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| ARRS > SEC Filings for ARRS > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
• Access, Transport & Supplies ("ATS")
• Media & Communications Systems ("MCS")
A detailed description of each segment is contained in "Our Principal Products"
in our Form 10-K for the year ended December 31, 2008.
Our Strategy and Key Highlights
Our long-term business strategy, "Convergence Enabled," includes the following
key elements:
• Maintain a strong capital structure, mindful of our 2013 debt maturity,
share repurchase opportunities and other capital needs including mergers and
acquisitions.
• Grow our current business into a more complete portfolio including a strong video product suite.
• Continue to invest in the evolution toward enabling true network convergence onto an all IP platform.
• Continue to expand our product/service portfolio through internal developments, partnerships and acquisitions.
• Expand our international business and begin to consider opportunities in markets other than cable.
• Continue to invest in and evolve the ARRIS talent pool to implement the above strategies.
Our mission is to simplify technology, facilitate its implementation, and enable
operators to put their subscribers in control of their entertainment,
information, and communication needs. Through a set of business solutions that
respond to specific market needs, we are integrating our products, software, and
services solutions to work with our customers as they address Internet Protocol
telephony deployment, high speed data deployment, Internet Protocol video
deployment, network capacity issues, on demand video rollout, operations
management, network integration, and business services opportunities.
Below are some key highlights and trends relative to our third quarter and
nine months ended September 30, 2009:
Financial Highlights
• Earnings per diluted share decreased only slightly (from $0.18 in the third
quarter 2008 to $0.17 in the third quarter 2009), despite a 7% decline in
sales.
• Gross margin percentage increased 6.2 percentage points to 41.9% in the third quarter 2009 as compared to the period in 2008, reflecting a stronger product mix including notably higher sales of our higher margin CMTS product line.
• We ended the third quarter 2009 with $576.7 million of cash resources which includes $561.7 of cash, cash equivalents, and short-term investments and $15.0 million of long-term U.S. treasury notes that mature in Q4 2010. We generated approximately $63.1 million of cash from operating activities in the third quarter and $171.2 million during the first nine months of 2009.
• We used $10.6 million of cash in the first quarter of 2009 to retire $15.0 million of the principal amount of our convertible debt, which represented a 29% discount. The Company also wrote off approximately $0.2 million of deferred finance fees associated with the portion of the notes retired. We recorded a pre-tax net gain of $4.2 million in the first quarter as a result of the retirement.
• We ended the third quarter of 2009 with an order backlog of approximately $169 million and a book-to-bill ratio of 1.01. Both order backlog and book-to-bill are up moderately compared to the third quarter of 2008.
Product Line Highlights
• Broadband Communications Systems
Through two recent acquisitions ARRIS has expanded its expertise in video processing and multimedia video delivery systems for delivery of programming from multiple sources to a variety of consumer devices. The acquired expertise and talent will accelerate the introduction of next generation IP based consumer video products and services. The two acquisitions are:
o The purchase of the assets, including the video processing intellectual property, of EG Technologies which includes a portfolio of encoding, transcoding and multiplexing products.
o On October 1, 2009, the purchase of the assets, including the intellectual property, of Digeo, Inc. The assets include an extensive patent portfolio in digital video recording, home networking, e-commerce and multimedia technologies, as well as the Moxi® line of home video delivery products.
o Downstream port shipments reached a record level of 33,955 in the third quarter of 2009, and were 90,476 through the first nine months of 2009.
o Operators continue to focus on deploying DOCSIS 3.0 technology in order to increase overall capacity as well as compete aggressively with higher speed service tiers. The ARRIS solution has been adopted broadly across the industry, with strong domestic US shipments and increased business internationally in CALA, Asia, and Europe.
o Continued improvement in gross margins resulting from both customer and product mix (increased CMTS shipments).
o The first in-service deployment of a DOCSIS 3.0 Upstream Channel Bonding service with JCN in Japan
o Achieved #1 CMTS world-wide market share for the first time in the second quarter of 2009.
