion
Our Unified Video Delivery Platform eliminates the need for
multiple hardware and software management systems to deliver and
manage video on demand (VOD), linear and
demand-oriented advertising (AdVOD), network-based
digital video recording (nPVR), and switched digital
video (SDV) services. Also, this platform streams
content and advertising to any device, whether mobile, personal
computer, or standard, high definition and Internal Protocol
television, all from a single server. Our content management
system offers a set of management and technical business tools
to help cable operators migrate networks to digital in order to
efficiently allocate bandwidth and to lower operating costs. Our
professional service personnel can add project management
support for switched digital video implementation.
nABLEtm
On Demand Software
Our On Demand Management System lets network operators manage
all aspects of video on demand the system, the
content, and the business from a single, integrated
platform that gives real-time control and visibility to achieve
maximum revenue. nABLE, which is at the heart of our unified
video delivery platform, reduces manual
9
intervention, simplifies operations, and reduces costs with one
process to manage delivery of on demand services at corporate,
regional, and local levels, all in real time and across
different video on demand delivery systems.
Digital
Advertising
Using our Digital Program Insertion (DPI), network
operators can reach both digital and analog customers from one,
cost-effective platform. This allows for a smooth, scalable
transition from analog-only systems and helps raise revenues
from a variety of advertising models, including high definition
ad insertion with standard and high definition content, local
and long form ads, and targeted advertising by geographic and
demographic segment. Telescoping, a form of viewer selected
advertising, puts the consumer in control by allowing users to
seek successive levels of detail about a given product or
service being advertised.
During 2008, we announced a series of interoperability test
activities with advertising technology companies to help
accelerate progress surrounding the SCTE 130, SCTE 118, DVS 766,
ADI 1.1 and ADI 2.0 standards and to define the cable
industrys addressable Advertising Insertion standards and
solutions. These interoperability activities focus on real-world
applications and new revenue-generating capabilities in advanced
advertising insertion for cable MSOs.
Operations
Management Systems
We provide a unified operations support system (OSS)
suite of products that allows customers to ensure high levels of
service availability through offering visibility, analysis, and
control to address their bandwidth management, network
optimization and assurance, and automated workforce needs. This
OSS suite provides a set of applications that support network
operators business and engineering needs by reducing the
cost and complexity of managing standards-based
(DOCSIS®)
and hybrid fiber coax networks while speeding deployment of new
Internet Protocol services in cable networks.
Service
Assurance
Customers can enhance and improve business processes with our
Assurance applications
(ServAssuretm)
by reducing time to repair outages, minimizing truck rolls, and
automating management of revenue-generating services. We provide
the tools for cable operators to have a
360o,
real-time view of their networks. With over 20 million
devices in subscribers homes being monitored worldwide,
our Assurance applications help communicate network and device
status across the entire network, proactively pinpointing outage
locations and impact on subscribers, and forecasting and
planning for maximum network capacity.
Service
Fulfillment
Our Fulfillment application automates the effective utilization
of bandwidth for delivering video on demand, Internet telephony,
gaming, and a whole host of content applications available to
consumers today. By ensuring standards-based quality of service
(QoS), this tool lets network operators prioritize
or de-prioritize specific data packets as needed, while
providing an infrastructure for event-based billing based on
bandwidth usage. The consumer is placed in control with tools to
select from services on an as-needed, bandwidth on demand basis.
Mobile
Workforce Management
Our suite of field service management tools combines
browser-based business applications with real-time connectivity
to the mobile workforce through wireless data connections and
mobile computing devices. By managing service delivery and
network integrity, we help network operators reduce operating
expenses by minimizing the need to send technicians on service
and maintenance calls while maximizing service quality and
customer retention.
Fixed
Mobile Convergence (FMC)
Our Mobility and Voice Call Continuity Application Servers
provide a migration strategy for cable operators digital
voice services, allowing them to evolve their existing landline
voice service by degrees into a fully-converged landline and
wireless offering.
10
Sales and
Marketing
We are positioned to serve customers worldwide with a sales and
sales engineering organization complemented by a skilled
technical services team. We maintain sales offices in Colorado,
Georgia and Pennsylvania in the United States, and in Argentina,
Brazil, Chile, Hong Kong, Japan, Korea, The Netherlands, and
Spain. Our sales engineering team assists customers in system
design and specification and can promptly be onsite to resolve
any problems that may arise during the course of a project. Our
technical services team provides professional services through
experienced and highly skilled personnel who work with network
operators to design and keep their networks operating at peak
performance. Core competencies include network engineering and
design, project management for launching advanced applications
over complex broadband networks, and solutions to move
todays sophisticated networks forward to Internet Protocol
and digital services. Additionally, we provide 24x7 technical
support, directly and through channel partners, as well as
provide training for customers and channel partners, as
required, both in our facilities and at our customers
sites.
We have agreements in various countries and regions with Value
Added Resellers (VARs), sales representatives and
channel partners that extend our sales presence into markets
without established sales offices. We also maintain an inside
sales group that is responsible for regular phone contact with
the customer, prompt order entry, timely and accurate delivery,
and effective sales administration.
Our marketing and product management teams focus on each of the
various product categories and work with our engineers and
various technology suppliers on new products and product
enhancements. These teams are responsible for inventory levels,
pricing, delivery requirements, market demand analysis, product
positioning and advertising.
We are committed to providing superior levels of customer
service by incorporating innovative customer-centric strategies
and processes supported by business systems designed to deliver
differentiating product support and value-added services. We
have implemented advanced customer relationship management
programs to bring additional value to our customers and provide
significant value to our operations management. Through these
information systems, we can provide our customers with product
information ranging from operational manuals to the latest
product updates. Through on-going development and refinement,
these programs will help to improve our productivity and enable
us to further improve our customer-focused services.
Customers
The vast majority of our sales are to cable system operators
worldwide. As the U.S. cable industry continued a trend
toward consolidation, the six largest MSOs controlled
approximately 89.9% of the triple play RGUs within the
U.S. cable market (according to Dataxis in the third
quarter 2008), thereby making our sales to those MSOs critical
to our success. Our sales are substantially dependent upon a
system operators selection of ARRIS network
equipment, demand for increased broadband services by
subscribers, and general capital expenditure levels by system
operators. Our two largest customers (including their
affiliates, as applicable) are Comcast and Time Warner Cable.
From time-to-time, the affiliates included in our revenues from
these customers have changed as a result of mergers and
acquisitions. Therefore, the revenue for our customers for prior
periods has been adjusted to include, on a comparable basis for
all periods presented, the affiliates currently understood to be
under common control. Our sales to these customers for the last
three years were:
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Years Ended December 31,
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2008
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2007
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2006
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(in thousands)
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Comcast
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$
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300,934
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$
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366,894
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|
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$
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316,124
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% of sales
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26.3
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%
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37.0
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%
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|
|
35.4
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%
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Time Warner Cable
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$
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235,405
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|
$
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106,376
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|
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$
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82,758
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% of sales
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20.6
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%
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10.7
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%
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9.3
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%
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ARRIS utilizes Standard Terms of Sale. These Standard Terms of
Sale apply to all purchases except those to a few of our large
customers with whom we have executed general purchase agreements
(GPAs). These GPAs do not obligate the customer to a
specific volume of business. The vast majority of our sales,
whether to customers with GPAs or otherwise, result from
periodic purchase orders. We have multiple agreements with our
largest customers, such as Comcast and Time Warner, based upon
their needs or as a result of prior acquisitions. We maintain
these agreements in the normal course of our business.
11
International
Operations
Our international revenue is generated primarily from
Asia-Pacific, Europe, Latin America and Canada. The Asia-Pacific
market includes China, Japan, Korea, Singapore, and Taiwan. The
European market includes Austria, Belgium, France, Germany, the
Netherlands, Norway, Poland, Portugal, Spain, Sweden and
Switzerland. The Latin America market includes Argentina,
Brazil, Chile, Colombia, Mexico, Peru and Puerto Rico. Revenues
from international customers were approximately 29.1%, 27.0% and
25.1% of total revenues for 2008, 2007 and 2006, respectively.
We continue to strategically invest in worldwide marketing and
sales efforts, which have yielded some promising results in
several regions. We currently maintain international sales
offices in Argentina, Brazil, Chile, Hong Kong, Japan, Korea,
The Netherlands, and Spain.
Research
and Development
We operate in an industry that is subject to rapid changes in
technology. Our ability to compete successfully depends in large
part upon anticipating such changes. Accordingly, we engage in
ongoing research and development activities in response to our
customers needs with the intention to advance existing
product lines
and/or
develop new offerings. We are committed to rapid innovation and
the development of new technologies in the evolving broadband
market. New products are developed in our research and
development laboratories in Beaverton, Oregon; Cork, Ireland;
Lisle, Illinois; Shenzhen, China; State College, Pennsylvania;
Suwanee, Georgia; Wallingford, Connecticut; and Waltham,
Massachusetts. We also form strategic alliances with world-class
producers and suppliers of complementary technology to provide
best-in-class
technologies focused on time-to-market solutions.
We believe that our future success depends on our rapid adoption
and implementation of broadband local access industry
specifications, as well as rapid innovation and introduction of
technologies that provide service and performance
differentiation. To that end, we believe that the
C4®
CMTS product line continues to lead the industry in areas such
as fault tolerance, wire-speed throughput and routing, and
density. With the introduction of DOCSIS3.0 capabilities on the
C4 platform in 2008, we extended this leadership and increased
worldwide market share. We announced the renewal of significant
supply agreements with Comcast in the US and KDG in Germany, as
well as new customers, iTSCOM in Japan and NET Servicos in
Brazil. The
C3tm
CMTS is designed for small to mid-size operators who are looking
for a CMTS that delivers superior RF performance while only
occupying one rack unit of space for delivering high-speed data
services, including VPN services. The
Touchstone®
product line offers a wide-range of
DOCSIS®,
Euro-DOCSIS®
and
PacketCabletm
certified products, including
Touchstone®
Cable Modems,
Touchstone®
Telephony Modems and
Touchstone®
Telephony Ports. In addition to the introduction of several new
cost-reduced versions, the
Touchstone®
product line was completely refreshed with the addition of
DOCSIS3.0 capabilities. We announced a significant DOCSIS3.0
EMTA win with Ziggo, a Dutch service provider. We also continued
to add additional capabilities to the
D5tm
Universal Edge QAM, with successful deployments for Switched
Digital Video, M-CMTS,
Video-On-Demand,
and Broadcast digital video applications at Comcast, Cabovisao,
and others.
Additionally our research and development has focused on
1 GHz access products. We were the first to introduce this
type of product in the industry. In particular, our CHP 5000
headend platform and OptoMax nodes provide a wide variety of
options to the operator to extend the capacity of their existing
infrastructures through service group segmentation or
multi-wavelength optical transport. We are also continuously
improving our market leading VOD back-office systems and Ad
Insertion products. Enhancements include innovations that
improve subscriber experience and help control the MSOs
operational expenditures.
Research and development expenses in 2008, 2007, and 2006 were
approximately $112.5 million, $71.2 million, and
$66.0 million, respectively. Research and development
expenses as a percent of sales in 2008, 2007 and 2006 were
approximately 9.8%, 7.2% and 7.4%, respectively. These costs
include allocated common costs associated with information
technologies and facilities.
The following trends impact our current product development
activities:
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Continued development and acceptance of open standards for
delivering voice, video and data;
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Widespread deployment of VoIP;
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Continued increase in peer-to-peer and over-the-top services
accelerating demand for new services requiring intensive,
high-touch processing and sophisticated management techniques;
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Increasing demand for higher speed broadband connections to the
home;
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The rapid adoption of video on demand and switched digital video
services;
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Expanded deployment of high definition video channels;
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Innovations in video encoding and decoding technology making
possible very low bit rate, high quality video streaming;
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Increased competition from DBS and telephone companies that
drives our customers to focus on delivering additional and
enhanced services. These services include more HDTV, faster
internet speeds and more video options, including niche video
content. All these services drove an increase in bandwidth
towards 1GHz, reduction in service group sizes, and the rapid
adoption of DOCSIS 3.0.
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Decreased size of service groups through the segmenting of nodes
and the implementation of new optics to support those nodes;
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Growing scarcity of dark fiber for the provision of new service
applications
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Increased focus on Commercial Services by our customer base
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Increased complexity of triple play markets and SLAs for QoS
driving stringent requirements for management tools;
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Increased use of comprehensive tool sets to reduce operating
expenses and improve QoS;
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Increasing digital STB penetrations which adds complexity and
network constraint;
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Lower ARPU markets requiring cost effective management
tools; and
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Continued silicon integration, multicore processor, and high
speed digital to analog convertor technology innovations are
making possible very low cost, multi-functional broadband
headend and consumer devices, integrating not only telephony but
wireless and video decompression and digital rights management
functionality.
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As a result, our product development activities are directed,
primarily, in the following areas:
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Development of network and client technologies to address the
emerging worldwide market opportunities in next generation video
and multimedia delivery (video over IP and
PacketCabletm
multimedia), as embodied in
CableLabs®
DOCSIS®
3.0 and M-CMTS standards including 100Mbps+ data speeds, IPv6
address and routing support, enhanced data security, and
enhanced multicast video support;
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Development of new CMTS line cards to separate upstream and
downstream functions to provide higher and greater flexibility
to our customers to add network capacity
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Development of Modular-CMTS capabilities on the
C4®
and
D5tm
products to allow for convergence of voice, video and data
traffic
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Development of a Compact version of the C4 CMTS, called the C4c.
This product will re-use the existing C4 line cards and
software, but will have fewer slots and therefore a smaller
footprint for headends and hubs that require less capacity.
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Expanding the range of next-generation, lithium-ion-based
Touchstone®
Telephony Modem EMTAs for both residential and commercial voice
and data applications;
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Product value engineering and cost reductions;
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Development of switched digital video and Modular CMTS features
on the
D5tm
Universal Edge QAM;
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13
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Network segmentation options for node families that provide MSOs
scalable, flexible network capacity with a minimal impact to
existing infrastructures;
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Multi-wavelength optical transport solutions to maximize the
utilization of limited, existing MSO fiber infrastructures;
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Development of headend and CPE products that enable and support
RF over Glass (RFoG) and Ethernet-based Passive
Optical (ePON) transport solutions;
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Development of a 1 GHz Optical Lid Upgrade providing a
solution for fiber deeper architectures and advanced services
like SDV, HSD, HD and VOIP.
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Development of drop-in 1 GHz Amplifiers
providing bandwidth enhancement for plant modernization while
minimizing the need for plant disruptions associated with
resplicing.
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Development of mid-sized Segmentable Node, 1 GHz providing
bandwidth expansion and a pay as you grow solution.
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Next generation Mobile Workforce Management System;
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Expanding capabilities of
ServAssuretm;
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Development of innovative VOD and Ad Insertion solutions;
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Development of a Fixed Mobile Convergence application server for
seamless call control handling; and
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Process innovations to lower development and manufacturing costs.
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Intellectual
Property
We have an aggressive program for protecting our intellectual
property. As of January 31, 2009, the program consists of
maintaining our portfolio of more than 360 issued patents (both
U.S. and foreign) and pursuing patent protection on new
inventions (currently more than 290 U.S. patent
applications and provisional patent applications including
foreign applications). In our effort to pursue new patents, we
have created a process whereby employees may submit ideas of
inventions for review by management. The review process
evaluates each submission for novelty, detectability, and
commercial value. Patent applications are filed on the
inventions that meet the criteria. ARRIS has 45 registered or
pending trademarks. In addition, we hold an exclusive license,
for use in our field, of numerous patents relating to fiber
optic and radio frequency transmission equipment and technology,
and network management techniques and services.
Our patents and patent applications generally are in the areas
of telecommunications hardware and related technologies. Our
recent research and development has led to a number of patent
applications in technology related to
DOCSIS®.
Our January 2002 purchase of the assets of
Cadant®
resulted in the acquisition of 19 U.S. patent applications,
seven Patent Convention Treaty (PCT) applications,
five trademark applications, one U.S. registered trademark
and five registered copyrights. The
Cadant®
patents are in the area of CMTS. Our March 2003 purchase of the
assets of Atoga Systems resulted in the acquisition of 5
U.S. patent applications. Our Atoga patents are in the area
of network traffic flow. In August 2003, we acquired various
assets of Com21, Inc. Included in those assets were 16 issued
U.S. patents plus 18 U.S. patent applications. The
Com21 patents cover a wide range of technologies, including wide
area networks, fiber and cable systems, automated teller machine
networks and CMTS. In 2005, we acquired assets of coaXmedia,
Inc. including 7 currently pending U.S. patent
applications, primarily in the field of providing broadband
access in a multi-user environment. Our December 2007 purchase
of C-COR resulted in the acquisition of 61 issued
U.S. patents, 59 U.S. patent applications, and an
exclusive license, for use in our field, of numerous patents
relating to fiber optic and radio frequency transmission
equipment and technology, and network management techniques and
services. The C-COR patents are in the area of fiber optic and
radio frequency transmission equipment and technology, and
network management techniques and services.
For technology that is not owned by us, we have a program for
obtaining appropriate licenses with the industry leaders to
ensure that the strongest possible patents support the licensed
technology. In addition, we have formed
14
strategic relationships with leading technology companies that
will provide us with early access to technology and will help
keep us at the forefront of our industry.
We have a program for protecting and developing trademarks. This
program consists of procedures for the use of current trademarks
and for the development of new trademarks. This program is
designed to ensure that our employees properly use those
trademarks and any new trademarks that are expected to develop
strong brand loyalty and name recognition. This is intended to
protect our trademarks from dilution or cancellation.
From time-to-time there are significant disputes with respect to
the ownership of the technology used in our industry and patent
infringements. See Part I, Item 3, Legal
Proceedings
Product
Sourcing and Distribution
Our product sourcing strategy for products other than Access and
Transport products centers on the use of contract manufacturers
to produce our products. Our largest contract manufacturers are
Unihan, Plexus Services Corporation, and Flextronics. The
facilities operated by these contract manufacturers for the
production of our products are located in China, Ireland,
Mexico, and the United States.
We have contracts with each of these manufacturers. We provide
these manufacturers with a
6-month or
12-month
rolling, non-binding forecasts, and we typically have a minimum
of 60 days of purchase orders placed with them for
products. Purchase orders for delivery within 60 days are
generally not cancelable. Purchase orders with delivery past
60 days may be cancelled with penalties in accordance with
each vendors terms. Each contract manufacturer provides a
minimum
15-month
warranty.
We manufacture our Access and Transport products in our own
manufacturing facility in Tijuana, Mexico, which was acquired as
part of our acquisition of C-COR. The factory is
89,400 square feet, and, as of December 31, 2008, we
employed approximately 426 employees. Typical items
purchased for the ARRIS manufactured products are fiber optic
lasers, photo receivers, radio frequency hybrids, printed
circuit boards, die cast aluminum housings, and other electronic
components. Although some of the components we use are single
sourced, generally there are alternate sources, if needed. We
outsource the manufacture and repair of certain assemblies and
modules where it is cost effective to do so or where there are
advantages with respect to delivery times. Current outsourcing
arrangements include European versions of amplifiers, certain
power supplies, accessories, optical modules, digital return
modules, circuit boards, repair services, and small-lot
manufacturing.
We distribute a substantial number of products that are not
produced by us in order to provide our customers with a
comprehensive product offering. For instance, we distribute
hardware and installation products that are distributed through
regional warehouses in California, Japan, The Netherlands, and
North Carolina and through drop shipments from our contract
manufacturers located throughout the world.
We obtain key components from numerous third party suppliers.
For example, Broadcom provides several
DOCSIS®
components in our CMTS product line. We also make extensive use
of FPGA from Altera and Xilinx in our
C4®
CMTS, C3 CMTS, and D5 Universal Edge QAM. Texas Instruments and
Microtune provide components used in some of our customer
premises equipment (CPE) (i.e., EMTAs and cable modems). Our
agreements with Texas Instruments include technology licensing
and component purchases. Several of our competitors have similar
agreements with Texas Instruments for these components. In
addition, we license software for operating network and security
systems or sub-systems, and a variety of routing protocols from
different suppliers.
Backlog
Our backlog consists of unfilled customer orders believed to be
firm and long-term contracts that have not been completed. With
respect to long-term contracts, we include in our backlog only
amounts representing orders currently released for production
or, in specific instances, the amount we expect to be released
in the succeeding 12 months. The amount contained in
backlog for any contract or order may not be the total amount of
the contract or order. The amount of our backlog at any given
time does not reflect expected revenues for any fiscal period.
15
Our backlog at December 31, 2008 was approximately
$114.8 million, at December 31, 2007 was approximately
$136.7 million and at December 31, 2006 was
approximately $92.7 million. We believe that all of the
backlog existing at December 31, 2008, will be shipped in
2009.
Anticipated orders from customers may fail to materialize and
delivery schedules may be deferred or canceled for a number of
reasons, including reductions in capital spending by network
operators, customer financial difficulties, annual capital
spending budget cycles, and construction delays.
Competition
The broadband communication systems markets are dynamic and
highly competitive and require companies to react quickly and
capitalize on change. We must retain skilled and experienced
personnel, as well as deploy substantial resources to meet the
changing demands of the industry and must be nimble to be able
to capitalize on change. We compete with national, regional and
local manufacturers, distributors and wholesalers including some
companies that are larger than we are. Our major competitors
include:
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Ambit Microsystems;
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Aurora Networks;
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BigBand Networks;
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Cisco Systems, Inc.;
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Commscope, Inc;
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Concurrent Computer Corporation;
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Ericsson (TandbergTV);
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Harmonic, Inc.;
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Motorola, Inc.;
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SeaChange, Inc.;
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Thomson; and
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TVC Communications, Inc.
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Our products are marketed with emphasis on quality, advanced
technology, differentiating features, flexibility, service, and
business solutions, and are generally priced competitively with
other manufacturers product lines. Product reliability and
performance, technological innovation, responsive customer
service, breadth of product offering, and pricing are several of
the key criteria for success over our competition.
One of the principal growth markets for us is the high speed
data access market into which we sell a CMTS, the headend
product for data and VoIP services. The largest provider of CMTS
products is Cisco, which took an early lead in the initial
deployment of data-only CMTS products. Cisco is expected to
defend its position via both upgrades to existing products and
the introduction of new products. Cisco had not previously
developed a carrier-grade telephony CMTS product, but has begun
to market the carrier-grade capability. Motorola also has been
emphasizing routing and carrier-grade performance for its CMTS.
In 2007, one of our major competitors in this market, BigBand
Networks, exited the market. In 2008 we believe we garnered
additional market share in the newer generation CMTS products
that enable both data and carrier-grade telephony deployments
due to our products differentiating features, fault
tolerance, wire-speed throughput, routing, and density.
The customer premises business consists of voice over IP enabled
modems (EMTAs) and cable modems. Motorola is the
market leader in cable modems. Motorola also was successful in
gaining an early leader status in EMTA sales with MSOs that were
the first to deploy VoIP. However, as this market accelerated,
we have gained the leading share position in the market. We
compete on price, product performance, our telephony experience,
and integration capabilities. Cisco via its Scientific-Atlanta
acquisition also has had some success in the cable modem market.
Cisco also has EMTA products and competes in this market.
Thomson is also an EMTA competitor and
16
gained share, particularly with Comcast, starting in late 2007.
We are a relatively small competitor in the cable modem market,
but have a significantly larger share of the EMTA market.
Specifically, we maintained number one EMTA market share
throughout 2005, 2006, 2007 and had approximately 44% of the
world market in the third quarter of 2008 according to
Infonetics Research, Broadband CPE Quarterly Worldwide Market
Share and Forecasts for Q3 2008. VoIP deployments slowed
slightly in the first three quarter of 2008 as compared to the
same period in 2007 based on the Infonetics report. We believe
this is the result of early VoIP market deployments slowing
impacted by the weakening economic environment offset by growth
in less mature markets including international operators. Our
nearest competitor in this category was Motorola and during the
third quarter of 2008 they had approximately 22% of the market.
Our content and operations management systems compete with
several vendors offering on demand video and digital advertising
insertion hardware and software, including SeaChange
International Inc., Ericssons TandbergTV Division, Cisco,
Motorola, and Concurrent Computer Corporation, as well as
vendors offering network management, mobile workforce
management, network configuration management, and network
capacity management systems in the United States, some of which
may currently have greater sales in these areas than we do. In
some instances, our customers internally develop their own
software for operations support systems. However, we believe
that we offer a more integrated solution that gives us a
competitive advantage in supporting the requirements of both
todays hybrid fiber coax networks and the emerging
all-digital, packet-based networks.
We also compete with Motorola, Cisco and Aurora Networks for
products within the Access, Transport and Supplies group.
Various manufacturers, who are suppliers to us, also sell
directly to our customers, as well as through other
distributors, into the cable marketplace. In addition, because
of the convergence of the cable, telecommunications and computer
industries and rapid technological development, new competitors
may enter the cable market.
In the supplies distribution business we compete with national
distributors, such as TVC Communications, Inc. and Commscope and
with several local and regional distributors. Product breadth,
price, availability and service are the principal competitive
advantages in the supply business. Our products in the supplies
distribution business are competitively priced and are marketed
with emphasis on quality. Product reliability and performance,
superior and responsive technical and administrative support,
and breadth of product offerings are key criteria for
competition. Technological innovations and speed to market are
additional competitive factors.
Lastly, some of our competitors, notably Cisco and Motorola, are
larger companies with greater financial resources and product
breadth than us. This may enable them to bundle products or be
able to market and price products more aggressively than we can.
Employees
As of January 31, 2009, we had 1,838 employees. ARRIS
has no employees represented by unions within the United States.
We believe that we have maintained a strong relationship with
our employees. Our future success depends, in part, on our
ability to attract and retain key personnel. Competition for
qualified personnel in the cable industry is intense, and the
loss of certain key personnel could have a material adverse
effect on us. We have entered into employment contracts with our
key executive officers and have confidentiality agreements with
substantially all of our employees. We also have long-term
incentive programs that are intended to provide substantial
incentives for our key employees to remain with us.
17
Our
business is dependent on customers capital spending on
broadband communication systems, and reductions by customers in
capital spending adversely affect our business.
Our performance is dependent on customers capital spending
for constructing, rebuilding, maintaining or upgrading broadband
communications systems. Capital spending in the
telecommunications industry is cyclical and can be curtailed or
deferred on short notice. A variety of factors affect the amount
of capital spending, and, therefore, our sales and profits,
including:
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general economic conditions;
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customer specific financial or stock market conditions;
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availability and cost of capital;
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governmental regulation;
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demands for network services;
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competition from other providers of broadband and high speed
services;
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acceptance of new services offered by our customers; and
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real or perceived trends or uncertainties in these factors.
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Several of our customers have accumulated significant levels of
debt. These high debt levels, coupled with the current
turbulence and uncertainty in the capital markets, have affected
the market values of domestic cable operators and may impact
their access to capital in the future. Even if the financial
health of our customers remains intact, we cannot assure you
that these customers may not purchase new equipment at levels we
have seen in the past or expect in the future. During the later
part of 2008 and continuing into 2009, the economy and financial
markets have been heavily impacted by housing market disruptions
and foreclosures as well as the recent material credit market
disruptions. One major MSO, Charter Communications, may file for
bankruptcy protection in the near-term, and others may do so in
due course. We cannot predict the impact if any of the recent
financial market turmoil, or of specific customer financial
challenges on our customers upgrade and maintenance
expenditures.
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
requires us to retain skilled and experienced personnel as well
as to 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 that are larger than we are. Our major
competitors include:
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Ambit Microsystems;
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Aurora Networks;
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BigBand Networks;
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Cisco Systems, Inc.;
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Commscope, Inc;
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Concurrent Computer Corporation;
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Ericsson (TandbergTV);
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Harmonic, Inc.;
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Motorola, Inc.;
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18
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SeaChange, Inc.;
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Thomson; and
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TVC Communications, Inc.
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The rapid technological changes occurring in the broadband
markets may lead to the entry of new competitors, including
those with substantially greater resources than our own. 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 are not as susceptible to
downturns in a particular market. In addition, several of our
competitors have been in operation longer than we have been, and
therefore they have more established relationships with domestic
and foreign broadband service users. We may not be able to
compete successfully in the future, and competition may
negatively impact our business.
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 July 2006, Adelphia sold its assets
to Comcast and Time Warner. 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 February 2006, Cisco
Systems, Inc. acquired Scientific-Atlanta, Inc.; in April 2007,
Ericsson acquired TANDBERG Television ASA; and in July 2007,
Motorola, Inc. acquired Terayon, Inc. 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.
We may
pursue acquisitions and investments that could adversely affect
our business.
In the past, we have made acquisitions of and investments in
businesses, products, and technologies to complement or expand
our business. While we have no announced plans for additional
acquisitions, future acquisitions are part of our strategic
objectives and may occur. If we identify an acquisition
candidate, we may not be able to successfully negotiate or
finance the acquisition or integrate the acquired businesses,
products, or technologies with our existing business and
products. Future acquisitions could result in potentially
dilutive issuances of equity securities, the incurrence of debt
and contingent liabilities, amortization expenses, and
substantial goodwill. We will test the goodwill that is created
by acquisitions, at least annually and will record an impairment
charge if its value has declined. For instance, in the fourth
quarter of 2008, we recorded a substantial impairment charge
with respect to the goodwill that was created as part of our
acquisition of C-COR.
We may
fail to realize the anticipated revenue and earnings growth and
other benefits expected from our recently completed acquisition
of C-COR, which could adversely affect the value of our
shares.
Our recently completed acquisition of C-COR involves the
integration of two companies that previously operated
independently. The integration of two previously independent
companies is a challenging, time-consuming and costly process.
While the integration process began in late 2007 once the C-COR
transaction closed, the
19
complete integration will take some time to accomplish. The
value of shares of our common stock will be affected by our
ability to achieve the benefits expected to result from the
acquisition. Achieving the benefits of the merger will depend in
part upon meeting the challenges inherent in the successful
combination of two business enterprises of the size and scope of
ARRIS and C-COR, and the possible resulting diversion of
managements attention for an extended period of time. It
is possible that the process of combining the companies could
result in the loss of key employees, the disruption of our
ongoing businesses, or inconsistencies in standards, controls,
procedures, and policies that adversely affect our ability to
maintain relationships with customers, suppliers, and employees,
or to achieve the anticipated benefits of the merger. In
addition, the successful combination of the companies will
require the dedication of significant management resources,
which could temporarily divert attention from the day-to-day
business of the combined company.
There can be no assurance that these challenges will be met and
that the diversion of management attention will not negatively
impact our operations. Delays encountered during the current
transition process could have a material adverse effect on our
revenues, expenses, operating results, and financial condition.
Although we expect significant benefits, such as revenue and
earnings growth, to result from the merger, there can be no
assurance that we will actually realize any of these anticipated
benefits.
We
have substantial goodwill.
Our financial statements reflect substantial goodwill,
approximately $231.7 million as of December 21, 2008,
that was recognized in connection with the acquisitions that we
have made. In accordance with Statement of Financial Accounting
Standard (SFAS) No. 142, Goodwill and Other
Intangible Assets, we annually (and more frequently if
changes in circumstances indicate that the asset may be
impaired) review the carrying amount of our goodwill in order to
determine whether it has been impaired for accounting purposes.
In general, if the fair value of the corresponding reporting
unit is less that the carrying value of the goodwill, we record
an impairment. The determination of fair value is dependent upon
a number of factors, including assumptions about future cash
flows and growth rates that are based on our current and
long-term business plans. In 2008, we recorded an impairment to
our goodwill of approximately $209.3 million. Should the
factors that determine fair value for these purposes erode
further, we would be required to record additional impairments
in the future. For additional information, see the discussion
under Critical Accounting Estimates in Item 7,
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
Our
business comes primarily from a few key customers. The loss of
one of these customers or a significant reduction in sales to
one of these customers would have a material adverse effect on
our business.
Our two largest customers (including their affiliates, as
applicable) are Comcast, and Time Warner Cable. For the year
ended December 31, 2008, sales to Comcast accounted for
approximately 26.3%, and sales to Time Warner Cable accounted
for approximately 20.6% of our total revenue. 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. For each of these customers, we also are one of their
largest suppliers. A consequence of that, if from time-to-time
customers elect to purchase products from our competitors in
order to diversify their supplier base and to dual-source key
products or to curtail purchasing due to budgetary or market
conditions, such decisions could have material consequences to
our business. In addition, because of the magnitude of our sales
to these customers the terms and timing of our sales are heavily
negotiated, and even minor changes can have a significant impact
upon or business.
We may
have difficulty in forecasting our sales.
Because a significant portion of the purchases by our customers
are discretionary, accurately forecasting sales is difficult. In
addition, more so than historically, in recent years our
customers have submitted their purchase orders less evenly over
the course of each quarter and year and with shorter lead times.
This has made it even more difficult for us to forecast sales
and other financial measures and plan accordingly.
20
The
broadband products that we develop and sell are subject to
technological change and a trend toward 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 toward open standards. The move
toward open standards is expected to increase the number of MSOs
that 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.
Failure
to increase our Media & Communications Systems revenue
would adversely affect our financial results.
Media & Communications Systems is expected to be our
fastest growing and highest gross margin segment. If we are
unable to grow revenues in this area, it will limit our ability
to increase earnings and likely have an adverse effect on our
stock price. Our ability to increase the revenue generated by
our MCS segment depends on many factors, some of which are
beyond our control. For example:
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our customers may decide to continue to manage their networks by
focusing on limited, individual elements of the network rather
than managing their entire network integrity and service
delivery processes using a suite of software application modules
such as those we offer;
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our software products may not perform as expected;
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new and better products may be developed by competitors;
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others may claim that our products infringe on their
intellectual property;
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our customers may decide to use internally developed software
tools to manage their networks rather than license software from
us;
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the software business is volatile, and we may not be able to
effectively utilize our resources and meet the needs of our
customers if we are unable to forecast the future demands of
such customers;
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if our customers increase the amount of spending on automated
network, service, and content and operations management tools,
new suppliers of these tools may enter the market and
successfully capture market share; and
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we may be unable to hire and retain enough qualified technical
and management personnel to support our growth plans.
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Fluctuations
in our Media & Communications Systems sales result in
greater volatility in our operating results.
The level of our Media & Communications Systems sales
fluctuate significantly quarter to quarter and results in
greater volatility of our operating results than has been
typical in the past, when the main source of volatility was the
high proportion of quick-turn product sales. The timing of
revenue recognition on software and system sales is based on
specific contract terms and, in certain cases, is dependent upon
completion of certain activities and customer acceptance which
are difficult to forecast accurately. Because the gross margins
associated with software and systems sales are substantially
higher than our average gross margins, fluctuations in quarterly
software sales have a disproportionate effect on operating
results and earnings per share and could result in our operating
results falling short of the expectations of securities analysts
and investors.
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 currently are 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 capitalize on their
technology. To compete successfully, we must quickly design,
develop, manufacture and sell new or enhanced products that
21
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.
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Furthermore, our competitors may develop similar or alternative
technologies 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
relationship could have a material adverse effect on the
progress of new products under development with that third party.
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 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 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.
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. Our products are
marketed and made available to existing and new 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 we and our
manufacturers and assemblers have plants.
A significant portion of our products are manufactured or
assembled in China, Ireland, Mexico, and other countries outside
of the United States. The governments of the foreign countries
in which our products are
22
manufactured may pass laws that impair our operations, such as
laws that impose exorbitant tax obligations or nationalize these
manufacturing facilities.
In addition, we own a manufacturing facility located in Tijuana,
Mexico. This operation is exposed to certain risks as a result
of its location, including:
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changes in international trade laws, such as the North American
Free Trade Agreement and Prosec, affecting our import and export
activities;
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changes in, or expiration of, the Mexican governments
IMMEX (Manufacturing Industry Maquiladora and Export Services)
program, which provides economic benefits to us;
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changes in labor laws and regulations affecting our ability to
hire and retain employees;
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fluctuations of foreign currency and exchange controls;
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potential political instability and changes in the Mexican
government;
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potential regulatory changes; and
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general economic conditions in Mexico.
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Any of these risks could interfere with the operation of this
facility and result in reduced production, increased costs, or
both. In the event that production capacity of this facility is
reduced, we could fail to ship products on schedule and could
face a reduction in future orders from dissatisfied customers.
If our costs to operate this facility increase, our margins
would decrease. Reduced shipments and margins would have an
adverse effect on our financial results.
We
face risks relating to currency fluctuations and currency
exchange.
On an ongoing basis we are exposed to various changes in foreign
currency rates because significant sales are denominated in
foreign currencies. 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 and option contracts. There can be no
assurance that our risk management strategies will be effective.
We also 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
depend on channel partners to sell our products in certain
regions and are subject to risks associated with these
arrangements.
We utilize distributors, value-added resellers, system
integrators, and manufacturers representatives to sell our
products to certain customers and in certain geographic regions
to improve our access to these customers and regions and to
lower our overall cost of sales and post-sales support. Our
sales through channel partners are subject to a number of risks,
including:
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ability of our selected channel partners to effectively sell our
products to end customers;
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our ability to continue channel partner arrangements into the
future since most are for a limited term and subject to mutual
agreement to extend;
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a reduction in gross margins realized on sale of our
products; and
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a diminution of contact with end customers which, over time,
could adversely impact our ability to develop new products that
meet customers evolving requirements.
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23
Our
profitability has been, and may continue to be, volatile, which
could adversely affect the price of our stock.
Although we have been profitable in the last three fiscal years,
prior to that we experienced significant losses and we may not
be profitable, or meet the level of expectations of the
investment community, in the future. This could have a material
adverse impact on our stock price.
We may
face higher costs associated with protecting our intellectual
property or obtaining access necessary to intellectual property
of others.
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, directly or
indirectly, and may continue to receive from third parties,
including some of our competitors, notices claiming that we, or
our customers using our products, have infringed upon
third-party patents or other proprietary rights. We are a
defendant in proceedings (and other proceedings have been
threatened) in which our customers were sued for patent
infringement and sued, or made claims against, us and other
suppliers for indemnification, and we may become involved in
similar litigation involving these and other customers in the
future. These claims, regardless of their merit, result in
costly litigation, divert the time, attention and resources of
our management, delay our product shipments, and, in some cases,
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. In addition, the payment of any damages or
any necessary licensing fees or indemnification costs associated
with a patent infringement claim could be material and could
also materially adversely affect our operating results. See
Legal Proceedings.
Changes
in accounting pronouncements can impact our
business.
We prepare our financial statements in accordance with
U.S. generally accepted accounting principles. These
principles periodically are modified by the Financial Accounting
Standards Board and other governing authorities, and those
changes can impact how we report our results of operations, cash
flows and financial positions. For instance, the FASB recently
announced that it has modified, the accounting principles that
govern the reporting of interest expense with respect to certain
convertible indebtedness, such as the convertible notes that we
have outstanding. The consequence of this will be an increase in
our interest expense and a restatement of interest expense for
prior periods. These changes could be significant.
We do
not intend to pay cash dividends in the foreseeable
future.
