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ARRIS GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) 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, MSOs
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 driving 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 driving 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 spurring cable operators to rapidly deploy new technologies.
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.
Within the past several years, the rise of wideband data services and
improvements in server technology has enabled a new competitive threat. So
called Over-the-Top ("OTT") entertainment, sports, and news video services such
as those offered by Netflix, Hulu, NBC, ABC, CBS, FOX, ESPN and other content
providers, now provide delivery of video programming directly to consumers via
the Internet bypassing the traditional service provider Pay TV service and the
attendant subscription and advertising revenue it generates for the service
providers. In addition, Google and other Internet portals have made acquisitions
and developed methods to provide advertising-supported video content which is
linked directly to advertising buyers, increasing advertising effectiveness and
reducing cost per impression. With the advent of these new OTT services, simple
standalone devices which enable the viewing of OTT video on any television in
the home have appeared on the retail shelves, thus moving the Internet viewing
experience from the PC in the den to the big screen TV in the living room.
Recently consumer electronics manufacturers have begun to incorporate the
network interfaces directly into their television sets and other entertainment
devices. Further, there is a growing demand to be able to view video on multiple
screens, for example tablets and PDAs.
OTT presents a new challenge to the MSOs, as consumers embrace these new
services in lieu of the traditional linear programming provided by the service
providers. OTT services provide the consumer with a new paradigm in
entertainment: availability of a wide range of high quality, feature length
programming specific to their tastes when they want to view it. In today's fast
paced society, immediacy is a major factor in consumer preference. To address
the challenge presented by OTT, the MSOs are moving to provide their content in
a more compelling on-demand format, utilizing many of the technologies used by
the OTT providers, but with a better managed, higher quality, more secure
service, which will enable consumers to receive any content on any screen,
anytime, anywhere. With the emergence of OTT programming, advertising revenues
are moving from the traditional linear programming to these new services. A key
factor in the migration is the economics of advertising in an on-demand format.
With the ability of advertisers to have immediate access to information
regarding individual viewers' preferences, and to be able to correspond with
that viewer in real time, the relevance of each
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ad impression is substantially improved and the cost per relevant impression is
dramatically reduced. The MSOs are addressing this opportunity, incorporating
advertising insertion servers into their networks and building a system behind
these servers to enable advertisers to mount campaigns directly to consumers via
the MSOs' networks.
Over the past decade, United States cable operators have spent substantial
investment 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.
Industry Conditions
Competition Between Cable Operators and Telephone Companies Continues. Telephone
companies are aggressively offering high-speed data services and are making
progress in offering video services to the residential market. Counterbalancing
these offerings, cable companies are providing IP-based telephone service and
DOCSIS 3.0-based ultra high-speed data service.
Competition Between Cable Operators and Direct Broadcast Satellite Services
Continues. Direct broadcast satellite services are aggressively offering many
HDTV channels. DIRECTV and The Dish Network and multiple satellite services
around the world are deploying significantly more HDTV channels including many
local channels. Cable operators are responding by reclaiming spectrum through
advanced technologies such as switched digital video, statistical multiplexing
and upgrades of their networks to 1 GHz to make more spectrum available for
additional HDTV channels.
Personalized Programming is Becoming More Readily Available Across Multiple
Platforms. Demand for bandwidth by cable subscribers continues to grow 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 major cable
operators 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 multiple screens - television, PC, tablet, smart phone and PDA further
increasing the challenges in delivering broadband content.
Emerging Competition Between Cable Operators and Internet-based Services is a
Major Market Disruption. OTT video services enabled by wideband data services,
is increasingly providing the same content provided by MSOs in an on-demand,
location independent format. In our fast paced world such immediacy is finding
favor with consumers. MSOs are responding with enhanced on-demand location
independent services of their own, providing immediate access to a wide array of
content anytime, anywhere, on any screen.
Advertisers are Exploring new Models To Better Leverage Advertising Investments
Across All Media. Google, Yahoo, Facebook, Microsoft and others have introduced
easy, interactive ways for advertisers to mount advertising campaigns, measure
results in real time, target individual consumers with ads specific to their
preferences, and provide consumers with a way to respond to ads in real
time. Advertisers, Programmers, and Content Distributors including MSOs are
evaluating ways to integrate this new advertising paradigm with existing linear
television by incorporating next generation advertising insertion servers in
their networks and jointly building an advanced advertising platform with
consistent technologies, metrics and interfaces across a national footprint.
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Macroeconomic Factors Have and May Continue to Affect our Industry. The recent
economic downturn continues to affect the global economy and the capital
investment strategy of our customers. New household formations are just
beginning to increase in 2013. This subdued climate is expected to result in low
capital expenditure growth rates in 2013 and the foreseeable future.
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 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 have Developed 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 other's
markets.
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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. In 2009, ARRIS
acquired Digeo and EGT. In November 2011, ARRIS acquired BigBand Networks. In
May 2012, Google acquired Motorola Mobility. In December 2012, ARRIS announced
its intention to purchase Motorola Home. It is also possible that other
competitor consolidations may occur which could have an impact on future sales
and profitability.
The impact of the above trends is difficult to predict and quantify, but
generally:
• The pace of new service introduction will continue to increase as will the
variety of connected consumer devices. This change will increase the
consumption of bandwidth and the demand for ARRIS' products.
• The need for MSOs to expand their networks to meet the increased bandwidth
and speed requirements their customers are demanding, driven by both the
competition MSOs face and the proliferation of new services, in turn leads
the MSOs to ask ARRIS, and ARRIS' competitors, for product innovations that
decrease the cost per megabit of capacity required. This trend may have an
impact on both revenues and margins, depending upon (amongst other things),
the life cycle of the technology being deployed and the price points
associated with that technology at a point in time. Further, the
requirement to continuously innovate is expected to require continued
development investment.
• The anticipated shift by MSOs to an all IP network is expected to increase ARRIS' revenue over time, as ARRIS is presently not a participant in the
set top box market which is expected to be displaced by gateways. Gateways
are expected to have lower than the current ARRIS average gross margin, as
a result, it is possible that the Company's overall average gross margin
may decline in the near term as gateway revenues ramp.
• Increased competition for the services of MSOs could result in pressure on
the pricing of their services, which in turn could negatively impact the
level of their capital expenditures and negatively impact their purchases
from ARRIS.
• The contemplated acquisition of Motorola Home will significantly increase the revenue, scale, product offerings of ARRIS. Further, it is anticipated
that ARRIS will incur significant debt and issue equity to complete the
acquisition. See Risk Factors for potential impacts associated with the
acquisition.
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.
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.
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On December 19, 2012 we entered into an Acquisition Agreement with Motorola
Mobility LLC, a Google Inc. subsidiary, pursuant to which, subject to the
satisfaction or waiver of the conditions therein, we will acquire the Motorola
Home business from Motorola Mobility for $2.35 billion in cash and equity,
subject to certain adjustments as provided for in the Agreement. The transaction
is expected to close in the second quarter of 2013. We believe acquiring
Motorola Home will enhance our ability to provide next-generation consumer video
products and services, supporting a more comprehensive product offering while
also accelerating our ability to deliver a comprehensive set of industry-leading
new products for broadband to a wide spectrum of customers. The acquisition adds
expertise in video and a larger presence in the home to our core strengths in
voice and data, ensuring we are even better positioned to capitalize on and
manage the evolution toward multi-screen home entertainment. The transaction
will increase our patent portfolio and provide a license to a wide array of
Motorola Mobility patents.
Below are some key highlights and trends:
Financial Highlights
• Sales in 2012 were $1.354 billion as compared to $1.089 billion in 2011.
• Gross margin percentage was 34.2% in 2012, which compares to 37.7% in 2011.
The decline reflects a product mix shift with higher percentage of Customer
Premise Equipment and HFC equipment sales (which have lower than average
margins) and lower percentage of CMTS equipment sales (which have higher
than average margins).
• We invested $170.7 million in research and development in 2012, up $24.2 million or approximately 16.5% from 2011.
• We ended 2012 with $584.0 million of cash, cash equivalents, short-term &
long-term marketable security investments, which compares to $561.1 million
at the end of 2011. We generated approximately $84.4 million of cash from
operating activities in 2012 and $113.2 million during 2011.
• During 2012, we used $51.9 million of cash to repurchase 4.5 million shares
of our common stock at an average price of $11.55 per share.
Product Line Highlights
Broadband Communications Systems
• CMTS
• Downstream port shipments were approximately 349 thousand in 2012, as
compared to 316 thousand in 2011.
• Continued capacity expansion with both new hardware sales (32D and 24U
line cards) as well as license upgrades to existing deployed product.
• Neared completion of development of next generation E6000 Converged Edge
Router CMTS product and started customer trials to enable smooth
transition of legacy video networks to IP.
• CPE
• Approximately 8.5 million CPE units were shipped in 2012 as compared to
5.3 million CPE units in 2011. Shipments of DOCSIS 3.0 CPEincreased to
81% of the total unit shipments in 2012 as compared to 40% in 2011.
• Significant increase in WiFi enabled devices as operaters extend their
network deep into the consumers home to ensure high quality of service
experience and simplify network management.
• Maintained number one EMTA market share for 32 consecutive quarters
(source: Infonetics).
• Whole Home IP Video Solution
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• Continued commercial deployment of a unique next generation hybrid whole
home media solution, taking advantage of the technology andknow-how
from the Digeo acquisition and the core technologies from our DOCSIS CPE
products.
• Expanded portfolio to include additional 3rdparty middleware options
such as NDS (Cisco) and Comcast RDK
Access, Transport & Supplies
• Selected as sole source optical node supplier with major MSOs.
• Growth in metro Wi-Fi deployments.
• Enhanced version of CHP COR Wave II platform.