o Approximately 1.2 million and 3.6 million EMTAs were shipped in the third quarter and first nine months of 2009, respectively, which was down 21% and 18% from the third quarter and first nine months of 2008, respectively, a result of overall VoIP net subscriber additions leveling off. We have retained number one market share for EMTAs for 17 consecutive quarters.
o We increased shipments of Multi-line and Wireless Gateways in the third quarter of 2009.
o DOCSIS 3.0 CPE shipments increased substantially in third quarter 2009. We expect a continuing transition from deployment of DOCSIS 2.0 to DOCSIS 3.0 CPE throughout the remainder of 2009.
• Access, Transport & Supplies
o Business continues to be impacted by macro economic factors, which resulted in lower sales year over year with a small sequential gain over the first quarter of 2009.
o DOCSIS 3.0 bandwidth efficiency improvements allow for network investments to be delayed.
o CORWave multi-wavelength optical transport platforms are continuing to gain traction with both domestic and international customers. These platforms will allow operators to multiply network capacity in support of narrowcast services at a fraction of traditional infrastructure upgrade costs. We expect these platforms to become more widely adopted as bandwidth demands continue to increase.
o Product mix and lower volumes negatively impacted margins.
• Media & Communications Systems
o Completed WorkAssureTM deployments for several Time Warner Cable regions.
o Demand for Assurance products continue to be strong based on:
§ DOCSIS 3.0 rollouts
§ A continued focus on Opex management and control
o Began ConvergeMedia backoffice and server deployments in several US MSOs including Charter.
Significant Customers
The vast majority of our sales are to cable system operators worldwide. As the
U.S. cable industry continued a trend toward consolidation, the six largest MSOs
control approximately 89.9% of the triple play Revenue Generating Units ("RGU")
within the U.S. cable market (according to Dataxis in the first quarter 2009),
thereby making our sales to those MSOs critical to our success. Our sales are
substantially dependent upon a system operator's selection of ARRIS' network
equipment, demand for increased broadband services by subscribers, and general
capital expenditure levels by system operators. Our two 10% customers (including
their affiliates, as applicable) are Comcast and Time Warner Cable. Over the
past year, certain customers' beneficial ownership may have changed as a result
of mergers and acquisitions. Therefore, the revenue for ARRIS' customers for
prior periods has been adjusted to include the affiliates currently understood
to be under common control. A summary of sales to these customers for the three
and nine month periods ended September 30, 2009 and 2008 are set forth below (in
thousands):
Three Months Ended September 30 Nine Months Ended September 30,
2009 2008 2009 2008
Comcast $ 101,975 $ 100,920 $ 263,843 $ 181,872
% of sales 37.0 % 33.9 % 32.7 % 21.3 %
Time Warner Cable $ 45,992 $ 43,862 $ 147,959 $ 190,081
% of sales 16.7 % 14.7 % 18.3 % 22.3 %
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Comparison of Operations for the Three and Nine Months Ended September 30, 2009
and 2008
Net Sales
The table below sets forth our net sales for the three and nine months ended
September 30, 2009 and 2008, for each of our reporting segments (in thousands):
Net Sales Increase (Decrease) Between 2009 and 2008
For the Three Months For the Nine Months For the Three Months For the Nine Months
Ended September 30, Ended September 30, Ended September 30 Ended September 30
2009 2008 2009 2008 $ % $ %
Business Segment:
BCS $ 211,288 $ 217,729 $ 617,188 $ 597,777 $ (6,441 ) (3.0 ) $ 19,411 3.2
ATS 45,488 62,100 131,946 211,961 (16,612 ) (26.8 ) (80,015 ) (37.7 )
MCS 18,996 17,722 58,677 42,429 1,274 7.2 16,248 38.3
Total sales $ 275,772 $ 297,551 $ 807,811 $ 852,167 $ (21,779 ) (7.3 ) $ (44,356 ) (5.2 )
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The table below sets forth our domestic and international sales for the three and nine months ended September 30, 2009 and 2008 (in thousands):
Net Sales Increase (Decrease) Between 2009 and 2008
For the Three Months For the Nine Months For the Three Months For the Nine Months
Ended September 30, Ended September 30, Ended September 30 Ended September 30
2009 2008 2009 2008 $ % $ %
Domestic $ 196,729 $ 220,105 $ 587,604 $ 602,967 $ (23,376 ) (10.6 ) $ (15,363 ) (2.5 )
International 79,043 77,446 220,207 249,200 1,597 2.1 (28,993 ) (11.6 )
Total sales $ 275,772 $ 297,551 $ 807,811 $ 852,167 $ (21,779 ) (7.3 ) $ (44,356 ) (5.2 )
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Broadband Communications Systems ("BCS") Net Sales 2009 vs. 2008
During the three months ended September 30, 2009, sales of our Broadband
Communications Systems segment products decreased by approximately 3.0% as
compared to the same period in 2008. The following factors contributed to the
decrease in sales:
• In the third quarter of 2009, we had lower sales of EMTAs as compared to the
third quarter of 2008.