Although from time to time we may consider repurchasing shares
of our common stock, we do not anticipate paying cash dividends
on our common stock in the foreseeable future. In addition, the
payment of dividends in certain circumstances may be prohibited
by the terms of our current and future indebtedness.
We
have anti-takeover defenses that could delay or prevent an
acquisition of our company.
We have 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
stockholders interests. This plan could make it more
difficult for a third party to acquire us or may delay that
process.
We
have the ability to issue preferred shares without stockholder
approval.
Our common shares may be subordinate to classes of preferred
shares issued in the future in the payment of dividends and
other distributions made with respect to common shares,
including distributions upon liquidation or dissolution. Our
Amended and Restated Certificate of Incorporation permits our
board of directors to issue preferred shares without first
obtaining stockholder approval. If we issued preferred shares,
these additional securities may have dividend or liquidation
preferences senior to the common shares. If we issue convertible
preferred shares, a subsequent conversion may dilute the current
common stockholders interest.
24
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Item 1B.
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Unresolved
Staff Comments
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As of December 31, 2008, there were no unresolved comments.
We currently conduct our operations from 21 different locations;
three of which we own, while the remaining 18 are leased. These
facilities consist of sales and administrative offices and
warehouses totaling approximately one million square feet. Our
long-term leases expire at various dates through 2023. We
believe that our current properties are adequate for our
operations.
A summary of our principal leased properties (those exceeding
10,000 sq. ft.) that are currently in use is as
follows:
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Location
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Description
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Area (sq. ft.)
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Lease Expiration
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Segment
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Suwanee, Georgia
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Office space
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129,403
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April 14, 2012
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All
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Tijuana, Mexico
|
|
Manufacturing
|
|
|
89,400
|
|
|
March 1, 2011
|
|
(2)
|
Wallingford, Connecticut
|
|
Office space
|
|
|
82,155
|
|
|
December 31, 2014
|
|
(2)
|
Beaverton, Oregon
|
|
Office space/
Manufacturing
|
|
|
60,389
|
|
|
January 31, 2011
|
|
(3)
|
Ontario, California
|
|
Warehouse
|
|
|
59,269
|
|
|
March 31, 2014
|
|
All
|
Lisle, Illinois
|
|
Office space
|
|
|
56,008
|
|
|
November 1, 2013
|
|
(1)
|
Waltham, Massachusetts
|
|
Office space
|
|
|
21,033
|
|
|
February 15, 2011
|
|
(3)
|
Englewood, Colorado
|
|
Office space
|
|
|
32,240
|
|
|
March 31, 2011
|
|
All
|
Ontario, California
|
|
Warehouse
|
|
|
26,565
|
|
|
December 31, 2009
|
|
All
|
Cork, Ireland
|
|
Office space
|
|
|
11,135
|
|
|
October 28, 2020
|
|
(1)
|
We own the following properties:
|
|
|
|
|
|
|
|
|
Location
|
|
Description
|
|
Area (sq. ft.)
|
|
|
Segment
|
|
Cary, North Carolina
|
|
Warehouse
|
|
|
151,500
|
|
|
All
|
State College, Pennsylvania
|
|
Office space
|
|
|
133,000
|
|
|
(2)(3)
|
Chicago, Illinois
|
|
Warehouse/
Office space
|
|
|
18,000
|
|
|
(2)
|
Segment:
|
|
|
(1) |
|
Broadband Communications Systems |
|
(2) |
|
Access, Transport and Supplies |
|
(3) |
|
Media & Communications Systems |
All All segments
|
|
Item 3.
|
Legal
Proceedings
|
From time to time, ARRIS is involved in claims, disputes,
litigation or legal proceedings incidental to the ordinary
course of its business, such as employment matters,
environmental proceedings, contractual disputes and intellectual
property disputes. Except as described below, ARRIS is not party
to any proceedings that are, or reasonably could be expected to
be, material to its business, results of operations or financial
condition.
The three previously reported Hybrid Patents, Inc. cases have
been settled. ARRIS settlement costs, which were not
significant, were included in operating expenses for the quarter
ended March 31, 2008.
The previously reported GPNE Corp. (GPNE) cases have
been settled. ARRIS settlement costs, which were not
significant, were included in operating expenses for the quarter
ended September 30, 2008.
25
The previously disclosed USA Video Technology Corp. a suit
against Time Warner Cable, Cox, Charter and Comcast was
successfully concluded on summary judgment motions.
Commencing in 2005, Rembrandt Technologies, LP filed a series of
lawsuits against Charter Communications, Inc, Time Warner Cable,
Inc., Comcast Corporation and others alleging infringement of
eight (8) patents related to the cable systems
operators use of data transmission, video, cable modem,
voice-over-internet, and other technologies and applications.
Although ARRIS is not a defendant in any of these lawsuits, its
customers are, and its customers either have requested
indemnification from, or may request indemnification or
cooperation with the defense costs from, ARRIS and the other
manufacturers of the equipment that is alleged to infringe.
ARRIS is party to a joint defense agreement with respect to one
of the lawsuits and has various understandings with the
defendants in the remaining lawsuits with respect to cost
sharing. In June 2007, the Judicial Panel of multi district
litigation issued an order centralizing the litigation for
administrative purposes in the District Court for Delaware. In
November 2007 ARRIS, Cisco, Motorola and other suppliers filed a
declaratory judgment action in the District Court of Delaware
seeking to have the court declare the patents invalid and not
infringed. After a favorable Markman hearing, Rembrandt reduced
the number of asserted patents from 8 to 5 with leave to
reassert under certain circumstances. It is premature to assess
the likelihood of a favorable outcome. In the event of an
adverse outcome, ARRIS could be required to indemnify its
customers, pay royalties,
and/or cease
using certain technology. Also, an adverse outcome may require a
change in the
DOCSIS®
standards to avoid using the patented technology.
In connection with our acquisition of C-COR, Inc., ARRIS on
October 31, 2007, was named as the defendant in a suit
entitled CIBC World Market Corp. vs. ARRIS Group, Inc., Action
No. 603605/2007, in the Supreme Court of the State of New
York, New York County. In the suit CIBC asserts that it is
entitled to a $4.0 million fee (fee) at the
closing of the proposed acquisition. We do not believe that any
fee is due to CIBC in connection with this acquisition.
ARRISs position is that its June 1, 2005, engagement
with CIBC, pursuant to which CIBC asserts its claim, was
terminated and that no fee is due under the engagement.
Independent of that termination, CIBC had a conflict of
interests in representing ARRIS in the transaction, provided no
services to ARRIS in connection with the transaction, and
otherwise is estopped from asserting that it is entitled to a
fee. ARRIS is contesting the entitlement to a fee asserted by
CIBC vigorously.
In 2007, ARRIS received correspondence from attorneys for the
Adelphia Recovery Trust (Trust), that the Company
may have received transfers from Adelphia Cablevision, LLC
(Cablevision), one of the Adelphia debtors, during
the year prior to its filing of a Chapter 11 petition on
June 25, 2002 (the Petition Date). The
correspondence further asserts that information obtained during
the course of the Adelphia Chapter 11 proceedings indicates
that Cablevision was insolvent during the year prior to the
Petition Date, and, accordingly, the Trust intends to assert
that the payments made to ARRIS were fraudulent transfers under
section 548 (a) of the Bankruptcy Code that may be
recovered for the benefit of Cablevisions bankruptcy
estate pursuant to section 550 of the Bankruptcy Code.
Prior to its acquisition by ARRIS, C-COR received a similar
correspondence making the same claims. We understand that
similar letters were received by other Adelphia suppliers and we
may seek to enter into a joint defense agreement to share legal
expenses if a suit is commenced. To date, no suit has been
commenced by the Trust. In the event a suit is commenced, ARRIS
intends to contest the case vigorously. No estimate can be made
of the possible range of loss, if any, associated with a
resolution of these assertions.
In January and February 2008, Verizon Services Corp. filed
separate lawsuits against various affiliates of Cox and against
Charter, in the District Courts for the Eastern District of
Virginia and for the Eastern District of Texas respectively,
alleging infringement of eight patents. In the Verizon v.
Cox suit, the jury issued a verdict in favor of Cox, finding
non-infringement in all patents and invalidating two of
Verizons patents. It is anticipated that Verizon may
appeal. The suit against Charter is still pending, and trial is
anticipated to take place in 2010. Verizon and Comcast have
reached a settlement of the subject patents. It is premature to
assess the likelihood of a favorable outcome of the Charter case
or Cox appeal; though the Cox outcome at trial increases the
likelihood of a favorable Charter outcome. In the event of an
unfavorable outcome, ARRIS may be required to indemnify Charter
and Cox, pay royalties
and/or cease
utilizing certain technology.
Acacia Media Technologies Corp. has sued Charter and Time Warner
Cable, Inc. for allegedly infringing U.S. Patent Nos.
5,132,992; 5,253,275; 5,550,863; and 6,144,702. The case has
been bifurcated, where the case for invalidity of the patents
will be tried first, and only if one or more patents are found
to be valid, then the case for
26
infringement will be tried. Both customers requested
C-CORs, as well as other vendors, support under the
indemnity provisions of the purchase agreements (related to
video-on-demand
products). We are reviewing the patents and analyzing the extent
to which these patents may relate to our products. It is
premature to assess the likelihood of a favorable outcome. In
the event of an unfavorable outcome, ARRIS may be required to
indemnify the defendants, pay royalties and /or cease using
certain technology.
V-Tran Media Technologies has filed a number of lawsuits against
21 different parties, including suits against Comcast, Charter,
Verizon, Time Warner and numerous smaller MSOs for infringement
on two patents related to television broadcast systems for
selective transmission. Both patents expired in June 2008. C-COR
manufactured products that allegedly infringed on their patents.
ARRIS is reviewing the patents and our products and analyzing
the extent to which these patents may relate to our products. It
is premature to assess the likelihood of a favorable outcome. In
the event of an unfavorable outcome, ARRIS may be required to
indemnify the defendants, or pay royalties. Given that the
patents have expired, it is unlikely that the case will result
in injunctions or ceasing the use of the technology.
In February 2008, sixteen former employees of a former
subsidiary of C-COR, filed a Fair Labor Standards Act suit
against the former subsidiary and C-COR alleging that the
plaintiffs were not properly paid for overtime. The suit was
filed as a class action and the proposed class could include
1,000 cable installers and field technicians. ARRIS is actively
contesting the suit.
From time to time third parties approach ARRIS or an ARRIS
customer, seeking that ARRIS or its customer consider entering
into a license agreement for such patents. Such invitations
cause ARRIS to dedicate time to study such patents and enter
into discussions with such third parties regarding the merits
and value, if any, of the patents. These discussions, may
materialize into license agreements or patents asserted against
ARRIS or its customers. If asserted against our customers, our
customers may seek indemnification from ARRIS. It is not
possible to determine the impact of any such ongoing discussions
on ARRISs business financial conditions.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
During the fourth quarter of 2008, no matters were submitted to
a vote of our companys security holders. .
|
|
Item 4A.
|
Executive
Officers and Board Committees
|
Executive
Officers of the Company
The following table sets forth the name, age as of
February 25, 2009, and position of our executive officers.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Robert J. Stanzione
|
|
|
60
|
|
|
Chief Executive Officer, Chairman of the Board
|
Lawrence A. Margolis
|
|
|
61
|
|
|
Executive Vice President, Administration, Legal, HR, and
Strategy, Chief Counsel, and Secretary
|
David B. Potts
|
|
|
51
|
|
|
Executive Vice President, Chief Financial Officer and Chief
Information Officer
|
John O. Caezza
|
|
|
51
|
|
|
President, Access, Transport and Supplies
|
Ronald M. Coppock
|
|
|
54
|
|
|
President, Worldwide Sales & Marketing
|
Bryant K. Isaacs
|
|
|
49
|
|
|
President, Media & Communications Systems
|
James D. Lakin
|
|
|
65
|
|
|
President, Advanced Technology & Services
|
Bruce W. McClelland
|
|
|
42
|
|
|
President, Broadband Communications Systems
|
Marc S. Geraci
|
|
|
55
|
|
|
Vice President, Treasurer
|
Robert J. Stanzione has been Chief Executive Officer
since 2000. From 1998 through 1999, Mr. Stanzione was
President and Chief Operating Officer of ARRIS.
Mr. Stanzione has been a director of ARRIS since 1998 and
has been the Chairman of the Board of Directors since 2003. From
1995 to 1997, he was President and Chief Executive Officer of
Arris Interactive L.L.C. From 1969 to 1995, he held various
positions with AT&T Corporation.
27
Mr. Stanzione has served as a director of Symmetricon, Inc.
since 2005. Mr. Stanzione also serves on the boards of the
National Cable Telecommunications Association and the Georgia
Cystic Fibrosis Foundation.
Lawrence A. Margolis has been Executive Vice President,
Strategic Planning, Administration, and Chief Counsel since 2004
and has served as the Secretary of ARRIS since 1992.
Mr. Margolis was the Chief Financial Officer from 1992 to
2004. Prior to joining ARRIS, Mr. Margolis was Vice
President, General Counsel and Secretary of Anixter, Inc., a
global communications products distribution company, from 1986
to 1992 and General Counsel and Secretary of Anixter from 1984
to 1986. Prior to 1984, he was a partner at the law firm of
Schiff Hardin & Waite.
David B. Potts has been the Chief Financial Officer since
2004, and has been Chief Information Officer since the
acquisition of Arris Interactive L.L.C. in August 2001. Prior to
being named Chief Financial Officer in 2004, Mr. Potts was
the Senior Vice President of Finance. Before joining ARRIS, he
was Chief Financial Officer of Arris Interactive L.L.C. from
1995 to 2001. From 1984 to 1995, Mr. Potts held various
executive management positions with Nortel Networks including
Vice President and Chief Financial Officer of Bell Northern
Research in Ottawa and Vice President of Mergers and
Acquisitions in Toronto. Prior to Nortel Networks,
Mr. Potts was with Touche Ross in Toronto. Mr. Potts
is a member of the Institute of Chartered Accountants in Canada.
John O. Caezza was appointed President of ARRIS Access,
Transport and Supplies in December 2007. He previously had held
the position of President of C-CORs Access and Transport
business unit. He is responsible for the Companys product
development, production, and technical support across its
Access, Transport and Supplies group. Prior to joining C-COR in
2001, Mr. Caezza was Vice President and General Manager of
the Broadband Communications Division of ADC Telecommunications,
Inc., with primary responsibilities for strategic product
creation and promotion. Mr. Caezza also has had extensive
management experience with Philips Broadband Networks, Inc.,
including the position of Vice President of Engineering and
Associate Director of International Sales.
Ronald M. Coppock has been President of ARRIS Worldwide
Sales since 2003. Prior to his current role, Mr. Coppock
was President of International Sales since 1997 and was formerly
Vice President International Sales and Marketing for TSX
Corporation. Mr. Coppock has been in the cable television
and satellite communications industry for over 20 years,
having held senior management positions with Scientific-Atlanta,
Pioneer Communications and Oak Communications. Mr. Coppock
is an active member of the American Marketing Association, Kappa
Alpha Order, Cystic Fibrosis Foundation Board, and the Auburn
University Alumni Action Committee.
Bryant K. Isaacs was appointed President,
Media & Communications Systems in December 2007 and
was President of ARRIS New Business Ventures since 2002. Prior
to his role as President, ARRIS New Business Ventures, he was
President of ARRIS Network Technologies since 2000. Prior to
joining ARRIS, he was Founder and General Manager of Lucent
Technologies Wireless Communications Networking Division
in Atlanta from 1997 to 2000. From 1995 through 1997,
Mr. Isaacs held the position of Vice President of Digital
Network Systems for General Instrument Corporation where he was
responsible for developing international business strategies and
products for digital video broadcasting systems.
James D. Lakin was appointed President, Advanced
Technology and Services in 2007. Prior to his current role he
was President of ARRIS Broadband since the acquisition of Arris
Interactive L.L.C. in 2001. From 2000 to August 2001, he was
President and Chief Operating Officer of Arris Interactive
L.L.C. From 1995 to 2000, Mr. Lakin was Chief Marketing
Officer of Arris Interactive L.L.C. Prior to 1995, he held
various executive positions with Compression Labs, Inc. and its
successor General Instrument Corporation.
Bruce W. McClelland was appointed President Broadband
Communications Systems in December 2007 and most recently had
been Vice President & General Manager of the ARRIS
Customer Premises Business Unit with responsibility for the
development of a broad range of voice and data products. Prior
to joining ARRIS in 1999 as Vice President of Engineering, he
had eleven years of experience with Nortel Networks where he was
responsible for development efforts on Nortel Networks
Signaling System 7 and the Class 4/5 DMS switching product
line.
Marc S. Geraci has been Vice President, Treasurer of
ARRIS since 2003 and has been with ARRIS since 1994. He began
with ARRIS as Controller for the International Sales Group and
in 1997 was named Chief Financial
28
Officer of that group. Prior to joining ARRIS, he was a
broker/dealer on the Pacific Stock Exchange in
San Francisco for eleven years and, prior to that, in
public accounting in Chicago for four years.
Board
Committees
Our Board of Directors has three permanent committees: Audit,
Compensation, and Nominating and Corporate Governance. The
charters for all three committees are located on our website at
www.arrisi.com. The Board believes that each of its members,
with the exception of Mr. Stanzione, is independent, as
defined by the SEC and NASDAQ rules. The Board has identified
John Petty as the lead independent director and audit committee
financial expert, as defined by the SEC. Additionally, the Board
has identified Matthew Kearney as an audit committee financial
expert.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
ARRIS common stock is traded on the NASDAQ Global Select
Market under the symbol ARRS. The following table
reports the high and low trading prices per share of the
Companys common stock as listed on the NASDAQ Global
Market System:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
15.45
|
|
|
$
|
12.32
|
|
Second Quarter
|
|
|
17.74
|
|
|
|
13.93
|
|
Third Quarter
|
|
|
17.89
|
|
|
|
11.21
|
|
Fourth Quarter
|
|
|
12.75
|
|
|
|
9.53
|
|
2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
10.03
|
|
|
$
|
4.96
|
|
Second Quarter
|
|
|
10.39
|
|
|
|
5.84
|
|
Third Quarter
|
|
|
10.02
|
|
|
|
6.67
|
|
Fourth Quarter
|
|
|
8.05
|
|
|
|
4.47
|
|
We have not paid cash dividends on our common stock since our
inception. On October 3, 2002, to implement our shareholder
rights plan, our board of directors declared a dividend
consisting of one right for each share of our common stock
outstanding at the close of business on October 25, 2002.
Each right represents the right to purchase one one-thousandth
of a share of our Series A Participating Preferred Stock
and becomes exercisable only if a person or group acquires
beneficial ownership of 15% or more of our common stock or
announces a tender or exchange offer for 15% or more of our
common stock or under other similar circumstances.
As of January 31, 2009, there were approximately 549 record
holders of our common stock. This number excludes shareholders
holding stock under nominee or street name accounts with brokers
or banks.
29
Stock
Performance Graph
Below is a graph comparing total stockholder return on the
Companys stock from December 31, 2003 through
December 31, 2008, with the Standard &
Poors 500 and the Index of NASDAQ U.S. Stocks of
entities in the industry of electronics and electrical equipment
and components, exclusive of computer equipment (SIC
3600-3699),
prepared by the Research Data Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/03
|
|
|
12/04
|
|
|
12/05
|
|
|
12/06
|
|
|
12/07
|
|
|
12/08
|
ARRIS Group Inc.
|
|
|
|
100.00
|
|
|
|
|
97.24
|
|
|
|
|
130.80
|
|
|
|
|
172.79
|
|
|
|
|
137.85
|
|
|
|
|
109.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S & P 500
|
|
|
|
100.00
|
|
|
|
|
110.88
|
|
|
|
|
116.33
|
|
|
|
|
134.70
|
|
|
|
|
142.10
|
|
|
|
|
89.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIC Codes 3600 -3699
|
|
|
|
100.00
|
|
|
|
|
94.33
|
|
|
|
|
100.56
|
|
|
|
|
97.24
|
|
|
|
|
103.38
|
|
|
|
|
56.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copyright
©
2009 Standard & Poors, a division of The
McGraw-Hill Companies, Inc. All rights reserved.
|
|
|
|
|
|
www.researchdatagroup.com/S&P.htm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notwithstanding anything to the contrary set forth in any of our
filings under the Securities Act of 1933, or the Securities
Exchange Act of 1934 that might incorporate future filings,
including this Annual Report on
Form 10-K,
in whole or in part, the Performance Graph presented below shall
not be incorporated by reference into any such filings.
30
|
|
Item 6.
|
Selected
Consolidated Historical Financial Data
|
The selected consolidated financial data as of December 31,
2008 and 2007 and for each of the three years in the period
ended December 31, 2008 set forth below are derived from
the accompanying audited consolidated financial statements of
ARRIS, and should be read in conjunction with such statements
and related notes thereto. The selected consolidated financial
data as of December 31, 2006, 2005 and 2004 and for the
years ended December 31, 2005 and 2004 is derived from
audited consolidated financial statements that have not been
included in this filing. The historical consolidated financial
information is not necessarily indicative of the results of
future operations and should be read in conjunction with
ARRIS historical consolidated financial statements and the
related notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this document. See Note 19 of the
Notes to the Consolidated Financial Statements for a summary of
our quarterly consolidated financial information for 2008 and
2007 (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Consolidated Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,144,565
|
|
|
$
|
992,194
|
|
|
$
|
891,551
|
|
|
$
|
680,417
|
|
|
$
|
490,041
|
|
Cost of sales
|
|
|
751,436
|
|
|
|
718,312
|
|
|
|
639,473
|
|
|
|
489,703
|
|
|
|
343,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
393,129
|
|
|
|
273,882
|
|
|
|
252,078
|
|
|
|
190,714
|
|
|
|
146,177
|
|
Selling, general, and administrative expenses
|
|
|
143,997
|
|
|
|
99,879
|
|
|
|
87,203
|
|
|
|
74,308
|
|
|
|
68,539
|
|
Research and development expenses
|
|
|
112,542
|
|
|
|
71,233
|
|
|
|
66,040
|
|
|
|
60,135
|
|
|
|
63,373
|
|
Impairment of goodwill
|
|
|
209,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development charge
|
|
|
|
|
|
|
6,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
44,195
|
|
|
|
2,278
|
|
|
|
632
|
|
|
|
1,212
|
|
|
|
28,690
|
|
Restructuring charges
|
|
|
1,211
|
|
|
|
460
|
|
|
|
2,210
|
|
|
|
1,331
|
|
|
|
7,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(118,113
|
)
|
|
|
93,912
|
|
|
|
95,993
|
|
|
|
53,728
|
|
|
|
(22,073
|
)
|
Interest expense
|
|
|
6,740
|
|
|
|
6,614
|
|
|
|
976
|
|
|
|
2,101
|
|
|
|
5,006
|
|
Loss on debt retirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,372
|
|
|
|
4,406
|
|
Gain related to terminated acquisition, net of expenses
|
|
|
|
|
|
|
(22,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(7,224
|
)
|
|
|
(24,776
|
)
|
|
|
(11,174
|
)
|
|
|
(3,100
|
)
|
|
|
(1,525
|
)
|
Other expense (income), net
|
|
|
(1,465
|
)
|
|
|
418
|
|
|
|
(1,092
|
)
|
|
|
421
|
|
|
|
(878
|
)
|
Loss (gain) on investments and notes receivable
|
|
|
717
|
|
|
|
(4,596
|
)
|
|
|
29
|
|
|
|
146
|
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(116,881
|
)
|
|
|
139,087
|
|
|
|
107,254
|
|
|
|
51,788
|
|
|
|
(30,402
|
)
|
Income tax expense (benefit)
|
|
|
6,258
|
|
|
|
40,951
|
|
|
|
(34,812
|
)
|
|
|
513
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
(123,139
|
)
|
|
|
98,136
|
|
|
|
142,066
|
|
|
|
51,275
|
|
|
|
(30,510
|
)
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
204
|
|
|
|
221
|
|
|
|
208
|
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(123,139
|
)
|
|
$
|
98,340
|
|
|
$
|
142,287
|
|
|
$
|
51,483
|
|
|
$
|
(28,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.99
|
)
|
|
$
|
0.89
|
|
|
$
|
1.32
|
|
|
$
|
0.53
|
|
|
$
|
(0.36
|
)
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.99
|
)
|
|
$
|
0.89
|
|
|
$
|
1.33
|
|
|
$
|
0.53
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.99
|
)
|
|
$
|
0.87
|
|
|
$
|
1.30
|
|
|
$
|
0.52
|
|
|
$
|
(0.36
|
)
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.99
|
)
|
|
$
|
0.87
|
|
|
$
|
1.30
|
|
|
$
|
0.52
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,351,397
|
|
|
$
|
1,561,949
|
|
|
$
|
1,013,557,
|
|
|
$
|
529,403
|
|
|
$
|
450,678
|
|
Long-term obligations
|
|
$
|
336,372
|
|
|
$
|
356,955
|
|
|
$
|
296,723
|
|
|
$
|
18,230
|
|
|
$
|
91,781
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
In recent years, the technology used in cable systems has
evolved significantly. Historically, cable systems offered only
one-way analog video service. Due to technological advancements,
these systems have evolved to become two-way broadband systems
delivering high-volume, high-speed, interactive services. MSOs
have over the years aggressively upgraded their networks to
cost-effectively support and deliver enhanced voice, video and
data services. As a result, cable operators have been able to
use broadband systems to increase their revenues by offering
enhanced interactive subscriber services, such as high-speed
data, telephony, digital video and video on demand, and to
effectively compete against other broadband communications
technologies, such as DSL, local multiport distribution service,
DBS, FTTH, and fixed wireless. Delivery of enhanced services
also has helped MSOs offset slowing basic video subscriber
growth, reduce their subscriber churn and compete against
alternative video providers, in particular, DBS and the
telephone companies.
A key factor supporting the growth of broadband systems is the
powerful growth of the Internet. Rapid growth in the number of
Internet users, their desire for ever higher Internet access
speeds, and more high-volume interactive services with growing
customer control features have created demand for our products.
Another key factor supporting the growth of broadband systems is
the evolution of video services being offered to consumers.
Video on demand, high definition television and switched digital
video are three key video services expanding the use of
MSOs broadband systems. The increase in volume and
complexity of the signals transmitted through the network and
emerging competitive pressures from telephone companies with
digital subscriber line and fiber to the premises offerings are
pushing cable operators to deploy new technologies as they
evolve. Further, cable operators are looking for products and
technologies that are flexible, cost effective, easily
deployable and scalable to meet future demand. Because the
technologies are evolving and the services delivered are growing
in complexity and volume, cable operators need equipment that
provides the necessary technical capability at a reasonable cost
at the time of initial deployment and the flexibility later to
accommodate technological advances and network expansion.
Over the past decade, United States cable operators have spent
over $100 billion to upgrade their networks to deliver
digital video and two-way services such as high-speed data,
video on demand, and telephony. As global cable operators
maximize their investment in their networks, we believe that our
business will be driven by the industry dynamics and trends
outlined below.
32
Industry
Conditions
As global cable operators maximize their investment in their
networks, we believe that our business will be impacted by the
following industry dynamics and trends:
Competition
Between Cable Operators and Telephone Companies is
Increasing.
Telephone companies are aggressively offering high-speed data
services and are making progress in offering video services to
the residential market. AT&T Inc. and Verizon
Communications have stated publicly that they will spend
billions of dollars to equip their networks to offer video
service, once a service offered only by cable and satellite
providers. Likewise, telephone companies have been increasingly
competitive on bandwidth and pricing for higher speed data
services, again to compete with the cable companies. Counter
balancing this, cable companies are providing Internet
Protocol-based telephone service and DOCSIS 3.0-based ultra high
speed data service. Comcast is now the fourth largest telephone
company in the U.S and is offering 50 Mbps data service in
many parts of its network.
Competition
Between U.S. Cable Operators and Direct Broadcast Satellite
Services is Increasing.
U.S. Direct Broadcast Satellite Services are aggressively
offering many HDTV channels. DIRECTV and The Dish Network
deployed significantly more HDTV channels including many local
channels during 2008. U.S. cable operators are responding
by reclaiming spectrum through advanced technologies such as
switched digital video and upgrading their networks to 1GHz to
make more spectrum available for additional HDTV channels.
Macroeconomic
Crisis is Expected to Affect our Industry.
The current macroeconomic crisis, including but not limited to
the ability of our customers to access capital, the severe
decline in new household formations, the increase in
unemployment and the resulting impact on consumer disposable
income has and is expected to contract the amount of capital
expenditures the MSOs will make for the foreseeable future.
Personalized
Programming is Becoming More Readily Available Across Multiple
Platforms.
Increased demand for bandwidth by cable subscribers is
developing as content providers (such as Google, Yahoo, YouTube,
Hulu, MySpace, Facebook, Blockbuster, Netflix, ABC, CBS, NBC,
movie and music studios, and gaming vendors) are offering
personalized content across multiple venues. For example,
broadcast network shows and user-generated (UG)
content, such as streaming video, personalized web pages, and
video and photo sharing, have become commonplace on the
Internet. Likewise, certain cable operators are experimenting
with offering more content through the use of network personal
video recorders (nPVRs) which, once copyright issues
are resolved, will add more traffic to the networks. Another
bandwidth intensive service being offered by a major cable
operator allows cable video subscribers to re-start programs on
demand if they miss the beginning of a television show
(time-shifted television). Television today has thus become more
interactive and personal, further increasing the demands on the
network. In addition, the Internet has set the bar on
personalization with viewers increasingly looking for
similar experiences across screens
television, PC and phone, further increasing the challenges in
delivering broadband content.
Growth in
Enhanced Broadband Services Requires Continued Upgrades and
Maintenance by Domestic and International Cable
Operators.
Cable operators are offering enhanced broadband services,
including high definition television, digital video, interactive
and on demand video services, high speed Internet and voice over
Internet Protocol. As these enhanced broadband services continue
to attract new subscribers, we expect that cable operators will
be required to invest in their networks to expand network
capacity and support increased customer demand for personalized
services. In the access portion, or
last-mile,
of the network, operators will need to upgrade headends, hubs,
nodes, and radio frequency distribution equipment. While many
domestic cable operators have substantially completed initial
network upgrades necessary to provide enhanced broadband
services, they will need to take a scalable approach to continue
upgrades as new services are deployed. In addition, many
international cable operators have not yet
33
completed the initial upgrades necessary to offer such enhanced
broadband services. Finally, as more and more critical services
are provided over the MSO network plant maintenance becomes a
more important requirement. Operators must replace network
components (such as amplifiers and lasers) as they approach the
end of their useful lives.
Growing
Demand for Bundled Services Video, Voice, and
Data.
In response to increased competition from telecommunication
service providers and direct broadcast satellite operators,
cable operators have not only upgraded their networks to cost
effectively support and deliver enhanced video, voice, and data,
but continue to invest significantly to offer a triple
play bundle of these services. The ability to
cost-effectively provide personalized, bundled services helps
cable operators reduce subscriber turnover and increase revenue
per subscriber. As a result, the focus on such services is
driving cable operators to continue to invest in network
infrastructure, content management, digital advertising
insertion, and back office automation tools.
Cable
Operators are Demanding Advanced Network Technologies and
Software Solutions.
The increase in volume and complexity of the signals transmitted
over broadband networks as a result of the migration to an all
digital, on demand network is causing cable operators to deploy
new technologies. For example, transport technologies based on
Internet Protocol allow cable operators to more cost effectively
deliver video, voice, and data across a common network
infrastructure. Cable operators also are demanding sophisticated
network and service management software applications that
minimize operating expenditures needed to support the complexity
of two-way broadband communications systems. As a result, cable
operators are focusing on technologies and products that are
flexible, cost effective, compliant with open industry
standards, and scalable to meet subscriber growth and
effectively deliver reliable, enhanced services.
Digital
Video Recorders are Impacting the Advertising
Business.
As the use of digital video recorders and other recording
devices becomes more prevalent, advertisers face the need to
develop new business models. Since personal recorders allow the
viewer to skip over ads, network operators are looking for new
ways to attract advertising dollars and deliver a meaningful ad
experience to viewers. As a result, many network operators are
implementing digital ad insertion, allowing them to transition
from all analog to a mix of analog and digital and ultimately to
all digital. One benefit is the ability to reallocate bandwidth.
More importantly, digital advertising allows network operators
to create a more dynamic and interactive experience between
advertiser and viewer. Telephone companies are also planning for
this transition.
Cable
Operators are Developing Strategies to Offer Business
Services.
Cable operators are leveraging their investment in existing
fiber and coax networks by expanding beyond traditional
residential customers to offer voice, video, and data services
to commercial (small and medium size businesses), education,
healthcare, and government clients. Using their experience in
delivering data, cable operators can bundle both voice and data
for commercial subscribers and effectively compete with the
telephone companies who have typically focused on large
enterprises. Business services are just one of several market
segments where cable and telephone companies are trying to
penetrate each others markets.
Volatile
Capital Market Conditions for Many Large Cable
Operators.
In recent years, the telecommunications equipment industry has
been impacted by several financial challenges, including
bankruptcies. The financial challenges are further heightened as
a result of the recent macroeconomic crisis. Many of our
domestic and international customers accumulated significant
levels of debt during the earlier part of this decade and have
since undertaken reorganizations and financial restructurings to
streamline their balance sheets. In February 2009, Charter
Communications announced that it had reached a preliminary
agreement with its bondholders to restructure its debt and is
expected to enter into a prepackaged Chapter 11 bankruptcy
on or before April 1, 2009. As part of its announcement,
Charter stated its intent to continue to pay trade creditors in
the normal course of business. Furthermore, it is also possible
that continuing industry restructuring and consolidation
34
will take place via mergers and or spin-offs. For example, in
2006 various Adelphia Communications properties were acquired by
Comcast and Time-Warner Cable, two of the largest
U.S. cable MSOs. Also in 2004, Cox Communications chose to
go private. Regulatory issues, financial concerns, capital
markets and business combinations among our customers are likely
to significantly impact the overall industry capital spending
plans potentially impacting our business. In addition, during
the past 12 months many MSOs have experienced a significant
decline in the value of their stocks. This in turn may lead to
MSOs to invest less in their networks for the foreseeable future.
Consolidation
of Vendors Has Occurred and May Continue.
In February 2006, Cisco Systems, Inc. acquired
Scientific-Atlanta, Inc. Both Cisco and Scientific-Atlanta are
key competitors of ARRIS. In February 2007, Ericsson purchased
Tandberg Television. In July 2007, Motorola acquired Terayon
Communication Systems. In December 2007, ARRIS acquired C-COR.
It is also possible that other competitor consolidations may
occur which could have an impact on future sales and
profitability.
Our
Strategy and Key Highlights
Our long-term business strategy Convergence Enabled
includes the following key elements:
|
|
|
|
|
Maintain a strong capital structure, mindful of our 2013 debt
maturity, share repurchase opportunities and other capital needs
including mergers and acquisitions.
|
|
|
|
Grow our current business into a more complete portfolio
including a strong video product suite. Continue to invest in
the evolution toward enabling true network convergence onto an
all IP platform.
|
|
|
|
Continue to expand our product/service portfolio through
internal developments, partnerships and acquisitions.
|
|
|
|
Expand our international business and begin to consider
opportunities in markets other than cable.
|
|
|
|
Continue to invest in and evolve the ARRIS talent pool to
implement the above strategies.
|
Our mission is to simplify technology, facilitate its
implementation, and enable operators to put their subscribers in
control of their entertainment, information, and communication
needs. Through a set of business solutions that respond to
specific market needs, we are integrating our products,
software, and services solutions to work with our customers as
they address Internet Protocol telephony deployment, high speed
data deployment, network capacity issues, on demand video
rollout, operations management, network integration, and
business services opportunities.
Below are some key highlights and trends relative to our
strategy:
Convergence
is taking hold as MSOs globally have embraced IP.
|
|
|
|
|
We have successfully leveraged our market position and industry
experience and continue to generate robust demand for both EMTA
and CMTS products. Furthermore, we have leveraged the market
position we acquired as a result of the purchase of C-COR in
December 2007 to increase sales of new products, notably sales
of Video on Demand, Operations Support Software, Access, and
Transport products.
|
|
|
|
As expected, sales to Comcast increased significantly in the
third quarter of 2008 as they begin the rollout of DOCSIS3.0
capabilities. This trend continued through the end of 2008 as
Comcast achieved their goal of 20% penetration of DOCSIS3.0
capabilities across their network.
|
|
|
|
We experienced increased sales in 2008 to other customers,
notably Time Warner and Liberty Media affiliates, as well as
certain international customers in countries such as Japan,
Germany, Mexico and Columbia.
|
|
|
|
We expect strong demand for CMTS products to continue in future
periods as new services and competition between our customers
and other service providers intensifies the need to provide ever
faster download speeds requiring added CMTS capacity and
features. In the third quarter of 2008, a new generation of CMTS
|
35
|
|
|
|
|
products based upon the DOCSIS 3.0 standard was introduced,
leveraging the installed base of current ARRIS CMTS products by
providing an efficient upgrade to these systems. Significant
shipments of this new product were made in the third and fourth
quarter.
|
|
|
|
|
|
Cable operators, particularly in North America, are aggressively
expanding their voice, video and data services to attract
commercial small and medium sized businesses. We provide several
products to address this opportunity, and in particular have
seen substantial growth of our DOCSIS multiline business service
terminals.
|
|
|
|
We introduced our Universal EdgeQAM D5 towards the end of 2007.
