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| ARRS > SEC Filings for ARRS > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
• Access, Transport and 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, 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 first quarter 2009:
Financial Highlights
• Earnings per diluted share increased to $0.10 in the first quarter 2009 as
compared to $0.03 in the first quarter 2008 despite a 7% decline in sales.
• Gross margin percentage increased 6.5 percentage points year over year to 37.7% in the first quarter 2009 reflecting a stronger product mix notably higher sales of our higher margin CMTS product line.
• We ended the first quarter 2009 with $424.4 million of cash & short-term investments. We generated approximately $13.8 million of cash from operating activities in the quarter.
• We used $10.6 million of cash to retire $15.0 million principal amount of our convertible debt which represented a 29% discount. The Company also wrote off approximately $0.2 million of deferred finance fees associated with the portion of the notes retired. We recorded a pre-tax net gain of $4.2 million as a result of the retirement.
• We ended the first quarter with an order backlog of approximately $155 million and a book-to-bill ratio of 1.16. Both order backlog and book-to-bill are up relative to the first and fourth quarters of 2008.
Product Line Highlights
• CMTS
o Downstream port shipments were 24,516 in the first quarter of 2009
o DOCSIS 3.0 equipment has had wide market acceptance
o Key wins occurred in Korea, Japan and North America
o Worldwide market share improved in the fourth quarter of 2008 (source:
Infonetics)
• CPE
o 1.3 million EMTAs were shipped in the first quarter of 2009. We have
retained number one market share for 16 consecutive quarters (source:
Infonetics)
o We have twice as large a market share as our nearest competitor in the fourth quarter of 2008
o We increased shipments of Multi-line and Wireless Gateways in the first quarter of 2009
o DOCSIS 3.0 CPE shipments increased over fourth quarter of 2008, but we still expect more significant transition to this product later in 2009
• Access, Transport & Supplies
o Business continues to be impacted by macro economics which resulted in lower sales year over year and sequentially
o Product mix and lower volumes impacted margins
• Media & Communications Systems
o We have seen strong acceptance of WorkAssure projects
o Won a new WorkAssure customer in Latin America in the first quarter of 2009
o Experienced mix shift toward On-Demand and Ad insertion in the first quarter of 2009
o Introduced two new video distribution platforms
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
controlled approximately 89.9% of the triple play Revenue Generating Units
("RGU") within the U.S. cable market (according to Dataxis in the third quarter
2008), thereby making our sales to those MSOs critical to our success. Our sales
are substantially dependent upon a system 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
month periods ended March 31, 2009 and 2008 are set forth below (in thousands):
Three Months Ended
March 31,
2009 2008
Comcast and affiliates $ 65,210 $ 34,226
% of sales 25.7 % 12.5 %
Time Warner Cable and affiliates $ 49,083 $ 70,921
% of sales 19.4 % 25.9 %
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Comparison of Operations for the Three Months Ended March 31, 2009 and 2008
Net Sales
The table below sets forth our net sales for the three months ended March 31,
2009 and 2008, for each of our segments (in thousands):
Net Sales
Three Months Ended Increase (Decrease) -
March 31, 2009 vs. 2008
2009 2008 $ %
Business Segment:
Broadband Communications Systems $ 194,131 $ 189,637 $ 4,494 2.4 %
Access, Transport & Supplies 42,990 72,894 (29,904 ) (41.0 )%
Media & Communications Systems 16,397 10,975 5,422 49.4 %
Total sales $ 253,518 $ 273,506 $ (19,988 ) (7.3 )%
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The table below sets forth our domestic and international sales for the three months ended March 31, 2009 and 2008 (in thousands):
Net Sales
Three Months Ended Increase (Decrease) -
March 31, 2009 vs. 2008
2009 2008 $ %
Domestic sales $ 186,025 $ 188,743 $ (2,718 ) (1.4 )%
International sales 67,493 84,763 (17,270 ) (20.4 )%
Total sales $ 253,518 $ 273,506 $ (19,988 ) (7.3 )%
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Broadband Communication Systems Net Sales 2009 vs. 2008
During the first quarter of 2009, sales of our BCS segment products increased by
approximately 2.4% as compared to the first quarter of 2008. This increase in
sales primarily resulted from:
• Higher sales to Comcast of both CMTS and EMTAs. Sales to Comcast were lower
in the first quarter of 2008 as they awaited the launch of our DOCSIS 3.0
product in the third quarter of 2008.
• Comcast sales were partially offset by decreases in sales to several customers, notably Charter and Liberty Media International.
Access, Transport and Supplies Net Sales 2009 vs. 2008
Access, Transport and Supplies segment revenue decreased by approximately 41.0%
in the first quarter of 2009, as compared to the first quarter of 2008. 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.