• The decline in EMTAs was partially offset by higher sales of CMTSs to several customers including Time Warner Cable and Cablevision Mexico.
During the nine months ended September 30, 2009, sales of our Broadband
Communications Systems segment products increased by approximately 3.2% as
compared to the same period in 2008. The following factors contributed to the
increase in sales:
• Higher sales to multiple customers of our CMTS products.
• The increase in our CMTS product sales was partially offset by a decrease in EMTA sales to several customers.
Access, Transport and Supplies ("ATS") Net Sales 2009 vs. 2008
Access, Transport and Supplies segment revenue decreased by approximately 26.8%
and 37.7% for the three and nine months ended September 30, 2009, respectively,
as compared to the same periods in 2008. The following factors contributed to
the decrease in sales:
• The decrease was primarily the result of the reduced spending by cable
operators as a result of the slowdown of the US economy, and in particular
new housing construction that drives capital equipment spending for plant
upgrades and rebuilds by cable operators.
• Operators were also able to delay node segmentations by taking advantage of bandwidth efficiency improvements brought about by the implementation of DOCSIS 3.0.
Media & Communications Systems ("MCS") Net Sales 2009 vs. 2008
Media & Communications Systems revenue increased by approximately 7.2% in the
third quarter of 2009 and 38.3% in the first nine months of the year, as
compared to the same periods in 2008. The increase in sales primarily reflects
the build-up of deferred revenue throughout 2008. The deferred revenue acquired
from C-COR acquisition was marked to fair value at the date of the acquisition
and rebuilt through 2008.
Gross Margin
The table below sets forth our gross margin for the three and nine months ended
September 30, 2009 and 2008, for each of our reporting segments (in thousands):
Gross Margin $ Increase (Decrease) Between 2009 and 2008
For the Three Months For the Nine Months For the Three Months For the Nine Months
Ended September 30, Ended September 30, Ended September 30 Ended September 30
2009 2008 2009 2008 $ % $ %
Business Segment:
BCS $ 94,317 $ 79,278 $ 265,952 $ 198,756 $ 15,039 19.0 $ 67,196 33.8
ATS 10,650 16,624 29,733 62,370 (5,974 ) (35.9 ) (32,637 ) (52.3 )
MCS 10,506 10,232 32,578 23,140 274 2.7 9,438 40.8
Total $ 115,473 $ 106,134 $ 328,263 $ 284,266 $ 9,339 8.8 $ 43,997 15.5
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The table below sets forth our gross margin percentages for the three and nine months ended September 30, 2009 and 2008, for each of our reporting segments:
Gross Margin % Increase (Decrease) Between 2009 and 2008
For the Three Months For the Nine Months For the Three Months For the Nine Months
Ended September 30, Ended September 30, Ended September 30 Ended September 30
2009 2008 2009 2008 Percentage Points
Business Segment:
BCS 44.6 % 36.4 % 43.1 % 33.2 % 8.2 9.9
ATS 23.4 % 26.8 % 22.5 % 29.4 % (3.4 ) (6.9 )
MCS 55.3 % 57.7 % 55.5 % 54.5 % (2.4 ) 1.0
Total 41.9 % 35.7 % 40.6 % 33.4 % 6.2 7.2
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Broadband Communications Systems Gross Margin 2009 vs. 2008
Broadband Communications Systems segment gross margin dollars and gross margin
percentage increased year over year:
• The increase in gross margin dollars was primarily the result of higher
sales due to the successful introduction of our DOCSIS 3.0 CMTS in the
second half of last year and product mix.