Our initial expectation, based on customer input, was that
demand for this product would be robust in the first quarter of
2008 driven by Switched Digital Video (SDV)
requirements. However, customers, in particular Comcast, delayed
network-wide introduction of SDV in favor of a more aggressive
conversion to all-digital. We have expanded our marketing and
development efforts to include other applications including
Modular CMTS, Broadcast and Video on Demand (VOD),
but sales in 2008 were modest. In 2008, we introduced an upgrade
to the existing installed base of D5 enabling an increase in the
number of ports withing the existing footprint. This enhancement
allows operators to expand their VOD and linear television
offerings without the need to add additional equipment.
|
|
|
|
We expect demand for EMTAs to remain robust; however, many
operators have reached a plateau in deployments and are also
managing churn due to competitive subscriber offerings. We do
not anticipate the growth in aggregate sales that we have
experienced in the past few years. However, we do anticipate the
start of a replacement cycle as DOCSIS3.0 services are launched
more aggressively in the second half of 2009 and 2010. This is
expected to spur further growth in the business. Shipments to
Central and Latin American countries almost doubled in 2008, as
large service providers such as Telmex and Telefonica competed
for residential communication and entertainment dollars.
|
|
|
|
Through our acquisition of C-COR in late 2007, we expanded our
portfolio to include several key new products that leverage the
capital spending of our customers. The Access and Transport
products are expected to benefit from the plant upgrades MSOs
will undertake to expand the capacity they will require to offer
new services to their subscribers. We are beginning to get
customer acceptance with our
CORWavetm
multi-wavelength optical platform that provides higher transport
capacity of traditional transport for a fraction of the
traditional infrastructure cost. This trend continues to
accelerate over time as a result of increasing capacity demands
on the networks and the increased scrutiny of new capital
investments. The operations support system (OSS) and
On-Demand products also are well positioned to provide value
added services and operational improvements to the MSOs.
|
|
|
|
Sales of our Access, Transport and Supplies products declined
quarter-over-quarter and year-over-year. The sale of these
infrastructure products are in part dependent upon line
extensions resulting from new home starts. We believe that the
slowdown of the US economy, and in particular new housing
construction, has and will have a near term impact on the sales
of these products.
|
We
continue to invest significantly in research and
development.
|
|
|
|
|
We have made significant investments in research and development
for new products and expansion of our existing products. Our
primary focus has been on products and services that will enable
MSOs to build and operate high-availability, fault-tolerant
networks, which allow them to generate greater revenue by
offering high-speed data, IP telephony and digital video to both
residential and business subscribers. This
success-based capital expenditure is a significant
portion of the cable operators total capital spending. In
addition, some MSOs have expressed interest in offering bundled
wireless telephony as part of their product offering. This
product, known as Fixed Mobile Convergence (FMC), will allow
cable subscribers to use mobile phones in their homes,
connecting to the MSOs VoIP network in the home, and to
roam from the home VoIP network to the cellular network outside
of the home and back seamlessly. We are developing products to
support this new offering.
|
36
|
|
|
|
|
With our acquisition of C-COR in late 2007, our research and
development effort was significantly expanded to include Access
and Transport, VOD, Ad Insertion and OSS products. Further, in
the third quarter 2008 we completed the purchase of certain
assets of Auspice which has and will increase our ongoing
research and development investment in our OSS products. In
2008, we spent approximately $112.5 million on research and
development, or 9.8% of revenue, which compares to
$71.2 million, or 7.2% of revenue, in 2007. We expect to
continue to spend similar or slightly higher amounts on research
and development in the future. We anticipate we may modestly
increase our development efforts on VOD and OSS products.
|
|
|
|
Key research and development accomplishments in 2008 included:
|
|
|
|
|
|
We introduced the 16D Cable Access Module (CAM) and
the Router Control Module (RCM) for the C4 CMTS. The
16D CAM provides higher downstream capacity than its predecessor
and DOCSIS 3.0 downstream channel bonding enabling downstream
speeds up to 160Mbps.
|
|
|
|
We announced DOCSIS 3.0 certification of the WBM750 Data Modem
and the TM702 Voice over IP EMTA. The ARRIS C4 CMTS reached a
critical milestone in releasing the new DOCSIS 3.0 hardware and
software for general availability opening a new era in ultra
high speed communications.
|
|
|
|
A new release was made available in the second quarter for the
ARRIS D5 Universal EdgeQAM platform increasing its capacity.
|
|
|
|
We released FM601 series amplifiers which extended the bandwidth
of the legacy Philips product lines to 1GHz. This release allows
us to significantly reduce network bandwidth upgrade costs
relative to the large installed bases in both the US and
internationally.
|
|
|
|
We received qualification of the CORWave multi-wavelength
optical platform increasing channel capacity and increasing
range over previous Coarse Wave Division Multiplexing
(CWDM) solutions.
|
|
|
|
We introduced the CORWave II platform which expands
capacity over traditional optical transport.
|
|
|
|
We released to production a first of its kind, new segmentable
node (OM2100) targeted specifically at the European and MDU
markets. As advanced services gain additional traction in these
markets, this release allows us to cost effectively address of
the growing need for segmentation.
|
|
|
|
We introduced Start Over, a feature for On Demand that allows a
viewer to view a program from the beginning even when they tune
in a few minutes late.
|
|
|
|
We released new features for our
ServAssuretm
and
WorkAssuretm
products including an integrated house check feature
that allows field technicians to remotely check the network and
multi-service health of an end-customers installation,
reducing the potential for a repeat truck roll. The
ServAssuretm
release allows operators to assure the service integrity of
DOCSIS 3.0 deployments.
|
We
continue to expand through partnerships and
acquisitions.
|
|
|
|
|
To further our strategy, on December 14, 2007 we acquired
C-COR in a cash and stock transaction valued at approximately
$682 million closed successfully on December 14, 2007.
As a result of this acquisition we now have substantially
greater scale and critical mass, as well as greater product
breadth and enhanced customer diversity. As our customer base
continues to consolidate, supplier scale and product breadth
have become increasingly important. On a combined basis, we
expect our increased product breadth and greater scale to be
strategically relevant to our customers, thereby giving us an
opportunity to capture a larger share of their spending. The
combination of our industry-leading voice, data and video
products together with C-CORs leading access,
transmission, video and software solutions will enhance our
competitive market position. Our new organization has an
impressive global footprint with excellent customer and product
line diversity and an even stronger international presence both
in terms of sales and staff presence. The ability to offer
end-to-end solutions should enable us to optimize customer
relationships and drive greater product pull through.
|
|
|
|
Further, in the third quarter of 2008, we completed the purchase
of certain assets of Auspice which expanded the customer base
and features of our OSS products.
|
37
At the
end of 2008, we had cash, cash equivalents and short term
investments of approximately $427.3 million.
|
|
|
|
|
In the first quarter 2008, we announced a share buyback program.
During the first quarter 2008, we repurchased 13.0 million
shares at an average price of $5.84 per share for an aggregate
consideration of approximately $76 million. No additional
shares were repurchased during the rest of 2008.
|
|
|
|
In the first quarter 2008, we redeemed, at par,
$35.0 million of convertible notes we assumed as part of
the C-COR
acquisition.
|
|
|
|
We generated $189.1 million of cash from operating
activities in 2008.
|
Results
of Operations
Overview
As highlighted earlier, we have faced, and in the future will
face, significant changes in our industry and business. These
changes have impacted our results of operations and are expected
to do so in the future. As a result, we have implemented
strategies both in anticipation and in reaction to the impact of
these dynamics. These strategies were outlined in the Overview
to the MD&A.
Below is a table that shows our key operating data as a
percentage of sales. Following the table is a detailed
description of the major factors impacting the year-over-year
changes of the key lines of our results of operations.
Key
Operating Data (as a percentage of net sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
65.7
|
|
|
|
72.4
|
|
|
|
71.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
34.3
|
|
|
|
27.6
|
|
|
|
28.3
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses
|
|
|
12.5
|
|
|
|
10.1
|
|
|
|
9.8
|
|
Research and development expenses
|
|
|
9.8
|
|
|
|
7.2
|
|
|
|
7.4
|
|
Impairment of goodwill
|
|
|
18.3
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development charge
|
|
|
|
|
|
|
0.6
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
3.9
|
|
|
|
0.2
|
|
|
|
0.1
|
|
Restructuring charges
|
|
|
0.1
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(10.3
|
)
|
|
|
9.5
|
|
|
|
10.8
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
0.1
|
|
Gain on terminated acquisition, net of expenses
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
|
|
Gain on investments
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
Gain on foreign currency
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
Interest income
|
|
|
(0.6
|
)
|
|
|
(2.4
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(10.2
|
)
|
|
|
14.0
|
|
|
|
12.0
|
|
Income tax expense (benefit)
|
|
|
0.6
|
|
|
|
4.1
|
|
|
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(10.8
|
)%
|
|
|
9.9
|
%
|
|
|
15.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Comparison
of Operations for the Three Years Ended December 31,
2008
Net
Sales
The table below sets forth our net sales for the three years
ended December 31, 2008, 2007, and 2006, for each of our
business segments described in Item 1 of this
Form 10-K
(in thousands except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Increase (Decrease)
|
|
|
|
For the Years Ended
|
|
|
Between Periods
|
|
|
|
December 31,
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BCS
|
|
$
|
822,816
|
|
|
$
|
859,164
|
|
|
$
|
766,470
|
|
|
$
|
(36,348
|
)
|
|
|
(4.2
|
)%
|
|
$
|
92,694
|
|
|
|
12.1
|
%
|
ATS
|
|
|
262,478
|
|
|
|
130,644
|
|
|
|
123,581
|
|
|
|
131,834
|
|
|
|
100.9
|
%
|
|
|
7,063
|
|
|
|
5.7
|
%
|
MCS
|
|
|
59,271
|
|
|
|
2,386
|
|
|
|
1,500
|
|
|
|
56,885
|
|
|
|
2384.1
|
%
|
|
|
886
|
|
|
|
59.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,144,565
|
|
|
$
|
992,194
|
|
|
$
|
891,551
|
|
|
$
|
152,371
|
|
|
|
15.4
|
%
|
|
$
|
100,643
|
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth our domestic and international sales
for the three years ended December 31, 2008, 2007, and 2006
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Increase (Decrease)
|
|
|
|
For the Years Ended
|
|
|
Between Periods
|
|
|
|
December 31,
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Domestic
|
|
$
|
811,823
|
|
|
$
|
724,065
|
|
|
$
|
668,093
|
|
|
$
|
87,758
|
|
|
|
12.1
|
%
|
|
$
|
55,972
|
|
|
|
8.4
|
%
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
|
50,435
|
|
|
|
41,997
|
|
|
|
52,859
|
|
|
|
8,438
|
|
|
|
20.1
|
|
|
|
(10,862
|
)
|
|
|
(20.6
|
)
|
Europe
|
|
|
127,102
|
|
|
|
98,575
|
|
|
|
74,991
|
|
|
|
28,527
|
|
|
|
28.9
|
|
|
|
23,584
|
|
|
|
31.5
|
|
Latin America
|
|
|
97,798
|
|
|
|
71,507
|
|
|
|
41,731
|
|
|
|
26,291
|
|
|
|
36.8
|
|
|
|
29,776
|
|
|
|
71.4
|
|
Canada
|
|
|
57,407
|
|
|
|
56,050
|
|
|
|
53,877
|
|
|
|
1,357
|
|
|
|
2.4
|
|
|
|
2,173
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total international
|
|
|
332,742
|
|
|
|
268,129
|
|
|
|
223,458
|
|
|
|
64,613
|
|
|
|
24.1
|
%
|
|
|
44,671
|
|
|
|
20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,144,565
|
|
|
$
|
992,194
|
|
|
$
|
891,551
|
|
|
$
|
152,371
|
|
|
|
15.4
|
%
|
|
$
|
100,643
|
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
Communications Systems Net Sales 2008 vs. 2007
During the year ended December 31, 2008, sales of our BCS
segment decreased $36.3 million or approximately 4.2%, as
compared to 2007. This decrease in BCS sales resulted from
several components:
|
|
|
|
|
Sales of our EMTA product decreased as many of our customers
have passed through the initial launch stage of telephony. In
2008, we shipped 5.9 million units as compared to
7.1 million units in 2007. The majority of the decrease is
due to lower EMTA sales to Comcast. This decrease was a result
of Comcast awarding market share to one of our competitors in
the fourth quarter of 2007. As a strategy, most of our customers
utilize multiple vendors.
|
|
|
|
Sales of our CMTS product increased reflecting higher sales to
Time Warner Cable, and Kabel Deutschland. Sales to Comcast,
Liberty Media International and other customers also increased
in conjunction with the launch of our DOCSIS 3.0 product in the
third quarter of 2008. Continued increased demand for bandwidth
coupled with the launch of telephony has driven increased demand
for our CMTS products from our customers.
|
Access,
Transport and Supplies Net Sales 2008 vs. 2007
During the year ended December 31, 2008, Access, Transport
and Supplies segment sales increased $131.8 million or
approximately 100.9%, as compared to the same period in 2007.
|
|
|
|
|
The increase was the result of the acquisition of C-COR. In
2007, we estimate that C-COR, prior to being acquired, recorded
sales associated within this segment of approximately
$216.3 million. The estimated
|
39
|
|
|
|
|
combined sales of ARRIS and C-COR in 2007 for this segment were
$347.0 million which compares to $262.5 million in
2008. The decline on a combined basis is the result of the
slowdown of the US economy, and in particular new housing
construction.
|
|
|
|
|
|
Sales in 2007 for this segment consisted of sales of our
Supplies products. Sales of our supply products decreased year
over year as a result of lower purchases by MSOs for new plant
and extension equipment reflecting the decline in new home
construction in the U.S.
|
Media &
Communications Systems Net Sales 2008 vs. 2007
During the year ended December 31, 2008, Media &
Communications Systems segment sales increased
$56.9 million or approximately 2384.1%, as compared to the
same period in 2007.
|
|
|
|
|
The increase was the result of the acquisition of C-COR. In
2007, we estimate that C-COR, prior to being acquired, recorded
sales associated within this segment of approximately
$65.4 million. Sales of our Media &
Communications Systems products as compared to the same sales by
C-COR in the prior year is not directly comparable because we
revalued C-CORs deferred revenue in connection with
recording the acquisition.
|
Broadband
Communications Systems Net Sales 2007 vs. 2006
During the year ended December 31, 2007, sales of our BCS
segment increased $92.7 million or approximately 12.1%, as
compared to 2006. This increase in BCS sales resulted from
several components:
|
|
|
|
|
Sales of our EMTA product increased as operators ramped up
deployment of VoIP. In 2007, we shipped 7.1 million units
as compared to 4.8 million units in 2006. The increase in
EMTA sales was broad-based and included sales to many new
customers. Many of our customers are now through the initial
launch stage of telephony. We enjoyed sole supplier status with
many customers, including Comcast, through much of 2007. As a
strategy, most of our customers utilize multiple vendors. As
expected, Comcast began awarding market share to one of our
competitors in the fourth quarter 2007.
|
|
|
|
Sales of our CMTS product increased reflecting higher sales to
Comcast and our success in capturing new customers, for example
Time Warner Cable and Cablevision Systems (NY). Continued
increased demand for bandwidth coupled with the launch of
telephony has driven increased demand for our CMTS products from
our customers.
|
|
|
|
Sales of our CBR voice products declined year-over-year as
customers migrated to VoIP products. As previously disclosed,
this product is now at end-of-life.
|
Access,
Transport and Supplies Net Sales 2007 vs. 2006
During the year ended December 31, 2007, Access, Transport
and Supplies segment sales increased $7.0 million or
approximately 5.7%, as compared to the same period in 2006.
|
|
|
|
|
Sales of this segment include Access and Transport Products of
the former C-COR, which was acquired on December 14, 2007.
For the period December 15 through December 31, 2007, we
sold approximately $5.0 million of these products.
|
|
|
|
Sales of the remaining products in this segment relate to our
Supplies product. Sales levels were similar in 2007 as compared
to 2006, which reflect primarily spending by MSOs for product to
maintain and repair their networks.
|
Media &
Communications Systems Net Sales 2007 vs. 2006
During the year ended December 31, 2007, Media &
Communications Systems segment sales increased $0.9 million
or approximately 59.1%, as compared to the same period in 2006.
|
|
|
|
|
Sales in this segment are mostly attributable to OSS and
On-Demand products acquired as part of the C-COR acquisition.
Since the acquisition occurred so late in 2007 there was not a
significant level of activity during 2007.
|
40
Gross
Margin
The table below sets forth our gross margin for the three years
ended December 31, 2008, 2007, and 2006, for each of our
business segments (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin $
|
|
|
Increase (Decrease)
|
|
|
|
For the Years Ended
|
|
|
Between Periods
|
|
|
|
December 31,
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Business Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BCS
|
|
$
|
285,136
|
|
|
$
|
251,416
|
|
|
$
|
229,871
|
|
|
$
|
33,720
|
|
|
|
13.4
|
%
|
|
$
|
21,545
|
|
|
|
9.4
|
%
|
ATS
|
|
|
76,387
|
|
|
|
22,930
|
|
|
|
22,081
|
|
|
|
53,457
|
|
|
|
233.1
|
%
|
|
|
849
|
|
|
|
3.8
|
%
|
MCS
|
|
|
31,606
|
|
|
|
(464
|
)
|
|
|
126
|
|
|
|
32,070
|
|
|
|
6911.6
|
%
|
|
|
(590
|
)
|
|
|
468.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
393,129
|
|
|
$
|
273,882
|
|
|
$
|
252,078
|
|
|
$
|
119,247
|
|
|
|
43.5
|
%
|
|
$
|
21,804
|
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth our gross margin percentages for the
three years ended December 31, 2008, 2007, and 2006, for
each of our business segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin%
|
|
|
Percentage Point Increase
|
|
|
|
For the Years Ended December 31,
|
|
|
(Decrease) Between Periods
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
Business Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BCS
|
|
|
34.7
|
%
|
|
|
29.3
|
%
|
|
|
30.0
|
%
|
|
|
5.4
|
|
|
|
(0.7
|
)
|
ATS
|
|
|
29.1
|
%
|
|
|
17.6
|
%
|
|
|
17.9
|
%
|
|
|
11.5
|
|
|
|
(0.3
|
)
|
MCS
|
|
|
53.3
|
%
|
|
|
(19.4
|
)%
|
|
|
8.4
|
%
|
|
|
72.7
|
|
|
|
(27.7
|
)
|
Total
|
|
|
34.3
|
%
|
|
|
27.6
|
%
|
|
|
28.3
|
%
|
|
|
6.7
|
|
|
|
(0.7
|
)
|
Our overall gross margins are dependent upon, among other
factors, achievement of cost reductions, product mix, customer
mix, product introduction costs, and price reductions granted to
customers.
Broadband
Communications Systems Gross Margin 2008 vs. 2007
The increase in the BCS segment gross margin dollars and the
increase in gross margin percentage in 2008 as compared to 2007
were related to the following factors:
|
|
|
|
|
Increases due to sales variations in product mix and increases
achieved due to cost reductions. In particular, as compared to
2007 we sold more CMTS products and fewer EMTA products. CMTS
products carry a higher gross margin percentage than the EMTA
products.
|
Access,
Transport and Supplies Gross Margin 2008 vs. 2007
The increase in the ATS segment gross margin dollars and the
increase in gross margin percentage in 2008 as compared to 2007
were related to the following factors:
|
|
|
|
|
As a result of the C-COR acquisition, revenues and gross margin
dollars increased significantly year over year. The increase in
gross margin percentage was a result of the addition of
C-CORs higher margin Access and Transport products.
|
|
|
|
The increase due to the C-COR acquisition was partially offset
by a decrease in the Supplies gross margin dollars as a result
of lower sales.
|
41
Media &
Communications Systems Gross Margin 2008 vs. 2007
The increase in the MCS segment gross margin dollars and the
increase in gross margin percentage in 2008 as compared to 2007
are related to the following factor:
|
|
|
|
|
The increase is attributable to the higher margin VOD and OSS
products we added to our portfolio as a result of the C-COR
acquisition.
|
Broadband
Communications Systems Gross Margin 2007 vs. 2006
The increase in BCS segment gross margin dollars and the
decrease in gross margin percentage in 2007 as compared to 2006
were related to the following factors:
|
|
|
|
|
The increase in gross margin dollars is the result of the
$92.7 million increase in sales, partially offset by lower
gross margin percentage.
|
|
|
|
The decrease in gross margin percentage reflects product mix
(having more lower margin EMTAs in the mix than higher margin
CMTS) and lower margins and higher startup costs associated with
the introduction of the Universal EdgeQAM, which began shipping
in late 2007.
|
|
|
|
The decreases described above were offset by an increase in the
gross profit percentage for our EMTAs. During 2006, in order to
secure market share we chose to reduce the price of our Model 4
EMTA in advance of introducing our cost reduced Model 5 EMTA. As
a result our 2006 margins were lower than historical averages
until the transition was completed in the fourth quarter 2006.
|
Access,
Transport and Supplies Gross Margin 2007 vs. 2006
The increase in ATS segment gross margin dollars year-over-year
was the result of the $7.0 million increase in sales. The
gross margin percentage did not materially differ year-over-year.
Media &
Communications Systems Gross Margin 2007 vs. 2006
As explained above, sales and margins were not material in both
periods.
Operating
Expenses
The table below provides detail regarding our operating expenses
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
Increase (Decrease)
|
|
|
|
For the Years Ended
|
|
|
Between Periods
|
|
|
|
December 31,
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Selling, general, & administrative
|
|
$
|
143,997
|
|
|
$
|
99,879
|
|
|
$
|
87,203
|
|
|
$
|
44,118
|
|
|
|
44.2
|
%
|
|
$
|
12,676
|
|
|
|
14.5
|
%
|
Research & development
|
|
|
112,542
|
|
|
|
71,233
|
|
|
|
66,040
|
|
|
|
41,309
|
|
|
|
58.0
|
%
|
|
|
5,193
|
|
|
|
7.9
|
%
|
Impairment of goodwill
|
|
|
209,297
|
|
|
|
|
|
|
|
|
|
|
|
209,297
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
Acquired in-process research & development
|
|
|
|
|
|
|
6,120
|
|
|
|
|
|
|
|
(6,120
|
)
|
|
|
(100.0
|
)%
|
|
|
6,120
|
|
|
|
100
|
%
|
Amortization of intangible assets
|
|
|
44,195
|
|
|
|
2,278
|
|
|
|
632
|
|
|
|
41,917
|
|
|
|
1840.1
|
%
|
|
|
1,646
|
|
|
|
260.4
|
%
|
Restructuring
|
|
|
1,211
|
|
|
|
460
|
|
|
|
2,210
|
|
|
|
751
|
|
|
|
163.3
|
%
|
|
|
(1,750
|
)
|
|
|
(79.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
511,242
|
|
|
$
|
179,970
|
|
|
$
|
156,085
|
|
|
$
|
331,272
|
|
|
|
184.1
|
%
|
|
$
|
23,885
|
|
|
|
15.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General, and Administrative, or SG&A, Expenses
2008 vs. 2007
Several factors contributed to the $44.1 million increase
year-over-year:
|
|
|
|
|
The inclusion of expenses associated with the former C-COR.
|
42
|
|
|
|
|
The year-over-year SG&A expenses declined when comparing
2008 to the combined expenses of ARRIS and the former C-COR for
2007, reflecting synergies achieved as a result of the
combination of the two companies.
|
|
|
|
Legal expenses increased by approximately $6.0 million year
over year as a result of increased costs associated with various
litigation matters, specifically patent related (see Legal
Proceedings). We anticipate that this trend may continue.
|
|
|
|
We anticipate spending slightly less on SG&A in 2009,
excluding potential variability in legal costs.
|
2007 vs. 2006
Several factors contributed to the $12.7 million increase
year-over-year:
|
|
|
|
|
Increased costs (salaries, fringe benefits, travel) of
approximately $7.0 million associated with increased
staffing levels, particularly in the sales organization, as a
result of the growth in the business and the decision to further
invest in the sales force.
|
|
|
|
Variable compensation costs (bonuses) decreased by
$2.0 million year-over-year reflecting less favorable
business results versus plan as compared to 2006.
|
|
|
|
We acquired C-COR on December 14, 2007 and as a result
incurred $1.8 million of SG&A cost in 2007 that did
not exist in 2006. Further, we incurred approximately
$1.4 million of integration expenses associated with the
acquisition.
|
|
|
|
We incurred $1.9 million higher legal costs defending
various matters, in particular patent litigation claims.
|
|
|
|
In 2006 we benefited by approximately $1.6 million from
recoveries of previous written off accounts receivable. This
benefit did not recur in 2007.
|
Research &
Development, or R&D, Expenses
Included in our R&D expenses are costs directly associated
with our development efforts (people, facilities, materials,
etc.) and reasonable allocations of our information technology
and facility costs.
2008 vs. 2007
Several factors contributed to the $41.3 million increase
year-over-year:
|
|
|
|
|
The inclusion of expenses associated with the former C-COR.
|
|
|
|
As planned, we increased our R&D spending as a combined
company, particularly on Video on Demand and OSS products.
|
|
|
|
We anticipate that we may spend slightly more on R&D in
2009.
|
2007 vs. 2006
Several factors contributed to the $5.1 million increase
year-over-year:
|
|
|
|
|
Salaries, benefits, and travel costs increased by approximately
$4.1 million reflecting higher staffing levels.
|
|
|
|
Variable compensation costs (bonuses) decreased by
$1.5 million year-over-year reflecting not as strong
business results versus plan as compared to 2006.
|
|
|
|
We acquired C-COR on December 14, 2007 and as a result
incurred $1.1 million of R&D expenses in 2007 that did
not exist in 2006.
|
|
|
|
Outside services related to R&D, such as testing and
certifications, increased approximately $1.0 million
year-over-year.
|
Acquired
In-Process Research and Development Charge
During 2007, we recorded a $6.1 million expense for
acquired in-process R&D related to the C-COR acquisition.
43
Restructuring
Charges
During 2008, 2007 and 2006, we recorded restructuring charges of
$1.2 million, $0.5 million and $2.2 million,
respectively. The majority of the charges recorded in 2008
relate to severance associated with the C-COR acquisition. We
recorded charges in 2008 and 2007 related to changes in
estimates related to real estate leases associated with the
previous consolidation of certain facilities. The adjustment
recorded in 2006 relates to a vacant property in Georgia. Given
the limited time left on the lease and the information we had
gained through our advisors and continued marketing efforts, we
concluded that we would be unsuccessful in subletting the
facility.
Impairment
of Goodwill
Goodwill relates to the excess of cost over the fair value of
net assets resulting from an acquisition. On an annual basis,
our goodwill is tested for impairment, or more frequently if
events or changes in circumstances indicate that the asset might
be impaired, in which case a test would be performed sooner. The
annual tests were performed in the fourth quarters of 2008,
2007, and 2006, with a test date of October 1. No
impairment was indicated as a result of the reviews in 2007 and
2006. As a result of the review in 2008, we recognized a total
noncash goodwill impairment loss of $128.9 million and
$80.4 million in the ATS and MCS reporting units,
respectively, See Critical Accounting Policies for further
information.
Amortization
of Intangibles
Our intangibles amortization expense in 2008 is related to the
acquisitions of Auspice Corporation in August of 2008 and C-COR
Incorporated in December of 2007. Prior to 2008, other
intangible assets are related to the existing technology
acquired from Arris Interactive L.L.C., from Cadant, Inc., from
Com21, and cXm Broadband LLC., all of which were fully amortized
by the end of 2008.
Other
Expense (Income)
The table below provides detail regarding our other expense
(income) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expense (Income)
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
Increase (Decrease)
|
|
|
|
December 31,
|
|
|
Between Periods
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
Interest expense
|
|
$
|
6,740
|
|
|
$
|
6,614
|
|
|
$
|
976
|
|
|
$
|
126
|
|
|
$
|
5,638
|
|
Gain related to terminated acquisition, net of expenses
|
|
|
|
|
|
|
(22,835
|
)
|
|
|
|
|
|
|
22,835
|
|
|
|
(22,835
|
)
|
Loss (gain) on investments
|
|
|
717
|
|
|
|
(4,596
|
)
|
|
|
29
|
|
|
|
5,313
|
|
|
|
(4,625
|
)
|
Loss (gain) on foreign currency
|
|
|
(422
|
)
|
|
|
48
|
|
|
|
(1,360
|
)
|
|
|
(470
|
)
|
|
|
1,408
|
|
Interest income
|
|
|
(7,224
|
)
|
|
|
(24,776
|
)
|
|
|
(11,174
|
)
|
|
|
17,552
|
|
|
|
(13,602
|
)
|
Other expense (income)
|
|
|
(1,043
|
)
|
|
|
370
|
|
|
|
268
|
|
|
|
(1,413
|
)
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense (income)
|
|
$
|
(1,232
|
)
|
|
$
|
(45,175
|
)
|
|
$
|
(11,261
|
)
|
|
$
|
43,943
|
|
|
$
|
(33,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
Interest expense reflects the amortization of deferred finance
fees, and the interest paid on our convertible subordinated
notes, capital leases and other debt obligations. We expect
interest expense to increase by approximately $12 million
(non-cash) in 2009, as compared to 2008, as a result of the
adoption of FASB Staff Position APB
14-1
Accounting for Convertible Debt Instruments That May be
Settled in Cash Upon Conversion (including Partial Cash
Settlement). See Note 3 to our Consolidated Financial
Statements.
Gain
Related to Terminated Acquisition of Tandberg Television
ASA
In January 2007, we announced our intention to purchase the
shares of TANDBERG Television for approximately
$1.2 billion. In February 2007, another party announced its
intent to make a competing all cash offer for all
44
of TANDBERG Televisions outstanding shares at a higher
price than our offer. Ultimately, the board of directors of
TANDBERG Television recommended to its shareholders that they
accept the other partys offer and our offer lapsed without
being accepted. As part of the agreement with TANDBERG
Television, we received a
break-up fee
of $18.0 million. In conjunction with the proposed
transaction, we incurred expenses of approximately
$7.5 million. We also realized a gain of approximately
$12.3 million on the sale of foreign exchange contracts we
had purchased to hedge the transaction purchase price.
Loss
(Gain) on Investments
We hold certain investments in the common stock of
publicly-traded companies, a number of non-marketable equity
securities, and investments in rabbi trusts associated with our
deferred compensation plans. For further discussion on the
classification and the accounting treatment of these
investments, see the Investments section within Financial
Liquidity and Capital Resources contained herein. During the
years ended December 31, 2008, 2007, and 2006, we recorded
net (gains) losses related to these investments of
$0.7 million, $(4.6) million, and $29 thousand,
respectively.
Loss
(Gain) in Foreign Currency
During 2008, 2007 and 2006, we recorded foreign currency losses
(gains) related to our international customers whose receivables
and collections are denominated in their local currency. We have
implemented a hedging strategy to mitigate the monetary exchange
fluctuations.
Interest
Income
Interest income was $7.2 million in 2008 as compared to
$24.8 million in 2007. The decline is a result of a lower
cash balance in 2008, which was significantly impacted by the
use of approximately $366 million for the C-COR
acquisition, and lower interest rates on cash investment in 2008.
Interest income was $24.8 million in 2007 as compared to
$11.2 million in 2006. The increase is the result of higher
cash balances in 2007 due to the issuance of $276 million
of Convertible Notes in the fourth quarter of 2006 and cash
generated from operating activities.
Income
Tax Expense
Our annual provision for income taxes and determination of the
deferred tax assets and liabilities require management to assess
uncertainties, make judgments regarding outcomes, and utilize
estimates. To the extent the final outcome differs from initial
assessments and estimates, future adjustments to our tax assets
and liabilities will be necessary.
In 2008, we recorded $6.3 million of income tax expense for
U.S. federal and state taxes and foreign taxes, which was
(5.4)% of our pre-tax loss of $116.9 million. Pre-tax
income was negatively impacted by $209.3 million as a
result of our impairment of goodwill, which generates an
unfavorable permanent difference between book and taxable income
of $144.6 million and an unfavorable timing difference
between book and taxable income of $64.7 million. The
allocation of a portion of the total impairment of goodwill to
tax deductible goodwill favorably impacted income tax expense by
$24.7 million. Excluding the impairment of goodwill and the
related tax treatment of the impairment, pre-tax income and
income tax expense would be $92.4 million and
$31.0 million, respectively. The effective tax rate,
exclusive of the goodwill impairment, would be approximately
33.5%. Also favorably impacting tax expense during 2008 were
research and development tax credits of approximately
$4.6 million, and $2.0 million of newly identified tax
benefits arising from domestic manufacturing deductions.
In 2007, we recorded $41.0 million of income tax expense
for U.S. federal and state taxes and foreign taxes. The
total tax expense was favorably impacted by two discrete events
during 2007. Capital gains arising from the terminated Tandberg
acquisition, along with other capital gains arising from the
sale of investments, allowed the Company to reverse
approximately $5.3 million in valuation allowances.
Additionally, upon finalizing our analysis of available research
and development tax credits during the third quarter of 2007, we
identified an additional $4 million of tax credit benefits.
These two favorable discrete events were partially offset by
approximately
45
$2.3 million of unfavorable tax impact arising from the
C-COR in-process research and development charges during the
fourth quarter.
In 2006, we recorded $34.8 million of income tax benefits
for U.S. federal and state taxes and foreign taxes. Current
tax expense of $3.7 million attributable to
U.S. federal and state taxes and foreign taxes was more
than offset by the reversal of approximately $31 million of
valuation allowances, as ARRIS emerged from its cumulative net
loss position, and $7.8 million in newly defined research
and development tax credit benefits.
Discontinued
Operations
In 2007 and 2006, we recorded income of $0.2 million,
related to our reserves for discontinued operations. These
adjustments were the result of the resolution of various vendor
liabilities, taxes and other costs. We did not record any
expense for discontinued operations in 2008.
Financial
Liquidity and Capital Resources
Overview
As highlighted earlier, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands, except DSO and Turns)
|
|
|
Key Working Capital Items
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
189,073
|
|
|
$
|
63,424
|
|
|
$
|
144,241
|
|
Cash, cash equivalents, and short-term investments
|
|
$
|
427,265
|
|
|
$
|
391,808
|
|
|
$
|
549,193
|
|
Accounts Receivable, net
|
|
$
|
159,443
|
|
|
$
|
166,953
|
|
|
$
|
115,304
|
|
- Days Sales Outstanding
|
|
|
52
|
|
|
|
48
|
*
|
|
|
41
|
|
Inventory
|
|
$
|
129,752
|
|
|
$
|
131,792
|
|
|
$
|
94,226
|
|
- Turns
|
|
|
5.7
|
|
|
|
7.2
|
*
|
|
|
6.1
|
|
Key Debt Items Convertible notes due 2026
|
|
$
|
276,000
|
|
|
$
|
276,000
|
|
|
$
|
276,000
|
|
C-COR convertible notes
|
|
$
|
|
|
|
$
|
35,000
|
|
|
$
|
|
|
Key Shareholder Equity Items Share Repurchases
|
|
$
|
75,960
|
|
|
$
|
|
|
|
$
|
|
|
Shares Issued for acquisitions
|
|
$
|
|
|
|
$
|
281,011
|
|
|
$
|
|
|
Capital Expenditures
|
|
$
|
21,352
|
|
|
$
|
15,072
|
|
|
$
|
12,728
|
|
|
|
|
* |
|
Full year excluding C-COR |
In managing our liquidity and capital structure, we have been
and are focused on key goals, and we have and will continue in
the future to implement actions to achieve them. They include:
|
|
|
|
|
Liquidity ensure that we have sufficient cash
resources or other short term liquidity to manage day to day
operations
|
|
|
|
Growth implement a plan to ensure that we have
adequate capital resources, or access thereto, fund internal
growth and execute acquisitions while retiring our notes in a
timely fashion.
|
Below is a description of key actions taken and an explanation
as to their potential impact:
Accounts
Receivable & Inventory
We use the number of times per year that inventory turns over
(based upon sales for the most recent period, or turns) to
evaluate inventory management, and days sales outstanding, or
DSOs, to evaluate accounts receivable management.
46
Both accounts receivable and inventory were significantly
impacted by the acquisition of C-COR. See discussion below of
changes year over year.
Issuance
of the 2026 Notes
On November 6, 2006, we issued $276.0 million of 2%
convertible senior notes due 2026. The notes are convertible, at
the option of the holder, at any time prior to maturity, based
on an initial conversion rate of 62.1504 shares per $1,000
base amount, into cash up to the principal amount and, if
applicable, shares of our common stock, cash or a combination
thereof. Interest is payable on May 15 and November 15 of each
year. We may redeem the notes at any time on or after
November 15, 2013, subject to certain conditions. As of
December 31, 2008, there were $276.0 million of the
notes outstanding. We issued the notes primarily to fund future
acquisitions.
Redemption
of $35.0 Million Notes Acquired as Part of the C-COR
Acquisition
The Notes were redeemed at par on January 14, 2008. See
below for a further description of the Notes.
Shares
Issued for Acquisition
As part of the C-COR acquisition in December 2007, we issued
25.1 million shares valued at $281 million.
Share
Repurchases
In 2008, we repurchased 13.0 million shares for an
aggregate $76.0 million.
Summary
of Current Liquidity Position and Potential for Future Capital
Raising
We believe our current liquidity position, where we had
approximately $427.3 million of cash, cash equivalents, and
short-term investments on hand as of December 31, 2008,
together with the prospects for continued generation of cash
from operations are adequate for our short and medium-term
business needs. We may in the future elect to repurchase shares
of our common stock or our outstanding convertible notes. In
addition, a key part of our overall long-term strategy may be
implemented through additional acquisitions, and a portion of
these funds may be used for that purpose as well. Should our
available funds be insufficient for those purposes, it is
possible that we will raise capital through private, or public,
share or debt offerings. We do not anticipate a need to access
the capital markets during 2009.
Contractual
Obligations
Following is a summary of our contractual obligations as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
Contractual Obligations
|
|
Less than 1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More than 5 Years
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Debt
|
|
$
|
146
|
|
|
$
|
137
|
|
|
$
|
276,000
|
|
|
$
|
|
|
|
$
|
276,283
|
|
Operating leases, net of sublease income(1)
|
|
|
7,155
|
|
|
|
10,328
|
|
|
|
5,286
|
|
|
|
3,067
|
|
|
|
25,836
|
|
Purchase obligations(2)
|
|
|
119,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations(3)
|
|
$
|
126,562
|
|
|
$
|
10,465
|
|
|
$
|
281,286
|
|
|
$
|
3,067
|
|
|
$
|
421,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes leases which are reflected in restructuring accruals on
the consolidated balance sheets. |
|
(2) |
|
Represents obligations under agreements with non-cancelable
terms to purchase goods or services. The agreements are
enforceable and legally binding, and specify terms, including
quantities to be purchased and the timing of the purchase. |
|
(3) |
|
Approximately $15.9 million of FIN 48 liabilities have
been excluded from the contractual obligation table because we
are unable to make reasonably reliable estimates of the period
of cash settlement with the respective taxing authorities. |
47
Off-Balance
Sheet Arrangements
The Company does not have any off-balance sheet arrangements as
defined in Item 303(a)(4)(ii) of
Regulation S-K.
Cash
Flow
Below is a table setting forth the key lines of our Consolidated
Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash provided by operating activities
|
|
$
|
189,073
|
|
|
$
|
63,424
|
|
|
$
|
144,241
|
|
Cash provided by (used in) investing
|
|
|
9,778
|
|
|
|
(221,667
|
)
|
|
|
(45,841
|
)
|
Cash provided by (used in) financing
|
|
|
(112,754
|
)
|
|
|
20,422
|
|
|
|
287,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
$
|
86,097
|
|
|
$
|
(137,821
|
)
|
|
$
|
386,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities:
Below are the key line items affecting cash from operating
activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income (loss)
|
|
$
|
(123,139
|
)
|
|
$
|
98,340
|
|
|
$
|
142,287
|
|
Adjustments to reconcile net income to cash provided by
(used in ) operating activities
|
|
|
275,412
|
|
|
|
(1,042
|
)
|
|
|
(29,951
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income including adjustments
|
|
|
152,273
|
|
|
|
97,298
|
|
|
|
112,336
|
|
(Increase)/Decrease in accounts receivable
|
|
|
8,579
|
|
|
|
(17,498
|
)
|
|
|
(32,153
|
)
|
(Increase)/Decrease in inventory
|
|
|
4,023
|
|
|
|
(9,502
|
)
|
|
|
19,683
|
|
Increase/(Decrease) in accounts payable and accrued liabilities
|
|
|
38,800
|
|
|
|
(9,906
|
)
|
|
|
50,200
|
|
Other, net
|
|
|
(14,602
|
)
|
|
|
3,032
|
|
|
|
(5,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
189,073
|
|
|
$
|
63,424
|
|
|
$
|
144,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), including adjustments, increased
$55.0 million during 2008 as compared to 2007. Our net
income (loss) before depreciation and amortization decreased
approximately $147.4 million in 2008 as compared to 2007.