Media & Communications Systems
• Growing share of linear advertising back office and server in the North
American market.
• Expanded deployments of ServAssure and WorkAssure in North and South
America.
Non-GAAP Measures
In addition to reviewing our financial results as determined under U.S. GAAP,
ARRIS management also uses non-GAAP measures, in particular Adjusted
("non-GAAP") earnings per share, as we believe they provide a meaningful insight
into our business and trends. We also believe that these non-GAAP measures
provide readers of our financial statements with useful information and insight
with respect to the results of our business. However, the presentation of
non-GAAP information is not intended to be considered in isolation or as a
substitute for results prepared in accordance with GAAP. Below are tables for
2012, 2011 and 2010 which detail and reconcile GAAP and non-GAAP earnings per
share:
(in thousands, except per
share data) For the Year Ended December 31, 2012
Income
Other Tax Net
Gross Operating Operating (Income) Expense Income
Margin Expense Income Expense (Benefit) (Loss)
Amounts in accordance with
GAAP $ 462,577 $ 375,306 $ 87,271 $ 12,975 $ 20,837 $ 53,459
Acquisition accounting
impacts related to deferred
revenue 2,899 - 2,899 - - 2,899
Stock compensation expense 3,169 (24,737 ) 27,906 - - 27,906
Amortization of intangible
assets - (30,294 ) 30,294 - - 30,294
Acquisition costs,
restructuring, and
integration costs - (12,631 ) 12,631 - - 12,631
Loss of sale of product line - (337 ) 337 - - 337
Settlement Charge - Pension - (3,064 ) 3,064 - - 3,064
Impairment of investment - - - (533 ) - 533
Non-cash interest expense - - (12,358 ) - 12,358
Adjustments of income tax
valuation allowances and
otherdiscrete tax items - - - - 4,658 (4,658 )
Tax related to items above - - - - 29,957 (29,957 )
Non-GAAP amounts $ 468,645 $ 304,243 $ 164,402 $ 84 $ 55,452 $ 108,866
GAAP net income per share -
diluted $ 0.46
Non-GAAP net income per share
- diluted $ 0.93
Weighted average common
shares - diluted 116,514
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(in thousands, except per share
data) For the Year Ended December 31, 2011
Income
Other Tax Net
Gross Operating Operating (Income) Expense Income
Margin Expense Income Expense (Benefit) (Loss)
Amounts in accordance with GAAP $ 410,513 $ 425,121 $ (14,608 ) $ 13,903 $ (10,849 ) $ (17,662 )
Acquisition accounting impacts
related to deferred revenue
3,126 3,126 - - 3,126
Stock compensation expense 2,040 (20,015 ) 22,055 - - 22,055
Acquisition costs, restructuring,
and integration costs - (7,565 ) 7,565 - - 7,565
Amortization of intangible assets - (33,649 ) 33,649 - - 33,649
Impairment of goodwill and
intangible assets - (88,633 ) 88,633 - - 88,633
Non-cash interest expense - - - (11,545 ) - 11,545
Impairment of investment - - - (3,000 ) - 3,000
Loss on retirement of debt - - - (19 ) - 19
Tax related to items above - - - - 26,642 (26,642 )
Adjustments of tax related to
goodwill impairment and certain
provision to return adjustments - - - - 25,584 (25,584 )
Non-GAAP amounts $ 415,679 $ 275,259 $ 140,420 $ (661 ) $ 41,377 $ 99,704
GAAP net income per share - diluted $ (0.15 )
Non-GAAP net income per share -
diluted $ 0.81
GAAP weighted average common shares
- diluted 120,157 (1)
Non-GAAP weighted average common
shares - diluted 122,555 (2)
(1) Basic shares used for 2011 as losses were reported for those periods and the
inclusion of dilutive shares would be antidilutive (2) Non-GAAP net income
for 2011 is positive and, therefore, the diluted shares used in this
calculation include the effect of options.
(in thousands, except per share
data) For the Year Ended December 31, 2010
Income
Other Tax Net
Gross Operating Operating (Income) Expense Income
Margin Expense Income Expense (Benefit) (Loss)
Amounts in accordance with GAAP $ 424,089 $ 314,184 $ 109,905 $ 15,275 $ 30,502 $ 64,128
Stock compensation expense
1,897 (19,930 ) 21,827 - - 21,827
Acquisition costs, restructuring,
and integration costs - (65 ) 65 - - 65
Amortization of intangible assets - (35,957 ) 35,957 - - 35,957
Non-cash interest expense - - - (11,325 ) - 11,325
Gain on retirement of debt - - - 373 - (373 )
Tax related to items above - - - - 24,311 (24,311 )
Adjustments of income tax
valuation allowances, R&Dcredits,
and other discrete tax items - - - - (889 ) 889
Non-GAAP amounts $ 425,986 $ 258,232 $ 167,754 $ 4,323 $ 53,924 $ 109,507
GAAP net income per share -
diluted $ 0.50
Non-GAAP net income per share -
diluted $ 0.85
GAAP weighted average common
shares - diluted 128,271
Non-GAAP weighted average common
shares - diluted 128,271
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In managing and reviewing our business performance, we exclude a number of items
required by GAAP. Management believes that excluding these items mentioned below
is useful in understanding the trends and managing our operations. Historically,
we have publicly presented these supplemental non-GAAP measures in order to
assist the investment community to see ARRIS through the "eyes of management,"
and therefore enhance understanding of ARRIS' operating performance. Non-GAAP
financial measures should be viewed in addition to, and not as an alternative
to, the Company's reported results prepared in accordance with GAAP. Our
non-GAAP financial measures reflect adjustments based on the following items, as
well as the related income tax effects:
Acquisition Accounting Impacts Related to Deferred Revenue: In connection with
our acquisition of BigBand, business combination rules require us to account for
the fair values of deferred revenue arrangements for which acceptance has not
been obtained, and post contract support in our purchase accounting. The
non-GAAP adjustment to our sales and cost of sales is intended to include the
full amounts of such revenues as if these purchase accounting adjustments had
not been applied. We believe the adjustment to these revenues is useful as a
measure of the ongoing performance of our business. We have historically
experienced high renewal rates related to our support agreements and our
objective is to increase the renewal rates on acquired post contract support
agreements; however, we cannot be certain that our customers will renew our
contracts.
Stock-Based Compensation Expense: We have excluded the effect of stock-based
compensation expenses in calculating our non-GAAP operating expenses and net
income (loss) measures. Although stock-based compensation is a key incentive
offered to our employees, we continue to evaluate our business performance
excluding stock-based compensation expenses. We record non-cash compensation
expense related to grants of options and restricted stock. Depending upon the
size, timing and the terms of the grants, the non-cash compensation expense may
vary significantly but will recur in future periods.
Acquisition Costs: We have excluded the effect of acquisition related expenses
in calculating our non-GAAP operating expenses and net income (loss) measures.
We incurred significant expenses in connection with our pending acquisition of
Motorola Home and our acquisition of BigBand, which we generally would not have
otherwise incurred in the periods presented as part of our continuing
operations. Acquisition related expenses consist of transaction costs, costs for
transitional employees, other acquired employee related costs, and integration
related outside services. We believe it is useful to understand the effects of
these items on our total operating expenses.
Restructuring Costs: We have excluded the effect of restructuring charges in
calculating our non-GAAP operating expenses and net income (loss) measures.
Restructuring expenses consist of employee severance, abandoned facilities, and
other exit costs. We believe it is useful to understand the effects of these
items on our total operating expenses.
Amortization of Intangible Assets: We have excluded the effect of amortization
of intangible assets in calculating our non-GAAP operating expenses and net
income (loss) measures. Amortization of intangible assets is non-cash, and is
inconsistent in amount and frequency and is significantly affected by the timing
and size of our acquisitions. Investors should note that the use of intangible
assets contributed to our revenues earned during the periods presented and will
contribute to our future period revenues as well. Amortization of intangible
assets will recur in future periods.
Impairment of Goodwill and Intangibles: We have excluded the effect of the
estimated impairment of goodwill and intangible assets in calculating our
non-GAAP operating expenses and net income (loss) measures. Although an
impairment does not directly impact the Company's current cash position, such
expense represents the declining value of the technology and other intangibles
assets that were acquired. We exclude these impairments when significant and
they are not reflective of ongoing business and operating results.
Non-Cash Interest on Convertible Debt: We have excluded the effect of non-cash
interest in calculating our non-GAAP operating expenses and net income (loss)
measures. We record the accretion of the debt discount related to the equity
component non-cash interest expense. We believe it is useful to understand the
component of interest expense that will not be paid out in cash.
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Impairment of Investment: We have excluded the effect of an
other-than-temporary impairment of a cost method investment in calculating our
non-GAAP financial measures. We believe it is useful to understand the effect of
this non-cash item in our other expense (income).
Loss (Gain) on Retirement of Debt: We have excluded the effect of the loss
(gain) on retirement of debt in calculating our non-GAAP financial measures. We
believe it is useful for investors to understand the effect of this non-cash
item in our other expense (income).
Loss on Sale of Product Line: We have excluded the effect of a loss on the
sale of a product line in calculating our non-GAAP operating expenses and net
income measures. We believe it is useful to understand the effects of these
items on our total operating expenses.
Settlement Charge-Pension: In an effort to reduce volatility and
administrative expense in connection with the Company's pension plan, we have
offered certain participants an opportunity to voluntarily elect an early payout
of their pension benefits. We exclude this charge in Non-GAAP measures, as this
is a one-time charge non-cash that is not considered by management in their
review of financial results.
Income Tax Expense (Benefit): We have excluded the tax effect of the non-GAAP
items mentioned above. Additionally, we have excluded the effects of certain tax
adjustments related to state valuation allowances, research and development tax
credits and provision to return differences.