Media & Communication Systems Net Sales 2009 vs. 2008
During the first quarter of 2009, sales of our MCS segment products increased by
approximately 49.4% as compared to the first quarter of 2008. This 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 months ended March 31,
2009 and 2008, for each of our reporting segments (in thousands):
Gross Margin $
Three Months Ended Increase (Decrease)
March 31, 2009 vs. 2008
2009 2008 $ %
Business Segment:
Broadband Communications Systems $ 78,921 $ 57,991 $ 20,930 36.1 %
Access, Transport and Supplies 9,268 21,876 (12,608 ) (57.6 )%
Media & Communications Systems 7,321 5,381 1,940 36.1 %
Total $ 95,510 $ 85,248 $ 10,262 12.0 %
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The table below sets forth our gross margin percentages for the three months ended March 31, 2009 and 2008, for each of our business segments:
Gross Margin %
Percentage Point
Three Months Ended Increase
March 31, (Decrease)
2009 2008 2009 vs. 2008
Business Segment:
Broadband Communications Systems 40.7 % 30.6 % 10.1
Access, Transport and Supplies 21.6 % 30.0 % (8.4 )
Media & Communications Systems 44.6 % 49.0 % (4.4 )
Total 37.7 % 31.2 % 6.5
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Broadband Communications Systems Gross Margin 2009 vs. 2008
Broadband Communications Systems segment gross margin dollars and percentage
increased year over year:
• The increase in gross margin dollars was primarily the result of higher
sales and product mix.
• The increase in gross margin percentage in the first quarter of 2009 as compared to the first quarter of 2008 primarily reflects product mix, as we sold more CMTS products and fewer EMTA products. CMTS products carry a higher gross margin percentage than the EMTA products.
Access, Transport and Supplies Gross Margin 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.
• The decrease in gross margin percentage was primarily the result of both a change in product mix and a decrease in sales. Access and Transport sales decreased proportionally more than the Supplies sales decreased, in particular the higher gross margin optics gear.
Media & Communications Systems Gross Margin 2009 vs. 2008
Media & Communications Systems segment gross margin dollars increased as gross
margin percentage decreased year over year:
• The increase in gross margin dollars was primarily the result of increased
sales.
• The decrease in gross margin percentage was primarily the result of product mix.
Operating Expenses
The table below provides detail regarding our operating expenses (in thousands):
Operating Expenses
Three Months Ended Increase (Decrease) - 2009
March 31, vs. 2008
2009 2008 $ %
Selling general and administrative $ 35,343 $ 36,982 $ (1,639 ) (4.4 )%
Research and development 28,395 28,122 273 1.0 %
Restructuring 120 405 (285 ) (70.4 )%
Amortization of intangible assets 9,263 13,254 (3,991 ) (30.1 )%
Total $ 73,121 $ 78,763 $ (5,642 ) (7.2 )%
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Selling, General, and Administrative, or SG&A, Expenses
The year over year decrease in SG&A expense reflects:
• The synergies we achieved during 2008 primarily related to the C-COR
acquisition.
• The decrease achieved by the synergies was partially offset by an increase in legal costs of approximately $1.2 million associated with patent and other litigation matters.
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 research and development expenses increased slightly as
compared to first quarter 2008.
Restructuring Charges
On a quarterly basis, we review our existing restructuring accruals and make
adjustments if necessary. For the first three months of 2009 and 2008, we
recorded increases to the accruals $0.1 million and $0.4 million, respectively.
The $0.4 million recorded in the first quarter 2008 related to severance for the
C-COR acquisition and changes in estimates associated with real estate leases.
Amortization of Intangibles
Intangibles amortization expense for the three months ended March 31, 2009 and
2008 was $9.3 million and $13.3 million, respectively. Our intangible expense in
2009 and 2008 is related to the acquisitions of Auspice Corporation in August of
2008 and C-COR Incorporated in December of 2007. The decline reflects the
completion of the amortization of the C-COR order backlog in 2008.
Goodwill Impairment
Goodwill impairment for the three months ended March 31, 2009 and 2008 was $0
for each period. We recorded a noncash 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 quarter of 2009, we
concluded that indicators of potential impairment did not exist. 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 first quarter 2009 and 2008 was $4.5 million and
$4.0 million, respectively. Interest expense reflects interest and the
amortization of a portion of the deferred finance fees primarily associated with
our $276.0 million 2% convertible subordinated notes. It also includes the
non-cash interest expense recorded in accordance with FSP ABP 14-1, Accounting
for Convertible Debt Instruments That May be Settle in Cash Upon Conversion
(including Partial Cash Settlement). See Note 2 and Note 11 of Notes to the
Consolidated Financial Statements.
Loss (Gain) in Foreign Currency
During the first quarter 2009, we recorded a foreign currency loss of
approximately $1.0 million. During the first quarter 2008, we recorded a foreign
currency gain of approximately $1.0 million. The gains and losses are primarily
driven by the fluctuation of the value of the euro, as compared to the U.S.
dollar, as we had several European customers whose receivables and collections
are denominated in euros. 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 first quarter of 2009 and 2008 was $385 thousand and
$2.7 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 earned in 2009 as compared to 2008.
Other Income
Other income for the three months ended March 31, 2009 and 2008 was $103
thousand and $36 thousand, respectively.