In 2008, net income (loss) included a goodwill impairment of
$209.3 million arising from the allocation of a portion of
the total impairment of goodwill to tax deductible goodwill and
a related tax benefit of $24.7 million. Net income in 2007
included gains of $22.8 million associated with the
terminated TANDBERG transaction.
Net income after adjustments for non cash items was
$15.0 million lower in 2007 as compared to 2006. Our
year-over-year increase in sales resulted in higher operating
income before depreciation, amortization and in-process research
and development expense. We also had higher net interest
income/expense as a result of higher cash balances. We recorded
a gain of $22.8 million associated with the terminated
TANDBERG transaction. These factors were more than offset with
an increase in income tax expense.
Accounts receivable decreased by $8.6 million in 2008 from
2007. Sales in the fourth quarter of 2008 were
$292.4 million as compared to $311.9 on a combined basis
(ARRIS and the former C-COR) in the fourth quarter of 2007. The
decline relates to lower sales in the fourth quarter of 2008 as
compared to 2007.
Accounts receivable increased by $51.6 in 2007 as compared to
2006 as a result of the C-COR acquisition in December 2007.
Inventory declined modestly in 2008 as compared to 2007 as a
result of lower sales discussed above. Inventory increased in
2007 compared to 2006 as a result of the C-COR acquisition.
Accounts payable and accrued liabilities increased in 2008 as
compared to 2007 by $38.8 million. Deferred revenue
increased by $38.5 million. The increase was the result of
the build-up
of deferred revenue from the MCS segment during the year. The
deferred revenue acquired from C-COR during the acquisition was
marked to fair
48
value at the date of the acquisition and rebuilt through 2008.
Accounts payable increased in 2008 as compared to 2007 as a
result of timing and more favorable terms we negotiated with
certain vendors.
The change in other net in 2008 is the result of an increase in
deferred cost of sales in the MCS segment during the year. The
deferred cost of sales has increased during the year along with
the deferred revenue. Along with the deferred revenue, the
deferred cost of sales was also marked to fair value at the date
of acquisition.
Investing
Activities:
Below are the key line items affecting investing activities (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Capital expenditures
|
|
$
|
(21,352
|
)
|
|
$
|
(15,072
|
)
|
|
$
|
(12,728
|
)
|
Acquisitions/other
|
|
|
(10,500
|
)
|
|
|
(285,284
|
)
|
|
|
|
|
Purchases of short-term investments
|
|
|
(109,347
|
)
|
|
|
(356,366
|
)
|
|
|
(129,475
|
)
|
Sales of short-term investments
|
|
|
155,114
|
|
|
|
412,217
|
|
|
|
96,150
|
|
Purchases of investments securities
|
|
|
(4,387
|
)
|
|
|
|
|
|
|
|
|
Cash proceeds from sale of property, plant and equipment
|
|
|
250
|
|
|
|
3
|
|
|
|
212
|
|
Proceeds from termination of TandbergTV acquisition, net of
payments
|
|
|
|
|
|
|
22,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
$
|
9,778
|
|
|
$
|
(221,667
|
)
|
|
$
|
(45,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures Capital expenditures are
mainly for test equipment, laboratory equipment, and computing
equipment. We anticipate investing approximately
$20.0 million in 2009.
Acquisitions/Other This represents cash investments
we have made in our various acquisitions.
Purchases and Disposals of Short-Term Investments
This represents purchases and disposals of auction rate
securities held as short-term investments.
Proceeds from Sales of Short-Term Investments This
represents the cash proceeds we received from the liquidation of
excess assets from our deferred compensation plan.
Cash proceeds from Sale of Property, Plant and
Equipment This represents the cash proceeds we
received from the sale of property, plant and equipment.
Proceeds from Termination of TandbergTV Acquisition, Net of
Payments This represents the cash proceeds we
received from the breakup fee of the proposed acquisition,
foreign exchange gains associated with the transaction, and
related costs we incurred in association with the proposed
transaction.
Financing Activities:
Below are the key items affecting our financing activities (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Proceeds from issuance of 2026 notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
276,000
|
|
Deferred financing fees paid
|
|
|
|
|
|
|
|
|
|
|
(7,760
|
)
|
Repurchase of shares to satisfy employee tax withholdings
|
|
|
(1,035
|
)
|
|
|
(3,093
|
)
|
|
|
(2,019
|
)
|
Payment of debt and capital lease obligations
|
|
|
(35,864
|
)
|
|
|
(19
|
)
|
|
|
|
|
Repurchase of common stock
|
|
|
(75,960
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
49
|
|
|
|
14,377
|
|
|
|
12,266
|
|
Excess tax benefits from stock-based compensation plans
|
|
|
56
|
|
|
|
9,157
|
|
|
|
9,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
$
|
(112,754
|
)
|
|
$
|
20,422
|
|
|
$
|
287,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Issuance
of Convertible Senior Notes due 2026
On November 6, 2006, we issued $276.0 million of 2%
convertible senior notes due 2026. The notes are convertible, at
the option of the holder, based on an initial conversion rate,
subject to adjustment, of 62.1504 shares per $1,000 base
amount (which represents an initial conversion price of
approximately $16.09 per share of our common stock), into cash
up to the principal amount and, if applicable, shares of our
common stock, cash or a combination thereof. The notes may be
converted during any calendar quarter in which the closing price
of our common stock for 20 or more trading days in a period of
30 consecutive trading days ending on the last trading day of
the immediately preceding calendar quarter exceeds 120% of the
conversion price in effect at that time (which, based on the
current conversion price would be $19.31) and upon the
occurrence of certain other events. Upon conversion, the holder
will receive the principal amount in cash and an additional
payment, in either cash or stock at the option of ARRIS. The
additional payment will be based on a formula which calculates
the difference between the initial conversion rate ($16.09) and
the market price at the date of the conversion. As of
December 31, 2008 and 2007, the notes could not be
convertible by the holders thereof. Interest is payable on May
15 and November 15 of each year. We may redeem the notes at any
time on or after November 15, 2013, subject to certain
conditions. As of December 31, 2008 and 2007, there were
$276.0 million of the notes outstanding. We issued the
notes primarily to fund future acquisitions. Additionally, we
paid approximately $7.8 million of finance fees related to
the issuance of the notes. These costs will be amortized over
seven years. The remaining balance of unamortized financing
costs from these notes as of December 31, 2008 and 2007 is
$5.4 million, and $6.5 million, respectively. See
Note 3 to our consolidated Financial Statements for a
discussion of the impact on our accounting for the notes of an
accounting pronouncement that will be adopted January 1,
2009.
Debt
Assumed as Part of the Acquisition of C-COR
At December 31, 2007, $35.0 million of
3.5% senior unsecured convertible notes (Notes)
due on December 31, 2009, which had been issued by C-COR,
were outstanding. Interest on the Notes was payable
semi-annually on June 30 and December 30. Each Note was
convertible by the holder, at its option, into shares of
ARRIS common stock at a conversion rate of
92.9621 shares per one thousand dollars of principal amount
of the Note, for an aggregate of 3,253,674 potential common
shares. The Notes were subsequently redeemed on January 14,
2008.
C-COR obtained $2.0 million of funding through the
Pennsylvania Industrial Development Authority (PIDA) for 40% of
the cost of the expansion of the Companys facility in
State College, Pennsylvania. The PIDA borrowing has an interest
rate of 2%. Monthly payments of principal and interest of $13
thousand are required through 2010. Certain property, plant, and
equipment collateralize the borrowing. The principal balance of
the PIDA borrowing at December 31, 2008 and
December 31, 2007 was $0.3 million and
$0.4 million respectively.
Common
Stock Transactions
In conjunction with the acquisition of C-COR on
December 14, 2007, the Company issued 25.1 million
shares of ARRIS common stock, together with approximately
$366 million in cash, in exchange for all of the
outstanding shares of C-COR common stock not already held by the
Company.
In 2008 we repurchased approximately 13 million shares of
our common stock for an approximate purchase price of
$76 million.
Sales of common stock represent the proceeds we received as a
result of exercise of stock options.
Income
Taxes
During 2008, approximately $0.5 million of
U.S. federal tax benefits were obtained from tax deductions
arising from equity-based compensation deductions, all of which
resulted from 2008 exercises of non-qualified stock options and
lapses of restrictions on restricted stock awards. During 2007,
approximately $6.9 million of U.S. federal tax
benefits were obtained from tax deductions arising from
equity-based compensation deductions, of which $3.8 million
resulted from 2007 exercises of non-qualified stock options and
lapses of restrictions on restricted stock awards. The remaining
$3.1 million of U.S. federal tax benefits during 2007
were due to the utilization of prior year net operating losses,
generated by equity-based compensation deductions, against 2007
50
taxable income. During 2006, approximately $13.7 million of
tax benefits were obtained from tax deductions arising from
equity-based compensation deductions of which $3.8 million
resulted from 2006 exercises of non-qualified stock options and
lapses of restrictions on restricted stock awards. The remaining
$9.9 million of tax benefits arose from the utilization of
prior year net operating losses, generated by equity-based
compensation deductions, against 2006 year taxable income.
Interest
Rates
As of December 31, 2008, 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, Ireland, and other foreign
countries. Further, as part of the C-COR acquisition we acquired
a manufacturing facility in Mexico. 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 a percentage of expected
foreign currency revenues. The percentage can vary, based on the
predictability of the revenues denominated in the foreign
currency.
Financial
Instruments
In the ordinary course of business, we, from time to time, will
enter into financing arrangements with customers. These
financial arrangements include letters of credit, commitments to
extend credit and guarantees of debt. 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. Additionally, we have cash collateral account
agreements with our financial institutions as security against
potential losses with respect to our foreign currency hedging
activities. The letters of credit and cash collateral accounts
are reported as restricted cash. As of December 31, 2008
and 2007, we had approximately $5.7 million and
$7.6 million outstanding, respectively, of cash collateral.
As of December 31, 2008 all of the $5.7 million was
short term and was classified as restricted cash. As of
December 31, 2007 the $7.6 million cash collateral
includes $7.0 million that has been classified as current
assets as restricted cash as the terms of the associated
commitments expire in less than one year and $0.6 million
that has been classified as long term and is included in other
assets.
Cash,
Cash Equivalents, Short-Term Investments and Available-For-Sale
Investments
Our cash and cash equivalents (which are highly-liquid
investments with an original maturity of three months or less)
are primarily held in money market funds that pay either taxable
or non-taxable interest. We hold investments consisting of debt
securities classified as available-for-sale, which are stated at
estimated fair value. These debt securities consist primarily of
commercial paper, auction rate securities, certificates of
deposits, and U.S. government agency financial instruments.
Auction rate securities, paying either taxable or non-taxable
interest, generally have long-term maturities beyond three
months but are priced and traded as short-term instruments. At
December 31, 2007, ARRIS had $30.3 million invested in
auction rate securities, all of which were classified as
short-term investments. As of December 31, 2008, we had
approximately $4.9 million of auction rate securities
outstanding at fair value, classified as long-term investments.
We are uncertain of when we will be able to liquidate the
remaining $4.9 million of auction rate securities because
they have failed at auction. However, the Company has been
provided the option to sell the security to a major financial
institution at par on June 30, 2010.
51
Therefore, ARRIS has classified the investment as long-term.
These securities are a single student loan issue rated AAA and
is substantially guaranteed by the federal government. Applying
the provisions of SFAS 157, we analyzed the fair value of
the security as of December 31, 2008. We have concluded
that the fair value is approximately $4.9 million
(including the fair value of the put option), which compares to
a face value of $5.0 million. We will continue to evaluate
the fair value of this security and mark it to market
accordingly.
From time to time, we held certain investments in the common
stock of publicly-traded and venture-backed private companies,
which were classified as available-for-sale. As of
December 31, 2008 and 2007 our holdings in these
investments were immaterial. Changes in the market value of
these securities are typically recorded in other comprehensive
income and gain or losses on related sales of these securities
are recognized in income. These securities are also subject to a
periodic impairment review, which requires significant judgment.
During the years ended December 31, 2008, December 31,
2007 and December 31, 2006, we recognized a gain/(loss) of
approximately $(0.7) million, $4.6 million, and $29
thousand, respectively, related to sales of our
available-for-sale investments. As of December 31, 2008 and
2007, we had unrealized gains/(losses) related to
available-for-sale securities of approximately $(274) thousand
and $20 thousand, respectively, included in comprehensive income.
On January 1, 2008, ARRIS adopted SFAS No. 157,
Fair Value Measurements, for its financial assets and
liabilities. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. See Note 5 of
Notes to the Consolidated Financial statement for disclosures
related to the fair value of our investments.
The Company has a deferred compensation plan, which was
available to certain current and former officers and key
executives of C-COR. During 2008, this plan was merged into a
new non-qualified deferred compensation plan which is also
available to key executives of the Company. Employee
compensation deferrals and matching contributions are held in a
rabbi trust, and are accounted for in accordance with
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. A rabbi trust is a funding
vehicle used to protect the deferred compensation from various
events (but not from bankruptcy or insolvency).
Additionally, ARRIS previously offered a deferred compensation
arrangement, which was available to certain employees. 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.
The Company also has a deferred retirement salary plan, which
was limited to certain current or former officers of C-COR.
ARRIS holds an investment to cover its liability, and accounts
for the investment in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities.
Capital
Expenditures
Capital expenditures are made at a level designed to support the
strategic and operating needs of the business. ARRIS
capital expenditures were $21.4 million in 2008 as compared
to $15.1 million in 2007 and $12.7 million in 2006.
ARRIS had no significant commitments for capital expenditures at
December 31, 2008. Management expects to invest
approximately $20 million in capital expenditures for the
year 2009.
Net
Operating Loss Carryforwards and Research and Development Credit
Carryforwards
As of December 31, 2008, ARRIS had net operating loss, or
NOL, carryforwards for domestic federal, domestic state, and
foreign income tax purposes of approximately $57.8 million,
$155.6 million, and $56.9 million, respectively. The
U.S. federal NOLs expire through 2024. Foreign NOLs related
to our Irish subsidiary in the amount of $21.3 have an
indefinite life and can only be used to offset Irish income.
During 2008, we completed our analysis of our ability to utilize
the domestic federal and domestic state NOLs acquired from C-COR
and concluded that approximately $0.6 million and
$115.6 million, respectively, of these NOLs were not more
likely than not to be utilized. Because we do not believe the
ultimate realizability of the deferred tax assets associated
with these domestic state and foreign NOLs is more likely than
not, we recorded valuation allowances against these remaining
52
acquired C-COR NOLs. We continually review the adequacy of the
valuation allowances and recognize the benefits only as
reassessment indicates that it is more likely than not that the
benefits will be realized.
Since the fourth quarter of 2006, ARRIS has been analyzing the
availability of domestic federal and domestic state research and
development tax credits arising from qualified research
expenditures for tax years beginning in 1999 and continuing
through 2008. Due to this analysis, we have recorded deferred
income tax assets related to those domestic federal research and
development tax credits in the amount of $40.4 million, and
domestic state research and development tax credits in the
amount of $5.4 million. During the tax years ending
December 31, 2008, and 2007, we utilized $12.1 million
and $9.1 million, respectively, to offset against federal
and state income tax liabilities. As of December 31, 2008,
ARRIS has $20.1 million of available domestic federal
research and development tax credits and $4.5 million of
available domestic state research and development tax credits.
The remaining unutilized domestic federal research and
development tax credits can be carried back one year and carried
forward twenty years. The domestic state research and
development tax credits carry forward and will expire pursuant
to the various applicable domestic state rules.
As of December 31, 2006, ARRIS reversed approximately
$72.3 million of the total valuation allowance that had
previously been recorded against its domestic federal, state,
and foreign deferred tax assets. This adjustment was required
when, after a review of the applicable evidence, ARRIS
management concluded than it was more likely than not to be able
to utilize these specific deferred tax assets in the future. The
availability of tax benefits of NOL and research and development
tax credit carryforwards to reduce ARRIS federal and state
income tax liability is subject to various limitations under the
Internal Revenue Code. The availability of tax benefits of NOL
carryforwards to reduce ARRIS foreign income tax liability
is subject to the various tax provisions of the respective
countries.
Defined
Benefit Pension Plans
The Company sponsors a qualified and non-qualified
non-contributory defined benefit pension plan that cover the
Companys U.S. employees. As of January 1, 2000,
the Company froze the defined pension plan benefits. These
participants elected to enroll in ARRIS enhanced 401(k)
plan. Due to the cessation of plan accruals for such a large
group of participants, a curtailment was considered to have
occurred and the Company accounted for this in accordance with
SFAS No. 88, Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits. The Company has not recognized
any expense (income) related to supplemental pension benefits
for years ended December 31, 2008, 2007, and 2006.
The investment strategies of the plans place a high priority on
benefit security. The plans invest conservatively so as not to
expose assets to depreciation in adverse markets. The
plans strategy also places a high priority on earning a
rate of return greater than the annual inflation rate along with
maintaining average market results. The plan has targeted asset
diversification across different asset classes and markets to
take advantage of economic environments and also to minimize
risk by dampening the portfolios volatility.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. This statement requires entities
to:
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fully recognize the funded status of defined benefit
plans an asset for an overfunded status or a
liability for an underfunded status,
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measure a defined benefit plans assets and obligations
that determine its funded status as of the end of the
entitys fiscal year, and
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recognize changes in the funded status of a defined benefit plan
in comprehensive earnings in the year in which the changes occur.
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ARRIS adopted SFAS No. 158 as of December 31,
2006. However, the requirement to measure plan
assets and benefit obligations as of the date of the fiscal
year-end balance sheet was effective for fiscal years ending
after December 15, 2008. ARRIS adopted this provision on
January 1, 2008 and has changed the measurement date from
September 30 to December 31 for the 2008 reporting year. The
impact of changing the measurement date for plan assets and
liabilities from September 30 to December 31 resulted in an
adjustment of $0.4 million to retained
53
earnings in the consolidated balance sheet for the year ended
December 31, 2008. See Note 18 of the Notes to the
Consolidated Financial Statements for further detail.
The weighted-average actuarial assumptions used to determine the
benefit obligations for the three years presented are set forth
below:
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2008
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2007
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2006
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Assumed discount rate for non-qualified plan participants
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6.25
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%
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6.25
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%
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5.75
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%
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Assumed discount rate for qualified plan participants
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6.25
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%
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6.25
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%
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5.75
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%
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Rates of compensation increase
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3.75
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%
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3.75
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%
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3.75
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%
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The weighted-average actuarial assumptions used to determine the
net periodic benefit costs are set forth below:
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2008
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2007
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2006
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Assumed discount rate for non-qualified plan participants
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6.25
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%
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5.75
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%
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5.50
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%
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Assumed discount rate for qualified plan participants
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6.25
|
%
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5.75
|
%
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|
5.75
|
%
|
Rates of compensation increase
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3.75
|
%
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3.75
|
%
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3.75
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%
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Expected long-term rate of return on plan assets
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7.50
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%
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8.00
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%
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8.00
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%
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The expected long-term rate of return on assets is derived using
the building block approach which includes assumptions for the
long term inflation rate, real return, and equity risk premiums.
As of December 31, 2008, the expected benefit payments
related to the Companys defined benefit pension plans
during the next ten years are as follows (in thousands):
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2009
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$
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850
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2010
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10,516
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2011
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933
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2012
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1,096
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2013
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1,383
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2014 - 2018
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7,592
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Other
Benefit Plans
ARRIS has established defined contribution plans pursuant to the
Internal Revenue Code Section 401(k) that cover all
eligible U.S. employees. ARRIS contributes to these plans
based upon the dollar amount of each participants
contribution. ARRIS made matching contributions to these plans
of approximately $4.1 million, $2.1 million and
$1.5 million in 2008, 2007, and 2006, respectively.
The Company has a deferred compensation plan that does not
qualify under Section 401(k) of the Internal Revenue Code,
which was available to certain current and former officers and
key executives of C-COR. During 2008, this plan was merged into
a new non-qualified deferred compensation plan which is also
available to key executives of the Company. Employee
compensation deferrals and matching contributions are held in a
rabbi trust. The total of net employee deferrals and matching
contributions, which is reflected in other long-term
liabilities, was $0.8 million and $3.7 million at
December 31, 2008 and 2007, respectively.
The Company previously 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. The total of net employee deferral and matching
contributions, which is reflected in other long-term
liabilities, was $1.9 million and $3.2 million at
December 31, 2008 and 2007, respectively.
The Company also has a deferred retirement salary plan, which
was limited to certain current or former officers of C-COR. The
present value of the estimated future retirement benefit
payments is being accrued over the estimated service period from
the date of signed agreements with the employees. The accrued
balance of this plan, the majority of which is included in other
long-term liabilities, was $2.3 million and
$2.1 million at December 31,
54
2008 and 2007, respectively. Total expenses included in
continuing operations for the deferred retirement salary plan
were approximately $284 thousand and $36 thousand for 2008 and
2007, respectively.
Critical
Accounting Policies
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 critical
accounting estimates communicated below with the audit committee
of the Companys Board of Directors and the audit committee
has reviewed the Companys related disclosures herein.
ARRIS generates revenue as a result of varying activities,
including the delivery of stand-alone equipment, custom design
and installation services, and bundled sales arrangements
inclusive of equipment, software and services. The revenue from
these activities is recognized in accordance with applicable
accounting guidance that includes but is not limited to Staff
Accounting Bulletin No. 101
(SAB 101), Revenue Recognition in Financial
Statements, Staff Accounting Bulletin No. 104
(SAB 104), Revenue Recognition, AICPA
Statement of Position
No. 97-2,
Software Revenue Recognition
(SOP 97-2),
AICPA Statement of Position
81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
(SOP 81-1),
EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21),
SOP No. 98-9,
Software Revenue Recognition, With Respect to Certain
Transactions
(SOP 98-9),
EITF 03-05,
Applicability of AICPA Statement of Position
97-2 to
Non-Software Deliverables in an Arrangement containing
More-Than-Incidental
Software,
(EITF 03-05),
Accounting Research Bulletin No. 45, Long-Term
Construction-Type Contracts (ARB 45),
EITF 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(EITF 01-9),
and related interpretations.
Revenue is recognized when all of the following criteria have
been met:
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When persuasive evidence of an arrangement
exists. Contracts and customer purchase orders
are used to determine the existence of an arrangement.
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Delivery has occurred. Shipping documents,
proof of delivery and customer acceptance (when applicable) are
used to verify delivery.
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The fee is fixed or determinable. Pricing is
considered fixed and determinable at the execution of a customer
arrangement, based on specific products and quantities to be
delivered at specific prices. This determination includes a
review of the payment terms associated with the transaction and
whether the sales price is subject to refund or adjustment or
future discounts.
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Collectability is reasonably assured. We
assess the ability to collect from our customers based on a
number of factors that include information supplied by credit
agencies, analyzing customer accounts, reviewing payment history
and consulting bank references. Should we have a circumstance
arise where a customer is deemed not creditworthy, all revenue
related to the transaction will be deferred until such time that
payment is received and all other criteria to allow us to
recognize revenue have been met.
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Revenue is deferred if any of the above revenue recognition
criteria are not met as well as when certain circumstances exist
for any of our products or services, including, but not limited
to:
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When undelivered products or services that are essential to the
functionality of the delivered product exist, revenue is
deferred until such undelivered products or services are
delivered as the customer would not have full use of the
delivered elements.
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When we dont have acceptance that is required.
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When trade-in rights are granted at the time of sale, that
portion of the sale is deferred until the trade-in right is
exercised or the right expires. In determining the deferral
amount, management estimates the expected
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trade-in rate and future value of the product upon trade-in.
These factors are periodically reviewed and updated by
management, and the updates may result in either an increase or
decrease in the deferral.
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Equipment We provide cable system operators
with equipment that can be placed within various stages of a
broadband cable system that allows for the delivery of cable
telephony, video and high-speed data as well as outside plant
construction and maintenance equipment. For equipment sales,
revenue recognition is generally established when the products
have been shipped, risk of loss has transferred, objective
evidence exists that the product has been accepted, and no
significant obligations remain relative to the transaction.
Additionally, based on historical experience, ARRIS has
established reliable estimates related to sales returns and
other allowances for discounts. These estimates are recorded as
a reduction to revenue at the time the revenue is initially
recorded.
Software We sell internally developed
software as well as software developed by outside third parties
that does not require significant production, modification or
customization. We recognize software and any associated system
product revenue where software is more than an incidental
component, in accordance with
SOP 97-2,
as amended by
SOP No. 98-9,
Software Revenue Recognition, With Respect to Certain
Transactions. Our products that contain more than incidental
software and are accounted for under
SOP 97-2:
CMTS, ARRIS Spectrum Analyzer (ASA), D5, UCTS,
Commercial Services Aggregator (CSA) 9000, CXM
Gateway, Video On Demand (VOD), and Advertising
Insertion.
Services Service revenue consists of customer
support and maintenance, installation, training,
on-site
support, network design and inside plant activities. A number of
our products are sold in combination with customer support and
maintenance services, which consist of software updates and
product support. Software updates provide customers with rights
to unspecified software updates that we choose to develop and to
maintenance releases and patches that we choose to release
during the period of the support period. Product support
services include telephone support, remote diagnostics, email
and web access, access to
on-site
technical support personnel and repair or replacement of
hardware in the event of damage or failure during the term of
the support period. Maintenance and support service fees are
generally billed and collected in advance of the associated
maintenance contract term. Maintenance and support service fees
collected are recorded as deferred revenue and recognized
ratably under the straight-line method over the term of the
contract, which is generally one year. We do not record
receivables associated with maintenance revenues without a firm,
non-cancelable order from the customer. Installation services
and training services are also recognized in service revenues
when performed. Pursuant to the requirements of
SOP 97-2,
we seek to establish appropriate vendor-specific objective
evidence (VSOE) of the fair value for all service
offerings. VSOE of fair value is determined based on the price
charged when the same element is sold separately and based on
the prices at which our customers have renewed their customer
support and maintenance. For elements that are not yet being
sold separately, the price established by management, if it is
probable that the price, once established, will not change
before the separate introduction of the element into the
marketplace is used to measure VSOE of fair value for that
element.
Incentives Customer incentive programs that
include consideration, primarily rebates/credits to be used
against future product purchases and certain volume discounts,
have been recorded as a reduction of revenue when offered.
Multiple Element Arrangements Certain
customer transactions may include multiple deliverables based on
the bundling of equipment, software and services. When a
multiple-element arrangement exists, the fee from the
arrangement should be allocated to the various deliverables, to
the extent appropriate, so that the proper amount can be
recognized as revenue as each element is delivered. Based on the
composition of the arrangement, we analyze the provisions of
EITF 00-21,
SOP 97-2
and
SOP 81-1
to determine which model should be applied towards accounting
for the multiple-element arrangement. If the arrangement
includes a combination of elements that fall within different
applicable guidance, we follow the provisions of the hierarchal
literature to separate those elements from each other and apply
the relevant guidance to each.
For multiple element arrangements that include software or have
a software-related element attached that is more than incidental
but that does not involve significant production, modification
or customization, we apply the provisions of
SOP 97-2
and, where applicable,
EITF 03-05,
Applicability of AICPA Statement of Position
97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software. If the arrangement includes
multiple elements, the fee should be allocated to the various
elements based on VSOE of fair value. If
56
sufficient VSOE of fair value does not exist for the allocation
of revenue to all the various elements in a multiple element
arrangement, all revenue from the arrangement is deferred until
the earlier of the point at which such sufficient VSOE is
established or all elements within the arrangement are
delivered. If VSOE of fair value exists for all undelivered
elements, but does not exist for one or more delivered elements,
the arrangement consideration should be allocated to the various
elements of the arrangement using the residual method of
accounting as allowed by
SOP 98-9.
Under the residual method, the amount of the arrangement
consideration allocated to the delivered elements is equal to
the total arrangement consideration less the aggregate fair
value of the undelivered elements. Using this method, any
potential discount on the arrangement is allocated entirely to
the delivered elements, which ensures that the amount of revenue
recognized at any point in time is not overstated. Under the
residual method, if VSOE exists for the undelivered element,
generally PCS, the fair value of the undelivered element is
deferred and recognized ratably over the term of the PCS
contract, and the remaining portion of the arrangement is
recognized as revenue upon delivery, which generally occurs upon
delivery of the product or implementation of the system. License
revenue allocated to software products, in certain
circumstances, is recognized upon delivery of the software
products.
Similarly, for multiple element arrangements that include
software or have a software-related element attached that is
more than incidental and does involve significant production,
modification or customization, we apply the provisions of
SOP 81-1.
Revenue in an arrangement with
SOP 81-1
software and the related production, modification or
customization services are recognized using the contract
accounting guidelines provided in this provision by applying the
percentage of completion or completed contract method. For
certain of our software license arrangements where professional
services are being provided and are deemed to be essential to
the functionality or are for significant production,
modification, or customization of the software product, both the
software and the associated professional service revenue are
recognized in accordance with the provisions of Accounting
Research Bulletin No. 45, Long-Term
Construction-Type Contracts (ARB 45) and
SOP 81-1.
Many of these software and professional services arrangements
are recognized using the completed-contract method as the
Company does not have the ability to reasonably estimate
contract costs at the inception of the contracts. Under the
completed-contract method, revenue is recognized when the
contract is complete, and all direct costs and related revenues
are deferred until that time. We recognize software license and
associated professional services revenue for our mobile
workforce management software license product installations
using the percentage-of-completion method of accounting as we
believe that our estimates of costs to complete and extent of
progress toward completion of such contracts are reliable. The
entire amount of an estimated loss on a contract is accrued at
the time a loss on a contract is projected. Actual profits and
losses may differ from these estimates.
For all other multiple element arrangements we follow the
guidance of
EITF 00-21.
Under this method, the deliverables are separated into more than
one unit of accounts when the following criteria are met:
(i) the delivered element(s) have value to the customer on
a stand-alone basis, (ii) objective and reliable evidence
of fair value exists for the undelivered element(s), and
(iii) delivery of the undelivered element(s) is probable
and substantially in the control of the Company. Revenue is then
allocated to each unit of accounting based on the relative fair
value of each accounting unit or by using the residual method if
objective evidence of fair value does not exist for the
delivered element(s). If any of the criteria are not met,
revenue is deferred until the criteria are met or the last
element has been delivered.
ARRIS employs the sell-in method of accounting for revenue when
using a Value Added Reseller (VAR) as our channel to market.
Because product returns are restricted, revenue under this
method is recognized at the time of shipment to the VAR provided
all criteria for recognition are met
ARRIS deferred revenue and deferred costs related to
shipments made to customers whereby the customer has the right
of return in addition to deferrals related to various customer
service agreements are summarized below (in thousands):
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2008
|
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|
2007
|
|
|
Increase
|
|
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Deferred revenue
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|
$
|
47,131
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|
$
|
8,588
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|
$
|
38,543
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|
Deferred cost
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14,488
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|
1,542
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|
12,946
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57
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b)
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Goodwill
and Intangible Assets
|
Goodwill
Goodwill relates to the excess of cost over the fair value of
net assets resulting from an acquisition. On an annual basis,
our goodwill is tested for impairment, or more frequently if
events or changes in circumstances indicate that the asset might
be impaired, in which case a test would be performed sooner. For
purposes of impairment testing, ARRIS has determined that its
reporting units are the reportable segments based on our
organizational structure and the financial information that is
provided to and reviewed by segment management. In accordance
with SFAS 142, Goodwill and Other Intangible Assets,
the impairment testing is a two-step process. The first step
is to identify a potential impairment by comparing the fair
value of a reporting unit with its carrying amount. We concluded
that a taxable transaction approach should be used in accordance
EITF 02-13,
Deferred Income Tax Considerations in Applying the Goodwill
Impairment Test in FASB Statement No. 142, Goodwill and
Other Intangible Assets. ARRIS determined the fair value of
each of its reporting units using a combination of an income
approach using discounted cash flow analysis and a market
approach comparing actual market transactions of businesses that
are similar to those of ARRIS. In addition, market multiples of
publicly traded guideline companies were also considered. The
discounted cash flow analysis requires us to make various
judgmental assumptions, including assumptions about future cash
flows, growth rates and weighted average cost of capital
(discount rate). The assumptions about future cash flows and
growth rates are based on the current and long-term business
plans of each reporting unit. Discount rate assumptions are
based on an assessment of the risk inherent in the future cash
flows of the respective reporting units. If necessary, the
second step of the goodwill impairment test compares the implied
fair value of the reporting units goodwill with the
carrying amount of that goodwill. The implied fair value of
goodwill is determined in a similar manner as the determination
of goodwill recognized in a business combination.
The annual tests were performed in the fourth quarters of 2008,
2007, and 2006, with a test date of October 1. No
impairment was indicated as a result of the reviews in 2007 and
2006. Virtually all of the goodwill associated with the ATS and
MCS reporting units arose as part of the December 14, 2007
acquisition of C-COR. During the fourth quarter of 2008 testing,
as a result of the current and continuing decline in the market
value of communications equipment suppliers in general, coupled
with the volatile macroeconomic conditions, ARRIS determined
that the fair values of the ATS and MCS reporting units were
less than their respective carrying values. As a result, we
proceeded to step two of the goodwill impairment test to
determine the implied fair value of the ATS and MCS goodwill.
ARRIS concluded that the implied fair value of the goodwill was
less than its carrying value and recorded an impairment charge
as of October 1, 2008. During the fourth quarter of 2008,
we experienced a continued decline in market conditions,
especially as a result of the housing market, with respect to
our ATS reporting unit. As a result, the Company determined that
it was possible that the future cash flows and growth rates for
the ATS reporting unit had declined since the impairment test
date of October 1, 2008. Further, the Company considered
whether the continued volatility in capital markets between
October 1, 2008 and December 31, 2008 could result in
a change in the discount rate, potentially resulting in further
impairment. As a result of these factors, we performed an
interim test as of December 31, 2008 for the ATS and MCS
reporting units. We did not perform an interim test for the BCS
reporting unit as we did not believe that an event occurred or
circumstances changed that would more likely than not reduce the
fair value of the reporting unit below its carrying amount. We
concluded that our remaining ATS and MCS goodwill was further
impaired and recorded an incremental goodwill impairment charge.
ARRIS recognized a total noncash goodwill impairment loss of
$128.9 million and $80.4 million in the ATS and MCS
reporting units, respectively, during the fourth quarter of
2008. This expense has been recorded in the goodwill impairment
line on the consolidated statement of operations. The fair value
of the BCS reporting unit exceeded its carrying value, and
therefore, no impairment charge was necessary. As part of
managements review process of the fair values assumed for
the reporting units, we reconciled the combined fair value to
the market capitalization of ARRIS and concluded that the fair
values used were reasonable.
58
The following table summarizes the critical assumptions that
were used in estimating fair value for our impairment tests:
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|
|
|
|
|
|
ATS
|
|
BCS
|
|
MCS
|
|
Weighted average cost of capital
|
|
17%
|
|
15%
|
|
20%
|
Comparable companies used for guideline method
|
|
ADC Telecommunications, Amphenol Corp., BigBand Networks, CIENA,
CommScope, CPI International, Harmonic, JDS Uniphase, Sycamore
Networks, Westell Technologies
|
|
3Com Corp., ADC Telecommunications, Commscope, Harmonic, Sonus
Network, Tellabs, Cisco Systems
|
|
BigBand Networks, Harmonic, OpenTV, SeaChange International, TII
Network Technologies, Concurrent Computer
|
Assumptions and estimates about future cash flows and discount
rates are complex and often subjective. They can be affected by
a variety of factors, including external factors such as
industry and economic trends, and internal factors such as
changes in our business strategy and our internal forecasts.
Although ARRIS believes the assumptions and estimates made are
reasonable and appropriate, different assumptions and estimates
could materially impact the reported financial results. For
example, an increase of 1% in the estimated discount rate could
have resulted in additional impairment charges of approximately
$14 million and $13 million for ATS and MCS,
respectively.
Following is a summary of the Companys goodwill (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Gross
|
|
|
Impairment
|
|
|
Net
|
|
|
Goodwill by Reporting Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
ATS
|
|
$
|
167,250
|
|
|
$
|
(128,884
|
)
|
|
$
|
38,366
|
|
BCS
|
|
|
150,569
|
|
|
|
|
|
|
|
150,569
|
|
MCS
|
|
|
123,162
|
|
|
|
(80,413
|
)
|
|
|
42,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
440,981
|
|
|
$
|
(209,297
|
)
|
|
$
|
231,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets
For reasons similar to those described above, we also conducted
a review of our long-lived assets, including amortizable
intangible assets, in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-lived
Assets. This review did not indicate that an impairment
existed as of December 31, 2008 or 2007.
Separable intangible assets that are not deemed to have an
indefinite life are amortized over their useful lives. Our
intangible assets have an amortization period of 6 months
to eight years. The gross carrying amount and accumulated
amortization of the intangible assets, other than goodwill, as
of December 31, 2008 and December 31, 2007 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Intangible Assets by Reporting Units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATS
|
|
$
|
164,242
|
|
|
$
|
(25,858
|
)
|
|
$
|
138,384
|
|
|
$
|
164,339
|
|
|
$
|
(1,086
|
)
|
|
$
|
163,253
|
|
BCS
|
|
|
106,429
|
|
|
|
(106,429
|
)
|
|
|
|
|
|
|
106,429
|
|
|
|
(106,429
|
)
|
|
|
|
|
MCS
|
|
|
110,039
|
|
|
|
(21,075
|
)
|
|
|
88,964
|
|
|
|
108,292
|
|
|
|
(1,652
|
)
|
|
|
106,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
380,710
|
|
|
$
|
(153,362
|
)
|
|
$
|
227,348
|
|
|
$
|
379,060
|
|
|
$
|
(109,167
|
)
|
|
$
|
269,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
c)
|
Allowance
for Doubtful Accounts and Sales Returns
|
We establish a reserve for doubtful accounts based upon our
historical experience and leading market indicators in
collecting accounts receivable. A majority of our accounts
receivable are from a few large cable system operators, either
with investment rated debt outstanding or with substantial
financial resources, and have very favorable payment histories.