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,
2012 2011 2010
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 65.8 62.3 61.0
Gross margin 34.2 37.7 39.0
Operating expenses:
Selling, general, and administrative expenses 12.4 14.0 12.7
Research and development expenses 12.6 13.5 12.9
Impairment of goodwill and intangibles - 8.1 -
Amortization of intangible assets 2.2 3.1 3.3
Restructuring charges 0.5 0.4 -
Operating income (loss) 6.5 (1.4 ) 10.1
Other expense (income):
Interest expense 1.3 1.6 1.7
Loss (gain) on investments (0.1 ) 0.1 (0.1 )
Loss (gain) on foreign currency 0.1 (0.1 ) -
Interest income (0.2 ) (0.3 ) (0.2 )
Other expense (income), net (0.1 ) (0.1 ) -
Income (loss) before income taxes 5.5 (2.6 ) 8.7
Income tax expense 1.5 (1.0 ) 2.8
Net income (loss) 4.0 % (1.6 )% 5.9 %
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Index to Financial Statements
Comparison of Operations for the Three Years Ended December 31, 2012
Net Sales
The table below sets forth our net sales for the three years ended December 31,
2012, 2011 and 2010 for each of our business segments described in Item 1 of
this Form 10-K (in thousands, except percentages):
Net Sales Increase (Decrease) Between Periods
For the Years Ended December 31, 2012 vs. 2011 2011 vs. 2010
2012 2011 2010 $ % $ %
Business Segment:
BCS $ 1,081,246 $ 824,008 $ 841,164 $ 257,238 31.2 % $ (17,156 ) (2.0 )%
ATS 207,513 197,687 181,067 9,826 5.0 % 16,620 9.2 %
MCS 64,904 66,990 65,275 (2,086 ) (3.1 )% 1,715 2.6 %
Total $ 1,353,663 $ 1,088,685 $ 1,087,506 $ 264,978 24.3 % $ 1,179 0.1 %
The table below sets forth our domestic and international sales for the three
years ended December 31, 2012, 2011 and 2010 (in thousands, except percentages):
Net Sales Increase (Decrease) Between Periods
For the Years Ended December 31, 2012 vs. 2011 2011 vs. 2010
2012 2011 2010 $ % $ %
Domestic $ 1,020,060 $ 748,167 $ 705,221 $ 271,893 36.3 % $ 42,946 6.1 %
International:
Americas, excluding U.S 202,887 195,500 222,185 7,387 3.8 % (26,685 ) (12.0 )%
Asia Pacific 65,554 59,194 63,492 6,360 10.7 % (4,298 ) (6.8 )%
EMEA 65,162 85,824 96,608 (20,662 ) (24.1 )% (10,784 ) (11.2 )%
Total international 333,603 340,518 382,285 (6,915 ) (2.0 )% (41,767 ) (10.9 )%
Total $ 1,353,663 $ 1,088,685 $ 1,087,506 $ 264,978 24.3 % $ 1,179 0.1 %
Broadband Communications Systems Net Sales 2012 vs. 2011
During the year ended December 31, 2012, sales of our BCS segment increased
$257.2 million or approximately 31.2%, as compared to 2011.
• This increase in sales is primarily attributable to high demand for our
DOCSIS3.0 CPE equipment and video gateway products.
• The higher sales also reflect the full year sales associated with our late 2011 acquisition of BigBand.
Access, Transport & Supplies Net Sales 2012 vs. 2011
During the year ended December 31, 2012, Access, Transport & Supplies segment
sales increased $9.8 million or approximately 5.0%, as compared to 2011.
• The increase in sales is a result of metro Wi-Fi wireless products, for
which initial sales of this product began in the fourth quarter of 2011.
• This increase in metro Wi-Fi products was partially offset by a decline in
optics products sales and the disposal of our ECCO product line.
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Media & Communications Systems Net Sales 2012 vs. 2011
During the year ended December 31, 2012, Media & Communications Systems segment
sales decreased $2.1 million or 3.1%, as compared to the same period in 2011.
Broadband Communications Systems Net Sales 2011 vs. 2010
During the year ended December 31, 2011, sales of our BCS segment decreased
$17.2 million or approximately 2.0%, as compared to 2010.
• This decline in sales is primarily the result of lower sales or our CMTS
products. The introduction of the higher density downstream line cards and
upgrade licenses for installed base of 16 channel cards enable us to be
more competitive and sell bandwidth at a reduced price per downstream thus
resulted in lower sales for comparable port shipments of our CMTS products.
• Offsetting these declines in CMTS sales was the introduction of our Moxi
Gateway product, resulting in higher CPE sales. Additionally, we had $4.7
million of higher revenue related to sales of the BigBand product.
Access, Transport & Supplies Net Sales 2011 vs. 2010
During the year ended December 31, 2011, Access, Transport & Supplies segment
sales increased $16.6 million or approximately 9.2%, as compared to the same
period in 2010.
• The increase reflects growth in our professional and commercial services as
well as several network upgrade projects.
Media & Communications Systems Net Sales 2011 vs. 2010
During the year ended December 31, 2011, Media & Communications Systems segment
sales increased $1.7 million or 2.6%, as compared to the same period in 2010.
• The increase was primarily due to expansion of deployments for our
Assurance product line as customers continue to focus on operating expense
reductions and improving customer satisfaction.
Gross Margin
The table below sets forth our gross margin for the three years ended
December 31, 2012, 2011 and 2010 for each of our business segments (in
thousands, except percentages):
Gross Margin $ Increase (Decrease) Between Periods
For the Years Ended December 31, 2012 vs. 2011 2011 vs. 2010
2012 2011 2010 $ % $ %
Business Segment:
BCS $ 373,493 $ 319,925 $ 343,884 53,568 16.7 % $ (23,959 ) (7.0 )%
ATS 47,079 49,272 45,971 (2,193 ) (4.5 )% 3,301 7.2 %
MCS 42,005 41,316 34,234 689 1.7 % 7,082 20.7 %
Total $ 462,577 $ 410,513 $ 424,089 $ 52,064 12.7 % $ (13,576 ) (3.2 )%
The table below sets forth our gross margin percentages for the three years
ended December 31, 2012, 2011 and 2010 for each of our business segments:
Gross Margin %
Percentage Point Increase
For the Years Ended December 31, (Decrease) Between Periods
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
Business Segment:
BCS 34.5 % 38.8 % 40.9 % (4.3 ) (2.1 )
ATS 22.7 % 24.9 % 25.4 % (2.2 ) (0.5 )
MCS 64.7 % 61.7 % 52.4 % 3.0 9.3
Total 34.2 % 37.7 % 39.0 % (3.5 ) (1.3 )
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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 2012 vs. 2011
The increase in the BCS segment gross margin dollars and decrease in gross
margin percentage in 2012 as compared to 2011 were related to the following
factors:
• The increase in gross margin dollars was the result of higher sales.
• The decrease in gross margin percentage was primarily reflects a product mix change as we had higher EMTA sales and lower CMTS sales. EMTA products
have a lower gross margin than CMTS products.
Access, Transport & Supplies Gross Margin 2012 vs. 2011
The decrease in the ATS segment gross margin dollars and gross margin percentage
in 2012 as compared to 2011 were related to the following factors:
• The decrease in both gross margin dollar and percentage was driven by
product mix, primarily resulting from lower gross margin for metro Wi-Fi
products and lower volume of optics products
Media & Communications Systems Gross Margin 2012 vs. 2011
The increase in the MCS segment gross margin dollars and gross margin percentage
in 2012 as compared to 2011 are related to the following factors:
• Higher year-over-year sales and product mix resulted in the increase in
both gross margin dollars and percentage.
Broadband Communications Systems Gross Margin 2011 vs. 2010
The decrease in the BCS segment gross margin dollars and gross margin percentage
in 2011 as compared to 2010 were related to the following factors:
• The decrease primarily reflects a product mix change with more sales of CPE
products, which have lower than average margins, and less sales of CMTS
products, which have higher than average margins. The decrease also
reflects competitive price pressure for our CMTS products.
Access, Transport & Supplies Gross Margin 2011 vs. 2010
The increase in the ATS segment gross margin dollars and decrease in gross
margin percentage in 2011 as compared to 2010 were related to the following
factors:
• The increase in gross margin dollars was primarily the result of higher
sales in 2011 as compared to 2010.
• The decrease in gross margin percentage was primarily the result of a change in product mix and pricing pressure associated with Supplies
products.
Media & Communications Systems Gross Margin 2011 vs. 2010
The increase in the MCS segment gross margin dollars and gross margin percentage
in 2011 as compared to 2010 are related to the following factors:
• The increase in gross margin dollars and percentage was primarily due to
higher Assurance sales which have higher gross margins.
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Operating Expenses
The table below provides detail regarding our operating expenses (in thousands,
except percentages):
Operating Expenses Increase (Decrease) Between Periods
For the Years Ended December 31, 2012 vs. 2011 2011 vs. 2010
2012 2011 2010 $ % $ %
Selling, general, &
administrative $ 161,338 $ 148,755 $ 137,694 $ 12,583 8.5 % $ 11,061 8.0 %
Research & development 170,706 146,519 140,468 24,187 16.5 % 6,051 4.3 %
Acquisition costs 5,870 3,205 - 2,665 83.2 % 3,205 100 %
Restructuring 6,761 4,360 65 2,401 55.1 % 4,295 6607.7 %
Impairment of goodwill &
intangibles - 88,633 - (88,633 ) (100 )% 88,633 100 %
Amortization of intangible
assets 30,294 33,649 35,957 (3,355 ) 10.0 % (2,308 ) (6.4 )%
Loss on sale of product line
337 - - 337 100 % - -
Total $ 375,306 $ 425,121 $ 314,184 $ (49,815 ) (11.7 )% $ 110,937 35.3 %
Selling, General, and Administrative, or SG&A, Expenses
2012 vs. 2011
The year over year increase of $12.6 million in SG&A expenses primarily reflects
the addition of BigBand as well as $3.1 million expense associated with early
pension settlements and higher legal expenses.