Income Taxes
In the three months ended March 31, 2009 and 2008, we recorded income tax
expense of $8.4 million and $2.3 million, respectively. See Note 16 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:
Liquidity & Capital Resources Data
Three Months Ended March 31,
2009 2008
(in thousands, except DSO and turns)
Key Working Capital Items
Cash provided by operating activities $ 13,845 $ 30,515
Cash, cash equivalents, and short-term investments $ 424,432 $ 293,028
Accounts receivable, net $ 155,792 $ 172,719
Days Sales Outstanding ("DSOs") 57 57
Inventory $ 120,774 $ 122,361
Inventory turns 5.0 5.9
Convertible notes at face value* $ 261,050 $ 276,000
Capital Expenditures $ 5,066 $ 6,429
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* The face value of our convertible notes will not agree to the amount on our balance sheet as a result of the accounting treatment in accordance with FSP APB 14-1. See Notes 2 and 11 of Notes to the Consolidated Financial Statements for more details.
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 decreased in the first quarter of 2009 as compared to 2008
as a result of lower sales during the quarter. The DSOs remained unchanged year
over year.
Inventory decreased in the first quarter of 2009 as compared to the first
quarter of 2008 by approximately $1.6 million. Declines in our inventory levels
of the ATS and MCS segments were partially offset with a modest increase in the
BCS segment. Inventory turns in the first quarter of 2009 were 5.0 as compared
to 5.9 in the same period of 2008. The decrease in turns relates to a couple
factors:
• With the market driven decline in the ATS sales, inventory was not reduced
at a similar rate resulting in higher inventory turns for this segment. We
anticipate that inventory turns for the ATS segment will improve over the
next several quarters.
• Despite a year over year increase in BCS segment sales of $4.5 million, the cost of goods sold decreased by approximately $16.4 million reflecting a shift in product mix. This resulted in lower inventory turns for the BCS segment year over year.
Summary of Current Liquidity Position and Potential for Future Capital Raising We believe our current liquidity position, where we have approximately $424 million of cash, cash equivalents, and short-term investments on hand as of March 31, 2009, together with the prospects for continued generation of cash from operations are adequate for our short- and medium-term business needs. We may in the future elect to repurchase additional shares of our common stock or additional principal amounts of our outstanding convertible notes. In addition, a key part of our overall long-term strategy may be implemented through additional acquisitions, and a portion of these funds may be used for that purpose. 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. Absent a major acquisition, we do not
anticipate a need to access the capital markets in 2009.
Commitments
Our contractual obligations are disclosed in our Annual Report on Form 10-K for
the year ended December 31, 2008. There has been no material change to our
contractual obligations during the first quarter of 2009.
Cash Flow
Below is a table setting forth the key line items of our Consolidated Statements
of Cash Flows (in thousands):
For the Three Months Ended
March 31,
2009 2008
Cash provided by operating activities $ 13,845 $ 30,515
Cash provided by (used in) investing activities (13,330 ) 3,216
Cash (used in) financing activities (11,471 ) (114,013 )
Net decrease in cash $ (10,956 ) $ (80,282 )
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Operating Activities:
Below are the key line items affecting cash provided by (used in) operating
activities (in thousands):
For the Three Months Ended
March 31,
2009 2008
Net income $ 12,882 $ 3,829
Adjustments to reconcile net income to cash provided by
operating activities 20,907 17,382
Net income including adjustments 33,789 21,211
Decrease/(increase) in accounts receivable 3,645 (5,336 )
Decrease in inventory 8,978 10,245
(Decrease) /increase in accounts payable and accrued
liabilities (35,789 ) 9,300
All other - net 3,222 (4,905 )
Cash provided by operating activities $ 13,845 $ 30,515
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Net income including adjustments increased $12.6 million during the first
quarter of 2009 as compared to 2008. Our net income before adjustments to net
income increased approximately $9.1 million in the first quarter 2009 as
compared to 2008. The adjustments to reconcile net income to cash provided by
operating activities increased approximately $3.5 million during the first
quarter of 2009 as compared to the same period in 2008. This increase was
related to primarily three factors: (1) a gain of $4.2 million associated with
the redemption of a portion of our convertible debt, (2) a decrease in
intangible amortization of $4.0 million in the first quarter of 2009 as compared
to 2008 as the order backlog acquired from C-COR was fully amortized during the
first half of 2008, and (3) the net deferred tax asset increased by $6.4 million
during the first quarter of 2008 as compared to a net decrease in the net
deferred tax asset of $4.7 million during the first quarter of 2009.
Accounts receivable decreased in the first quarter of 2009 and increased in the
first quarter 2008. These moderate changes related to the level of sales and the
timing of sales during the quarters.
Inventory decreased in the first quarter of both 2009 and 2008. During 2009 the
decrease was due to timing and an effort to reduce our inventory levels.
The decline in accounts payable and accrued liabilities in 2009 reflects the
payment of the annual bonus in the first quarter coupled with normal timing
variations associated with payments of accounts payable. In 2008, accounts
payable and accrued liabilities increased as a result of the build-up of
. . .
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