Unlike businesses with relatively small individual accounts
receivable from a large number of customers, if we were to have
a collection problem with one of our major customers, it is
possible the reserve that we have established will not be
sufficient. We calculate our reserve for uncollectible accounts
using a model that considers customer payment history, recent
customer press releases, bankruptcy filings, if any,
Dun & Bradstreet reports, and financial statement
reviews. The Companys calculation is reviewed by
management to assess whether additional research is necessary,
and if complete, whether there needs to be an adjustment to the
reserve for uncollectible accounts. The reserve is established
through a charge to the provision and represents amounts of
current and past due customer receivable balances of which
management deems a loss to be both probable and estimable. In
the past several years, two of our major customers encountered
significant financial difficulty due to the industry downturn
and tightening financial markets. At the end of 2008, we believe
that we have a major customer, Charter Communications that is in
a financially distressed position. The amount owed to the
Company by Charter at year end 2008 was not material. Further,
Charter has announced that it has reached an agreement with its
bondholders by which it would restructure its balance sheet
through a pre-packaged Chapter 11 bankruptcy on or before
April 1, 2009. As part of the restructuring, Charter has
publically stated that it intends to continue to pay trade
creditors in the normal course.
In the event that we are not able to predict changes in the
financial condition of our customers, resulting in an unexpected
problem with collectability of receivables and our actual bad
debts differ from estimates, or we adjust estimates in future
periods, our established allowances may be insufficient and we
may be required to record additional allowances. Alternatively,
if we provided more allowances than are ultimately required, we
may reverse a portion of such provisions in future periods based
on our actual collection experience. In the event we adjust our
allowance estimates, it could materially affect our operating
results and financial position.
We also establish a reserve for sales returns and allowances.
The reserve is an estimate of the impact of potential returns
based upon historic trends.
Our reserves for uncollectible accounts and sales returns and
allowances were $4.0 million and $2.8 million as of
December 31, 2008 and 2007, respectively.
Inventory is reflected in our financial statements at the lower
of average cost, approximating
first-in,
first-out, or market value.
The table below sets forth inventory balances at December 31 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Gross inventory
|
|
$
|
148,563
|
|
|
$
|
144,640
|
|
Reserves
|
|
|
(18,811
|
)
|
|
|
(12,848
|
)
|
|
|
|
|
|
|
|
|
|
Net inventory
|
|
$
|
129,752
|
|
|
$
|
131,792
|
|
|
|
|
|
|
|
|
|
|
Net inventory at the end of 2007 included approximately
$28.2 million acquired at fair value as part of the
C-COR
acquisition.
We continuously evaluate future usage of product and where
supply exceeds demand, we may establish a reserve. In reviewing
inventory valuations, we also review for obsolete items. This
evaluation requires us to estimate future usage, which, in an
industry where rapid technological changes and significant
variations in capital spending by system operators are
prevalent, is difficult. As a result, to the extent that we have
overestimated future usage of inventory, the value of that
inventory on our financial statements may be overstated. When we
believe that we have overestimated our future usage, we adjust
for that overstatement through an increase in cost of sales in
the period identified as the inventory is written down to its
net realizable value. Inherent in our valuations are certain
60
management judgments and estimates, including markdowns,
shrinkage, manufacturing schedules, possible alternative uses
and future sales forecasts, which can significantly impact
ending inventory valuation and gross margin. The methodologies
utilized by the Company in its application of the above methods
are consistent for all periods presented.
The Company conducts annual physical inventory counts at all
ARRIS locations to confirm the existence of its inventory.
We offer warranties of various lengths to our customers
depending on product specifics and agreement terms with our
customers. We provide, by a current charge to cost of sales in
the period in which the related revenue is recognized, an
estimate of future warranty obligations. The estimate is based
upon historical experience. The embedded product base, failure
rates, cost to repair and warranty periods are used as a basis
for calculating the estimate. We also provide, via a charge to
current cost of sales, estimated expected costs associated with
non-recurring product failures. In the event of a significant
non-recurring product failure, the amount of the reserve may not
be sufficient. In the event that our historical experience of
product failure rates and costs of correcting product failures
change, our estimates relating to probable losses resulting from
a significant non-recurring product failure changes, or to the
extent that other non-recurring warranty claims occur in the
future, we may be required to record additional warranty
reserves. Alternatively, if we provided more reserves than we
needed, we may reverse a portion of such provisions in future
periods. In the event we change our warranty reserve estimates,
the resulting charge against future cost of sales or reversal of
previously recorded charges may materially affect our operating
results and financial position. Information regarding the
changes in ARRIS aggregate product warranty liabilities
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
January 1,
|
|
$
|
14,370
|
|
|
$
|
8,234
|
|
Accruals related to warranties (including changes in estimates)
|
|
|
5,445
|
|
|
|
4,961
|
|
Settlements made (in cash or in kind)
|
|
|
(8,769
|
)
|
|
|
(4,675
|
)
|
C-COR warranty reserves acquired, including purchase price
adjustments
|
|
|
(862
|
)
|
|
|
5,850
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
10,184
|
|
|
$
|
14,370
|
|
|
|
|
|
|
|
|
|
|
The year-over-year change in the reserve balance reflects both
increased reserves and usage of our on-going warranty claims. It
also reflects the
additions, usages and adjustments attributable to non-recurring
product issues. We review and update our estimates, with respect
to the non-recurring product issues on a routine basis.
|
|
f)
|
Stock-Based
Compensation
|
SFAS No. 123R, Share-Based Payment requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements as
compensation cost based on the fair value on the date of grant.
The Company determines fair value of such awards using the
Black-Scholes option pricing model. The Black-Scholes option
pricing model incorporates certain assumptions, such as
risk-free interest rate, expected volatility, and expected life
of options, in order to arrive at a fair value estimate. Because
changes in assumptions can materially affect the fair value
estimate, the existing model may not provide a reliable single
measure of the fair value of our share-based payment awards.
Management will continue to assess the assumptions and
methodologies used to calculate estimated fair value of
share-based compensation. Circumstances may change and
additional data may become available over time, which could
result in changes to these assumptions and methodologies and
thereby materially impact our fair value determination. If
factors change and we employ different assumption in the
application of Statement 123R in future periods, the
compensation expense that we record under Statement 123R may
differ significantly from what we have recorded in the current
period.
61
Forward-Looking
Statements
Certain information and statements contained in this
Managements Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this report,
including statements using terms such as may,
expect, anticipate, intend,
estimate, believe, plan,
continue, could be, or similar
variations or the negative thereof, constitute forward-looking
statements with respect to the financial condition, results of
operations, and business of ARRIS, including statements that are
based on current expectations, estimates, forecasts, and
projections about the markets in which we operate and
managements beliefs and assumptions regarding these
markets. These and any other statements in this document that
are not statements about historical facts are
forward-looking statements. We caution investors
that forward-looking statements made by us are not guarantees of
future performance and that a variety of factors could cause our
actual results to differ materially from the anticipated results
or other expectations expressed in our forward-looking
statements. Important factors that could cause results or events
to differ from current expectations are described in the risk
factors set forth in Item 1A, Risk Factors.
These factors are not intended to be an all-encompassing list of
risks and uncertainties that may affect the operations,
performance, development and results of our business. In
providing forward-looking statements, ARRIS expressly disclaims
any obligation to update publicly or otherwise these statements,
whether as a result of new information, future events or
otherwise except to the extent required by law.
|
|
Item 7A.
|
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. However, it is possible that a
security will fail to reprice at the scheduled auction date. In
these instances, we are entitled to receive a penalty interest
rate above market and the auction rate security will be held
until the next scheduled auction date. At December 31, 2007
ARRIS had $30.3 million invested in auction rate
securities. During 2008, we successfully liquidated, at par, a
net of $25.3 million of the auction rate securities.
However, one auction rate security of approximately
$5.0 million has continued to fail at auction, resulting in
ARRIS continuing to hold this security. Due to the current
market conditions and the failure of the auction rate security
to reprice, beginning in the second quarter of 2008, we recorded
changes in the fair value of the instrument as an impairment
charge in the Statement of Operations in the Gain (Loss) on
Investment line. This particular security was held as of
December 31, 2008 as a long-term investment with a fair
market value of $4.9 million (including the fair value of
the put option). ARRIS may not be able to liquidate this
security until a successful auction occurs, or alternatively, we
have been provided the option to sell the security to a major
financial institution at par on June 30, 2010. During the
year ended December 31, 2008, we recorded changes in fair
value of $0.1 million.
A significant portion of our products are manufactured or
assembled in China, Mexico, Ireland, 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 is the predominant currency of the customers
who are billed in their local currency. Taking into account the
effects of foreign currency fluctuations of the euro versus the
dollar, a hypothetical 10% weakening of the U.S. dollar (as
of December 31,
62
2008) would provide a gain on foreign currency of
approximately $1.9 million. Conversely, a hypothetical 10%
strengthening of the U.S. dollar would provide a loss on
foreign currency of approximately $1.9 million. As of
December 31, 2008, we had no material contracts, other than
accounts receivable, denominated in foreign currencies.
We regularly review our forecasted sales in euros and enter into
option contracts when appropriate. In the event that we
determine a hedge to be ineffective prior to expirations
earnings may be effected by the change in the hedge value. As of
December 31, 2008, we had option collars outstanding with
notional amounts totaling 12.0 million euros, which mature
through 2009. As of December 31, 2008, we had forward
contracts outstanding with notional amounts totaling
16.3 million euros, which mature through 2009. The fair
value of these option collars and forward contracts was
approximately $0.4 million.
|
|
Item 8.
|
Consolidated
Financial Statements and Supplementary Data
|
The report of our independent registered public accounting firm
and consolidated financial statements and notes thereto for the
Company are included in this Report and are listed in the Index
to Consolidated Financial Statements.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
N/A
|
|
Item 9A.
|
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
Rule 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.
|
|
Item 9B.
|
Other
Information
|
N/A
63
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
ARRIS management is responsible for establishing and
maintaining an adequate system of internal control over
financial reporting as required by the Sarbanes-Oxley Act of
2002 and as defined in Exchange Act
Rule 13a-15(f).
A control system can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Under managements supervision, an evaluation of the design
and effectiveness of ARRIS internal control over financial
reporting was conducted based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, management concluded that
ARRIS internal control over financial reporting was
effective as of December 31, 2008.
The effectiveness of ARRIS internal control over financial
reporting as of December 31, 2008 has been audited by
Ernst & Young LLP, an independent registered public
accounting firm retained as auditors of ARRIS Group, Inc.s
financial statement, as stated in their report which is included
herein.
/s/ RJ STANZIONE
Robert J. Stanzione
Chief Executive Officer, Chairman
/s/ DAVID B. POTTS
David B. Potts
Executive Vice President, Chief Financial Officer,
Chief Accounting Officer,
and Chief Information Officer
February 26, 2009
64
The Board of Directors and Shareholders
ARRIS Group, Inc.
We have audited ARRIS Group, Inc. and subsidiaries
internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). ARRIS Group, Inc.s
management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting
included in the accompanying Managements Report On
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, ARRIS Group, Inc. and subsidiaries maintained,
in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on the
COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of ARRIS Group, Inc. as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in period ended
December 31, 2008, and our report dated February 26,
2009 expressed an unqualified opinion thereon.
Atlanta, Georgia
February 26, 2009
65
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
66
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
ARRIS Group, Inc.
We have audited the accompanying consolidated balance sheets of
ARRIS Group, Inc. and subsidiaries as of December 31, 2008
and 2007 and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2008. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of ARRIS management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of ARRIS Group, Inc. and
subsidiaries at December 31, 2008 and 2007, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Notes 3 and 15 of the Notes to the
Consolidated Financial Statements, the Company adopted Statement
of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, in 2006, and adopted FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109, Accounting for Income Taxes, in 2007 and
Statement of Financial Accounting Standards No. 157,
Fair Value Measurements, in 2008.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of ARRIS Group, Inc. and subsidiaries
internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 26, 2009 expressed an
unqualified opinion thereon.
Atlanta, Georgia
February 26, 2009
67
ARRIS
GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
409,894
|
|
|
$
|
323,797
|
|
Short-term investments, at fair value
|
|
|
17,371
|
|
|
|
68,011
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short-term investments
|
|
|
427,265
|
|
|
|
391,808
|
|
Restricted cash
|
|
|
5,673
|
|
|
|
6,977
|
|
Accounts receivable (net of allowances for doubtful accounts of
$3,988 in 2008 and $2,826 in 2007)
|
|
|
159,443
|
|
|
|
166,953
|
|
Other receivables
|
|
|
4,749
|
|
|
|
4,330
|
|
Inventories (net of reserves of $18,811 in 2008 and $12,848 in
2007)
|
|
|
129,752
|
|
|
|
131,792
|
|
Prepaids
|
|
|
8,004
|
|
|
|
5,856
|
|
Current deferred income tax assets
|
|
|
44,004
|
|
|
|
44,939
|
|
Other current assets
|
|
|
19,782
|
|
|
|
4,841
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
798,672
|
|
|
|
757,496
|
|
Property, plant and equipment (net of accumulated depreciation
of $100,313 in 2008 and $83,644 in 2007)
|
|
|
59,204
|
|
|
|
59,156
|
|
Goodwill
|
|
|
231,684
|
|
|
|
455,352
|
|
Intangible assets (net of accumulated amortization of $153,362
in 2008 and $109,167 in 2007)
|
|
|
227,348
|
|
|
|
269,893
|
|
Investments
|
|
|
14,681
|
|
|
|
8,592
|
|
Noncurrent deferred income tax assets
|
|
|
11,514
|
|
|
|
3,459
|
|
Other assets
|
|
|
8,294
|
|
|
|
8,001
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,351,397
|
|
|
$
|
1,561,949
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
75,863
|
|
|
$
|
58,852
|
|
Accrued compensation, benefits and related taxes
|
|
|
27,024
|
|
|
|
26,177
|
|
Accrued warranty
|
|
|
6,752
|
|
|
|
8,298
|
|
Deferred revenue
|
|
|
44,461
|
|
|
|
8,474
|
|
Current portion of long-term debt
|
|
|
146
|
|
|
|
35,305
|
|
Current deferred income tax liabilities
|
|
|
1,059
|
|
|
|
|
|
Other accrued liabilities
|
|
|
25,410
|
|
|
|
42,121
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
180,715
|
|
|
|
179,227
|
|
Long-term debt, net of current portion
|
|
|
276,137
|
|
|
|
276,765
|
|
Accrued pension
|
|
|
18,820
|
|
|
|
10,455
|
|
Noncurrent income taxes payable
|
|
|
9,607
|
|
|
|
6,322
|
|
Noncurrent deferred income tax liabilities
|
|
|
17,565
|
|
|
|
45,255
|
|
Other noncurrent liabilities
|
|
|
14,243
|
|
|
|
18,158
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
517,087
|
|
|
|
536,182
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share, 5.0 million
shares authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share, 320.0 million
shares authorized; 123.1 million and 132.4 million
shares issued and outstanding in 2008 and 2007, respectively
|
|
|
1,362
|
|
|
|
1,356
|
|
Capital in excess of par value
|
|
|
1,105,998
|
|
|
|
1,093,498
|
|
Treasury stock at cost, 13 million shares in 2008 and 51
thousand shares in 2007
|
|
|
(75,960
|
)
|
|
|
(572
|
)
|
Accumulated deficit
|
|
|
(188,562
|
)
|
|
|
(64,993
|
)
|
Unrealized gain (loss) on marketable securities
|
|
|
(274
|
)
|
|
|
20
|
|
Unfunded pension liability, including income tax impact of
$2,778 and $665 in 2008 and 2007, respectively
|
|
|
(8,070
|
)
|
|
|
(3,358
|
)
|
Cumulative translation adjustments
|
|
|
(184
|
)
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
834,310
|
|
|
|
1,025,767
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,351,397
|
|
|
$
|
1,561,949
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
68
ARRIS
GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands, except per share data)
|
|
|
Net sales
|
|
$
|
1,144,565
|
|
|
$
|
992,194
|
|
|
$
|
891,551
|
|
Cost of sales
|
|
|
751,436
|
|
|
|
718,312
|
|
|
|
639,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
393,129
|
|
|
|
273,882
|
|
|
|
252,078
|
|
Gross margin%
|
|
|
34.3
|
%
|
|
|
27.6
|
%
|
|
|
28.3
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses
|
|
|
143,997
|
|
|
|
99,879
|
|
|
|
87,203
|
|
Research and development expenses
|
|
|
112,542
|
|
|
|
71,233
|
|
|
|
66,040
|
|
Impairment of goodwill
|
|
|
209,297
|
|
|
|
|
|
|
|
|
|
Acquired in-process research and development charge
|
|
|
|
|
|
|
6,120
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
44,195
|
|
|
|
2,278
|
|
|
|
632
|
|
Restructuring charges
|
|
|
1,211
|
|
|
|
460
|
|
|
|
2,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511,242
|
|
|
|
179,970
|
|
|
|
156,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(118,113
|
)
|
|
|
93,912
|
|
|
|
95,993
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
6,740
|
|
|
|
6,614
|
|
|
|
976
|
|
Gain related to terminated acquisition, net of expenses
|
|
|
|
|
|
|
(22,835
|
)
|
|
|
|
|
Loss (gain) on investments and notes receivable
|
|
|
717
|
|
|
|
(4,596
|
)
|
|
|
29
|
|
Loss (gain) on foreign currency
|
|
|
(422
|
)
|
|
|
48
|
|
|
|
(1,360
|
)
|
Interest income
|
|
|
(7,224
|
)
|
|
|
(24,776
|
)
|
|
|
(11,174
|
)
|
Other expense (income), net
|
|
|
(1,043
|
)
|
|
|
370
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(116,881
|
)
|
|
|
139,087
|
|
|
|
107,254
|
|
Income tax expense (benefit)
|
|
|
6,258
|
|
|
|
40,951
|
|
|
|
(34,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
(123,139
|
)
|
|
|
98,136
|
|
|
|
142,066
|
|
Income from discontinued operations
|
|
|
|
|
|
|
204
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(123,139
|
)
|
|
$
|
98,340
|
|
|
$
|
142,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.99
|
)
|
|
$
|
0.89
|
|
|
$
|
1.32
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.99
|
)
|
|
$
|
0.89
|
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(0.99
|
)
|
|
$
|
0.87
|
|
|
$
|
1.30
|
|
Income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(0.99
|
)
|
|
$
|
0.87
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic
|
|
|
124,878
|
|
|
|
110,843
|
|
|
|
107,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares diluted
|
|
|
124,878
|
|
|
|
113,027
|
|
|
|
109,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
69
ARRIS
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(123,139
|
)
|
|
$
|
98,340
|
|
|
$
|
142,287
|
|
Depreciation
|
|
|
20,915
|
|
|
|
10,852
|
|
|
|
9,787
|
|
Amortization of intangible assets
|
|
|
44,195
|
|
|
|
2,278
|
|
|
|
632
|
|
Amortization of deferred finance fees
|
|
|
1,113
|
|
|
|
1,116
|
|
|
|
139
|
|
Goodwill impairment
|
|
|
209,297
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision (benefit)
|
|
|
11,846
|
|
|
|
4,405
|
|
|
|
(38,490
|
)
|
Deferred income tax related to goodwill impairment
|
|
|
(24,725
|
)
|
|
|
|
|
|
|
|
|
Stock compensation expense
|
|
|
11,277
|
|
|
|
10,903
|
|
|
|
9,423
|
|
Provision for doubtful accounts
|
|
|
819
|
|
|
|
279
|
|
|
|
(174
|
)
|
Gain related to previously written off receivables
|
|
|
|
|
|
|
(377
|
)
|
|
|
(1,573
|
)
|
Loss (gain) on disposal of fixed assets
|
|
|
14
|
|
|
|
182
|
|
|
|
(61
|
)
|
Loss (gain) on investments and notes receivable
|
|
|
717
|
|
|
|
(4,604
|
)
|
|
|
32
|
|
Income from discontinued operations
|
|
|
|
|
|
|
(204
|
)
|
|
|
(221
|
)
|
Gain related to terminated acquisition, net of expenses
|
|
|
|
|
|
|
(22,835
|
)
|
|
|
|
|
Acquired in-process research and development charge
|
|
|
|
|
|
|
6,120
|
|
|
|
|
|
Excess income tax benefits from stock-based compensation plans
|
|
|
(56
|
)
|
|
|
(9,157
|
)
|
|
|
(9,445
|
)
|
Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
8,579
|
|
|
|
(17,498
|
)
|
|
|
(32,153
|
)
|
Other receivables
|
|
|
(471
|
)
|
|
|
(1,774
|
)
|
|
|
(2,270
|
)
|
Inventories
|
|
|
4,023
|
|
|
|
(9,502
|
)
|
|
|
19,683
|
|
Accounts payable and accrued liabilities
|
|
|
38,800
|
|
|
|
(9,906
|
)
|
|
|
50,200
|
|
Other, net
|
|
|
(14,131
|
)
|
|
|
4,806
|
|
|
|
(3,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
189,073
|
|
|
|
63,424
|
|
|
|
144,241
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(109,347
|
)
|
|
|
(356,366
|
)
|
|
|
(129,475
|
)
|
Sales of short-term investments
|
|
|
155,114
|
|
|
|
412,217
|
|
|
|
96,150
|
|
Purchases of investments
|
|
|
(4,387
|
)
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(21,352
|
)
|
|
|
(15,072
|
)
|
|
|
(12,728
|
)
|
Cash proceeds from sale of property, plant, and equipment
|
|
|
250
|
|
|
|
3
|
|
|
|
212
|
|
Cash paid for acquisition, net of cash acquired
|
|
|
(10,500
|
)
|
|
|
(285,284
|
)
|
|
|
|
|
Cash paid for hedge related to terminated acquisition
|
|
|
|
|
|
|
(26,469
|
)
|
|
|
|
|
Cash proceeds from hedge related to terminated acquisition
|
|
|
|
|
|
|
38,750
|
|
|
|
|
|
Cash received related to terminated acquisition, net of payments
|
|
|
|
|
|
|
10,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
9,778
|
|
|
|
(221,667
|
)
|
|
|
(45,841
|
)
|
See accompanying notes to the consolidated financial statements.
70
ARRIS
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
$
|
49
|
|
|
$
|
14,377
|
|
|
$
|
12,266
|
|
Proceeds from issuance of debt
|
|
|
|
|
|
|
|
|
|
|
276,000
|
|
Repurchase of common stock
|
|
|
(75,960
|
)
|
|
|
|
|
|
|
|
|
Payment of debt and capital lease obligations
|
|
|
(35,864
|
)
|
|
|
(19
|
)
|
|
|
|
|
Excess income tax benefits from stock-based compensation plans
|
|
|
56
|
|
|
|
9,157
|
|
|
|
9,445
|
|
Repurchase of shares to satisfy employee tax withholdings
|
|
|
(1,035
|
)
|
|
|
(3,093
|
)
|
|
|
(2,019
|
)
|
Deferred financing costs paid
|
|
|
|
|
|
|
|
|
|
|
(7,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(112,754
|
)
|
|
|
20,422
|
|
|
|
287,932
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
86,097
|
|
|
|
(137,821
|
)
|
|
|
386,332
|
|
Cash and cash equivalents at beginning of year
|
|
|
323,797
|
|
|
|
461,618
|
|
|
|
75,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
409,894
|
|
|
$
|
323,797
|
|
|
$
|
461,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible assets acquired, excluding cash
|
|
$
|
23,108
|
|
|
$
|
11,645
|
|
|
$
|
|
|
Intangible assets acquired, including goodwill and adjustments
|
|
|
(12,608
|
)
|
|
|
582,847
|
|
|
|
|
|
Prior investment in acquired company
|
|
|
|
|
|
|
(5,973
|
)
|
|
|
|
|
Equity issued for acquisition, including fair value of assumed
stock options
|
|
|
|
|
|
|
(303,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for acquisition, net of cash acquired
|
|
$
|
10,500
|
|
|
$
|
285,284
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Landlord funded leasehold improvements
|
|
$
|
|
|
|
$
|
85
|
|
|
$
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid during the year
|
|
$
|
5,800
|
|
|
$
|
6,182
|
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid during the year
|
|
$
|
19,834
|
|
|
$
|
22,687
|
|
|
$
|
2,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
71
ARRIS
GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
(Loss) Gain on
|
|
|
Unfunded
|
|
|
Gain
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Excess of
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Marketable
|
|
|
Pension
|
|
|
(Loss) on
|
|
|
Translation
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Par Value
|
|
|
Stock
|
|
|
Deficit
|
|
|
Securities
|
|
|
Liability
|
|
|
Derivatives
|
|
|
Adjustments
|
|
|
Total
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance, January 1, 2006
|
|
$
|
1,069
|
|
|
$
|
732,405
|
|
|
$
|
|
|
|
$
|
(305,555
|
)
|
|
$
|
1,077
|
|
|
$
|
(4,618
|
)
|
|
$
|
1,523
|
|
|
$
|
(184
|
)
|
|
$
|
425,717
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,287
|
|
|
|
|
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
Unrealized gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,074
|
)
|
|
|
|
|
|
|
(2,074
|
)
|
|
|
|
|
Minimum liability on unfunded pension adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,589
|
|
|
|
|
|
Compensation under stock award plans
|
|
|
|
|
|
|
9,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,423
|
|
|
|
|
|
Income tax benefit related to exercise of stock options
|
|
|
|
|
|
|
5,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,192
|
|
|
|
|
|
Income tax benefit related to exercise of stock options in prior
years due to release of valuation allowance
|
|
|
|
|
|
|
4,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,253
|
|
|
|
|
|
Issuance of common stock and other
|
|
|
20
|
|
|
|
10,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
1,089
|
|
|
$
|
761,500
|
|
|
$
|
|
|
|
$
|
(163,268
|
)
|
|
$
|
1,297
|
|
|
$
|
(4,462
|
)
|
|
$
|
(551
|
)
|
|
$
|
(184
|
)
|
|
$
|
595,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
72
ARRIS
GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
|
|
(Loss) Gain on
|
|
|
Unfunded
|
|
|
Gain
|
|
|
Cumulative
|
|
|
|
|
|
|
Common
|
|
|
Excess of
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Marketable
|
|
|
Pension
|
|
|
(Loss) on
|
|
|
Translation
|
|
|
|
|
|
|
Stock
|
|
|
Par Value
|
|
|
Stock
|
|
|
Deficit
|
|
|
Securities
|
|
|
Liability
|
|
|
Derivatives
|
|
|
Adjustments
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance, December 31, 2006
|
|
$
|
1,089
|
|
|
$
|
761,500
|
|
|
$
|
|
|
|
$
|
(163,268
|
)
|
|
$
|
1,297
|
|
|
$
|
(4,462
|
)
|
|
$
|
(551
|
)
|
|
$
|
(184
|
)
|
|
$
|
595,421
|
|
Comprehensive income :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,340
|
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,277
|
)
|
Unrealized gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
551
|
|
|
|
|
|
|
|
551
|
|
Change in unfunded pension liability, net of $665 of income tax
impact
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,104
|
|
|
|
|
|
|
|
|
|
|
|
1,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,718
|
|
Compensation under stock award plans
|
|
|
|
|
|
|
10,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,903
|
|
Adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
Income tax benefit related to exercise of stock options
|
|
|
|
|
|
|
8,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,987
|
|
Fair value of stock options related to C-COR acquisition
|
|
|
|
|
|
|
22,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,797
|
|
Issuance of common stock related to C-COR acquisition
|
|
|
251
|
|
|
|
280,759
|
|
|
|
(572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280,438
|
|
Issuance of common stock and other
|
|
|
16
|
|
|
|
8,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
1,356
|
|
|
|
1,093,498
|
|
|
|
(572
|
)
|
|
|
(64,993
|
)
|
|
|
20
|
|
|
|
(3,358
|
)
|
|
|
|
|
|
|
(184
|
)
|
|
|
1,025,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive me (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(123,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(123,139
|
)
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(294
|
)
|
Change in unfunded pension liability, net of $2,778 of income
tax impact
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,712
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128,145
|
)
|
Service cost, interest cost, and expected return on plan assets
for Oct 1 Dec 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(310
|
)
|
Amortization of prior service cost for Oct 1 Dec 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120
|
)
|
Compensation under stock award plans
|
|
|
|
|
|
|
11,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,277
|
|
Issuance of common stock and other
|
|
|
6
|
|
|
|
1,692
|
|
|
|
572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,270
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(75,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,960
|
)
|
Income tax benefit related to exercise of stock options
|
|
|
|
|
|
|
(469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
1,362
|
|
|
$
|
1,105,998
|
|
|
$
|
(75,960
|
)
|
|
$
|
(188,562
|
)
|
|
$
|
(274
|
)
|
|
$
|
(8,070
|
)
|
|
$
|
|
|
|
$
|
(184
|
)
|
|
$
|
834,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
73
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1.
|
Organization
and Basis of Presentation
|
ARRIS Group, Inc. (together with its consolidated subsidiaries,
except as the context otherwise indicates, ARRIS or
the Company), is an international communications
technology company, headquartered in Suwanee, Georgia. ARRIS
operates in three business segments, Broadband Communications
Systems, Access, Transport and Supplies, and Media &
Communications Systems. ARRIS specializes in integrated
broadband network solutions that include products, systems and
software for content and operations management (including video
on demand, or VOD), and professional services. ARRIS is a
leading developer, manufacturer and supplier of telephony, data,
video, construction, rebuild and maintenance equipment for the
broadband communications industry. In addition, we are a leading
supplier of infrastructure products used by cable system
operators to build-out and maintain hybrid fiber-coaxial
(HFC) networks. The Company provides its customers
with products and services that enable reliable, high-speed,
two-way broadband transmission of video, telephony, and data.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned foreign and
domestic subsidiaries. Intercompany accounts and transactions
have been eliminated in consolidation.
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
Certain balance sheet and cash flow line items in prior periods
have been reclassified to conform to the current financial
statement presentation.
|
|
(d)
|
Cash,
Cash Equivalents, Short-Term Investments and Available-For-Sale
Investments
|
ARRIS cash and cash equivalents (which are highly-liquid
investments with an original maturity of three months or less)
are primarily held in money market funds that pay either taxable
or non-taxable interest. The Company holds investments
consisting of debt securities classified as available-for-sale,
which are stated at estimated fair value. These debt securities
consist primarily of commercial paper, auction rate securities,
certificates of deposits, and U.S. government agency
financial instruments. Auction rate securities, paying either
taxable or non-taxable interest, generally have long-term
maturities beyond three months but are priced and traded as
short-term instruments. However, as of December 31, 2008,
the auction rate securities were classified as long-term as
described below. These investments are on deposit with major
financial institutions.
From time to time, the Company has held certain investments in
the common stock of publicly-traded and venture-backed private
companies, which were classified as available-for-sale. As of
December 31, 2008 and 2007, the Companys holdings in
these investments were immaterial. Changes in the market value
of these securities are typically recorded in other
comprehensive income (loss) and gains or losses on related sales
of these securities are recognized in income (loss). These
securities are also subject to a periodic impairment review,
which requires significant judgment. During the years ended
December 31, 2008 and December 31, 2007, the Company
recognized (gains)/losses of approximately $717 thousand and
$(4.6) million, respectively, related to sales of our
available-for-sale investments. As of December 31, 2008 and
2007, ARRIS had unrealized gains/ (losses) related to
available-for-sale securities of approximately $(274) thousand
and $20 thousand, respectively, included in comprehensive income
(loss).
74
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has a deferred compensation plan, which was
available to certain current and former officers and key
executives of C-COR. During 2008, this plan was merged into a
new non-qualified deferred compensation plan which is also
available to key executives of the Company. Employee
compensation deferrals and matching contributions are held in a
rabbi trust, and are accounted for in accordance with
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. A rabbi trust is a funding
vehicle used to protect the deferred compensation from various
events (but not from bankruptcy or insolvency).
Additionally, ARRIS previously offered a deferred compensation
arrangement, which was available to certain employees. 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.
The Company also has a deferred retirement salary plan, which
was limited to certain current or former officers of C-COR.
ARRIS holds an investment to cover its liability, and accounts
for the investment in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities.
Inventories are stated at the lower of average cost,
approximating
first-in,
first-out, or market. The cost of
work-in-process
and finished goods is comprised of material, labor, and overhead.
ARRIS generates revenue as a result of varying activities,
including the delivery of stand-alone equipment, custom design
and installation services, and bundled sales arrangements
inclusive of equipment, software and services. The revenue from
these activities is recognized in accordance with applicable
accounting guidance that includes but is not limited to Staff
Accounting Bulletin No. 101
(SAB 101), Revenue Recognition in Financial
Statements, Staff Accounting Bulletin No. 104
(SAB 104), Revenue Recognition, AICPA
Statement of Position
No. 97-2,
Software Revenue Recognition
(SOP 97-2),
AICPA Statement of Position
81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
(SOP 81-1),
EITF
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21),
SOP No. 98-9,
Software Revenue Recognition, With Respect to Certain
Transactions
(SOP 98-9),
EITF 03-05,
Applicability of AICPA Statement of Position
97-2 to
Non-Software Deliverables in an Arrangement containing
More-Than-Incidental Software,
(EITF 03-05),
Accounting Research Bulletin No. 45, Long-Term
Construction-Type Contracts (ARB 45),
EITF 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(EITF 01-9),
and related interpretations.
Revenue is recognized when all of the following criteria have
been met:
|
|
|
|
|
When persuasive evidence of an arrangement
exists. Contracts and customer purchase orders
are used to determine the existence of an arrangement.
|
|
|
|
Delivery has occurred. Shipping documents,
proof of delivery and customer acceptance (when applicable) are
used to verify delivery.
|
|
|
|
The fee is fixed or determinable. Pricing is considered
fixed and determinable at the execution of a customer
arrangement, based on specific products and quantities to be
delivered at specific prices. This determination includes a
review of the payment terms associated with the transaction and
whether the sales price is subject to refund or adjustment or
future discounts.
|
|
|
|
Collectability is reasonably assured. We assess the
ability to collect from our customers based on a number of
factors that include information supplied by credit agencies,
analyzing customer accounts, reviewing payment history and
consulting bank references. Should we have a circumstance arise
where a customer is deemed not creditworthy, all revenue related
to the transaction will be deferred until such time that payment
is received and all other criteria to allow us to recognize
revenue have been met.
|
75
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue is deferred if any of the above revenue recognition
criteria are not met as well as when certain circumstances exist
for any of our products or services, including, but not limited
to:
|
|
|
|
|
When undelivered products or services that are essential to the
functionality of the delivered product exist, revenue is
deferred until such undelivered products or services are
delivered as the customer would not have full use of the
delivered elements.
|
|
|
|
When we dont have acceptance that is required.
|
|
|
|
When trade-in rights are granted at the time of sale, that
portion of the sale is deferred until the trade-in right is
exercised or the right expires. In determining the deferral
amount, management estimates the expected trade-in rate and
future value of the product upon trade-in. These factors are
periodically reviewed and updated by management, and the updates
may result in either an increase or decrease in the deferral.
|
Equipment We provide cable system operators
with equipment that can be placed within various stages of a
broadband cable system that allows for the delivery of cable
telephony, video and high-speed data as well as outside plant
construction and maintenance equipment. For equipment sales,
revenue recognition is generally established when the products
have been shipped, risk of loss has transferred, objective
evidence exists that the product has been accepted, and no
significant obligations remain relative to the transaction.
Additionally, based on historical experience, ARRIS has
established reliable estimates related to sales returns and
other allowances for discounts. These estimates are recorded as
a reduction to revenue at the time the revenue is initially
recorded.
Software We sell internally developed
software as well as software developed by outside third parties
that does not require significant production, modification or
customization. We recognize software and any associated system
product revenue where software is more than an incidental
component, in accordance with
SOP 97-2,
as amended by
SOP No. 98-9,
Software Revenue Recognition, With Respect to Certain
Transactions. Our products that contain more than incidental
software and are accounted for under
SOP 97-2:
CMTS, ARRIS Spectrum Analyzer (ASA), D5, UCTS,
Commercial Services Aggregator (CSA) 9000, CXM
Gateway, Video On Demand (VOD), and Advertising
Insertion.
Services Service revenue consists of customer
support and maintenance, installation, training,
on-site
support, network design and inside plant activities. A number of
our products are sold in combination with customer support and
maintenance services, which consist of software updates and
product support. Software updates provide customers with rights
to unspecified software updates that we choose to develop and to
maintenance releases and patches that we choose to release
during the period of the support period. Product support
services include telephone support, remote diagnostics, email
and web access, access to
on-site
technical support personnel and repair or replacement of
hardware in the event of damage or failure during the term of
the support period. Maintenance and support service fees are
generally billed and collected in advance of the associated
maintenance contract term. Maintenance and support service fees
collected are recorded as deferred revenue and recognized
ratably under the straight-line method over the term of the
contract, which is generally one year. We do not record
receivables associated with maintenance revenues without a firm,
non-cancelable order from the customer. Installation services
and training services are also recognized in service revenues
when performed. Pursuant to the requirements of
SOP 97-2,
we seek to establish appropriate vendor-specific objective
evidence (VSOE) of the fair value for all service
offerings. VSOE of fair value is determined based on the price
charged when the same element is sold separately and based on
the prices at which our customers have renewed their customer
support and maintenance. For elements that are not yet being
sold separately, the price established by management, if it is
probable that the price, once established, will not change
before the separate introduction of the element into the
marketplace is used to measure VSOE of fair value for that
element.
Incentives Customer incentive programs that
include consideration, primarily rebates/credits to be used
against future product purchases and certain volume discounts,
have been recorded as a reduction of revenue when offered.
Multiple Element Arrangements Certain
customer transactions may include multiple deliverables based on
the bundling of equipment, software and services. When a
multiple-element arrangement exists, the fee from the
76
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
arrangement should be allocated to the various deliverables, to
the extent appropriate, so that the proper amount can be
recognized as revenue as each element is delivered. Based on the
composition of the arrangement, we analyze the provisions of
EITF 00-21,
SOP 97-2
and
SOP 81-1
to determine which model should be applied towards accounting
for the multiple-element arrangement. If the arrangement
includes a combination of elements that fall within different
applicable guidance, we follow the provisions of the hierarchal
literature to separate those elements from each other and apply
the relevant guidance to each.
For multiple element arrangements that include software or have
a software-related element attached that is more than incidental
but that does not involve significant production, modification
or customization, we apply the provisions of
SOP 97-2
and, where applicable,
EITF 03-05,
Applicability of AICPA Statement of Position
97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software. If the arrangement includes
multiple elements, the fee should be allocated to the various
elements based on VSOE of fair value. If sufficient VSOE of fair
value does not exist for the allocation of revenue to all the
various elements in a multiple element arrangement, all revenue
from the arrangement is deferred until the earlier of the point
at which such sufficient VSOE is established or all elements
within the arrangement are delivered. If VSOE of fair value
exists for all undelivered elements, but does not exist for one
or more delivered elements, the arrangement consideration should
be allocated to the various elements of the arrangement using
the residual method of accounting as allowed by
SOP 98-9.
Under the residual method, the amount of the arrangement
consideration allocated to the delivered elements is equal to
the total arrangement consideration less the aggregate fair
value of the undelivered elements. Using this method, any
potential discount on the arrangement is allocated entirely to
the delivered elements, which ensures that the amount of revenue
recognized at any point in time is not overstated. Under the
residual method, if VSOE exists for the undelivered element,
generally PCS, the fair value of the undelivered element is
deferred and recognized ratably over the term of the PCS
contract, and the remaining portion of the arrangement is
recognized as revenue upon delivery, which generally occurs upon
delivery of the product or implementation of the system. License
revenue allocated to software products, in certain
circumstances, is recognized upon delivery of the software
products.