2011 vs. 2010
Several factors contributed to the $11.1 million increase year over year:
• We acquired BigBand on November 21, 2011 and as a result incurred $3.1
million of incremental SG&A cost in 2011.
• We incurred higher legal expenses as a result of various patent and other
litigation matters (see Part I, Item 3, "Legal Proceedings").
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 corporate facility costs.
2012 vs. 2011
The increase of $24.2 million year-over-year in research and development expense
reflects the addition of BigBand and increased headcount, as we continued to
aggressively invest in R&D.
2011 vs. 2010
The increase of $6.1 million year-over-year in research and development expense
reflects:
• $3.0 million incremental R&D expenses associated with BigBand, which were
acquired in the fourth quarter of 2011.
• Higher prototype and incremental startup costs related to new product
development.
Acquisition Costs
During 2012, we recorded acquisition-related expenses of $5.9 million.
Approximately $0.8 million of these expenses were related to the acquisition of
BigBand and $5.1 million were related to the pending acquisition of Motorola
Home and consisted of transaction costs and legal fees. During 2011, we recorded
acquisition related expenses $3.2 million. These expenses were related to the
acquisition of BigBand and consisted of transaction costs, employee related
costs, and integration related outside services.
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Restructuring Charges
During 2012, 2011 and 2010, we recorded restructuring charges of $6.8 million,
$4.4 million and $0.1 million, respectively. The charges recorded in 2012
related to severance and facilities associated with the continued implementation
of the restructuring initiative following the acquisition of BigBand to align
our workforce and operating costs with current business opportunities. The
majority of the charges recorded in 2011 relate to the restructuring initiative
following the acquisition of BigBand. Charges in 2010 reflected changes in
estimates related to real estate leases associated with the previous
restructuring charges.
Impairment of Goodwill and Intangible Assets
Goodwill relates to the excess of cost over the fair value of net assets
resulting from an acquisition. Our goodwill is tested for impairment on an
annual basis, or more frequently if events or changes in circumstances indicate
that the asset is most likely than not impaired. The annual tests were performed
in the fourth quarters of 2012, 2011 and 2010, with an assessment date of
October 1. No impairment resulted from the review in 2010 or 2012. As a result
of the review in 2011, we recognized a total non-cash goodwill impairment loss
of $41.2 in the MCS reporting unit. The Company determined that the fair values
of the MCS reporting unit was less than its respective carrying amount, as a
result of a decline in the expected future cash flows for the reporting unit. In
making our assessment regarding MCS future cash flows, a number of specific
factors arose from our annual strategic planning process in the fourth quarter,
including an assessment of historical operating results, key customer inputs,
and anticipated development expenditures required to migrate the product
portfolio in line with the changing market dynamics, including the evolution
from a proprietary to open standards IP architecture. As a result of these
factors, the Company has decided to shift some investment from the MCS reporting
unit to its BCS reporting unit. Given the decision to reduce our investment
going forward, we correspondingly moderated our long-term projections for the
MCS segment.
In 2011, indicators of impairment existed for long-lived assets associated with
the MCS reporting unit due to changes in projected operating results and cash
flows. As a result of the review in 2011, an impairment loss of $47.4 million
before tax ($29.1 million after tax) related to MCS customer relationships was
recorded. See Note 14 of Notes to the Consolidated Financial Statements for
disclosures related to goodwill and intangible assets.
Amortization of Intangible Assets
We recorded $30.3 million of intangibles amortization expense in 2012. Our
intangibles amortization expenses in 2012, 2011 and 2010 are related to the
acquisitions of BigBand Networks in November 2011, Digeo, Inc. in October 2009,
EG Technology, Inc. in September 2009, Auspice Corporation in August 2008 and
C-COR Incorporated in December 2007.
Loss on Sale of Product Line
In March of 2012, the Company completed the sale of certain assets of its ECCO
electronic connector product line to Eclipse Embedded Technologies, Inc. for
approximately $3.9 million. The Company recorded a net loss of $(0.3) million on
the sale, which included approximately $0.3 million of transaction related
costs. The results of the ECCO product line were deemed immaterial to the
overall financial results of the Company, and as such the Company has not
reported the results in discontinued operations.
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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
2012 2011 2010 2012 vs. 2011 2011 vs. 2010
Interest expense $ 17,797 $ 16,939 $ 17,965 $ 858 $ (1,026 )
Loss (gain) on debt retirement - 19 (373 ) (19 ) 392
Loss (gain) on investments (1,404 ) 1,570 (414 ) (2,975 ) 1,984
Loss (gain) on foreign currency 786 (580 ) (44 ) 1,366 (536 )
Interest income (3,242 ) (3,154 ) (1,997 ) (87 ) (1,157 )
Other expense (income) (962 ) (891 ) 138 (71 ) (1,029 )
Total other expense $ 12,975 $ 13,903 $ 15,275 $ (928 ) $ (1,372 )
Interest Expense
Interest expense reflects the amortization of deferred finance fees and the
non-cash interest component of our convertible subordinated notes, interest paid
on the notes, capital leases and other debt obligations.
Loss (Gain) on Debt Retirement
During 2011, the Company acquired $5.0 million face value of the notes for
approximately $5.0 million. The Company allocated $2 thousand to the
reacquisition of the equity component of the notes. The Company also wrote off
approximately $33 thousand of deferred finance fees associated with the portion
of the notes acquired. As a result, the Company realized a loss of approximately
$19 thousand on the retirement of the notes.
During 2010, we purchased $24.0 million of face value of the convertible notes
for approximately $23.3 million. We allocated $0.1 million to the reacquisition
of the equity component of the notes. We wrote off approximately $0.2 million of
deferred finance fees associated with the portion of the notes acquired and
realized a gain of approximately $0.4 million on the retirement of the
convertible notes.
Loss (Gain) on Investments
From time to time, we hold certain investments in the common stock of private
and publicly-traded companies, a number of non-marketable equity securities, and
investments in rabbi trusts associated with our deferred compensation plans.
During the years ended December 31, 2012, 2011 and 2010, we recorded net (gains)
losses related to these investments of $(1.4) million, $1.6 million and $(0.4)
million, respectively.
Loss (Gain) on Foreign Currency
During 2012, 2011 and 2010, we recorded foreign currency (gains) losses related
to our international customers whose receivables and collections are denominated
in their local currency, primarily in euro. To mitigate the volatility related
to fluctuations in the foreign exchange rates, we may enter into various foreign
currency contracts. The (gain) loss on foreign currency is driven by the
fluctuations in the foreign currency exchanges rates, primarily the euro.
Interest Income
Interest income reflects interest earned on cash, cash equivalents, short-term
and long-term marketable security investments. Interest income was $3.2 million
in 2012, and $3.2 million in 2011 as compared to $2.0 million in 2010.
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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 2012, we recorded $20.8 million of income tax expense for U.S. federal and
state taxes and foreign taxes, which was 28.0% of our pre-tax income of $74.3
million. The effective income tax rate was favorably impacted by $4.7 million in
discrete tax events. The most significant 2012 discrete tax events were a
reversal of $3.4 million of tax liabilities from uncertain tax positions, mostly
attributable to the expiration of certain statutes of limitations in the third
quarter of 2012, a favorable impact of $0.7 million from global
provision-to-return adjustments and $0.6 million from net valuation allowance
decreases. Exclusive of the discrete tax events, the effective income tax rate
would have been approximately 33.3%. The increase in the effective income tax
rate from prior year, exclusive of discrete tax events and the prior year
Goodwill impairment, was primarily attributable to the absence of research and
development tax credits. While legislation was passed to extend the research and
development tax credit in January of 2013, the passage was too late to allow the
Company to record the benefit in 2012. However, 2012 tax expense was still
favorably impacted by research and development tax credits as a result of the
expiration of certain statute of limitations for prior years and certain
adjustments for provision-to-return. During the first quarter of 2013, the
Company will record the 2012 impact of the 2013 legislation as a favorable
discrete tax event and will also include the impact of the 2013 credit in its
effective income tax rate for 2013.
In 2011, we recorded $10.8 million of income tax benefit for U.S. federal and
state taxes and foreign taxes, which was 38.1% of our pre-tax loss of $28.5
million. Pre-tax income was negatively impacted by $88.6 million as a result of
our impairment of goodwill and intangibles, which generated an unfavorable
permanent difference between book and taxable income of $22.3 million and an
unfavorable timing difference between book and taxable income of $66.3 million.
The allocation of a portion of the total impairment of goodwill to tax
deductible goodwill favorably impacted income tax expense by $7.3 million. The
effective tax rate was favorably impacted by certain discrete tax events. The
2011 discrete tax events included the release of approximately $4.0 million of
state valuation allowances in the first quarter of 2011 and the reversal of $2.7
million of tax liabilities from uncertain tax positions mostly attributable to
the expiration of certain statutes of limitations in the third quarter of 2011,
offset by approximately $3.8 million of tax increases primarily due to
non-deductible acquisition costs, and increases in U.S. Federal valuation
allowances / other. Exclusive of the impairments and the discrete tax events,
the effective income tax rate would have been approximately 29.7%.