• The increase in gross margin percentage primarily reflects product mix, as we sold more CMTS products and fewer EMTA products in the three and nine month periods in 2009 as compared to the same periods in 2008. CMTS products carry higher gross margin percentage than the EMTA products.
Access, Transport and Supplies Gross Margin 2009 vs. 2008
The Access, Transport and Supplies segment gross margin dollars and percentage
decreased year over year:
• The decrease in gross margin dollars was primarily the result of a decrease
in sales in both the three and nine month periods in 2009.
• The decrease in gross margin percentage was primarily the result of both a change in product mix and a decrease in sales. In the three and nine month periods in 2009, Access and Transport sales decreased proportionally more than the Supplies sales decreased. In addition, our gross margin was negatively impacted by the decline in the overall volume resulting in a higher manufacturing cost per unit due to the allocation of fixed factory overhead costs as well as lower gross margin on certain headend optics gear.
Media & Communications Systems Gross Margin 2009 vs. 2008
Media & Communications Systems gross margin percentage decreased during the
three months ended September 30, 2009 while increasing during the nine months
ended September 30, 2009 as compared to the same periods in 2008.
• Both the decrease during the three months ended and the increase during the
nine months ended are primarily a result of product mix.
• Performance in this segment is variable as revenue recognition is significantly tied to customer acceptances associated with multiple month and quarter projects, and non linear orders for licenses and hardware.
Operating Expenses
The table below provides detail regarding our operating expenses (in thousands):
Operating Expenses Increase (Decrease) Between 2009 and 2008
For the Three Months For the Nine Months For the Three Months For the Nine Months
Ended September 30, Ended September 30, Ended September 30 Ended September 30
2009 2008 2009 2008 $ % $ %
SG&A $ 36,311 $ 33,012 $ 110,782 $ 107,040 $ 3,299 10.0 $ 3,742 3.5
Research &
development 30,909 27,473 89,447 83,257 3,436 12.5 6,190 7.4
Restructuring
Charges 73 202 785 782 (129 ) (63.9 ) 3 0.4
Amortization of
intangibles 9,281 9,146 27,807 34,854 135 1.5 (7,047 ) (20.2 )
Total $ 76,574 $ 69,833 $ 228,821 $ 225,933 $ 6,741 9.7 $ 2,888 1.3
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Selling, General, and Administrative, or SG&A, Expenses
The increase in SG&A expenses for the three months ended September 30, 2009 as
compared to the same period in 2008 reflects:
• Higher variable compensation costs, in particular sales commissions and
incentive accruals.
• An increase in stock compensation expense of $0.9 million as a result of the annual grant in March of 2009.
• An increase in legal expenses of $0.8 million as a result of increased costs associated with various patent and other litigation matters (see Legal Proceedings).
The year over year increase in SG&A expense reflects:
• Higher variable compensation costs, in particular incentive accruals.
• An increase in stock compensation expense of $2.1 million as a result of the annual stock grant in March of 2009.
• An increase in legal expenses of $3.7 as a result of increased costs including settlement costs associated with various patent and other litigation matters (see Legal Proceedings).
• The increases were partially offset by decreases in travel and entertainment and professional fees.
Research & Development Expenses
We continue to aggressively invest in research and development. Our primary
focus is on products that allow MSOs to capture new revenues and reduce
operating costs. The increase in research and development expense reflects:
• Higher compensation costs, fringe benefits and incentive accruals.