Similarly, for multiple element arrangements that include
software or have a software-related element attached that is
more than incidental and does involve significant production,
modification or customization, we apply the provisions of
SOP 81-1.
Revenue in an arrangement with
SOP 81-1
software and the related production, modification or
customization services are recognized using the contract
accounting guidelines provided in this provision by applying the
percentage of completion or completed contract method. For
certain of our software license arrangements where professional
services are being provided and are deemed to be essential to
the functionality or are for significant production,
modification, or customization of the software product, both the
software and the associated professional service revenue are
recognized in accordance with the provisions of Accounting
Research Bulletin No. 45, Long-Term
Construction-Type Contracts (ARB 45) and
SOP 81-1.
Many of these software and professional services arrangements
are recognized using the completed-contract method as the
Company does not have the ability to reasonably estimate
contract costs at the inception of the contracts. Under the
completed-contract method, revenue is recognized when the
contract is complete, and all direct costs and related revenues
are deferred until that time. We recognize software license and
associated professional services revenue for our mobile
workforce management software license product installations
using the percentage-of-completion method of accounting as we
believe that our estimates of costs to complete and extent of
progress toward completion of such contracts are reliable. The
entire amount of an estimated loss on a contract is accrued at
the time a loss on a contract is projected. Actual profits and
losses may differ from these estimates.
For all other multiple element arrangements we follow the
guidance of
EITF 00-21.
Under this method, the deliverables are separated into more than
one unit of accounts when the following criteria are met:
(i) the delivered element(s) have value to the customer on
a stand-alone basis, (ii) objective and reliable evidence
of fair value exists for the undelivered element(s), and
(iii) delivery of the undelivered element(s) is probable
and substantially in the control of the Company. Revenue is then
allocated to each unit of accounting based on the relative fair
value of each accounting unit or by using the residual method if
objective evidence of fair value does not exist for the
delivered
77
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
element(s). If any of the criteria are not met, revenue is
deferred until the criteria are met or the last element has been
delivered.
ARRIS employs the sell-in method of accounting for revenue when
using a Value Added Reseller (VAR) as our channel to market.
Because product returns are restricted, revenue under this
method is recognized at the time of shipment to the VAR provided
all criteria for recognition are met
ARRIS deferred revenue and deferred costs related to
shipments made to customers whereby the customer has the right
of return in addition to deferrals related to various customer
service agreements are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
Deferred revenue
|
|
$
|
47,131
|
|
|
$
|
8,588
|
|
|
$
|
38,543
|
|
Deferred cost
|
|
|
14,488
|
|
|
|
1,542
|
|
|
|
12,946
|
|
|
|
(g)
|
Shipping
and Handling Fees
|
Shipping and handling costs for the years ended
December 31, 2008, 2007, and 2006 were approximately
$4.6 million, $5.4 million and $5.8 million,
respectively, and are classified in net sales and cost of sales.
|
|
(h)
|
Depreciation
of Property, Plant and Equipment
|
The Company provides for depreciation of property, plant and
equipment on the straight-line basis over estimated useful lives
of 10 to 40 years for buildings and improvements, 2 to
10 years for machinery and equipment, and the shorter of
the term of the lease or useful life for leasehold improvements.
Included in depreciation expense is the amortization of landlord
funded tenant improvements which amounted to $0.4 million
in 2008 and $0.4 million in 2007. Depreciation expense,
including amortization of capital leases, for the years ended
December 31, 2008, 2007, and 2006 was approximately
$20.9 million, $10.9 million and $9.8 million
respectively.
|
|
(i)
|
Goodwill
and Long-Lived Assets
|
Goodwill relates to the excess of cost over the fair value of
net assets resulting from an acquisition. On an annual basis,
our goodwill is tested for impairment, or more frequently if
events or changes in circumstances indicate that the asset is
more likely than not impaired, in which case a test would be
performed sooner. The impairment testing is a two-step process.
The first step is to identify a potential impairment by
comparing the fair value of a reporting unit with its carrying
amount. In accordance with SFAS 142, Goodwill and Other
Intangible Assets, we have determined that our reporting
units are the reportable segments based on our organizational
structure and the financial information that is provided to and
reviewed by segment management. The estimates of fair value of a
reporting unit are determined based on a discounted cash flow
analysis and guideline public company analysis. A discounted
cash flow analysis requires the Company to make various
judgmental assumptions, including assumptions about future cash
flows, growth rates and discount rates. The assumptions about
future cash flows and growth rates are based on the current and
long-term business plans of each reporting unit. Discount rate
assumptions are based on an assessment of the risk inherent in
the future cash flows of the respective reporting units. If
necessary, the second step of the goodwill impairment test
compares the implied fair value of the reporting units
goodwill with the carrying amount of that goodwill. The implied
fair value of goodwill is determined in a similar manner as the
determination of goodwill recognized in a business combination.
As part of managements review process of the fair values
assumed for the reporting units, the Company reconciled the
combined fair value to the market capitalization of ARRIS and
concluded that the fair values used were reasonable.
The annual tests were performed in the fourth quarters of 2008,
2007, and 2006, with a test date of October 1. No
impairment was indicated as a result of the reviews in 2007 and
2006. During step one of the impairment analysis in 2008, the
Company concluded that the fair values of its ATS and MCS
reporting units were less than their respective carrying values.
As a result, ARRIS performed step two of the goodwill impairment
test to determine the implied fair value of the goodwill of the
ATS and MCS reporting units. The Company concluded that the
implied
78
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fair value of the goodwill was less than its carrying value and
recognized a total noncash goodwill impairment loss of
$128.9 million and $80.4 million related to the ATS
and MCS reporting units, respectively, during the fourth quarter
of 2008. This expense has been recorded in the impairment of
goodwill line on the consolidated statements of operations. The
fair value of the BCS reporting unit exceeded its carrying
value, and therefore, no impairment charge was necessary. See
Note 12 of Notes to the Consolidated Financial Statements
for further information.
As of December 31, 2008, the Company had remaining goodwill
of $231.7 million, of which $38.4 million related to
the ATS reporting unit, $150.6 million related to the BCS
reporting unit, and $42.7 million related to the MCS
reporting unit.
Other intangible assets represent purchased intangible assets,
which include purchased technology, customer relationships,
covenants not-to-compete, and order backlog. Amounts allocated
to other identifiable intangible assets are amortized on a
straight-line basis over their estimated useful lives as follows:
|
|
|
Purchased technology
|
|
4 - 6 years
|
Customer relationships
|
|
2 - 8 years
|
Non-compete agreements
|
|
2 years
|
Trademarks
|
|
2 years
|
Order backlog
|
|
1/2 year
|
As of December 31, 2008, the financial statements included
intangible assets of $227.3 million, net of accumulated
amortization of $153.4 million. As of December 31,
2007, the financial statements included intangible assets of
$269.9 million, net of accumulated amortization of
$109.2 million. The intangible assets as of
December 31, 2008 are related to the acquisitions of
Auspice Corporation in August of 2008 and C-COR Incorporated in
December of 2007. Prior to 2008, other intangible assets are
related to the existing technology acquired from Arris
Interactive L.L.C., from Cadant, Inc., from Com21, and cXm
Broadband LLC., all of which were fully amortized by the end of
2008. The valuation process to determine the fair market values
of the existing technology by management included valuations by
an outside valuation service. The values assigned were
calculated using an income approach utilizing the cash flow
expected to be generated by these technologies.
For reasons similar to those described above, the Company also
conducted a review of its long-lived assets, including
amortizable intangible assets, in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-lived
Assets. This review did not indicate that an impairment
existed as of December 31, 2008 or 2007.
|
|
(j)
|
Advertising
and Sales Promotion
|
Advertising and sales promotion costs are expensed as incurred.
Advertising expense was approximately $0.8 million,
$0.8 million and $0.5 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
|
|
(k)
|
Research
and Development
|
Research and development (R&D) costs are
expensed as incurred. ARRIS research and development
expenditures for the years ended December 31, 2008, 2007
and 2006 were approximately $112.5 million,
$71.2 million and $66.0 million, respectively. The
expenditures include compensation costs, materials, other direct
expenses, and allocated costs of information technology,
telecom, and facilities.
ARRIS provides warranties of various lengths to customers based
on the specific product and the terms of individual agreements.
For further discussion, see Note 6, Guarantees.
ARRIS uses the liability method of accounting for income taxes,
which requires recognition of temporary differences between
financial statement and income tax bases of assets and
liabilities, measured by enacted tax
79
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
rates. In 2001, a valuation allowance was calculated in
accordance with the provisions of Financial Accounting Standards
Board (FASB) Statement No. 109, Accounting
for Income Taxes, which requires that a valuation allowance
be established and maintained when it is more likely than
not that all or a portion of deferred income tax assets
will not be realized. At the end of the fourth quarter of 2006,
ARRIS determined that it was more likely than not that it would
be able to realize the benefits of a significant portion of its
U.S. federal and state income deferred income tax assets
and subsequently reversed the related valuation allowances. As
of December 31, 2006, its ending valuation allowances were
predominantly due to U.S. federal capital loss and foreign
net operating loss carryforwards. During 2007, the Company
reversed additional valuation allowances related to the
U.S. federal capital losses as capital gains were
generated. However, the valuation allowances were subsequently
increased because of the acquisition of C-COR Incorporated on
December 14, 2007, since the Company concluded that it was
not more likely than not to realize certain benefits arising
from C-CORs U.S. state deferred income tax assets and
foreign deferred income tax assets. The Company continually
reviews the adequacy of the valuation allowance to reassess
whether it is more likely than not to realize its various
deferred income tax assets. See Note 15 of Notes to the
Consolidated Financial Statements for further discussion. As of
December 31, 2008, the Company has $15.7 million of
valuation allowances.
|
|
(n)
|
Foreign
Currency Translation
|
A significant portion of the Companys products are
manufactured or assembled in Mexico, Taiwan, China, Ireland, and
other foreign countries. Sales into international markets have
been and are expected in the future to be an important part of
the Companys 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.
Certain international customers are billed in their local
currency. The Company uses a hedging strategy and enters into
forward or currency option contracts based on a percentage of
expected foreign currency revenues. The percentage can vary,
based on the predictability of the revenues denominated in
foreign currency.
As of December 31, 2008, the Company had option collars
outstanding with notional amounts totaling 12.0 million
euros, which mature through 2009. As of December 31, 2008,
the Company had forward contracts outstanding with notional
amounts totaling 16.3 million euros, which mature through
2009. The fair value of option contracts as of December 31,
2008 and 2007 was a gain (loss) of approximately
$0.4 million and $(0.6) million. During the years
ended December 31, 2008, 2007 and 2006, the Company
recognized net losses (gains) of $(21) thousand,
$1.3 million and $48 thousand, respectively, related to
option contracts. During the years ended December 31, 2008,
2007 and 2006, the Company also recognized losses (gains) of $0,
$66 thousand and $37 thousand, respectively, on effective hedges
that were recorded with the corresponding sales.
ARRIS ceased using hedge accounting in March 2007. The last
hedge considered effective expired in January 2007. Currently,
all foreign currency hedges are recorded at fair value and the
gains or losses are included in other expense/ (income) on the
Consolidated Statements of Operations.
|
|
(o)
|
Stock-Based
Compensation
|
The Company elected to early adopt the fair value recognition
provisions of SFAS No. 123R, Share-Based Payment
on July 1, 2005, using the modified prospective
approach. See Note 17 of Notes to the Consolidated
Financial Statements for further discussion of the
Companys significant accounting policies related to stock
based compensation.
|
|
(p)
|
Concentrations
of Credit Risk
|
Financial instruments that potentially subject ARRIS to
concentrations of credit risk consist principally of cash, cash
equivalents and short-term investments, and accounts receivable.
ARRIS places its temporary cash investments with high credit
quality financial institutions. Concentrations with respect to
accounts receivable occur as the Company sells primarily to
large, well-established companies including companies outside of
the United
80
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
States. The Companys credit policy generally does not
require collateral from its customers. ARRIS closely monitors
extensions of credit to other parties and, where necessary,
utilizes common financial instruments to mitigate risk or
requires cash on delivery terms. Overall financial strategies
and the effect of using a hedge are reviewed periodically. When
deemed uncollectible, accounts receivable balances are written
off against the allowance for doubtful accounts.
ARRIS customers have been impacted in the past by several
factors, including an industry downturn and tightening of access
to capital. The market which the Company serves is characterized
by a small number of large customers creating a concentration of
risk. As a result, the Company has incurred significant charges
related to uncollectible accounts related to large customers.
The Companys analysis of the allowance for doubtful
accounts at the end of 2008 and 2007 resulted in expense of
$0.8 million and $0.3 million for the respective
years. The mix of the Companys accounts receivable at
December 31, 2008 was weighted heavily toward high quality
accounts from a credit perspective. This, coupled with strong
fourth quarter collections, resulted in a reduction in the
reserve when applying ARRIS reserve methodology.
The following methods and assumptions were used by the Company
in estimating its fair value disclosures for financial
instruments:
|
|
|
|
|
Cash, cash equivalents, and short-term
investments: The carrying amounts reported in the
consolidated balance sheets for cash, cash equivalents, and
short-term investments approximate their fair values.
|
|
|
|
Accounts receivable and accounts payable: The
carrying amounts reported in the balance sheet for accounts
receivable and accounts payable approximate their fair values.
The Company establishes a reserve for doubtful accounts based
upon its historical experience in collecting accounts receivable.
|
|
|
|
Marketable securities: The fair values for
trading and available-for-sale equity securities are based on
quoted market prices.
|
|
|
|
Non-marketable securities: Non-marketable
equity securities are subject to a periodic impairment review;
however, there are no open-market valuations, and the impairment
analysis requires significant judgment. This analysis includes
assessment of the investees financial condition, the
business outlook for its products and technology, its projected
results and cash flow, recent rounds of financing, and the
likelihood of obtaining subsequent rounds of financing.
|
|
|
|
Short-term debt: The fair value of the
Companys senior unsecured convertible notes
(Notes) which were assumed as part of the C-COR
acquisition totaled approximately $35.0 million at
December 31, 2007. The Company issued notification that it
called the Notes on December 14, 2007 and subsequently
extinguished the Notes on January 14, 2008 for
$35.0 million plus accrued interest.
|
|
|
|
Long-term debt: The fair value of the
Companys convertible subordinated debt is based on its
quoted market price and totaled approximately
$176.6 million and $258.1 million at December 31,
2008 and 2007, respectively.
|
|
|
|
Foreign exchange contracts: The fair values of
the Companys foreign currency contracts are estimated
based on dealer quotes, quoted market prices of comparable
contracts adjusted through interpolation where necessary,
maturity differences or if there are no relevant comparable
contracts on pricing models or formulas by using current
assumptions. As of December 31, 2008, the Company had
option collars outstanding with notional amounts totaling
12.0 million euros, which mature through 2009. As of
December 31, 2008, the Company had forward contracts
outstanding with notional amounts totaling 16.3 million
euros, which mature through 2009. The fair value of option
contracts as of December 31, 2008 and 2007 resulted in a
gain (loss) of approximately $0.4 million and
$(0.6) million.
|
Under the provisions of AICPA Statement of Position
SOP 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, the Company capitalizes costs
associated with internally
81
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
developed
and/or
purchased software systems for new products and enhancements to
existing products that have reached the application development
stage and meet recoverability tests. Capitalized costs include
external direct costs of materials and services utilized in
developing or obtaining internal-use software and payroll and
payroll-related expenses for employees who are directly
associated with and devote time to the internal-use software
project. Capitalization of such costs begins when the
preliminary project stage is complete and ceases no later than
the point at which the project is substantially complete and
ready for its intended purpose. These capitalized costs are
amortized on a straight-line basis over periods of two to seven
years, beginning when the asset is ready for its intended use.
Capitalized costs are included in property, plant, and equipment
on the consolidated balance sheets. The carrying value of the
software is reviewed regularly and impairment is recognized if
the value of the estimated undiscounted cash flow benefits
related to the asset is less than the remaining unamortized
costs.
Research and development costs are charged to expense as
incurred. ARRIS generally has not capitalized any such
development costs under SFAS No. 86, Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed, because the costs incurred between the attainment
of technological feasibility for the related software product
through the date when the product is available for general
release to customers has been insignificant.
|
|
(r)
|
Comprehensive
Income (Loss)
|
The components of comprehensive income (loss) include net income
(loss), unrealized gains (losses) on derivative instruments,
foreign currency translation adjustments, unrealized gains
(losses) on available-for-sale securities, and change in
unfunded pension liability, net of tax, if applicable.
Comprehensive income (loss) is presented in the consolidated
statements of shareholders equity.
|
|
Note 3.
|
Impact of
Recently Issued Accounting Standards
|
In December 2008, the FASB issued FSP
No. FAS 132(R)-1, Employers Disclosures about
Postretirement Benefit Plan Assets. This FSP requires
additional disclosures about plan assets for sponsors of defined
benefit pension and postretirement plans including expanded
information regarding investment strategies, major categories of
plan assets, and concentrations of risk within plan assets.
Additionally, this FSP requires disclosures similar to those
required under SFAS No. 157 with respect to the fair
value of plan assets such as the inputs and valuation techniques
used to measure fair value and information with respect to
classification of plan assets in terms of the hierarchy of the
source of information used to determine their value. The
disclosures under this FSP are required for annual periods
ending after December 15, 2009. ARRIS is currently
evaluating the requirements of these additional disclosures.
In May 2008, the FASB issued FASB Staff Position
(FSP) APB
14-1,
Accounting for Convertible Debt Instruments That May be
Settled in Cash Upon Conversion (including Partial Cash
Settlement). The FSP requires that the liability and equity
components of convertible debt instruments that may be settled
in cash upon conversion (including partial cash settlement),
commonly referred to as an Instrument C under Emerging Issues
Task Force (EITF) Issue
No. 90-19,
Convertible Bonds with Issuer Options to Settle for Cash Upon
Conversion, to be separately accounted for in a manner that
reflects the issuers nonconvertible debt borrowing rate.
The FSP is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and is to be
applied retrospectively to all periods presented (retroactive
restatement) pursuant to the guidance in Statement of Financial
Accounting Standards (SFAS) No. 154,
Accounting Changes and Error Corrections. The FSP will
impact the accounting treatment of the Companys 2%
convertible senior subordinated notes due 2026 by
(1) shifting a portion of the convertible notes balances to
capital in excess of par value, (2) creating a discount on
the convertible notes that would be amortized through interest
expense over the life of the convertible notes, thus
significantly increasing interest expense and
(3) therefore, reducing net income and basic and diluted
earnings per shares within the Companys consolidated
statements of operations. The Company adopted the requirements
of the FSP on January 1, 2009. Based upon its analysis, the
Company expects that its accumulated deficit balance will be
increased by approximately $23 million, its convertible
senior subordinated notes balance will be reduced by
approximately $40 million and its additional paid-in
capital balance will be increased by approximately
$40 million, including a
82
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
deferred tax impact of approximately $24 million. Interest
expense during the fiscal year ended December 31, 2009 is
also expected to increase by approximately $12 million, as
compared to 2008, as a result of the adoption.
Also in May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles.
SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be
used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). SFAS No. 162
is effective 60 days following the Securities and Exchange
Commissions approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. The Company does not expect the
adoption of SFAS No. 162 to have a material impact on
its financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement
No. 133. SFAS No. 161 is effective for our
Company as of January 1, 2009. SFAS No. 161
amends SFAS No. 133 to change the disclosure
requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. Based on the
Companys initial analysis, SFAS No. 161 will not
have a material effect on its consolidated financial statements.
In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 160, Noncontrolling
Interests in Consolidated Financial Statements an
amendment of ARB No. 51. SFAS No. 160 is
effective for our Company as of January 1, 2009.
SFAS No. 160 amends ARB 51 to establish accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It
requires that ownership interests in subsidiaries held by
parties other than the parent be clearly identified, labeled,
and presented within equity, but separate from the parents
equity, in the consolidated statement of financial position. It
also requires that consolidated net income be reported including
the amounts attributable to both the parent and the
noncontrolling interest and that the amounts of consolidated net
income attributable to the parent and to the noncontrolling
interest be disclosed on the face of the consolidated statement
of income. Based on the Companys initial analysis,
SFAS No. 160 will not have a material effect on its
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, which is effective
for the Company as of January 1, 2009.
SFAS No. 141R requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions
specified in the Statement. Based on the Companys initial
analysis, SFAS No. 141R will not have a material
effect on its consolidated financial statements; however, it
could result in a material impact on any future acquisitions or
adjustments to tax valuation allowances related to prior
acquisitions.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements.
SFAS No. 157 was effective for the Company on
January 1, 2008. However, in February 2008, the FASB
released FASB Staff Position FSP
FAS 157-2,
Effective Date of FASB Statement No. 157, which
delayed the effective date of SFAS No. 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The
adoption of SFAS No. 157 for ARRIS financial
assets and liabilities did not have a material impact on its
consolidated financial statements. ARRIS does not expect the
adoption of SFAS No. 157 for its non-financial assets
(including goodwill and intangible assets) and liabilities on
January 1, 2009 to have a material impact on the
consolidated financial statements. See Note 5 of Notes to
the Consolidated Financial statement for required disclosures.
83
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments classified as available for sale securities as of
December 31, 2008 and 2007 consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
15,771
|
|
|
$
|
11,833
|
|
Auction rate securities
|
|
|
|
|
|
|
30,270
|
|
Certificates of deposit
|
|
|
|
|
|
|
9,807
|
|
U.S. Government agency bonds
|
|
|
|
|
|
|
9,574
|
|
Corporate obligations
|
|
|
|
|
|
|
3,447
|
|
Asset-backed securities
|
|
|
|
|
|
|
2,974
|
|
Variable rate demand notes
|
|
|
1,600
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
Total classified as current assets
|
|
$
|
17,371
|
|
|
$
|
68,011
|
|
|
|
|
|
|
|
|
|
|
Non-Current Assets:
|
|
|
|
|
|
|
|
|
Cash surrender value of company owned life insurance
|
|
$
|
4,527
|
|
|
$
|
3,075
|
|
Auction rate securities
|
|
|
4,908
|
|
|
|
|
|
Mutual funds
|
|
|
22
|
|
|
|
3,230
|
|
Money market funds
|
|
|
437
|
|
|
|
70
|
|
Corporate obligations
|
|
|
20
|
|
|
|
37
|
|
Investment in private company
|
|
|
4,000
|
|
|
|
|
|
SERP investments
|
|
|
767
|
|
|
|
2,180
|
|
|
|
|
|
|
|
|
|
|
Total classified as non-current assets
|
|
$
|
14,681
|
|
|
$
|
8,592
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,052
|
|
|
$
|
76,603
|
|
|
|
|
|
|
|
|
|
|
The unrealized gains and losses at December 31, 2008 and
2007 were not material.
The contractual maturities of the Companys investments as
of December 31, 2008 are as follows (in thousands):
|
|
|
|
|
|
|
December 31, 2008
|
|
|
Due in one year or less
|
|
$
|
23,123
|
|
Due in one to five years securities
|
|
|
4,908
|
|
|
|
|
|
|
Due after ten years
|
|
|
4,021
|
|
|
|
|
|
|
Total
|
|
|
32,052
|
|
|
|
Note 5.
|
Fair
Value Measurements
|
As defined in SFAS No. 157, fair value is based on the
price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. In order to increase
consistency and comparability in fair value measurements,
SFAS No. 157 establishes a fair value hierarchy
84
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that prioritizes observable and unobservable inputs used to
measure fair value into three broad levels, which are described
below:
Level 1: Quoted prices (unadjusted) in
active markets that are accessible at the measurement date for
assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.
Level 2: Observable prices that are based
on inputs not quoted on active markets, but corroborated by
market data.
Level 3: Unobservable inputs are used
when little or no market data is available. The fair value
hierarchy gives the lowest priority to Level 3 inputs.
The following table presents the Companys assets measured
at fair value on a recurring basis subject to the disclosure
requirements of SFAS 157 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Current investments
|
|
$
|
|
|
|
$
|
17,371
|
|
|
$
|
|
|
|
$
|
17,371
|
|
Noncurrent investments
|
|
|
459
|
|
|
|
5,314
|
|
|
|
|
|
|
|
5,773
|
|
Auction rate securities
|
|
|
|
|
|
|
|
|
|
|
4,908
|
|
|
|
4,908
|
|
Investment in private company
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
4,000
|
|
Foreign currency contracts
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
850
|
|
|
$
|
22,685
|
|
|
$
|
8,908
|
|
|
$
|
32,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of the Companys short-term investment
and long-term investments instruments are classified within
Level 1 or Level 2 of the fair value hierarchy as they
are valued using quoted market prices, market prices for similar
securities, or alternative pricing sources with reasonable
levels of price transparency. The types of instruments valued
based on quoted market prices in active markets include the
Companys investments in commercial paper and money market
funds. Such instruments are generally classified within
Level 1 of the fair value hierarchy. The types of
instruments valued based on other observable inputs include the
Companys cash surrender value of company owned life
insurance, certificates of deposit, corporate obligations, and
variable rate demand notes. Such instruments are classified
within Level 2 of the fair value hierarchy. See Note 4
of Notes to the Consolidated Financial Statements for further
information on the Companys investments.
The table below includes a roll-forward of the Companys
auction rate securities that have been classified as a
Level 3 in the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
Level 3
|
|
|
Estimated fair value January 1, 2008
|
|
$
|
5,000
|
|
2008 change in fair value
|
|
|
(91
|
)
|
|
|
|
|
|
Estimated fair value December 31, 2008
|
|
$
|
4,909
|
|
|
|
|
|
|
At December 31, 2008 and 2007, ARRIS had $5.0 million
and $30.3 million, respectively, invested in auction rate
securities. During 2008, the Company successfully liquidated, at
par, a net of $25.3 million of its auction rate securities.
However, one auction rate security of $5.0 million par
value has continued to fail at auction, resulting in ARRIS
continuing to hold this security. Due to the current market
conditions and the failure of the auction rate security to
reprice, beginning in the second quarter of 2008, the Company
has recorded changes in the fair value of the instrument as an
impairment charge, in the Statement of Operations in the Loss
(Gain) on Investments line. The security was held as of
December 31, 2008 as a long-term investment with a fair
market value of $4.9 million, which includes the value of
the put option described below. The Company may not be able to
liquidate this security until a successful auction occurs, or
alternatively, the Company has been provided the option to sell
the security to a major financial institution at par from
June 30, 2010 through July 2, 2012. This security is a
single student loan issue rated AAA and is substantially
guaranteed by the federal government. ARRIS will continue to
evaluate the fair value of its investment in this auction rate
security for any further impairment. As of December 31,
2008, there was no active
85
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
market for this auction rate security or comparable securities
due to current market conditions. Therefore, until such a market
becomes active, the auction rate security is classified as
Level 3 within the fair value hierarchy.
During the third quarter of 2008, ARRIS invested
$4.0 million in equity in a venture-backed private company
focused on video processing and management. As part of the
investment, ARRIS secured exclusive rights to sell the products
developed by this company to some of our customers. The private
company is in its early stages of development and is currently
not traded on any exchanges. Since its offering in July 2008,
there have been no further offerings of equity ownership. For
these reasons, ARRIS has concluded that its investment should be
classified as a Level 3 asset. SFAS No. 157
recognizes that unobservable inputs may need to be used for
measuring fair value for Level 3 assets and liabilities as
observable inputs are not available. ARRIS has obtained current
financial projections from the private company, and concluded
that it has no reason to believe that its investment is impaired
and that the balance of $4.0 million is stated at fair
value.
All of the Companys foreign currency contracts are
over-the-counter instruments. There is an active market for
these instruments, and therefore, they are classified as
Level 1 in the fair value hierarchy. ARRIS does not enter
into currency contracts for trading purposes. The Company has a
master netting agreement with the primary counterparty to the
derivative instruments. This agreement allows for the net
settlement of assets and liabilities arising from different
transactions with the same counterparty.
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 of the sale and recognized on a
straight-line basis over the contract period. Costs of services
performed under these types of contracts are charged to expense
as incurred.
Information regarding the changes in ARRIS aggregate
product warranty liabilities for the years ending
December 31, 2008 and 2007 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
January 1,
|
|
$
|
14,370
|
|
|
$
|
8,234
|
|
Accruals related to warranties (including changes in estimates)
|
|
|
5,445
|
|
|
|
4,961
|
|
Settlements made (in cash or in kind)
|
|
|
(8,769
|
)
|
|
|
(4,675
|
)
|
C-COR warranty reserves acquired, including purchase price
adjustments
|
|
|
(862
|
)
|
|
|
5,850
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
|
|
$
|
10,184
|
|
|
$
|
14,370
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7.
|
Business
Acquisitions
|
Acquisition
of Auspice Corporation
On August 12, 2008, ARRIS acquired certain assets of
Auspice Corporation (Auspice) for $5.0 million.
In accordance with SFAS No. 141 Accounting for
Business Combinations, this transaction was accounted for as
a
86
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
business combination. The Company completed this transaction to
enhance its offerings for Service Assurance software and to gain
market share in the industry.
Acquisition
of C-COR Incorporated
On December 14, 2007, ARRIS completed its acquisition of
100% of the outstanding shares of C-COR Incorporated
(C-COR). Pursuant to the Agreement and Plan of
Merger, each issued and outstanding share of
C-COR common
stock, other than shares held in treasury or by ARRIS, were
converted into the right to receive either (i) $13.75 in
cash or (ii) 1.0245 shares of ARRIS common stock and
$0.688 in cash. ARRIS paid approximately $366 million in
cash and issued 25.1 million shares of common stock valued
at $281 million in the merger. In addition, all outstanding
options to acquire shares of C-COR common stock were converted
into options to acquire shares of ARRIS common stock and the
number of shares underlying such options and the exercise price
thereof were adjusted accordingly. The vesting of the unvested
outstanding options was accelerated as a result of the merger.
The following is a summary of the total purchase price of the
transaction and allocation of the purchase price, based upon an
independent valuation (in thousands):
|
|
|
|
|
Total purchase consideration cash and equity
|
|
$
|
646,665
|
|
Prior investment in acquired company
|
|
|
5,973
|
|
Fair value of assumed stock options
|
|
|
22,797
|
|
Acquisition-related transaction costs
|
|
|
6,912
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
682,347
|
|
|
|
|
|
|
Net tangible assets
|
|
$
|
116,814
|
|
Identifiable intangible assets:
|
|
|
|
|
Acquired technology
|
|
|
38,810
|
|
Order backlog
|
|
|
7,940
|
|
Customer relationships
|
|
|
220,470
|
|
Non-compete agreements
|
|
|
5,110
|
|
Acquired in-process research and development
|
|
|
6,120
|
|
Goodwill (prior to impairment charge in the fourth quarter of
2008)
|
|
|
287,083
|
|
|
|
|
|
|
Allocation of purchase price
|
|
$
|
682,347
|
|
|
|
|
|
|
|
|
Note 8.
|
Segment
Information
|
The management approach required under
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, has been used to present
the following segment information. This approach is based upon
the way the management of the Company organizes segments within
an enterprise for making operating decisions and assessing
performance. Financial information is reported on the basis that
it is used internally by the chief operating decision maker for
evaluating segment performance and deciding how to allocate
resources to segments.
Prior to fiscal year 2007, the Company reported its results of
operations as one operating segment. In connection with the
acquisition of C-COR on December 14, 2007, the Company
realigned its organizational structure for the new combined
business. Under the new organizational structure the Company
manages its business under three segments: Broadband
Communications Systems (BCS), Access, Transport and
Supplies (ATS), and Media & Communications
Systems (MCS). A detailed description of each
segment is contained under Item 1 in Our Principal
Products.
87
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Broadband Communications Systems segments
product solutions include Headend and Subscriber Premises
equipment that enable cable operators to provide Voice over IP,
Video over IP and high-speed data services to residential and
business subscribers.
The Access, Transport and Supplies segments product
lines cover all components of a hybrid fiber coax network,
including managed and scalable headend and hub equipment,
optical nodes, radio frequency products, transport products and
supplies.
The Media & Communications Systems segment
provides content and operations management systems, including
products for Video on Demand, Ad Insertion, Digital Advertising,
Service Assurance, Service Fulfillment and Mobile Workforce
Management.
The table below presents information about the Companys
reporting segments for the years ended December 31 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
|
Access,
|
|
|
Media &
|
|
|
|
|
|
|
Communications
|
|
|
Transport and
|
|
|
Communications
|
|
|
|
|
|
|
Systems
|
|
|
Supplies
|
|
|
Systems
|
|
|
Total
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
822,816
|
|
|
$
|
262,478
|
|
|
$
|
59,271
|
|
|
$
|
1,144,565
|
|
Gross margin
|
|
|
285,136
|
|
|
|
76,387
|
|
|
|
31,606
|
|
|
|
393,129
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
24,772
|
|
|
|
19,423
|
|
|
|
44,195
|
|
Impairment of goodwill
|
|
|
|
|
|
|
128,884
|
|
|
|
80,413
|
|
|
|
209,297
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
859,164
|
|
|
$
|
130,644
|
|
|
$
|
2,386
|
|
|
$
|
992,194
|
|
Gross margin
|
|
|
251,416
|
|
|
|
22,930
|
|
|
|
(464
|
)
|
|
|
273,882
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
1,086
|
|
|
|
1,192
|
|
|
|
2,278
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
58
|
|
Write-off of in-process research and development
|
|
|
|
|
|
|
1,320
|
|
|
|
4,800
|
|
|
|
6,120
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
766,470
|
|
|
$
|
123,581
|
|
|
$
|
1,500
|
|
|
$
|
891,551
|
|
Gross margin
|
|
|
229,871
|
|
|
|
22,081
|
|
|
|
126
|
|
|
|
252,078
|
|
Amortization of intangible assets
|
|
|
402
|
|
|
|
|
|
|
|
230
|
|
|
|
632
|
|
The following table summarizes the Companys net intangible
assets and goodwill by reportable segment as of
December 31, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
|
Access,
|
|
|
Media &
|
|
|
|
|
|
|
Communications
|
|
|
Transport and
|
|
|
Communications
|
|
|
|
|
|
|
Systems
|
|
|
Supplies
|
|
|
Systems
|
|
|
Total
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
150,569
|
|
|
$
|
38,366
|
|
|
$
|
42,749
|
|
|
$
|
231,684
|
|
Intangible assets, net
|
|
|
|
|
|
|
138,384
|
|
|
|
88,964
|
|
|
|
227,348
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
150,569
|
|
|
$
|
179,827
|
|
|
$
|
124,956
|
|
|
$
|
455,352
|
|
Intangible assets, net
|
|
|
|
|
|
|
163,253
|
|
|
|
106,640
|
|
|
|
269,893
|
|
The Companys two largest customers (including their
affiliates, as applicable) are Comcast and Time Warner Cable.
Over the past year, certain customers beneficial ownership
may have changed as a result of mergers and acquisitions.
Therefore the revenue for ARRIS customers for prior
periods has been adjusted to include the
88
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
affiliates under common control. A summary of sales to these
customers for 2008, 2007, and 2006 is set forth below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Comcast and affiliates
|
|
$
|
300,934
|
|
|
$
|
366,894
|
|
|
$
|
316,124
|
|
% of sales
|
|
|
26.3
|
%
|
|
|
37.0
|
%
|
|
|
35.4
|
%
|
Time Warner Cable and affiliates
|
|
$
|
235,405
|
|
|
$
|
106,376
|
|
|
$
|
82,758
|
|
% of sales
|
|
|
20.6
|
%
|
|
|
10.7
|
%
|
|
|
9.3
|
%
|
For the year ended December 31, 2006 sales to Liberty Media
International and affiliates accounted for 10.0% of ARRIS
sales. For the years ended December 31, 2007 and
December 31, 2008, their sales were less than 10% of
ARRIS sales.
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, Hong Kong, Japan, Korea,
Singapore, and Taiwan. The European market primarily includes
Austria, Belgium, France, Germany, the Netherlands, Poland,
Portugal, Spain, and Switzerland. The Latin American market
primarily includes Argentina, Brazil, Chile, and Puerto Rico.
Sales to international customers were approximately 29.1%, 27.0%
and 25.1% of total sales for the years ended December 31,
2008, 2007 and 2006, respectively. International sales for the
years ended December 31, 2008, 2007 and 2006 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Asia Pacific
|
|
$
|
50,435
|
|
|
$
|
41,997
|
|
|
$
|
52,859
|
|
Europe
|
|
|
127,103
|
|
|
|
98,575
|
|
|
|
74,991
|
|
Latin America
|
|
|
97,798
|
|
|
|
71,507
|
|
|
|
41,731
|
|
Canada
|
|
|
57,406
|
|
|
|
56,050
|
|
|
|
53,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
332,742
|
|
|
$
|
268,129
|
|
|
$
|
223,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes ARRIS international
long-lived assets by geographic region as of December 31,
2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Asia Pacific
|
|
$
|
1,222
|
|
|
$
|
1,166
|
|
Europe
|
|
|
1,884
|
|
|
|
1,919
|
|
Latin America Latin America
|
|
|
169
|
|
|
|
3,120
|
|
Canada
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,278
|
|
|
$
|
6,205
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9.
|
Restructuring
Charges
|
The Companys restructuring activities are accounted for in
accordance with Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities.