In 2010, we recorded $30.5 million of income tax expense for U.S. federal and
state taxes and foreign taxes, which was 32.23% of our pre-tax income of $94.6
million. During the fourth quarter of 2010, approximately $4.1 million of
research and development tax credits were recorded after Congress passed
legislation retroactively extending the tax credits back to January 1, 2010. The
research and development tax credit legislation was extended through
December 31, 2011.
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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,
2012 2011 2010
(in thousands, except DSO and Turns)
Key Working Capital Items
Cash provided by operating activities $ 84,401 $ 113,153 $ 118,509
Cash, cash equivalents, and short-term investments $ 530,117 $ 518,779 $ 620,102
Long-term U.S corporate bonds $ 53,914 $ 42,366 $ -
Accounts Receivable, net $ 188,581 $ 152,437 $ 125,933
-Days Sales Outstanding 46 47 45
Inventory, net $ 133,848 $ 115,912 $ 101,763
- Turns 7.1 6.2 6.7
Key Financing Items
Convertible notes at face value $ 232,050 $ 232,050 $ 237,050
Convertible notes at book value $ 222,124 $ 209,766 $ 202,615
Cash used for early redemption of convertible notes $ - $ 4,984 $ 23,287
Key Shareholder Equity Items
Cash used for share repurchases $ 51,921 $ 109,123 $ 69,326
Capital Expenditures $ 21,507 $ 23,307 $ 22,645
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 convertible notes in a timely fashion.
• Share repurchases - opportunistically repurchase our common stock.
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.
Accounts receivable at the end of 2012 increased as compared to the end of 2011,
primarily as a result of higher sales in the fourth quarter of 2012 as compared
to the fourth quarter of 2011. DSOs decreased slightly from 2011 to 2012,
primarily the result of payment patterns of our customers and timing of
shipments to customers. Looking forward, it is possible that DSOs may increase
dependent upon our customer mix and payment patterns, particularly if
international sales increase.
Inventory increased in 2012 as compared to 2011. The increase in inventory was
primarily related to an increase in BCS inventory level to ensure adequate
supply. Inventory turns increased in 2012 as compared to 2011.
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Early Redemption of Convertible Notes
In 2011 and 2010, we repurchased $5.0 million and $24.0 million of face value of
our convertible notes for approximately $5.0 million and $23.3 million,
respectively. No repurchases were made in 2012.
Common Share Repurchases
During 2012, we repurchased 4.5 million shares of our common stock for $51.9
million at an average stock price of $11.55. During 2011, we repurchased
10.0 million shares of our common stock for $109.1 million at an average stock
price of $10.95. During 2010, we repurchased 6.8 million shares of our common
stock for $69.3 million at an average stock price of $10.24. The remaining
authorized amount for stock repurchases under this program was $19.6 million as
of December 31, 2012.
In the fourth quarter of 2012, the Company's Board of Directors authorized a new
plan for ARRIS to purchase up to an additional $150 million of common stock. No
repurchases have been made under this plan. (As of December 31, 2012, the
remaining authorized amount for future repurchases was $150.0 million) Unless
terminated earlier by a Board resolution, this new plan will expire when ARRIS
has used all authorized funds for repurchase
Summary of Current Liquidity Position and Potential for Future Capital Raising
We believe our current liquidity position, where we had approximately $530.1
million of cash, cash equivalents, and short-term investments and $53.9 million
of long-term marketable securities on hand as of December 31, 2012, together
with the prospects for continued generation of cash from operating activities
are adequate for our short- and medium-term business needs. Upon the closing of
the pending Motorola Home acquisition, we expect to be able to generate
sufficient cash on a consolidated basis to make all of the principal and
interest payments under the anticipated credit agreements, indentures and other
instruments governing our indebtedness. We may in the future elect to repurchase
additional shares of our common stock or additional principal amounts of our
outstanding convertible notes. However, 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. 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.
Contractual Obligations
Following is a summary of our contractual obligations as of December 31, 2012:
Payments due by period
More than
Contractual Obligations Less than 1 Year 1-3 Years 3-5 Years 5 Years Total
(in thousands)
Debt (1) $ 232,050 $ - $ - $ - $ 232,050
Operating leases, net of sublease
income (2) 10,366 15,540 8,906 5,668 40,480
Purchase obligations (3) 214,399 - - - 214,399
Total contractual obligations (4) $ 456,815 $ 15,540
$ 8,906 $ 5,668 $ 486,929
(1) ARRIS may redeem the notes at any time on or after November 15, 2013, subject
to certain conditions. In addition, the holders may require us to purchase
all or a portion of their convertible notes on or after November 15, 2013.
Does not include interest, which is payable at the rate of 2% per annum.
(2) Includes leases which are reflected in restructuring accruals on the
consolidated balance sheets.
(3) 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.
(4) Approximately $25.4 million of uncertain tax position 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.
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We are required to pay a termination fee of $117.5 million to Google if we
terminate the Motorola Home acquisition under certain circumstances specified in
the Acquisition Agreement.
Should the closing of the Motorola Home acquisition be delayed beyond March 19,
2013, which we currently expect, the Company will be subject to "ticking fees"
under the commitment letter entered into with respect to the Credit Facility
that will be used to partially finance the acquisition. For the first 30 days,
the ticking fees for both the Term Loan A and the Term Loan B will be 0.50% per
annum of the total amount committed for each term loan under the commitment
letter. After 30 days, the ticking fee for the Term Loan A will remain 0.50% per
annum, but the ticking fee for the Term Loan B will be calculated at 50% of the
applicable margin for LIBOR advances as determined in accordance with the
commitment letter. Ticking fees will accrue until the earlier of the termination
of the commitment letter for the proposed Credit Facility and the closing of the
transaction.
Off-Balance Sheet Arrangements
We do not have any material 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):
2012 2011 2010 Net cash provided by operating activities $ 84,401 $ 113,153
$ 118,509
Net cash used in investing (151,062 ) (134,613 ) (176,699 )
Net cash used in financing (37,511 ) (95,786 ) (89,254 )
Net decrease in cash and cash equivalents $ (104,172 ) $ (117,246 )
$ (147,444 )
Operating Activities:
Below are the key line items affecting cash from operating activities (in
thousands):
2012 2011 2010
Net income (loss) $ 53,459 $ (17,662 ) $ 64,128
Adjustments to reconcile net income (loss) to
cash provided by operating activities 80,867 141,077 97,837
Net income including adjustments 134,326 123,415 161,965
Decrease (increase) in accounts receivable (37,139 ) (22,093 ) 18,058
Increase in inventory (21,491 ) (7,144 ) (5,912 )
Increase (decrease) in accounts payable and
accrued liabilities (5,675 ) 433 (48,308 )
All other, net 14,380 18,542 (7,294 )
Net cash provided by operating activities $ 84,401 $ 113,153 $ 118,509
2012 vs. 2011
Net income including adjustments, as per the table above, increased $10.9
million during 2012 as compared to 2011 reflecting higher sales and lower
operating expense as discussed above.
Accounts receivable increased $37.1 million in 2012. These increases were
primarily related to higher sales in the fourth quarter of 2012 as compared to
the fourth quarter of 2011, and also are impacted by the payment patterns of our
customers. It is possible that both accounts receivable and DSOs may increase in
future periods, particularly if we have an increase in international sales,
which tend to have longer payment terms.
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Inventory increased by $21.5 million in 2012 primarily as a result of the effort
to increase our inventory to ensure adequate supply of our BCS product
offerings.
Accounts payable and accrued liabilities decreased by $5.7 million in 2012.
Account payables increased due to increased purchases resulting from higher
sales. Accrued liabilities decreased as a result over higher variable
compensation payments made in 2012.
All other accounts, net, includes the changes in other receivables, income taxes
payable (recoverable), and prepaids. The other receivables represent amounts due
from our contract manufacturers for material used in the assembly of our
finished goods. The change in our income taxes recoverable account is a result
of the timing of the actual estimated tax payments during the year as compared
to the actual tax liability for the year. The net change in 2012 was
approximately $14.4 million as compared to $18.5 million in 2011.
2011 vs. 2010
Net income (loss), including adjustments, decreased $38.6 million during 2011 as
compared to 2010 reflecting lower gross margin and higher operating expense as
discussed above. In 2011, net loss included a goodwill & intangible impairment
of $88.6 million and a related tax benefit of $25.6 million arising from the
allocation of a portion of the total impairment of goodwill to tax deductible
goodwill and the impairment of intangibles.
Accounts receivable increased $22.1 million in 2011 as a result of higher sales
in the fourth quarter of 2011 as compared to fourth quarter of 2010 and payment
patterns of our customers.
Inventory increased by $7.1 million in 2011. The increase in inventory was
primarily related to an increase in BCS inventory level to ensure adequate
supply.
Investing Activities:
Below are the key line items affecting investing activities (in thousands):
2012 2011 2010
Capital expenditures $ (21,507 ) $ (23,307 ) $ (22,645 )
Acquisitions/other - (130, 227 ) (4,000 )
Purchases of investments (418,956 ) (277,937 ) (514,376 )
Sales of investments 286,013 296,774 364,077
Sale of property, plant and equipment 139 84 245
Sale of product line 3,249 - -
Net cash used in investing activities $ (151,062 ) $ (134,613 ) $ (176,699 )
Capital Expenditures - Capital expenditures are mainly for test equipment,
laboratory equipment, and computing equipment. We anticipate investing
approximately $25 million in 2013.
Acquisitions/Other - This represents cash investments we have made in our
various acquisitions. In 2011, we paid $ 162.4 million cash, or $53.1 million
net of cash and marketable securities acquired, for the acquisition of BigBand
Networks. In 2010, we paid $4.0 million related to a deferral of the purchase
price of Digeo, Inc.
Purchases and Sales of Investments - This represents purchases and sales of
securities.
Sale of Property, Plant and Equipment - This represents the cash proceeds we
received from the sale of property, plant and equipment.