• We have incrementally invested year over year in research and development, a trend which we anticipate will continue.
• We anticipate an increase in research and development expense of approximately $3 million per quarter associated with the acquisitions of EGT and Digeo.
Restructuring Charges
On a quarterly basis, we review our existing restructuring accruals and make
adjustments if necessary. For the three and nine month periods ending
September 30, 2009, we recorded adjustments of $0.1 million and $0.8 million.
For the three and nine month period ending September 30, 2008, we recorded
adjustments of $0.2 million and $0.8 million respectively.
Amortization of Intangible Assets
Intangibles amortization expense for the three months ended September 30, 2009
and 2008 was $9.3 million and $9.1 million, respectively. For the nine months
ended September 30, 2009 and 2008, intangible amortization expense was
$27.8 million and $34.9 million, respectively.
The decline for the nine months ended September 30, 2009, reflects the
completion of the amortization of the C-COR order backlog in 2008.
Goodwill Impairment
No goodwill impairment was recorded for the three and nine months ended
September 30, 2009 and 2008. We recorded a non-cash goodwill impairment charge
of $128.9 million and $80.4 million related to the ATS and MCS reporting units,
respectively, during the fourth quarter of 2008. We continue to monitor our
assessments of goodwill, particularly in light of the current economic climate,
most notably with respect to the ATS segment. For the first nine months of 2009,
we concluded that there was no impairment. As the ongoing expected cash flows
and carrying amounts of our remaining goodwill are assessed, changes in the
economic conditions, changes to our business strategy, changes in operating
performance or other indicators of impairment could cause us to realize
additional impairment charges in the future.
Other Expense (Income)
Interest Expense
Interest expense for the three months ended September 30, 2009 and 2008 was
$4.4 million. For the nine months ended September 30, 2009 and 2008, interest
expense was $13.1 million and $12.7 million respectively. Interest expense
reflects interest (including cash and non-cash components) and the amortization
of deferred finance fees associated with our $261.0 million 2% convertible
subordinated notes. See Note 2 and Note 12 of Notes to the Consolidated
Financial Statements.
Loss (Gain) in Foreign Currency
During the three months ended September 30, 2009 and 2008, we recorded a foreign
currency loss of approximately $1.1 million and $0.4 million, respectively.
During the nine months ended September 30, 2009 and 2008, we recorded a foreign
currency loss (gain) of approximately $3.6 million and $(0.3) million
respectively. The gains and losses are primarily driven by the fluctuation of
the value of the euro and peso, as compared to the U.S. dollar, as we had
several European and Mexican customers whose receivables and collections are
denominated in Euros and Pesos. We have implemented a hedging strategy to
mitigate the monetary exchange fluctuations from the time of invoice to the time
of payment, and have occasionally entered into forward contracts based on a
percentage of expected foreign currency receipts.
Interest Income
Interest income during the three months ended September 30, 2009 and 2008 was
$0.4 million and $1.5 million, respectively. During the nine months ended
September 30, 2009 and 2008, interest income was $1.2 million and $5.9 million,
respectively. The income reflects interest earned on cash, cash equivalents and
short term investments. Interest income decreased year over year as result of
lower interest rates in 2009 as compared to 2008.
Other (Income)/Expense
Other (income)/expense for the three months ended September 30, 2009 and 2008
was $(0.3) million and $(72) thousand, respectively. For the nine months ended
September 30, 2009 and 2008, other expense was $(0.9) million and $(43)
thousand, respectively.
Income Taxes
In the three and nine months ended September 30, 2009, we recorded income tax
expense of $12.7 million and $31.9 million, respectively, as compared to the
same periods in 2008, when we recorded $10.7 million and $17.6 million,
respectively. See Note 17 of the Notes to the Consolidated Financial Statements
for additional information about income taxes.
Financial Liquidity and Capital Resources
Overview
One of our key strategies is to maintain and improve our capital structure. The
key metrics we focus on are summarized in the table below:
. . .
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