During the first quarter of 2004, ARRIS consolidated two
facilities in Georgia, giving the Company the ability to house
many of its core technology, marketing, and corporate
headquarters functions in a single building. This consolidation
resulted in a restructuring charge of approximately
$6.2 million in 2004 related to lease commitments
89
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and the write-off of leasehold improvements and other fixed
assets. ARRIS expects the remaining payments to be made by the
second quarter of 2009, which is the end of the lease.
|
|
|
|
|
|
|
(in thousands)
|
|
|
Balance as of December 31, 2007
|
|
$
|
2,121
|
|
2008 payments
|
|
|
(1,738
|
)
|
2008 adjustments to accrual
|
|
|
162
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
545
|
|
|
|
|
|
|
In the fourth quarter of 2007, the Company initiated a
restructuring plan related to its acquisition of C-COR. The plan
focuses on the rationalization of personnel, facilities and
systems across the entire organization. The restructuring
affected approximately 60 employees. The plan also included
contractual obligations related to change of control provisions
included in certain C-COR employment contracts. The total
estimated cost of this restructuring plan was approximately
$8.6 million, of which approximately $0.5 million was
recorded as severance expense during the fourth quarter of 2007
and $8.1 million was assumed liabilities related to
employee severance and termination benefits that were accounted
for as an adjustment to the allocation of the original purchase
price for C-COR upon acquisition. The remainder is expected to
be paid in 2009.
|
|
|
|
|
|
|
(in thousands)
|
|
|
Balance as of December 31, 2007
|
|
$
|
8,622
|
|
2008 payments
|
|
|
(8,664
|
)
|
2008 adjustments to accrual
|
|
|
253
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
211
|
|
|
|
|
|
|
Additionally, ARRIS acquired remaining restructuring accruals of
approximately $0.7 million representing C-COR contractual
obligations that related to excess leased facilities and
equipment. These payments will be paid over their remaining
lease terms through 2014, unless terminated earlier.
|
|
|
|
|
|
|
(in thousands)
|
|
|
Balance as of December 31, 2007
|
|
$
|
642
|
|
2008 payments
|
|
|
(315
|
)
|
2008 adjustments to accrual
|
|
|
167
|
|
|
|
|
|
|
Balance as December 31, 2008
|
|
$
|
494
|
|
|
|
|
|
|
Note 10. Inventories
Inventories are stated at the lower of average cost,
approximating
first-in,
first-out, or market. The components of inventory are as
follows, net of reserves (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw material
|
|
$
|
19,247
|
|
|
$
|
20,004
|
|
Work in process
|
|
|
4,814
|
|
|
|
2,533
|
|
Finished goods
|
|
|
105,691
|
|
|
|
109,255
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
129,752
|
|
|
$
|
131,792
|
|
|
|
|
|
|
|
|
|
|
90
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 11.
|
Property,
Plant and Equipment
|
Property, plant and equipment, at cost, consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
2,612
|
|
|
$
|
2,612
|
|
Buildings and leasehold improvements
|
|
|
20,048
|
|
|
|
19,432
|
|
Machinery and equipment
|
|
|
136,857
|
|
|
|
120,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,517
|
|
|
|
142,800
|
|
Less: Accumulated depreciation
|
|
|
(100,313
|
)
|
|
|
(83,644
|
)
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
59,204
|
|
|
$
|
59,156
|
|
|
|
|
|
|
|
|
|
|
Note 12. Goodwill
and Intangible Assets
Goodwill
Goodwill relates to the excess of cost over the fair value of
net assets resulting from an acquisition. On an annual basis,
the Companys goodwill is tested for impairment, or more
frequently if events or changes in circumstances indicate that
the asset is more likely than not impaired, in which case a test
would be performed sooner. For purposes of impairment testing,
the Company has determined that its reporting units are the
reportable segments based on our organizational structure and
the financial information that is provided to and reviewed by
segment management. In accordance with SFAS 142,
Goodwill and Other Intangible Assets, the impairment
testing is a two-step process. The first step is to identify a
potential impairment by comparing the fair value of a reporting
unit with its carrying amount. The Company concluded that a
taxable transaction approach should be used in accordance
EITF 02-13,
Deferred Income Tax Considerations in Applying the Goodwill
Impairment Test in FASB Statement No. 142, Goodwill and
Other Intangible Assets . The Company determined the fair
value of each of its reporting units using a combination of an
income approach using discounted cash flow analysis and a market
approach comparing actual market transactions of businesses that
are similar to those of the Company. In addition, market
multiples of publicly traded guideline companies were also
considered. The discounted cash flow analysis requires the
Company to make various judgmental assumptions, including
assumptions about future cash flows, growth rates and weighted
average cost of capital (discount rate). The assumptions about
future cash flows and growth rates are based on the current and
long-term business plans of each reporting unit. Discount rate
assumptions are based on an assessment of the risk inherent in
the future cash flows of the respective reporting units. If
necessary, the second step of the goodwill impairment test
compares the implied fair value of the reporting units
goodwill with the carrying amount of that goodwill. The implied
fair value of goodwill is determined in a similar manner as the
determination of goodwill recognized in a business combination.
The annual tests were performed in the fourth quarters of 2008,
2007, and 2006, with a test date of October 1. No
impairment was indicated as a result of the reviews in 2007 and
2006. Virtually all of the goodwill associated with the ATS and
MCS reporting units arose as part of the December 14, 2007
acquisition of C-COR. During the annual 2008 testing, as a
result of the current and continuing decline in the market value
of communications equipment suppliers in general, coupled with
the volatile macroeconomic conditions, ARRIS determined that the
fair values of the ATS and MCS reporting units were less than
their respective carrying values. As a result, the Company
proceeded to step two of the goodwill impairment test to
determine the implied fair value of the ATS and MCS goodwill.
ARRIS concluded that the implied fair value of the goodwill was
less than its carrying value and recorded an impairment charge
as of October 1, 2008. During the fourth quarter of 2008,
ARRIS experienced a continued decline in market conditions,
especially as a result of the housing market, with respect to
its ATS reporting unit. As a result, the Company determined that
it was possible that the future cash flows and growth rates for
the ATS reporting unit had declined since the impairment test
date of October 1, 2008. Further, the Company considered
whether the continued volatility in capital markets between
October 1, 2008 and December 31, 2008 could result in
a change in the discount rate, potentially resulting in further
impairment. As a result of these factors,
91
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Company performed an interim test as of December 31,
2008 for the ATS and MCS reporting units. The Company did not
perform an interim test for the BCS reporting unit as it did not
believe that an event occurred or circumstances changed that
would more likely than not reduce the fair value of the
reporting unit below its carrying amount. The Company concluded
that its remaining ATS and MCS goodwill was further impaired and
recorded an incremental goodwill impairment charge. ARRIS
recognized a total noncash goodwill impairment loss of
$128.9 million and $80.4 million in the ATS and MCS
reporting units, respectively, during the fourth quarter of
2008. This expense has been recorded in the goodwill impairment
line on the consolidated statements of operations. The fair
value of the BCS reporting unit exceeded its carrying value, and
therefore, no impairment charge was necessary. As part of
managements review process of the fair values assumed for
the reporting units, the Company reconciled the combined fair
value to its market capitalization and concluded that the fair
values used were reasonable.
The following table summarizes the critical assumptions that
were used in estimating fair value for the impairment tests:
|
|
|
|
|
|
|
|
|
ATS
|
|
BCS
|
|
MCS
|
|
Weighted average cost of capital
|
|
17%
|
|
15%
|
|
20%
|
Comparable companies used for guideline method
|
|
ADC Telecommunications,
Amphenol Corp.,
BigBand Networks,
CIENA, CommScope,
CPI International,
Harmonic, JDS
Uniphase, Sycamore
Networks, Westell
Technologies
|
|
3Com Corp., ADC
Telecommunications,
Commscope, Harmonic,
Sonus Network,
Tellabs, Cisco Systems
|
|
BigBand Networks, Harmonic,
OpenTV, SeaChange
International, TII Network
Technologies, Concurrent
Computer
|
Assumptions and estimates about future cash flows and discount
rates are complex and often subjective. They can be affected by
a variety of factors, including external factors such as
industry and economic trends, and internal factors such as
changes in our business strategy and our internal forecasts.
Although ARRIS believes the assumptions and estimates made are
reasonable and appropriate, different assumptions and estimates
could materially impact the reported financial results. For
example, an increase of 1% in the estimated discount rate could
have resulted in additional impairment charges of approximately
$14 million and $13 million for ATS and MCS,
respectively.
Following is a summary of the Companys goodwill (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
Impairment
|
|
|
Net
|
|
|
Gross
|
|
|
Impairment
|
|
|
Net
|
|
|
Goodwill by Reporting Unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATS
|
|
$
|
167,250
|
|
|
$
|
(128,884
|
)
|
|
$
|
38,366
|
|
|
$
|
179,827
|
|
|
$
|
|
|
|
$
|
179,827
|
|
BCS
|
|
|
150,569
|
|
|
|
|
|
|
|
150,569
|
|
|
|
150,569
|
|
|
|
|
|
|
|
150,569
|
|
MCS
|
|
|
123,162
|
|
|
|
(80,413
|
)
|
|
|
42,749
|
|
|
|
124,956
|
|
|
|
|
|
|
|
124,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
440,981
|
|
|
$
|
(209,297
|
)
|
|
$
|
231,684
|
|
|
$
|
455,352
|
|
|
$
|
|
|
|
$
|
455,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangibles
For reasons similar to those described above, the Company also
conducted a review of its long-lived assets, including
amortizable intangible assets, in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-lived
Assets. This review did not indicate that an impairment
existed as of December 31, 2008 or 2007.
Separable intangible assets that are not deemed to have an
indefinite life are amortized over their useful lives. The
Companys intangible assets have an amortization period of
6 months to eight years. The gross carrying amount and
accumulated amortization of the Companys intangible
assets, other than goodwill, as of December 31, 2008 and
December 31, 2007 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Book
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Intangible Assets by Reporting Units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATS
|
|
$
|
164,242
|
|
|
$
|
(25,858
|
)
|
|
$
|
138,384
|
|
|
$
|
164,339
|
|
|
$
|
(1,086
|
)
|
|
$
|
163,253
|
|
BCS
|
|
|
106,429
|
|
|
|
(106,429
|
)
|
|
|
|
|
|
|
106,429
|
|
|
|
(106,429
|
)
|
|
|
|
|
MCS
|
|
|
110,039
|
|
|
|
(21,075
|
)
|
|
|
88,964
|
|
|
|
108,292
|
|
|
|
(1,652
|
)
|
|
|
106,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
380,710
|
|
|
$
|
(153,362
|
)
|
|
$
|
227,348
|
|
|
$
|
379,060
|
|
|
$
|
(109,167
|
)
|
|
$
|
269,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded on the intangible assets listed in
the above table for the years ended December 31, 2008,
2007, and 2006 was $44.2 million, $2.3 million and
$0.6 million, respectively. The estimated total
amortization expense for each of the next five fiscal years is
as follows (in thousands):
|
|
|
|
|
2009
|
|
$
|
36,946
|
|
2010
|
|
$
|
34,368
|
|
2011
|
|
$
|
34,187
|
|
2012
|
|
$
|
34,120
|
|
2013
|
|
$
|
33,858
|
|
93
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 13.
|
Long-Term
Obligations
|
Debt, capital lease obligations and other long-term liabilities
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2.00% convertible senior notes due 2026
|
|
$
|
276,000
|
|
|
$
|
276,000
|
|
2.00% Pennsylvania Industrial Development Authority debt, net of
current portion
|
|
|
137
|
|
|
|
271
|
|
9.26% equipment financing obligations, net of current portion
|
|
|
|
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
276,137
|
|
|
|
276,765
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
4,896
|
|
|
|
8,986
|
|
Accrued warranty
|
|
|
3,432
|
|
|
|
6,072
|
|
Deferred revenue
|
|
|
2,671
|
|
|
|
114
|
|
Landlord funded leasehold improvements
|
|
|
1,308
|
|
|
|
1,747
|
|
Other long-term liabilities
|
|
|
1,936
|
|
|
|
1,239
|
|
|
|
|
|
|
|
|
|
|
Total other long-term liabilities
|
|
|
14,243
|
|
|
|
18,158
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
$
|
290,380
|
|
|
$
|
294,923
|
|
|
|
|
|
|
|
|
|
|
On November 6, 2006, the Company issued $276.0 million
of 2% convertible senior notes due 2026. The notes are
convertible, at the option of the holder, based on an initial
conversion rate, subject to adjustment, of 62.1504 shares
per $1,000 principal amount (which represents an initial
conversion price of approximately $16.09 per share of our common
stock), into cash up to the principal amount and, if applicable,
shares of the Companys common stock, cash or a combination
thereof. The notes may be converted during any calendar quarter
in which the closing price of ARRIS common stock for 20 or
more trading days in a period of 30 consecutive trading days
ending on the last trading day of the immediately preceding
calendar quarter exceeds 120% of the conversion price in effect
at that time (which, based on the current conversion price,
would be $19.31) and upon the occurrence of certain other
events. Upon conversion, the holder will receive the principal
amount in cash and an additional payment, in either cash or
stock at the option of the Company. The additional payment will
be based on a formula which calculates the difference between
the initial conversion rate ($16.09) and the market price at the
date of the conversion. As of February 25, 2009, the notes
could not be converted by the holders thereof. Interest is
payable on May 15 and November 15 of each year. The Company may
redeem the notes at any time on or after November 15, 2013,
subject to certain conditions. As of December 31, 2008 and
2007, there were $276.0 million of the notes outstanding.
Additionally, we paid approximately $7.8 million of finance
fees related to the issuance of the notes. These costs are being
amortized over seven years. The remaining balance of unamortized
financing costs from these notes as of December 31, 2008,
and 2007 was $5.4 million, and $6.5 million,
respectively. See Note 3 of Notes to the Consolidated
Financial Statements for information related to the impact of
the adoption on January 1, 2009 of FSP ABP
14-1 with
respect to these notes.
The Company has not paid cash dividends on its common stock
since its inception.
94
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 14.
|
Earnings
Per Share
|
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings (loss) per share
computations for the periods indicated (in thousands except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(123,139
|
)
|
|
$
|
98,136
|
|
|
$
|
142,066
|
|
Income from discontinued operations
|
|
|
|
|
|
|
204
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(123,139
|
)
|
|
$
|
98,340
|
|
|
$
|
142,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
124,878
|
|
|
|
110,843
|
|
|
|
107,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.99
|
)
|
|
$
|
0.89
|
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(123,139
|
)
|
|
$
|
98,136
|
|
|
$
|
142,066
|
|
Income from discontinued operations
|
|
|
|
|
|
|
204
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(123,139
|
)
|
|
$
|
98,340
|
|
|
$
|
142,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
124,878
|
|
|
|
110,843
|
|
|
|
107,268
|
|
Net effect of dilutive shares
|
|
|
|
|
|
|
2,184
|
|
|
|
2,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
124,878
|
|
|
|
113,027
|
|
|
|
109,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.99
|
)
|
|
$
|
0.87
|
|
|
$
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In November 2006, the Company issued $276.0 million of
convertible senior notes. Upon conversion, ARRIS will satisfy at
least the principal amount in cash, rather than common stock.
This reduced the potential earnings dilution to only include the
conversion premium, which is the difference between the
conversion price per share of common stock and the average share
price. The average share price in 2008, 2007 and 2006 was less
than the conversion price of $16.09 and, consequently, did not
result in dilution.
The effects of approximately 1.4 million dilutive shares
were not presented for the year ended December 31, 2008 as
the Company incurred a net loss during the period and inclusion
of these securities would be antidilutive.
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.
95
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax expense (benefit) consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current Federal
|
|
$
|
13,492
|
|
|
$
|
31,044
|
|
|
$
|
2,235
|
|
State
|
|
|
5,903
|
|
|
|
5,269
|
|
|
|
1,077
|
|
Foreign
|
|
|
(258
|
)
|
|
|
233
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,137
|
|
|
|
36,546
|
|
|
|
3,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Federal
|
|
|
(12,007
|
)
|
|
|
4,744
|
|
|
|
(32,785
|
)
|
State
|
|
|
(798
|
)
|
|
|
463
|
|
|
|
(3,429
|
)
|
Foreign
|
|
|
(74
|
)
|
|
|
(802
|
)
|
|
|
(2,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,879
|
)
|
|
|
4,405
|
|
|
|
(38,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,258
|
|
|
$
|
40,951
|
|
|
$
|
(34,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax rate of 35%
and the effective income tax rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory federal income tax expense (benefit)
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
4.4
|
%
|
|
|
2.8
|
%
|
|
|
1.7
|
%
|
Differences between U.S. and foreign income tax rates
|
|
|
(1.0
|
)%
|
|
|
(0.7
|
)%
|
|
|
(0.1
|
)%
|
Impairment of goodwill
|
|
|
43.3
|
%
|
|
|
|
|
|
|
|
|
Domestic manufacturing deduction
|
|
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
Decrease in valuation allowance
|
|
|
(0.1
|
)%
|
|
|
(3.8
|
)%
|
|
|
(62.3
|
)%
|
Federal tax exempt interest
|
|
|
(0.3
|
)%
|
|
|
(2.1
|
)%
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
1.6
|
%
|
|
|
|
|
Research and development tax credits
|
|
|
(4.0
|
)%
|
|
|
(4.3
|
)%
|
|
|
(7.2
|
)%
|
Other, net
|
|
|
(0.2
|
)%
|
|
|
1.0
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.4
|
%
|
|
|
29.5
|
%
|
|
|
(32.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. Significant components of ARRIS net deferred
income tax assets (liabilities) were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Current deferred income tax assets:
|
|
|
|
|
|
|
|
|
Inventory costs
|
|
$
|
10,504
|
|
|
$
|
8,626
|
|
Federal alternative minimum tax (AMT) credit
|
|
|
|
|
|
|
850
|
|
Federal research and development credits
|
|
|
3,000
|
|
|
|
8,755
|
|
Federal/state net operating loss carryforwards
|
|
|
11,703
|
|
|
|
5,216
|
|
Foreign net operating loss carryforwards
|
|
|
69
|
|
|
|
0
|
|
Warranty reserve
|
|
|
2,840
|
|
|
|
3,527
|
|
Deferred revenue
|
|
|
11,844
|
|
|
|
5,091
|
|
Other, principally operating expenses
|
|
|
5, 995
|
|
|
|
12,874
|
|
|
|
|
|
|
|
|
|
|
Total current deferred income tax assets
|
|
|
45,955
|
|
|
|
44,939
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred income tax assets:
|
|
|
|
|
|
|
|
|
Federal/state net operating loss carryforwards
|
|
|
15,464
|
|
|
|
39,044
|
|
Federal capital loss carryforwards
|
|
|
163
|
|
|
|
|
|
Foreign net operating loss carryforwards
|
|
|
13,242
|
|
|
|
16,739
|
|
Federal alternative minimum tax credit
|
|
|
2,224
|
|
|
|
1,374
|
|
Federal research and development credits
|
|
|
16,649
|
|
|
|
2,983
|
|
Pension and deferred compensation
|
|
|
8,372
|
|
|
|
6,618
|
|
Equity compensation
|
|
|
6,728
|
|
|
|
4,488
|
|
Other, principally operating expenses
|
|
|
2,322
|
|
|
|
3,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred income tax assets
|
|
|
65,164
|
|
|
|
74,733
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
111,119
|
|
|
|
119,672
|
|
|
|
|
|
|
|
|
|
|
Current deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Other, principally operating expenses
|
|
|
(1,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current deferred income tax liabilities
|
|
|
(1,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, depreciation and basis differences
|
|
|
(833
|
)
|
|
|
(708
|
)
|
Other noncurrent liabilities
|
|
|
(512
|
)
|
|
|
(226
|
)
|
Goodwill and Intangibles
|
|
|
(56,103
|
)
|
|
|
(92,101
|
)
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred income tax liabilities
|
|
|
(57,448
|
)
|
|
|
(93,035
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(58,507
|
)
|
|
|
(93,035
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
|
52,612
|
|
|
|
26,637
|
|
Valuation allowance
|
|
|
(15,718
|
)
|
|
|
(23,494
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
36,894
|
|
|
$
|
3,143
|
|
|
|
|
|
|
|
|
|
|
The valuation allowance for deferred income tax assets of
$15.7 million and $23.5 million at December 31,
2008 and 2007, respectively, relates to the uncertainty
surrounding the realization of certain deferred income tax
97
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets in various jurisdictions. The valuation allowance was
calculated in accordance with the provisions of
SFAS No. 109, which requires that a valuation
allowance be established and maintained when it is more
likely than not that all or a portion of deferred income
tax assets will not be realized. As of December 31, 2008,
the ending valuation allowance is predominantly due to foreign
net operating loss carryforwards, much of which relates to the
pre-acquisition operations of C-COR entities. $11.7 million
of the valuation allowance as of December 31, 2008, would
have been allocated to reduce goodwill upon recognition or
realization of the related deferred income tax asset if the
Company was not adopting FAS 141R effective January 1,
2009. Under FAS 141R, adjustments to valuation allowances
originally established from purchase accounting will be reversed
into the income statement. The Company continually reviews the
adequacy of the valuation allowance by reassessing whether it is
more likely than not to realize its various deferred income tax
assets.
As of December 31, 2008 and December 31, 2007, ARRIS
had $57.8 million and $115.3 million, respectively, of
U.S. Federal net operating losses available to offset
against future ARRIS taxable income. During 2007, ARRIS utilized
all of the self-generated U.S. Federal net operating losses
carried forward from 2006 against 2007 taxable income. The cash
benefit resulting from the utilization of these
U.S. Federal net operating losses was credited directly to
paid in capital during 2007, since all of these
U.S. Federal net operating losses were generated by equity
compensation deductions. During December of 2007, ARRIS acquired
$110.6 million of U.S. federal net operating losses
from its purchase of all of the common stock of C-COR.
Approximately $2.6 million of these acquired
U.S. federal net operating losses were utilized in 2007,
and $57.5 million were utilized in 2008. The
U.S. Federal net operating losses may be carried forward
for twenty years. The available acquired U.S. Federal net
operating losses as of December 31, 2008, will expire
between the years 2020 and 2026. As of December 31, 2008,
ARRIS also had $155.6 million of U.S. state net
operating loss carryforwards in various states. Approximately
$124.6 million of U.S. state net operating losses were
acquired from C-COR. The amounts available for utilization vary
by state due to the apportionment of the Companys taxable
income and state law governing the expiration of these net
operating losses. U.S. state net operating loss
carryforwards of approximately $31.4 million relate to the
exercise of employee stock options and restricted stock
(equity compensation). Any future cash benefit
resulting from the utilization of these U.S. state net
operating losses attributable to this portion of equity
compensation will be credited directly to paid in capital during
the year in which the cash benefit is realized. Additionally,
ARRIS has foreign net operating loss carryforwards available, as
of December 31, 2008, of approximately $56.9 million
with varying expiration dates. Approximately $33.9 million
of the available foreign net operating loss carryforwards were
acquired from C-COR, and approximately $21.3 million of the
total foreign net operating loss carryforwards relate to
ARRIS Irish subsidiary and have an indefinite life.
ARRIS ability to use U.S. Federal and state net
operating loss carryforwards to reduce future taxable income, or
to use research and development tax credit carryforwards to
reduce future income tax liabilities, is subject to restrictions
attributable to equity transactions that resulted in a change of
ownership during its 2001 and 2004 tax years as defined in
Internal Revenue Code Sections 382 and 383. All of the tax
attributes (net operating losses carried forward and tax credits
carried forward) acquired from the C-COR Incorporated
transaction are also subject to restrictions arising from equity
transactions, including transactions that created ownership
changes within C-COR prior to its acquisition by ARRIS. With the
exception of $0.6 million of its U.S federal net operating
loss carryforwards and $115.6 million of its
U.S. state net operating loss carryforwards, ARRIS does not
expect that the limitations placed on its net operating losses
and research and development tax credits as a result of applying
these and other rules will result in the expiration of its net
operating loss and research and development tax credit
carryforwards. However, future equity transactions could further
limit the utilization of these tax attributes.
Since the fourth quarter of 2006, ARRIS has been analyzing the
availability of domestic federal and domestic state research and
development tax credits arising from qualified research
expenditures for tax years beginning in 1999 and continuing
through 2008. Due to this analysis, we have recorded deferred
income tax assets related to those domestic federal research and
development tax credits in the amount of $40.4 million, and
domestic state research and development tax credits in the
amount of $5.4 million. During the tax years ending
December 31, 2008, and 2007, we utilized $12.1 million
and $9.1 million, respectively, to offset against federal
and state income tax liabilities. As of December 31, 2008,
ARRIS has $20.1 million of available domestic federal
research and
98
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
development tax credits and $4.5 million of available
domestic state research and development tax credits. The
remaining unutilized domestic federal research and development
tax credits can be carried back one year and carried forward
twenty years. The domestic state research and development tax
credits carry forward and will expire pursuant to the various
applicable domestic state rules.
ARRIS intends to indefinitely reinvest the undistributed
earnings of its foreign subsidiaries. Accordingly, no deferred
income taxes have been recorded for the difference between its
financial and tax basis investment in its foreign subsidiaries.
If these earnings were distributed to the U.S. in the form
of dividends, or otherwise, ARRIS would have additional
U.S. taxable income and, depending on the companys
tax posture in the year of repatriation, may have to pay
additional U.S. income taxes. Withholding taxes may also
apply to the repatriated earnings. Determination of the amount
of unrecognized income tax liability related to these
permanently reinvested and undistributed foreign subsidiary
earnings is currently not practicable.
Tabular Reconciliation of Unrecognized Tax Benefits (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Beginning balance
|
|
$
|
9,873
|
|
|
$
|
3,459
|
|
Gross increases tax positions in prior period
|
|
|
8
|
|
|
|
943
|
|
Gross decreases tax positions in prior period
|
|
|
|
|
|
|
(1
|
)
|
Gross increases current-period tax positions
|
|
|
5,206
|
|
|
|
1,481
|
|
Increases from acquired businesses
|
|
|
1,888
|
|
|
|
3,991
|
|
Decreases relating to settlements with taxing authorities
|
|
|
(355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
16,620
|
|
|
$
|
9,873
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2007, the Company adopted the provisions of
FIN 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement
No. 109, Accounting for Income Taxes. FIN 48 seeks
to clarify the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS No. 109, Accounting for Income
Taxes, by prescribing 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. Under FIN 48, the financial statement
effects of a tax position should initially be recognized when it
is more-likely-than-not, based on the technical merits, that the
position will be sustained upon examination. A tax position that
meets the more-likely-than-not recognition threshold should
initially and subsequently be measured as the largest amount of
tax benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement with a taxing authority.
As a result of the adoption of FIN 48, the Company recorded
a $65 thousand decrease to the January 1, 2007 balance in
retained earnings.
The Company and its subsidiaries file income tax returns in the
U.S. federal jurisdiction, and various states and foreign
jurisdictions. With few exceptions, the Company is no longer
subject to U.S. federal, state and local, or
non-U.S. income
tax examinations by tax authorities for years before 2001. The
Company and its subsidiaries are currently under income tax
audit in only three jurisdictions (the state of Ohio, the
Netherlands, and France) and they have not received notices of
any planned or proposed income tax audits. Additionally, the
Company has no outstanding unpaid income tax assessments for
prior income tax audits.
At the end of 2008, the Companys total tax liability
related to uncertain net tax positions totaled approximately
$15.9 million, all of which would cause the effective
income tax rate to change upon the recognition ARRIS does not
currently anticipate that the total amount of unrecognized tax
benefits will materially increase or decrease within the next
twelve months. The Company has recorded approximately
$0.4 million of interest and penalty accrual related to the
anticipated payment of these potential tax liabilities. The
Company classifies interest and penalties recognized on the
liability for uncertain tax positions as income tax expense.
99
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ARRIS leases office, distribution, and warehouse facilities as
well as equipment under long-term leases expiring at various
dates through 2023. Included in these operating leases are
certain amounts related to restructuring activities; these lease
payments and related sublease income are included in
restructuring accruals on the consolidated balance sheets.
Future minimum operating lease payments under non-cancelable
leases at December 31, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
Operating Leases
|
|
|
2009
|
|
$
|
7,285
|
|
2010
|
|
|
6,068
|
|
2011
|
|
|
4,427
|
|
2012
|
|
|
3,008
|
|
2013
|
|
|
2,278
|
|
Thereafter
|
|
|
3,067
|
|
Less sublease income
|
|
|
(297
|
)
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
25,836
|
|
|
|
|
|
|
Total rental expense for all operating leases amounted to
approximately $9.0 million, $5.4 million and
$5.4 million for the years ended December 31, 2008,
2007 and 2006, respectively.
As of December 31, 2008, the Company had approximately
$5.7 million of restricted cash. Of the total restricted
cash, $3.7 million is outstanding under letters of credit
which were cash collateralized and $2.0 million is security
for hedge transactions. Additionally, the Company had
contractual obligations of approximately $119.3 million
under agreements with non-cancelable terms to purchases goods or
services over the next year. All contractual obligations
outstanding at the end of prior years were satisfied within a
12 month period, and the obligations outstanding as of
December 31, 2008 are expected to be satisfied in 2009.
|
|
Note 17.
|
Stock-Based
Compensation
|
ARRIS grants stock options under its 2008 Stock Incentive Plan
(2008 SIP), 2007 Stock Incentive Plan (2007
SIP) and 2004 Stock Incentive Plan (2004 SIP)
and issues stock purchase rights under its Employee Stock
Purchase Plan (ESPP). Upon approval of the 2004 SIP
by stockholders on May 26, 2004, all shares available for
grant under the 2002 Stock Incentive Plan (2002 SIP)
and the 2001 Stock Incentive Plan (2001 SIP) were
cancelled. However, those shares subject to outstanding stock
awards issued under the 2002 SIP and the 2001 SIP that are
forfeited, cancelled, or expire unexercised; shares tendered
(either actually or through attestation) to pay the option
exercise price of such outstanding awards; and shares withheld
for the payment of withholding taxes associated with such
outstanding awards return to the share reserve of the 2002 SIP
and 2001 SIP and shall be available again for issuance under
those plans. All options outstanding as of May 26, 2004
under the 2002 SIP and 2001 SIP remained exercisable. These
plans are described below.
On May 28, 2008, the Board of Directors approved the 2008
SIP to facilitate the retention and continued motivation of key
employees, consultants and directors, and to align more closely
their interests with those of the Company and its stockholders.
Awards under the 2008 SIP may be in the form of stock options,
stock grants, stock units, restricted stock, stock appreciation
rights, performance shares and units, and dividend equivalent
rights. A total of 12,300,000 shares of the Companys
common stock may be issued pursuant to this plan. The Plan has
been designed to allow for flexibility in the form of awards;
however, awards denominated in shares of common stock other than
stock options and stock appreciation rights will be counted
against the Plan limit as 1.58 shares for every one share
covered by such an award. The vesting requirements for issuance
under this plan may vary; however, awards generally are required
to have a minimum three-year vesting period or term.
100
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On May 24, 2007, the Board of Directors approved the 2007
SIP to facilitate the retention and continued motivation of key
employees, consultants and directors, and to align more closely
their interests with those of the Company and its stockholders.
Awards under the 2007 SIP may be in the form of incentive stock
options, non-qualified stock options, stock grants, stock units,
restricted stock, stock appreciation rights, performance shares
and units, and dividend equivalent rights. A total of
5,000,000 shares of the Companys common stock may be
issued pursuant to this plan. The vesting requirements for
issuance under this plan may vary.
In 2004, the Board of Directors approved the 2004 SIP to
facilitate the retention and continued motivation of key
employees, consultants and directors, and to align more closely
their interests with those of the Company and its stockholders.
Awards under the 2004 SIP may be in the form of incentive stock
options, non-qualified stock options, stock grants, stock units,
restricted stock, stock appreciation rights, performance shares
and units, dividend equivalent rights and reload options. A
total of 6,000,000 shares of the Companys common
stock may be issued pursuant to this plan. The vesting
requirements for issuance under this plan may vary.
In 2002, the Board of Directors approved the 2002 SIP to
facilitate the retention and continued motivation of key
employees, consultants and directors, and to align more closely
their interests with those of the Company and its stockholders.
Awards under the 2002 SIP may be in the form of incentive stock
options, non-qualified stock options, stock grants, stock units,
restricted stock, stock appreciation rights, performance shares
and units, dividend equivalent rights and reload options. A
total of 2,500,000 shares of the Companys common
stock were originally reserved for issuance under this plan. The
vesting requirements for issuance under this plan vary.
In 2001, the Board of Directors approved the 2001 SIP to
facilitate the retention and continued motivation of key
employees, consultants and directors, and to align more closely
their interests with those of the Company and its stockholders.
Awards under the 2001 SIP may be in the form of incentive stock
options, non-qualified stock options, stock grants, stock units,
restricted stock, stock appreciation rights, performance shares
and units, dividend equivalent rights and reload options. A
total of 9,580,000 shares of the Companys common
stock were originally reserved for issuance under this plan. The
vesting requirements for issuance under this plan vary.
In 2001, the Board of Directors approved a proposal to grant
truncated options to employees and board members having previous
stock options with exercise prices more than 33% higher than the
market price of the Companys stock at $10.20 per share.
The truncated options to purchase stock of the Company pursuant
to the Companys 2001 SIP, have the following terms:
(a) one fourth of each option shall be exercisable
immediately and an additional one fourth shall become
exercisable or vest on each anniversary of this grant;
(b) each option shall be exercisable in full after the
closing price of the stock has been at or above the target price
as determined by the agreement for twenty consecutive trading
days (the Accelerated Vesting Date); (c) each
option shall expire on the earliest of (i) the tenth
anniversary of grant, (ii) six months and one day from the
accelerated vesting date, (iii) the occurrence of an
earlier expiration event as provided in the terms of the options
granted by 2000 stock option plans. No compensation was recorded
in relation to these options.
In connection with the Companys reorganization on
August 3, 2001, the Company froze additional grants under
other prior plans, which were the 2000 Stock Incentive Plan
(2000 SIP), the 2000 Mid-Level Stock Option
Plan (MIP), the 1997 Stock Incentive Plan
(SIP), the 1993 Employee Stock Incentive Plan
(ESIP), the Director Stock Option Plan
(DSOP), and the TSX Long-Term Incentive Plan
(LTIP). All options granted under the previous plans
are still exercisable. The Board of Directors approved the prior
plans to facilitate the retention and continued motivation of
key employees, consultants and directors, and to align more
closely their interests with those of the Company and its
stockholders. Awards under these plans were in the form of
incentive stock options, non-qualified stock options, stock
grants, stock units, restricted stock, stock appreciation
rights, performance shares and units, dividend equivalent rights
and reload options. A total of 2,500,000 shares of the
Companys common stock were originally reserved for
issuance under this plan. Options granted under this plan vest
in fourths on the anniversary date of the grant beginning with
the first anniversary and terminate ten years from the date of
grant. Vesting requirements for issuance under the prior plans
varied, as did the related date of termination.
101
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options
ARRIS grants stock options to certain employees. Upon stock
option exercise the Company issues new shares. Stock options
generally vest over three or four years of service and have
either seven or ten year contractual terms. The exercise price
of an option is equal to the fair market value of ARRIS
stock on the date of grant. Upon adoption of
SFAS No. 123R on July 1, 2005, ARRIS elected to
continue to use the Black-Scholes model and engages an
independent third party to assist the Company in determining the
Black-Scholes valuation of its equity awards. 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 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. The stock compensation expense is
amortized over the vesting period using the straight-line method.
A summary of activity of ARRIS options granted under its
stock incentive plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
Average
|
|
|
Contractual Term
|
|
|
Value
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
(in years)
|
|
|
(in thousands)
|
|
|
Beginning balance, January 1, 2008
|
|
|
11,383,550
|
|
|
$
|
10.57
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
75,000
|
|
|
$
|
9.11
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(225,807
|
)
|
|
$
|
6.49
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(55,243
|
)
|
|
$
|
12.43
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(932,162
|
)
|
|
$
|
15.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2008
|
|
|
10,245,338
|
|
|
$
|
9.19
|
|
|
|
3.61
|
|
|
$
|
8,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
8,662,126
|
|
|
$
|
9.85
|
|
|
|
3.67
|
|
|
$
|
7,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used in this model to value
ARRIS stock options during 2008, 2007 and 2006 were as
follows: risk-free interest rates of 2.5%, 4.4% and 4.9%,
respectively; a dividend yield of 0%; volatility factor of the
expected market price of ARRIS common stock of 0.51, 0.52
and 0.60, respectively; and a weighted average expected life of
4.0 years, 4.4 years and 4.7 years, respectively.
The weighted average grant-date fair value of options granted
during 2008, 2007, and 2006 were $9.11, $6.28 and $7.14,
respectively. The total intrinsic value of options exercised
during 2008, 2007, and 2006 was approximately $0.6 million,
$12.3 million, $13.7 million, respectively.
Restricted
Stock (Non-Performance) and Stock Units
ARRIS grants restricted stock and stock units to certain
employees and its non-employee directors. The Company records a
fixed compensation expense equal to the fair market value of the
shares of restricted stock granted on a straight-line basis over
the requisite services period for the restricted shares. The
Company applies an estimated post-vesting forfeiture rate based
upon historical rates.
102
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes ARRIS unvested restricted
stock (excluding performance-related) and stock unit
transactions during the year ending December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at January 1, 2008
|
|
|
583,186
|
|
|
$
|
12.10
|
|
Granted
|
|
|
2,336,180
|
|
|
$
|
5.73
|
|
Vested
|
|
|
(269,125
|
)
|
|
$
|
10.23
|
|
Forfeited
|
|
|
( 99,750
|
)
|
|
$
|
7.19
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008
|
|
|
2,550,491
|
|
|
$
|
6.66
|
|
|
|
|
|
|
|
|
|
|
Performance-Related
Restricted Shares
ARRIS grants to certain employees restricted shares, in which
the number of shares is dependent upon performance conditions.
The number of shares which could potentially be issued ranges
from zero to 150% of the target award. Compensation expense is
recognized using the graded method and is based upon the fair
market value of the shares estimated to be earned. The fair
value of the restricted shares is estimated on the date of grant
using the same valuation model as that used for stock options
and other restricted shares. As of December 31, 2008, ARRIS
had recognized compensation expense based upon the achievement
of 55% of the target awards based upon the Companys 2008
performance level reached for the shares granted in March 2008.
The following table summarizes ARRIS unvested
performance-related restricted stock transactions during the
year ending December 31, 2008 (includes 55% achievement of
2008 performance goals):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at January 1, 2008
|
|
|
416,409
|
|
|
$
|
11.70
|
|
Granted
|
|
|
212,676
|
|
|
$
|
5.65
|
|
Vested
|
|
|
(190,881
|
)
|
|
$
|
9.71
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2008
|
|
|
438,204
|
|
|
$
|
9.63
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of restricted shares, including both
non-performance and performance-related shares, vested and
issued during 2008, 2007 and 2006 was $2.9 million,
$9.3 million and $6.1, respectively.
Employee
Stock Purchase Plan (ESPP)
ARRIS offers an ESPP to certain employees. The plan complies
with Section 423 of the U.S. Internal Revenue Code,
which provides that employees will not be immediately taxed on
the difference between the market price of the stock and a
discounted purchase price if it meets certain requirements.
Participants can request that up to 10% of their base
compensation be applied toward the purchase of ARRIS common
stock under ARRIS ESPP. Purchases by any one participant
are limited to $25,000 (based upon the fair market value) in any
one year. The exercise price is the lower of 85% of the fair
market value of the ARRIS common stock on either the first day
of the purchase period or the last day of the purchase period. A
plan provision which allows for the more favorable of two
exercise prices is commonly referred to as a
look-back feature. Under APB Opinion No. 25,
Accounting for Stock Issued to Employees, the ESPP was
deemed noncompensatory, and therefore, no compensation expense
was recognized. However, SFAS No. 123R narrows the
noncompensatory exception significantly; any discount offered in
excess of five percent generally will be considered compensatory
and appropriately recognized as compensation expense.
Additionally, any ESPP offering a look-back feature is
considered compensatory. ARRIS uses the Black-Scholes option
valuation model to value shares issued under the ESPP. The
valuation is comprised of two components; the 15% discount of a
share of common stock and 85% of a six month option held
(related to the look-back feature). The weighted average
assumptions used to estimate the fair value of
103
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
purchase rights granted under the ESPP for 2008, 2007, and 2006
were as follows: risk-free interest rates of 2.1%, 4.4% and
4.6%, respectively; a dividend yield of 0%; volatility factor of
the expected market price of ARRIS common stock of 0.67,
0.41 and 0.56, respectively; and a weighted average expected
life of 0.5 year for each. The Company recorded stock
compensation expense related to the ESPP of approximately
$0.6 million, $0.4 million and $0.4 million for
the years ended December 31, 2008, 2007, and 2006,
respectively.