Sale of Product Line - This represents the cash proceeds we received from the
sale of our ECCO product line.
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Financing Activities:
Below are the key items affecting our financing activities (in thousands):
2012 2011 2010
Payment of debt obligations $ - $ - $ (124 )
Early retirement of long term debt - (4,984 ) (23,287 )
Repurchase of common stock (51,921 ) (109,123 ) (69,326 )
Proceeds from issuance of common stock 20,304 22,985 7,178
Repurchase of shares to satisfy minimum tax
withholdings (9,443 ) (8,332 ) (6,447 )
Excess tax benefits from stock-based
compensation plans 3,549 3,668 2,752
Net cash used in financing activities $ (37,511 ) $ (95,786 ) $ (89,254 )
Payment of Debt Obligation-This represents the payment of the short term loan to
the Pennsylvania Industrial Development Authority (PIDA) for the cost of
expansion of the facility in State College, Pennsylvania. The debt was repaid in
2010.
Early Retirement of Long -Term Debt - During 2011, the Company acquired $5.0
million face value of the notes for approximately $5.0 million. The Company
allocated $2 thousand to the reacquisition of the equity component of the notes.
The Company also wrote off approximately $33 thousand of deferred finance fees
associated with the portion of the notes acquired. As a result, the Company
realized a loss of approximately $19 thousand on the retirement of the notes.
In 2010, we purchased $24.0 million of the face value of our convertible debt
for approximately $23.3 million. We allocated $0.1 million to the reacquisition
of the equity component of the notes. We also wrote off approximately $0.2
million of deferred finance fees associated with the portion of the notes
retired. We realized a gain of approximately $0.4 million on the retirement of
the convertible notes.
Repurchase of Common Stock - This represents the cash used to buy back the
Company's common stock.
Proceeds from Issuance of Common Stock - This represents cash proceeds related
to the exercise of stock options by employees, offset with expenses paid related
to the issuance of common stock.
Repurchase of Shares to Satisfy Minimum Tax Withholdings - This represents the
minimum shares withheld to satisfy the minimum tax withholding when restricted
stock vests.
Excess Tax Benefits from Stock-Based Compensation Plans - This represents the
cash that otherwise would have been paid for income taxes if increases in the
value of equity instruments also had not been deductible in determining taxable
income.
Income Taxes
During 2012, approximately $2.7 million of U.S. federal tax benefits were
obtained from tax deductions arising from equity-based compensation deductions,
all of which resulted from 2012 exercises of non-qualified stock options and
lapses of restrictions on restricted stock awards. During 2011, approximately
$3.7 million of U.S. federal tax benefits were obtained from tax deductions
arising from equity-based compensation deductions, all of which resulted from
2011 exercises of non-qualified stock options and lapses of restrictions on
restricted stock rewards. In 2010, approximately $2.6 million of U.S. federal
and state tax benefits were obtained from tax deductions arising from
equity-based compensation deductions, all of which resulted from 2010 exercises
of non-qualified stock options and lapses of restrictions on restricted stock
awards.
Interest Rates
As of December 31, 2012, we did not have any floating rate indebtedness or
outstanding interest rate swap agreements.
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Foreign Currency
A significant portion of our products are manufactured or assembled in China and
Mexico, and we have research and development centers in China, Ireland and
Israel. 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. We have certain
predictable expenditures for international operations in local currency. We use
a hedging strategy and enter into forward or currency option contracts based on
a percentage of expected foreign currency expenses. The percentage can vary,
based on the predictability of the revenues and expenses 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.
We execute 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, 2012 and 2011, we had approximately $4.7
million and $4.1 million outstanding, respectively, of cash collateral.
Cash, Cash Equivalents, and 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 short-term
investments consisting of mutual funds and debt securities classified as
available-for-sale, which are stated at estimated fair value. The debt
securities consist primarily of commercial paper, certificates of deposits,
short term corporate obligations and U.S. government agency financial
instruments.
From time to time, we hold certain investments in the common stock of
publicly-traded companies, which were classified as available-for-sale. As of
September 30, 2012, our holdings in these investments were $5.3 million. During
the fourth quarter of 2012, we sold our holdings, resulting in a gain of
approximately $1.0 million. As of December 31, 2012, we have no holdings in
these investments. As of December 31, 2011, our holdings in these investments
were $4.8 million. Changes in the market value of these securities typically are
recorded in other comprehensive income and gains or losses on related sales of
these securities are recognized in income (loss).
We hold cost method investments in private companies. Due to the fact the
investments are in private companies, we are exempt from estimating the fair
value on an interim and annual basis. It is not practical to estimate the fair
value since the quoted market price is not available. Furthermore, the cost of
obtaining an independent valuation appears excessive considering the materiality
of the investments to the Company. However, we are required to estimate the fair
value if there has been an identifiable event or change in circumstance that may
have a significant adverse effect on the fair value of the investment. Each
quarter, we evaluate our investments for any other-than-temporary impairment, by
reviewing the current revenues, bookings and long-term plan of the private
companies. During the evaluations perfomed in 2012, we concluded that two of the
private companies had indicators of impairment, and that the fair value had
declined. This resulted in other-than-temporary impairment charges of $1.5
million during the year ended December 31, 2012. Purchases of cost method
investments were $7.2 million during 2012 and disposals were $0.7 million. These
investments are recorded at $6.0 million and $1.0 million as of December 31,
2012 and 2011, respectively.
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See Note 5 of Notes to the Consolidated Financial Statements for disclosures
related to the fair value of our investments.
We have a deferred compensation plan that 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
our key executives. Employee compensation deferrals and matching contributions
are held in a rabbi trust, which is a funding vehicle used to protect the
deferred compensation from various events (but not from bankruptcy or
insolvency).
Additionally, we previously offered a deferred compensation arrangement to
certain senior 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.
We also have deferred retirement salary plans, which were limited to certain
current or former officers of C-COR. We hold investments to cover the liability.
ARRIS also funds its nonqualified defined benefit plan for certain executives in
a rabbi trust.
Capital Expenditures
Capital expenditures are made at a level designed to support the strategic and
operating needs of the business. Capital expenditures were $21.5 million in 2012
as compared to $23.3 million in 2011and $22.6 million in 2010. We had no
significant commitments for capital expenditures at December 31, 2012.
Management expects to invest approximately $25.0 million in capital expenditures
for the year 2013.
Deferred Income Tax Assets - Including Net Operating Loss Carryforwards and
Research and Development Credit Carryforwards, and Valuation Allowances
Deferred income tax assets represent amounts available to reduce income taxes
payable on taxable income in future years. Such assets arise because of
temporary differences between the financial reporting and tax bases of assets
and liabilities, as well as from net operating loss and tax credit
carryforwards. We evaluate the recoverability of these future tax deductions and
credits by assessing the adequacy of future expected taxable income from all
sources, including reversal of taxable temporary differences, forecasted
operating earnings and available tax planning strategies. If we conclude that
deferred tax assets are more-likely-than-not to not be realized, then we record
a valuation allowance against those assets. We continually review the adequacy
of the valuation allowances established against deferred tax assets. As part of
that review, we regularly project taxable income based on book income
projections by legal entity. Our ability to utilize our state deferred tax
assets is dependent upon our future taxable income by legal entity. During 2012,
we merged certain historical loss generating legal entities into a historically
profitable legal entity, resulting in a release of approximately $1.2 million of
state valuation allowances. A material portion of ARRIS' income tax filings are
in the United States. In order to realize the $54.0 million of U.S. Federal
deferred income tax assets in excess of liabilities that are reported at
December 31, 2012, ARRIS will need to generate future U.S. Federal taxable
income of approximately $154.2 million.
As of December 31, 2012, we had net operating loss, or NOL, carryforwards for
U.S. federal, U.S. state, and foreign income tax purposes of approximately $47.0
million, $186.7 million, and $40.8 million, respectively. The U.S. federal NOLs
expire through 2030. Foreign NOLs related to our Irish subsidiary in the amount
of $19.9 million have an indefinite life. Other significant foreign NOLs arise
from our Dutch subsidiaries ($6.8 million, expiring during the next 7 years),
our French branch ($5.9 million, no expiration), and our U.K. branch ($7.1
million, no expiration). The net operating losses are subject to various
limitations on how and when the losses can be used to offset against taxable
income. Approximately $44.1 million of post-apportioned and $60.9 million of
pre-apportioned U.S. state NOLs, and $3.2 million of the foreign NOLs are
subject to valuation allowances because we do not believe the ultimate
realization of the deferred tax assets associated with these U.S. federal and
state NOLs is more-likely-than-not.
During 2012, we utilized approximately $3.3 million of U.S. federal NOLs, $10.8
million of post-apportioned and $21.9 million of pre-apportioned U.S. state NOLs
to offset against taxable income. We used approximately $1.5 million of U.S.
federal NOLs and $14.7 million of U.S. state NOLs to reduce taxable income in
2011.
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During the tax years ending December 31, 2012, and 2011, we utilized $1.2
million and $12.1 million, respectively of U.S. federal and state research and
development tax credits, to offset against U.S. federal and state income tax
liabilities. As of December 31, 2012, ARRIS has $5.6 million of available U.S.
federal research and development tax credits and $14.1 million of available U.S.
state research and development tax credits. The remaining unutilized U.S.
federal research and development tax credits can be carried back one year and
carried forward twenty years. The U.S. state research and development tax
credits carry forward and will expire pursuant to the various applicable state
rules. Approximately $5.2 million of U.S. federal research and development tax
credits and $9.2 million of state research and development tax credits are
subject to valuation allowances because we do not believe the ultimate
realization of the related deferred tax assets is more-likely-than-not.
Since the acquisition of C-COR Incorporated in 2007, ARRIS has generally
reported taxable income in excess of its pre-tax net book income for financial
reporting purposes. A significant reconciling item between the taxable income
and the pre-tax net book income has been the book amortization expense relating
to the separately stated intangible assets arising from the C-COR transaction.
Additionally, each tax year ARRIS includes in its taxable income all items of
revenue that are deferred for financial reporting purposes. Other significant
reconciling items between taxable income and pre-tax net book income are certain
reserves that are recorded as expenses for pre-tax net book income purposes
which are not deductible for income tax purposes until they are paid.
The Company obtains significant benefits from U.S. Federal research and
development tax credits, which are used to reduce the Company's U.S. Federal
income tax liability. During December of 2010, Congress passed legislation that
provides for an extension of these tax credits so that the Company can continue
to calculate and claim research and development tax credits for the 2010 and
2011 tax years. The federal research and development credit expired on
December 31, 2011. On January 2, 2013, the American Taxpayer Relief Act of 2012
was signed into law. Under this act, the federal research and development credit
was retroactively extended for amounts paid or incurred after December 31, 2011
and before January 1, 2014. The effects of these changes in the tax law will
result in a tax benefit which will be recognized in the first quarter of 2013,
which is the quarter in which the law was enacted.
Defined Benefit Pension Plans
ARRIS sponsors a qualified and a non-qualified non-contributory defined benefit
pension plan that cover certain U.S. employees. As of January 1, 2000, we 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.
During the fourth quarter of 2012, in an effort to reduce the volatility and
administration expense in connection with ARRIS' pension obligation, we notified
eligible employees of a limited opportunity to voluntarily elect an early payout
of their pension benefits. These payouts were approximately $7.7 million and was
funded from existing pension assets. ARRIS accounted for the lump-sum payments
as a settlement and recorded a noncash pension settlement charge of
approximately $3.1 million in the fourth quarter of 2012.
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 2012, the plan assets were comprised
of approximately 61% and 39% of equity and debt securities, respectively. For
2011, the plan assets were comprised of approximately 43%, 54%, and 3% of
equity, debt securities, and money market funds, respectively. For 2013, the
plan's current target allocations are 38% equity securities, 20% debt
securities, and 42% money market funds. Liabilities or amounts in excess of
these funding levels are accrued and reported in the consolidated balance
sheets. ARRIS has established a rabbi trust to fund the pension obligations of
the Chief Executive Officer under his Supplemental Retirement Plan including the
benefit under our non-qualified defined benefit plan. In addition, we have
established a rabbi trust for certain executive officers and certain senior
management personnel to fund the pension liability to those officers under the
non-qualified plan.
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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 portfolio's
volatility.
The weighted-average actuarial assumptions used to determine the benefit
obligations for the three years presented are set forth below:
2012 2011 2010
Assumed discount rate for non-qualified plan participants 3.75 % 4.50 % 5.50 %
Assumed discount rate for qualified plan participants 3.75 % 4.50 % 5.50 %
Rate of compensation increase 3.75 % 3.75 % 3.75 %
The weighted-average actuarial assumptions used to determine the net periodic
benefit costs are set forth below:
2012 2011 2010
Assumed discount rate for non-qualified plan participants 4.50 % 5.50 % 5.75 %
Assumed discount rate for qualified plan participants 4.50 % 5.50 % 5.75 %
Rate of compensation increase 3.75 % 3.75 % 3.75 %
Expected long-term rate of return on plan assets 6.00 % 7.50 % 7.50 %
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 2013 for the plan.
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 participant's
contribution. ARRIS made matching contributions to these plans of approximately
$5.7 million, $5.0 million, and $4.9 million in 2012, 2011 and 2010,
respectively.
We have a deferred compensation plan that does not qualify under Section 401(k)
of the Internal Revenue Code, that 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 our key
executives. 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, were $2.7
million and $2.6 million at December 31, 2012 and 2011, respectively. Total
expenses included in continuing operations for the matching contributions were
approximately $0.1 million in 2012 and $0.2 million in 2011.
We previously offered a deferred compensation arrangement, that 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 $2.1 million and $2.6 million at December 31, 2012
and 2011, respectively.
We also have 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
$2.0 million and $2.2 million at December 31, 2012 and 2011, respectively. Total
expense (income) included in continuing operations for the deferred retirement
salary plan were approximately $0.1 million and $(0.2) million for 2012 and
2011, respectively.
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Our wholly-owned subsidiary located in Israel is required to fund future
severance liabilities determined in accordance with Israeli severance pay laws.
Under these laws, employees are entitled upon termination to one month's salary
for each year of employment or portion thereof. We record compensation expense
to accrue for these costs over the employment period, based on the assumption
that the benefits to which the employee is entitled, if the employee separates
immediately. We fund the liability by monthly deposits in insurance policies and
severance funds. The value of the severance fund assets are primarily recorded
in other non-current assets on the Company's consolidated balance sheets, which
was $3.8 million as of December 31, 2012. The liability for long-term severance
accrued on the Company's consolidated balance sheets was $4.2 million as of
December 31, 2012.
Critical Accounting Policies
The accounting and financial reporting policies of ARRIS 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 discussed below
with the audit committee of the Board of Directors and the audit committee has
reviewed the related disclosures.
a) Revenue Recognition
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 and their 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. For
professional services evidence that an agreement exists includes
information documenting the scope of work to be performed, price, and
customer acceptance. These are contained in the signed Contract, Purchase
Order, or other documentation that shows scope, price and customer
acceptance.
• 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 or 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 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 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.
Revenue is deferred if any of the above revenue recognition criteria is 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 required acceptance has not occurred.
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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 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 Sold Without Tangible Equipment - ARRIS sells internally developed
software as well as software developed by outside third parties that does not
require significant production, modification or customization. For arrangements
that contain only software and the related post-contract support, we recognize
revenue in accordance with the applicable software revenue recognition guidance.
If the arrangement includes multiple elements that are software only, then the
software revenue recognition guidance is applied and the fee is allocated to the
various elements based on vendor-specific objective evidence ("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 software arrangement,
all revenue from the arrangement is deferred until the earlier of the point at
which such sufficient VSOE of fair value 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 is allocated to the various elements of the arrangement using the
residual method of accounting. 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. Under the residual method, if VSOE of fair value exists for the
undelivered element, generally post contract support ("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. If sufficient VSOE of fair value does not exist for PCS,
revenue for the arrangement is recognized ratably over the term of support.
Standalone Services - Installation, training, and professional services are
generally recognized as service revenues when performed or upon completion of
the service when the final act is significant in relation to the overall service
transaction. The key element for Professional Services in determining when
service transaction revenue has been earned is determining the pattern of
delivery or performance which determines the extent to which the earnings
process is complete and the extent to which customers have received value from
services provided. The delivery or performance conditions of our service
transactions are typically evaluated under the proportional performance or
completed performance model.
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 the shipment of the
requisite equipment occurs.
Value Added Resellers-ARRIS typically 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 generally
recognized at the time of shipment to the VAR provided all criteria for
recognition are met. There are occasions, based on facts and circumstances
surrounding the VAR transaction, where ARRIS will employ the sell-through method
of recognizing revenue and defer that revenue until payment occurs.
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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 is
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 the
accounting guidance to determine the appropriate model that is applied towards
accounting for the multiple element arrangement. If the arrangement includes a
combination of elements that fall within different applicable guidance, ARRIS
follows 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 that is more than incidental and does involve
significant production, modification or customization, revenue is recognized
using the contract accounting guidelines by applying the
percentage-of-completion or completed-contract method. We recognize software
license and associated professional services revenue for certain 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. For certain 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 using the
completed-contract method. The completed-contract method is used for these
particular arrangements because they are considered short-term arrangements and
the financial position and results of operations would not be materially
different from those under the percentage-of-completion method. 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. 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 arrangements that fall within the software revenue recognition guidance, the
fee is 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 of fair value 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 is
allocated to the various elements of the arrangement using the residual method
of accounting. 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 of fair value 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.
Many of ARRIS' 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 ARRIS chooses to develop and to maintenance releases and patches that we
choose to release during the term 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 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. 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.
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b) Goodwill and Intangible Assets
Goodwill
Goodwill relates to the excess of cost over the fair value of net assets
resulting from an acquisition. Our goodwill is tested for impairment on an
annual basis, or more frequently if events or changes in circumstances indicate
that the asset is more likely than not impaired. Our goodwill impairment testing
date is October 1, which aligns with the timing of the Company's annual
strategic planning process, which enables the Company to incorporate the
reporting units' long-term financial projections which are generated from the
annual strategic planning process as a basis for performing our impairment
testing. For purposes of impairment testing, we have determined that our
reporting units are the operating segments based on our organizational
structure, the financial information that is provided to and reviewed by segment
management and aggregation criteria applicable to component businesses that are
economically similar. 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. We determined the fair value of each reporting unit
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 our business. In addition, market multiples of publicly traded
guideline companies also were considered. We considered the relative strengths
and weaknesses inherent in the valuation methodologies utilized in each approach
and consulted with a third party valuation specialist to assist in determining
the appropriate weighting. 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 unit's goodwill
with the carrying amount of that goodwill. If the carrying amount of a reporting
unit's goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount in excess of the carrying amount of goodwill
over its implied fair value. The implied fair value of goodwill is determined in
a similar manner as the determination of goodwill recognized in a business
combination. We assign the fair value of a reporting unit to all of the assets
and liabilities of that unit, including intangible assets, as if the reporting
unit had been acquired in a business combination. Any excess of the fair value
of a reporting unit over the amounts assigned to its assets and liabilities
represents the implied fair value of goodwill.
The valuation methodologies described above have been consistently applied for
all years discussed below.