Unrecognized
Compensation Cost
As of December 31, 2008, there was approximately
$22.0 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
2.7 years.
Treasury
Stock
During the first quarter of 2008, we acquired approximately
13 million shares at a cost of $76 million. The
repurchased shares are held as treasury stock on the
Consolidated Balance Sheet as of December 31, 2008.
Note 18. Employee
Benefit Plans
The Company sponsors a qualified and non-qualified
non-contributory defined benefit pension plan that cover certain
U.S. employees. As of January 1, 2000, the Company
froze the qualified defined pension plan benefits for its
participants. These participants elected to enroll in
ARRIS enhanced 401(k) plan. Due to the cessation of plan
accruals for such a large group of participants, a curtailment
was considered to have occurred and the Company accounted for
this in accordance with SFAS No. 88,
Employers Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination
Benefits.
The U.S. pension plan benefit formulas generally provide
for payments to retired employees based upon their length of
service and compensation as defined in the plans. ARRIS
investment policy is to fund the qualified plan as required by
the Employee Retirement Income Security Act of 1974
(ERISA) and to the extent that such contributions
are tax deductible. For 2008, the plan assets were comprised of
approximately 49%, 42%, and 9% of equity, debt securities, and
money market funds, respectively. For 2007, the plan assets were
comprised of approximately 51%, 40% and 9% of equity, debt
securities, and money market funds respectively. In 2009, the
plan will target allocations of 60% equity, 30% debt securities,
and 10% money market funds. Liabilities or amounts in excess of
these funding levels are accrued and reported in the
consolidated balance sheet. The Company has determined to
establish a rabbi trust and to fund the pension obligations of
Mr. Robert Stanzione under his Supplemental Retirement Plan
including the benefit under the Companys non-qualified
defined benefit plan. In addition, the Company is establishing a
rabbi trust for certain executive officers to fund the
Companys pension liability to those officers under the
non-qualifed plan.
The investment strategies of the plans place a high priority on
benefit security. The plans invest conservatively so as not to
expose assets to depreciation in adverse markets. The
plans strategy also places a high priority on earning a
rate of return greater than the annual inflation rate along with
maintaining average market results. The plan has targeted asset
diversification across different asset classes and markets to
take advantage of economic environments and to also act as a
risk minimizer by dampening the portfolios volatility.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. This statement requires entities
to:
|
|
|
|
|
fully recognize the funded status of defined benefit
plans an asset for an overfunded status or a
liability for an underfunded status,
|
|
|
|
measure a defined benefit plans assets and obligations
that determine its funded status as of the end of the
entitys fiscal year, and
|
104
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
recognize changes in the funded status of a defined benefit plan
in comprehensive earnings in the year in which the changes occur.
|
ARRIS adopted SFAS No. 158 as of December 31,
2006. However, the requirement to measure plan assets and
benefit obligations as of the date of the fiscal year-end
balance sheet was effective for fiscal years ending after
December 15, 2008. ARRIS adopted this provision on
January 1, 2008 and has changed the measurement date from
September 30 to December 31 for the 2008 reporting year. The
impact of changing the measurement date for plan assets and
liabilities from September 30 to December 31 resulted in an
adjustment of $0.4 million to retained earnings in the
consolidated balance sheet for the year ended December 31,
2008.
Summary data for the non-contributory defined benefit pension
plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Change in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
29,687
|
|
|
$
|
28,367
|
|
Service cost
|
|
|
1,027
|
|
|
|
558
|
|
Interest cost
|
|
|
2,316
|
|
|
|
1,648
|
|
Actuarial loss (gain)
|
|
|
2,199
|
|
|
|
(294
|
)
|
Benefit payments
|
|
|
(892
|
)
|
|
|
(592
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
34,337
|
|
|
$
|
29,687
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
19,188
|
|
|
$
|
16,204
|
|
Actual return on plan assets
|
|
|
(4,096
|
)
|
|
|
2,174
|
|
Company contributions
|
|
|
1,151
|
|
|
|
1,402
|
|
Expenses and benefits paid from plan assets
|
|
|
(892
|
)
|
|
|
(592
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
15,351
|
|
|
$
|
19,188
|
|
|
|
|
|
|
|
|
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
Funded status of plan
|
|
$
|
(18,986
|
)
|
|
$
|
(10,500
|
)
|
Unrecognized actuarial loss
|
|
|
9,461
|
|
|
|
1,374
|
|
Unamortized prior service cost
|
|
|
722
|
|
|
|
1,320
|
|
Employer contributions, 9/30 12/31
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(8,803
|
)
|
|
$
|
(7,777
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the statement of financial position
consist of:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Noncurrent assets
|
|
$
|
|
|
|
$
|
290
|
|
Current liabilities
|
|
|
(166
|
)
|
|
|
(119
|
)
|
Noncurrent liabilities
|
|
|
(18,820
|
)
|
|
|
(10,642
|
)
|
Accumulated other comprehensive income(1)
|
|
|
10,183
|
|
|
|
2,694
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(8,803
|
)
|
|
$
|
(7,777
|
)
|
|
|
|
|
|
|
|
|
|
105
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
The total unfunded pension liability on the Consolidated Balance
Sheets as of December 31, 2008 and 2007 included a related
income tax effect of $(2.1) million and $0.7 million,
respectively. |
Other changes in plan assets and benefit obligations recognized
in other comprehensive income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in thousands)
|
|
|
Net (gain) loss
|
|
$
|
8,088
|
|
|
$
|
(1,190
|
)
|
Amortization of net (loss) gain
|
|
|
|
|
|
|
(102
|
)
|
Amortization of prior service cost
|
|
|
(598
|
)
|
|
|
(477
|
)
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income (loss)
|
|
$
|
7,490
|
|
|
$
|
(1,769
|
)
|
|
|
|
|
|
|
|
|
|
Information for defined benefit plans with accumulated benefit
obligations in excess of plan assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
|
(in thousands)
|
|
|
Accumulated benefit obligation
|
|
$
|
33,125
|
|
|
$
|
9,396
|
|
Projected benefit obligation
|
|
$
|
34,337
|
|
|
$
|
10,790
|
|
Plan assets
|
|
$
|
15,351
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2007 the plan assets of the Companys
qualified plan exceeded its accumulated benefit obligation and
therefore is excluded. |
Net periodic pension cost for 2008, 2007 and 2006 for pension
and supplemental benefit plans includes the following components
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Service cost
|
|
$
|
1,026
|
|
|
$
|
558
|
|
|
$
|
519
|
|
Interest cost
|
|
|
2,316
|
|
|
|
1,648
|
|
|
|
1,478
|
|
Return on assets (expected)
|
|
|
(1,792
|
)
|
|
|
(1,277
|
)
|
|
|
(1,125
|
)
|
Recognized net actuarial (gain) loss
|
|
|
|
|
|
|
102
|
|
|
|
8
|
|
Amortization of prior service cost(1)
|
|
|
598
|
|
|
|
477
|
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost(2)
|
|
$
|
2,148
|
|
|
$
|
1,508
|
|
|
$
|
1,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior service cost is amortized on a straight-line basis over
the average remaining service period of employees expected to
receive benefits under the plan. |
|
(2) |
|
For 2008, this represents 15 months of expense as a result
of changing the measurement date from September 30 to
December 31. Of the total net periodic pension cost of
$2,148 thousand, approximately $1,718 thousand was included in
pension expense in the Consolidated Statements of Operations and
$430 thousand was reflected as an adjustment to retained
earnings in the Consolidated Balance Sheet. |
The weighted-average actuarial assumptions used to determine the
benefit obligations for the three years presented are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Assumed discount rate for non-qualified plan participants
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
|
5.75
|
%
|
Assumed discount rate for qualified plan participants
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
|
5.75
|
%
|
Rates of compensation increase
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
106
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted-average actuarial assumptions used to determine the
net periodic benefit costs are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Assumed discount rate for non-qualified plan participants
|
|
|
6.25
|
%
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
Assumed discount rate for qualified plan participants
|
|
|
6.25
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Rates of compensation increase
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
|
|
3.75
|
%
|
Expected long-term rate of return on plan assets
|
|
|
7.50
|
%
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
The expected long-term rate of return on assets is derived using
the building block approach which includes assumptions for the
long term inflation rate, real return, and equity risk premiums.
No minimum funding contributions are required in 2009 for the
plan; however, the Company may make a voluntary contribution.
As of December 31, 2008, the expected benefit payments
related to the Companys defined benefit pension plans
during the next ten years are as follows (in thousands):
|
|
|
|
|
2009
|
|
$
|
850
|
|
2010
|
|
|
10,516
|
|
2011
|
|
|
933
|
|
2012
|
|
|
1,096
|
|
2013
|
|
|
1,383
|
|
2014 2018
|
|
|
7,592
|
|
Other
Benefit Plans
ARRIS has established defined contribution plans pursuant to the
Internal Revenue Code Section 401(k) that cover all
eligible U.S. employees. ARRIS contributes to these plans
based upon the dollar amount of each participants
contribution. ARRIS made matching contributions to these plans
of approximately $4.1 million, $2.1 million and
$1.5 million in 2008, 2007, and 2006, respectively.
The Company has a deferred compensation plan that does not
qualify under Section 401(k) of the Internal Revenue Code,
which was available to certain current and former officers and
key executives of C-COR. During 2008, this plan was merged into
a new non-qualified deferred compensation plan which is also
available to key executives of the Company. Employee
compensation deferrals and matching contributions are held in a
rabbi trust. The total of net employee deferrals and matching
contributions, which is reflected in other long-term
liabilities, was $0.8 million and $3.7 million at
December 31, 2008 and 2007, respectively.
The Company previously 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. The total of net employee deferral and matching
contributions, which is reflected in other long-term
liabilities, was $1.9 million and $3.2 million at
December 31, 2008 and 2007, respectively.
The Company also has a deferred retirement salary plan, which
was limited to certain current or former officers of C-COR. The
present value of the estimated future retirement benefit
payments is being accrued over the estimated service period from
the date of signed agreements with the employees. The accrued
balance of this plan, the majority of which is included in other
long-term liabilities, was $2.3 million and
$2.1 million at December 31, 2008 and 2007,
respectively. Total expenses included in continuing operations
for the deferred retirement salary plan were approximately $284
thousand and $36 thousand for 2008 and 2007, respectively.
107
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 19.
|
Summary
Quarterly Consolidated Financial Information
(unaudited)
|
The following table summarizes ARRIS quarterly
consolidated financial information (in thousands, except share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2008 Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Net sales
|
|
$
|
273,506
|
|
|
$
|
281,110
|
|
|
$
|
297,551
|
|
|
$
|
292,398
|
|
Gross margin(1)
|
|
|
85,248
|
|
|
|
92,884
|
|
|
|
106,134
|
|
|
|
108,863
|
|
Operating income (loss)(2)
|
|
|
6,485
|
|
|
|
15,547
|
|
|
|
36,301
|
|
|
|
(176,446
|
)
|
Income (loss) from continuing operations
|
|
|
5,405
|
|
|
|
9,437
|
|
|
|
24,075
|
|
|
|
(176,233
|
)
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(4)
|
|
$
|
5,405
|
|
|
$
|
9,437
|
|
|
$
|
24,075
|
|
|
$
|
(162,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.20
|
|
|
$
|
(1.32
|
)
|
Income from discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net income (loss)
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.20
|
|
|
$
|
(1.32
|
)
|
Net income (loss) per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.19
|
|
|
$
|
(1.32
|
)
|
Income from discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net income (loss)
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.19
|
|
|
$
|
(1.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters in 2007 Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
Net sales
|
|
$
|
235,253
|
|
|
$
|
252,718
|
|
|
$
|
254,662
|
|
|
$
|
249,561
|
|
Gross margin(1)
|
|
|
68,747
|
|
|
|
72,376
|
|
|
|
68,834
|
|
|
|
63,925
|
|
Operating income(2)
|
|
|
25,997
|
|
|
|
28,072
|
|
|
|
27,202
|
|
|
|
12,641
|
|
Income from continuing operations(3)
|
|
|
37,644
|
|
|
|
23,274
|
|
|
|
27,522
|
|
|
|
9,696
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
330
|
|
|
|
(126
|
)
|
Net income(4)
|
|
$
|
37,644
|
|
|
$
|
23,274
|
|
|
$
|
27,852
|
|
|
$
|
9,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.35
|
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.08
|
|
Income from discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net income
|
|
$
|
0.35
|
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.08
|
|
Net income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.08
|
|
Income from discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net income
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.08
|
|
|
|
|
(1) |
|
During each quarter in 2008 and 2007, the Company recognized
stock compensation expense of approximately $0.2 million in
cost of goods sold which impacted gross margins. |
|
|
|
During the fourth quarter of 2007, the Company recorded a charge
of approximately $1.0 million related to the write off of
inventory for the discontinuation of a particular product. |
|
(2) |
|
In addition to (1) above, the following items impacted
operating income: |
|
|
|
|
|
During the first, second, third and fourth quarters of 2008, the
Company recognized stock compensation expense (included in
operating expenses) of approximately $2.5 million,
$2.6 million, $2.6 million and
|
108
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
$2.7 million, respectively. During the first, second, third
and fourth quarters of 2007, the Company recognized stock
compensation expense (included in operating expenses) of
approximately $2.5 million, $3.1 million,
$2.5 million and $2.0 million, respectively.
|
|
|
|
|
|
During the first, second, third and fourth quarters of 2008, the
Company recorded restructuring reserve adjustments of
$0.4 million, $0.2 million, $0.2 million, and
$0.4 million, respectively. During the first quarter of
2007, the Company recorded a restructuring reserve adjustment of
approximately $0.4 million. The adjustments predominantly
related to changes in estimates related to real estate leases.
|
|
|
|
During the first quarter of 2007, the Company recorded a gain of
$0.4 million related to previously written off receivables.
This gain resulted in a reduction in bad debt expense for the
quarter.
|
|
|
|
During the first quarter of 2008, the Company recorded expenses
of approximately $0.4 million related to the integration of
C-COR into ARRIS following the December 2007 acquisition.
|
|
|
|
During the fourth quarter of 2007, ARRIS completed its
acquisition of C-COR. As a result, the Company acquired
approximately $6.1 million of in-process
research & development which was subsequently written
off. Additionally, the Company recorded amortization of
intangibles during the fourth quarter of 2007 of approximately
$2.1 million, predominantly related to the intangible
assets acquired from C-COR. Prior to the fourth quarter of 2007,
ARRIS recorded approximately $0.1 million to
$0.2 million per quarter in 2006 and 2007 related to the
amortization of it prior intangibles.
|
|
|
|
During the first, second, third and fourth quarters of 2008, the
Company recognized amortization of intangible assets of
approximately $13.3 million, $12.5 million,
$9.1 million and $9.3 million, respectively. During
the first, second, third and fourth quarters of 2007, the
Company recognized amortization of intangible assets of
approximately $0.1 million, $0.1 million,
$0.1 million and $2.1 million, respectively.
|
|
|
|
During the fourth quarter 2008, ARRIS recorded goodwill
impairment charges of $209.3 million with respect to the
goodwill testing.
|
|
|
|
(3) |
|
During the second and third quarters of 2007, ARRIS recorded
gains of approximately $1.3 million and $3.5 million,
respectively, related to its investments. |
|
|
|
In January 2007, ARRIS announced its intention to acquire
TANDBERG Television. TANDBERG subsequently choose to accept
another partys bid and the ARRIS bid lapsed. As part
of the initial agreement, the Company received a
break-up fee
of $18.0 million. In conjunction with the proposed
transaction, ARRIS incurred expenses of approximately
$7.5 million. ARRIS also realized a gain of approximately
$12.3 million on the sale of foreign exchange contracts the
Company purchased to hedge the transaction purchase price. The
net impact was the recognition of a gain of approximately
$22.8 million during the first quarter of 2007 as a result
of the failed acquisition. |
|
(4) |
|
During the third quarter of 2008, the Company recorded an income
tax benefit of $1.5 million related to certain provision to
return adjustments. |
|
|
|
During the fourth quarter of 2008, ARRIS recorded an income tax
adjustment of approximately $24.7 million related to the
deferred tax impacts associated with the goodwill impairment. |
|
|
|
During the first, third, and fourth quarters of 2007, the
Company recorded tax adjustments of $3.2 million,
$3.5 million, and $1.2 million, respectively, related
to valuation allowance and R&D tax credits. These
adjustments resulted in a reduction of income tax expense during
those quarters. |
From time to time, ARRIS is involved in claims, disputes,
litigation or legal proceedings incidental to the ordinary
course of its business, such as employment matters,
environmental proceedings, contractual disputes and intellectual
property disputes. Except as described below, ARRIS is not party
to any proceedings that are, or reasonably could be expected to
be, material to its business, results of operations or financial
condition.
109
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The three previously reported Hybrid Patents, Inc. cases have
been settled. ARRIS settlement costs, which were not
significant, were included in operating expenses for the quarter
ended March 31, 2008.
The previously reported GPNE Corp. (GPNE) cases have
been settled. ARRIS settlement costs, which were not
significant, were included in operating expenses for the quarter
ended September 30, 2008.
The previously disclosed USA Video Technology Corp. a suit
against Time Warner Cable, Cox, Charter and Comcast was
successfully concluded on summary judgment motions.
Commencing in 2005, Rembrandt Technologies, LP filed a series of
lawsuits against Charter Communications, Inc, Time Warner Cable,
Inc., Comcast Corporation and others alleging infringement of
eight (8) patents related to the cable systems
operators use of data transmission, video, cable modem,
voice-over-internet, and other technologies and applications.
Although ARRIS is not a defendant in any of these lawsuits, its
customers are, and its customers either have requested
indemnification from, or may request indemnification or
cooperation with the defense costs from, ARRIS and the other
manufacturers of the equipment that is alleged to infringe.
ARRIS is party to a joint defense agreement with respect to one
of the lawsuits and has various understandings with the
defendants in the remaining lawsuits with respect to cost
sharing. In June 2007, the Judicial Panel of multi district
litigation issued an order centralizing the litigation for
administrative purposes in the District Court for Delaware. In
November 2007 ARRIS, Cisco, Motorola and other suppliers filed a
declaratory judgment action in the District Court of Delaware
seeking to have the court declare the patents invalid and not
infringed. After a favorable Markman hearing, Rembrandt reduced
the number of asserted patents from 8 to 5 with leave to
reassert under certain circumstances. It is premature to assess
the likelihood of a favorable outcome. In the event of an
adverse outcome, ARRIS could be required to indemnify its
customers, pay royalties,
and/or cease
using certain technology. Also, an adverse outcome may require a
change in the
DOCSIS®
standards to avoid using the patented technology.
In connection with our acquisition of C-COR, Inc., ARRIS on
October 31, 2007, was named as the defendant in a suit
entitled CIBC World Market Corp. vs. ARRIS Group, Inc., Action
No. 603605/2007, in the Supreme Court of the State of New
York, New York County. In the suit CIBC asserts that it is
entitled to a $4.0 million fee (fee) at the
closing of the proposed acquisition. We do not believe that any
fee is due to CIBC in connection with this acquisition.
ARRISs position is that its June 1, 2005, engagement
with CIBC, pursuant to which CIBC asserts its claim, was
terminated and that no fee is due under the engagement.
Independent of that termination, CIBC had a conflict of
interests in representing ARRIS in the transaction, provided no
services to ARRIS in connection with the transaction, and
otherwise is estopped from asserting that it is entitled to a
fee. ARRIS is contesting the entitlement to a fee asserted by
CIBC vigorously.
In 2007, ARRIS received correspondence from attorneys for the
Adelphia Recovery Trust (Trust), that the Company
may have received transfers from Adelphia Cablevision, LLC
(Cablevision), one of the Adelphia debtors, during
the year prior to its filing of a Chapter 11 petition on
June 25, 2002 (the Petition Date). The
correspondence further asserts that information obtained during
the course of the Adelphia Chapter 11 proceedings indicates
that Cablevision was insolvent during the year prior to the
Petition Date, and, accordingly, the Trust intends to assert
that the payments made to ARRIS were fraudulent transfers under
section 548 (a) of the Bankruptcy Code that may be
recovered for the benefit of Cablevisions bankruptcy
estate pursuant to section 550 of the Bankruptcy Code.
Prior to its acquisition by ARRIS, C-COR received a similar
correspondence making the same claims. We understand that
similar letters were received by other Adelphia suppliers and we
may seek to enter into a joint defense agreement to share legal
expenses if a suit is commenced. To date, no suit has been
commenced by the Trust. In the event a suit is commenced, ARRIS
intends to contest the case vigorously. No estimate can be made
of the possible range of loss, if any, associated with a
resolution of these assertions.
In January and February 2008, Verizon Services Corp. filed
separate lawsuits against various affiliates of Cox and against
Charter, in the District Courts for the Eastern District of
Virginia and for the Eastern District of Texas respectively,
alleging infringement of eight patents. In the Verizon v.
Cox suit, the jury issued a verdict in favor of Cox, finding
non-infringement in all patents and invalidating two of
Verizons patents. It is anticipated that Verizon may
appeal. The suit against Charter is still pending, and trial is
anticipated to take place in 2010. Verizon and Comcast have
reached a settlement of the subject patents. It is premature to
assess the likelihood of a favorable
110
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outcome of the Charter case or Cox appeal; though the Cox
outcome at trial increases the likelihood of a favorable Charter
outcome. In the event of an unfavorable outcome, ARRIS may be
required to indemnify Charter and Cox, pay royalties
and/or cease
utilizing certain technology.
Acacia Media Technologies Corp. has sued Charter and Time Warner
Cable, Inc. for allegedly infringing U.S. Patent Nos.
5,132,992; 5,253,275; 5,550,863; and 6,144,702. The case has
been bifurcated, where the case for invalidity of the patents
will be tried first, and only if one or more patents are found
to be valid, then the case for infringement will be tried. Both
customers requested C-CORs, as well as other
vendors, support under the indemnity provisions of the
purchase agreements (related to
video-on-demand
products). We are reviewing the patents and analyzing the extent
to which these patents may relate to our products. It is
premature to assess the likelihood of a favorable outcome. In
the event of an unfavorable outcome, ARRIS may be required to
indemnify the defendants, pay royalties and /or cease using
certain technology.
V-Tran Media Technologies has filed a number of lawsuits against
21 different parties, including suits against Comcast, Charter,
Verizon, Time Warner and numerous smaller MSOs for infringement
on two patents related to television broadcast systems for
selective transmission. Both patents expired in June 2008. C-COR
manufactured products that allegedly infringed on their patents.
ARRIS is reviewing the patents and our products and analyzing
the extent to which these patents may relate to our products. It
is premature to assess the likelihood of a favorable outcome. In
the event of an unfavorable outcome, ARRIS may be required to
indemnify the defendants, or pay royalties. Given that the
patents have expired, it is unlikely that the case will result
in injunctions or ceasing the use of the technology.
In February 2008, sixteen former employees of a former
subsidiary of C-COR, filed a Fair Labor Standards Act suit
against the former subsidiary and C-COR alleging that the
plaintiffs were not properly paid for overtime. The suit was
filed as a class action and the proposed class could include
1,000 cable installers and field technicians. ARRIS is actively
contesting the suit.
From time to time third parties approach ARRIS or an ARRIS
customer, seeking that ARRIS or its customer consider entering
into a license agreement for such patents. Such invitations
cause ARRIS to dedicate time to study such patents and enter
into discussions with such third parties regarding the merits
and value, if any, of the patents. These discussions, may
materialize into license agreements or patents asserted against
ARRIS or its customers. If asserted against our customers, our
customers may seek indemnification from ARRIS. It is not
possible to determine the impact of any such ongoing discussions
on ARRISs business financial conditions.
111
PART III
|
|
Item 10.
|
Directors,
Executive Officers, and Corporate Governance
|
Information relating to directors and officers of ARRIS, the
Audit Committee of the board of directors and stockholder
nominations for directors is set forth under the captions
entitled Election of Directors,
Section 16(a) Beneficial Ownership Reporting
Compliance, and Committees of the Board of Directors
and Meeting Attendance in the Companys Proxy
Statement for the 2008 Annual Meeting of Stockholders and is
incorporated herein by reference. Certain information concerning
the executive officers of the Company is set forth in
Part I of this document under the caption entitled
Executive Officers of the Company.
ARRIS code of ethics and financial code of ethics
(applicable to our CEO, senior financial officers, and all
finance, accounting, and legal managers) are available on our
website at www.arrisi.com under Investor Relations,
Corporate Governance. The website also will disclose whether
there have been any amendments or waivers to the Code of Ethics
and Financial Code of Ethics. ARRIS will provide copies of these
documents in electronic or paper form upon request to Investor
Relations, free of charge.
ARRIS board of directors has identified Matthew Kearney
and John Petty, both members of the Audit Committee, as our
audit committee financial experts, as defined by the SEC.
|
|
Item 11.
|
Executive
Compensation
|
Information regarding compensation of officers and directors of
ARRIS is set forth under the captions entitled Executive
Compensation, Compensation of Directors,
Employment Contracts and Termination of Employment and
Change-In-Control
Arrangements, Committees of the Board of Directors
and Meeting Attendance Compensation Committee,
and Compensation Committee Report in the Proxy
Statement and is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners, Management and Related
Stockholders Matters
|
Information regarding ownership of ARRIS common stock is set
forth under the captions entitled Equity Compensation Plan
Information, Security Ownership of Management
and Security Ownership of Principal Stockholders in
the Proxy Statement and is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships, Related Transactions, and Director
Independence
|
Information regarding certain relationships, related
transactions with ARRIS, and director independence is set forth
under the captions entitled Compensation of
Directors, Certain Relationships and Related Party
Transactions, and Election of Directors in the
Proxy Statement and is incorporated herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Information regarding principal accountant fees and services is
set forth under the caption Relationship with Independent
Registered Public Accounting Firm in the Proxy Statement
and is incorporated herein by reference.
112
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
(a)
|
(1) Financial
Statements
|
The following Consolidated Financial Statements of ARRIS Group,
Inc. and Report of Ernst & Young LLP, Independent
Registered Public Accounting Firm are filed as part of this
Report.
|
|
|
|
|
|
|
Page
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
67
|
|
Consolidated Balance Sheets at December 31, 2008 and 2007
|
|
|
68
|
|
Consolidated Statements of Operations for the years ended
December 31, 2008, 2007 and 2006
|
|
|
69
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007 and 2006
|
|
|
70
|
|
Consolidated Statements of Stockholders Equity for the
years ended December 31, 2008, 2007 and 2006
|
|
|
72
|
|
Notes to the Consolidated Financial Statements
|
|
|
74
|
|
113
|
|
(a)
|
(2) Financial
Statement Schedules
|
The following consolidated financial statement schedule of ARRIS
is included in this item pursuant to paragraph (b) of
Item 15:
Schedule II
Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are not applicable, and therefore have been omitted.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Charge to
|
|
|
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses(1)
|
|
|
Deductions(2)
|
|
|
Period
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowance deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,826
|
|
|
$
|
1,151
|
|
|
$
|
(11
|
)
|
|
$
|
3,988
|
|
Reserve for obsolete and excess inventory(3)
|
|
$
|
12,848
|
|
|
$
|
12,815
|
|
|
$
|
6,852
|
|
|
$
|
18,811
|
|
Income tax valuation allowance(4)
|
|
$
|
23,494
|
|
|
$
|
|
|
|
$
|
7,776
|
|
|
$
|
15,718
|
|
YEAR ENDED DECEMBER 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowance deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,576
|
|
|
$
|
279
|
|
|
$
|
1,029
|
|
|
$
|
2,826
|
|
Reserve for obsolete and excess inventory(3)
|
|
$
|
13,245
|
|
|
$
|
3,397
|
|
|
$
|
3,794
|
|
|
$
|
12,848
|
|
Income tax valuation allowance(4)
|
|
$
|
9,393
|
|
|
$
|
19,294
|
|
|
$
|
5,193
|
|
|
$
|
23,494
|
|
YEAR ENDED DECEMBER 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves and allowance deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,729
|
|
|
$
|
(174
|
)
|
|
$
|
(21
|
)
|
|
$
|
3,576
|
|
Reserve for obsolete and excess inventory(3)
|
|
$
|
15,151
|
|
|
$
|
2,880
|
|
|
$
|
4,786
|
|
|
$
|
13,245
|
|
Income tax valuation allowance(4)
|
|
$
|
87,202
|
|
|
$
|
|
|
|
$
|
77,809
|
|
|
$
|
9,393
|
|
|
|
|
(1) |
|
In the year ended December 31, 2007, the charge to expense
primarily represents an adjustment to goodwill for the acquired
valuation allowances from C-COR. |
|
(2) |
|
Represents: a) Uncollectible accounts written off, net of
recoveries and write-offs, b) Net change in the sales
return and allowance account, and c) Disposal of obsolete
and excess inventory, and d) Release and correction of
valuation allowances. |
|
(3) |
|
The reserve for obsolescence and excess inventory is included in
inventories. |
|
(4) |
|
The income tax valuation allowance is included in current and
noncurrent deferred income tax assets. |
114
Each management contract or compensation plan required to be
filed as an exhibit is identified by an asterisk (*).
|
|
|
|
|
|
|
|
|
|
|
The filings referenced for
|
|
|
|
|
incorporation by reference are
|
|
|
|
|
ARRIS (formerly known as
|
Exhibit
|
|
|
|
Broadband Parent, Inc.) filings
|
Number
|
|
Description of Exhibit
|
|
unless otherwise noted
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation
|
|
Registration Statement #333-61524, Exhibit 3.1
|
|
3
|
.2
|
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation
|
|
August 3, 2001 Form 8-A, Exhibit 3.2
|
|
3
|
.3
|
|
By-laws
|
|
Registration Statement #333-61524, Exhibit 3.2, filed by
Broadband Parent Corporation
|
|
4
|
.1
|
|
Form of Certificate for Common Stock
|
|
Registration Statement #333-61524, Exhibit 4.1
|
|
4
|
.2
|
|
Rights Agreement dated October 3, 2002
|
|
October 3, 2002 Form 8-K, Exhibit 4.1
|
|
4
|
.3
|
|
Indenture dated November 13, 2006
|
|
November 16, 2006 Form 8-K, Exhibit 4.5
|
|
10
|
.1(a)*
|
|
Amended and Restated Employment Agreement with Robert J.
Stanzione, dated August 6, 2001
|
|
September 30, 2001 Form 10-Q, Exhibit 10.10(c)
|
|
10
|
.1(b)*
|
|
Supplemental Executive Retirement Plan for Robert J. Stanzione,
effective August 6, 2001
|
|
September 30, 2001 Form 10-Q, Exhibit 10.10(d)
|
|
10
|
.1(c)*
|
|
Amendment to Employment Agreement with Robert J. Stanzione,
dated December 8, 2006
|
|
December 12, 2006 Form 8-K, Exhibit 10.7
|
|
10
|
.1(d)*
|
|
Second Amendment to Amended and Restated Employment Agreement
with Robert J. Stanzione, dated November 26, 2008
|
|
November 28, 2008 Form 8-K, Exhibit 10.8
|
|
10
|
.1(e)*
|
|
First Amendment to the Robert Stanzione Supplemental Executive
Retirement Plan, dated November 26, 2008
|
|
November 28, 2008 Form 8-K, Exhibit 10.9
|
|
10
|
.2(a)*
|
|
Amended and Restated Employment Agreement with Lawrence A.
Margolis, dated April 29, 1999
|
|
June 30, 1999 Form 10-Q, Exhibit 10.33, filed by ANTEC Corp
|
|
10
|
.2(b)*
|
|
Amendment to Employment Agreement with Lawrence Margolis, dated
December 8, 2006
|
|
December 12, 2006 Form 8-K, Exhibit 10.6
|
|
10
|
.2(c)*
|
|
Second Amendment to Amended and Restated Employment Agreement
with Lawrence Margolis, dated November 26, 2008
|
|
November 28, 2008 Form 8-K, Exhibit 10.7
|
|
10
|
.3(a)*
|
|
Employment Agreement with David B. Potts dated December 8,
2006
|
|
December 12, 2006 Form 8-K, Exhibit 10.4
|
115
|
|
|
|
|
|
|
|
|
|
|
The filings referenced for
|
|
|
|
|
incorporation by reference are
|
|
|
|
|
ARRIS (formerly known as
|
Exhibit
|
|
|
|
Broadband Parent, Inc.) filings
|
Number
|
|
Description of Exhibit
|
|
unless otherwise noted
|
|
|
10
|
.3(b)*
|
|
First Amendment to Employment Agreement with David B. Potts,
dated November 26, 2008
|
|
November 28, 2008 Form 8-K, Exhibit 10.6
|
|
10
|
.4(a)*
|
|
Employment Agreement with Ronald M. Coppock, dated
December 8, 2006
|
|
December 12, 2006 Form 8-K, Exhibit 10.1
|
|
10
|
.4(b)*
|
|
First Amendment to Employment Agreement with Ronald M. Coppock,
dated November 26, 2008
|
|
November 28, 2008 Form 8-K, Exhibit 10.3
|
|
10
|
.5(a)*
|
|
Employment Agreement with James D. Lakin, dated December 8,
2006
|
|
December 12, 2006 Form 8-K, Exhibit 10.2
|
|
10
|
.5(b)*
|
|
First Amendment to Employment Agreement with James D. Lakin,
dated November 26, 2008
|
|
November 28, 2008 Form 8-K, Exhibit 10.5
|
|
10
|
.6(a)*
|
|
Employment Agreement with Bryant K. Isaacs, dated
December 8, 2006
|
|
December 12, 2006 Form 8-K,
|
|
|
|
|
|
|
Exhibit 10.3
|
|
10
|
.6(b)*
|
|
First Amendment to Employment Agreement with Bryant K. Isaacs,
dated November 26, 2008
|
|
November 28, 2008 Form 8-K, Exhibit 10.4
|
|
10
|
.7*
|
|
Employment Agreement with Bruce McClelland, dated
November 26, 2008
|
|
November 28, 2008 Form 8-K, Exhibit 10.2
|
|
10
|
.8*
|
|
Employment Agreement with John Caezza, dated November 26,
2008
|
|
November 28, 2008 Form 8-K, Exhibit 10.1
|
|
10
|
.9*
|
|
Management Incentive Plan
|
|
July 2, 2001 Appendix IV of Proxy Statement filed as part
of Registration Statement #333-61524, filed by Broadband Parent
Corporation
|
|
10
|
.10*
|
|
2001 Stock Incentive Plan
|
|
July 2, 2001 Appendix III of Proxy Statement filed as part
of Registration Statement #333-61524, files by Broadband Parent
Corporation
|
|
10
|
.11*
|
|
2004 Stock Incentive Plan
|
|
Appendix B of Proxy Statement filed on April 20, 2004
|
|
10
|
.12*
|
|
2007 Stock Incentive Plan
|
|
June 30, 2007, Form 10-Q Exhibit 10.15
|
|
10
|
.13*
|
|
2008 Stock Incentive Plan
|
|
June 30, 2008, Form 10-Q Exhibit 10.15
|
|
10
|
.14*
|
|
Form of Stock Options Grant under 2001 and 2004 Stock Incentive
Plans
|
|
March 31, 2005 Form 10-Q, Exhibit 10.20
|
116
|
|
|
|
|
|
|
|
|
|
|
The filings referenced for
|
|
|
|
|
incorporation by reference are
|
|
|
|
|
ARRIS (formerly known as
|
Exhibit
|
|
|
|
Broadband Parent, Inc.) filings
|
Number
|
|
Description of Exhibit
|
|
unless otherwise noted
|
|
|
10
|
.15*
|
|
Form of Restricted Stock Grant under 2001 and 2004 Stock
Incentive Plans
|
|
March 31, 2005 Form 10-Q, Exhibit 10.21
|
|
10
|
.16*
|
|
Form of Incentive Stock Option Agreement
|
|
September 30, 2007, Form 10-Q Exhibit 10.1
|
|
10
|
.17*
|
|
Form of Nonqualified Stock Option Agreement
|
|
September 30, 2007, Form 10-Q Exhibit 10.2
|
|
10
|
.18*
|
|
Form of Restricted Stock Award Agreement
|
|
September 30, 2007, Form 10-Q Exhibit 10.3
|
|
10
|
.19*
|
|
Form of Nonqualified Stock Options Agreement
|
|
April 11, 2008
Form 8-K,
Exhibit 10.1
|
|
10
|
.20*
|
|
Form of Restricted Stock Grant
|
|
April 11, 2008
Form 8-K,
Exhibit 10.2
|
|
10
|
.21*
|
|
Form of Restricted Stock Unit Grant
|
|
April 11, 2008
Form 8-K,
Exhibit 10.3
|
|
10
|
.22
|
|
Solectron Manufacturing Agreement and Addendum
|
|
December 31, 2001 Form 10-K, Exhibit 10.15
|
|
10
|
.23
|
|
Mitsumi Agreement
|
|
December 31, 2001 Form 10-K, Exhibit 10.16
|
|
21
|
|
|
Subsidiaries of the Registrant
|
|
Filed herewith.
|
|
23
|
|
|
Consent of Ernst & Young LLP
|
|
Filed herewith.
|
|
24
|
|
|
Powers of Attorney
|
|
Filed herewith.
|
|
31
|
.1
|
|
Section 302 Certification of the Chief Executive Officer
|
|
Filed herewith.
|
|
31
|
.2
|
|
Section 302 Certification of the Chief Financial Officer
|
|
Filed herewith.
|
|
32
|
.1
|
|
Section 906 Certification of the Chief Executive Officer
|
|
Filed herewith.
|
|
32
|
.2
|
|
Section 906 Certification of the Chief Financial Officer
|
|
Filed herewith.
|
117
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of 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.
ARRIS GROUP, INC.
David B. Potts
Executive Vice President,
Chief Financial Officer and
Chief Accounting Officer
Dated: February 26, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ RJ
Stanzione
Robert
J. Stanzione
|
|
Chief Executive Officer and
Chairman of the Board of Directors
|
|
February 26, 2009
|
|
|
|
|
|
/s/ David
B. Potts
David
B. Potts
|
|
Executive Vice President,
Chief Financial Officer and
Chief Accounting Officer
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Alex
B. Best*
Alex
B. Best
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Harry
L.
Bosco* Harry
L. Bosco
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ John
A. Craig*
John
A. Craig
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Matthew
B.
Kearney* Matthew
B. Kearney
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ William
H. Lambert*
William
H. Lambert
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ John
R. Petty*
John
R. Petty
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ David
A. Woodle*
David
A. Woodle
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Lawrence
A. Margolis
Lawrence
A. Margolis(as attorney in fact
for each person indicated)
|
|
|
|
|
118