2010 Impairment Analysis - There was no impairment of goodwill for our three
reporting units from our annual goodwill impairment assessment performed as of
October 1, 2010. The fair value of our MCS reporting unit exceeded its carrying
value by 4.2% and thus was at risk of failing step one of the goodwill
impairment test, and was therefore at risk of a future impairment in the event
of significant unfavorable changes in the forecasted cash flows or the key
assumptions used in our analysis, including the weighted average cost of capital
(discount rate) and growth rates utilized in the discounted cash flow analysis.
2011 Impairment Analysis - There was no impairment of goodwill for our BCS and
ATS reporting units from annual goodwill impairment assessment performed as of
October 1, 2011. The fair value of our ATS reporting unit exceeded its carrying
value by 7.6% and thus was at risk of failing step one of the goodwill
impairment test, and was therefore at risk of a future impairment in the event
of significant unfavorable changes in the forecasted cash flows or the key
assumptions used in our analysis, including the weighted average cost of capital
(discount rate) and growth rates utilized in the discounted cash flow analysis.
We determined during our step one of impairment testing that the fair value of
the MCS reporting unit was less than its respective carrying value, as a result
of a decline in the expected future cash flows for the reporting unit. In making
our assessment regarding MCS future cash flows, a number of specific factors
arose from our annual strategic planning process in the fourth quarter,
including an assessment of historical operating results, key customer inputs,
and anticipated development expenditures required to migrate the product
portfolio in line with the changing market dynamics, including the evolution
from a proprietary to open standards IP architecture. As a result of these
factors, the
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Company decided to shift some investment from the MCS reporting unit to its BCS
reporting unit. Given the decision to reduce our investment going forward, we
correspondingly moderated our long term projections for the MCS segment. The
Company proceeded to step two of the goodwill impairment test to determine the
implied fair value of the MCS goodwill. The Company concluded that the implied
fair value of the goodwill was less than its carrying value, which resulted in a
write off of all goodwill as of October 1, 2011 of $41.2 million before tax
($33.9 million after tax) for the MCS reporting unit. This expense was recorded
in impairment of goodwill and intangibles line on the consolidated statements of
operations.
2012 Impairment Analysis - There was no impairment of goodwill for our BCS and
ATS reporting units from our annual goodwill impairment assessment performed as
of October 1, 2012. The fair value of our ATS reporting unit exceeded its
carrying value by $48.6 million, or 22.1%, and thus was at risk of failing step
one of the goodwill impairment test, and was therefore at risk of a future
impairment in the event of significant unfavorable changes in the forecasted
cash flows or the key assumptions used in our analysis, including the weighted
average cost of capital (discount rate) and growth rates utilized in the
discounted cash flow analysis.
The following table sets forth the information regarding our ATS reporting unit
as of October 1, 2012 (annual goodwill impairment testing date), including key
assumptions (dollars in thousands):
% Fair Value
Exceeds Carrying
Value as of Goodwill as of
Key Assumptions October 1, 2012 October 1, 2012
Terminal
Growth Percent of
Discount Rate Rate Percentage Amount Total Assets
ATS 13.0 % 3.0 % 22.1 % $ 35,027 11.2 %
Assumptions and estimates about future cash flows and discount rates are complex
and often subjective. They are sensitive to changes in underlying assumptions
and 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. Our assessment includes
significant estimates and assumptions including the timing and amount of future
discounted cash flows, the discount rate and the perpetual growth rate used to
calculate the terminal value.
Our discounted cash flow analysis included projected cash flows over a ten-year
period, using our three-year business plans plus an additional seven years of
projected cash flows based on the most recent three-year plan. These forecasted
cash flows took into consideration management's outlook for the future and were
compared to historical performance to assess reasonableness. A discount rate was
applied to the forecasted cash flows. The discount rate considered market and
industry data, as well as the specific risk profile of the reporting unit. A
terminal value was calculated, which estimates the value of annual cash flow to
be received after the discrete forecast periods. The terminal value was based
upon an exit value of annual cash flow after the discrete forecast period in
year ten.
Examples of events or circumstances that could reasonably be expected to
negatively affect the underlying key assumptions and ultimately impact the
estimated fair value of the aforementioned reporting unit may include such items
as the following:
• a prolonged decline in capital spending for constructing, rebuilding,
maintaining, or upgrading broadband communications systems;
• rapid changes in technology occurring in the broadband communication
markets which could lead to the entry of new competitors or increased
competition from existing competitors that would adversely affect our sales
and profitability;
• the concentration of business we receive from several key customers, the
loss of which would have a material adverse effect on our business;
• continued consolidation of our customers base in the telecommunications
industry could result in delays or reductions in purchases of our products
and services, if the acquirer decided not to continue using us as a
supplier;
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• new products and markets currently under development may fail to realize
anticipated benefits;
• changes in business strategies affecting future investments in businesses,
products and technologies to complement or expand our business could result
in adverse impacts to existing business and products;
• volatility in the capital (equity and debt) markets, resulting in a higher
discount rate; and
• legal proceeding settlements and/or recoveries, and its effect on future cash flows.
As a result, there can be no assurance that the estimates and assumptions made
for purposes of the annual goodwill impairment test will prove to be accurate
predictions of the future. Although management believes the assumptions and
estimates made are reasonable and appropriate, different assumptions and
estimates could materially impact the reported financial results. The table
below provides sensitivity analysis related to the impact of each of the key
assumptions, on a standalone basis, on the resulting percentage change in fair
value of our ATS reporting unit as of October 1, 2012:
Percentage Reduction in Fair Value (Income Approach)
Assuming Hypothetical Assuming Hypothetical Assuming Hypothetical
10% Reduction in cash 1% increase in Discount 1% decrease in Terminal
flows Rate Growth Rate
ATS -6.6 % -7.0 % -2.8 %
Intangible Assets
We test our long-lived assets for recoverability when events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Examples of such circumstances include, but are not limited to, operating or
cash flow losses from the use of such assets or changes in our intended uses of
such assets. To test for recovery, we group assets (an "asset group") in a
manner that represents the lowest level for which identifiable cash flows are
largely independent of the cash flows of other groups of assets and liabilities.
The carrying amount of a long-lived asset or an asset group is not recoverable
if it exceeds the sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the asset or asset group. In determining future
undiscounted cash flows, we have made a "policy decision" to use pre-tax cash
flows in our evaluation, which is consistently applied.
If we determine that an asset or asset group is not recoverable, then we would
record an impairment charge if the carrying value of the asset or asset group
exceeds its fair value. Fair value is based on estimated discounted future cash
flows expected to be generated by the asset or asset group. The assumptions
underlying cash flow projections would represent management's best estimates at
the time of the impairment review.
No review for impairment of long-lived assets was conducted in 2010 and 2012 as
no indicators of impairment existed. In 2011, indicators of impairment existed
for long-lived assets associated with the MCS reporting unit due to changes in
projected operating results and cash flows. As such, we tested the MCS
long-lived assets for recoverability by grouping assets at the lowest level for
which identifiable cash flows are largely independent of the cash flows of other
groups of assets and liabilities. This was determined to be the MCS reporting
unit level. We compared the undiscounted cash flows over the estimated useful
life of the primary asset in the group. The estimated cash flows included
revenues and expenses directly associated with and arise from the use of the
asset group. Based upon the analysis, the undiscounted cash flows used in the
recoverability test were less than the carrying amount of the asset group. We
determined the fair value of the long-lived asset group and recognized an
impairment loss for the amount the carrying amount of the long-lived asset group
exceeded its fair value. In the fourth quarter of 2011, an impairment loss of
$47.4 million before tax ($29.1 million after tax) related to MCS customer
relationships was recorded.
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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. Our 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.
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
$1.6 million and $1.4 million as of December 31, 2012 and 2011, respectively.
d) Inventory Valuation
Inventory is reflected in our financial statements at the lower of average cost,
approximating first-in, first-out, or market value.
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 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 ARRIS in its application of the above
methods are consistent for all periods presented.
We conduct physical inventory counts at all ARRIS locations, either annually or
through ongoing cycle-counts, to confirm the existence of its inventory.
e) Warranty
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
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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.
f) Income Taxes
Considerable judgment must be exercised in determining the proper amount of
deferred income tax assets to record on the balance sheet and also in concluding
as to the correct amount of income tax liabilities relating to uncertain tax
positions.
Deferred income tax assets must be evaluated quarterly and a valuation allowance
should 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. In determining the
likelihood of realizing deferred income tax assets, management must consider all
positive and negative evidence, such as the probability of future taxable
income, tax planning, and the historical profitability of the entity in the
jurisdiction where the asset has been recorded. Significant judgment must also
be utilized by management in modeling the future taxable income of a legal
entity in a particular jurisdiction. Whenever management subsequently concludes
that it is more-likely-than-not that a deferred income tax asset will be
realized, the valuation allowance must be partially or totally removed.
Uncertain tax positions occur, and a resulting income tax liability is recorded,
when management concludes that an income tax position fails to achieve a
more-likely-than-not recognition threshold. In evaluating whether or not an
income tax position is uncertain, management must presume the income tax
position will be examined by the relevant taxing authority that has full
knowledge of all relevant information and management must consider the technical
merits of an income tax position based on the statutes, legislative intent,
regulations, rulings and case law specific to each income tax position.
Uncertain income tax positions must be evaluated quarterly and, when they no
longer fail to meet the more-likely-than-not recognition threshold, the related
income tax liability must be derecognized.
Forward-Looking Statements
Certain information and statements contained in this Management's 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 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
management's beliefs and assumptions regarding these markets. Any other
statements in this document that are not statements about historical facts also
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, but instead are the risks that we currently
perceive as potentially being material. 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.
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