Item 1A. RISK FACTORS
Our business is dependent on customers’ capital
spending on broadband communication systems, and reductions by customers in capital spending would adversely affect our business.
Our performance is primarily dependent
on customers’ capital spending for constructing, rebuilding, maintaining or upgrading broadband communications systems. Capital
spending in the broadband communications industry is cyclical and can be curtailed or deferred on short notice. A variety of factors
affect capital spending, and, therefore, our sales and profits, including:
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demand for network services;
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general economic conditions;
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foreign currency fluctuations;
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competition from other providers of broadband and high-speed services;
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customer specific financial or stock market conditions;
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availability and cost of capital;
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governmental regulations;
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customer acceptance of new services offered; and
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real or perceived trends or uncertainties in these factors.
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Several of our customers have accumulated
significant levels of debt. These high debt levels, coupled with the volatility in the capital markets, may impact their access
to capital in the future, or reduce the amounts they spend on purchasing additional equipment from us. Even if the financial health
of our customers remains intact, these customers may not purchase new equipment at levels we have seen in the past or expect in
the future. We cannot predict the impact, if any, of any softening or downturn in the national or global economy or of specific
customer financial challenges on our customers’ expansion and maintenance expenditures.
Uncertainties associated with the
transaction with CommScope could adversely affect our business, results of operations and financial condition.
On November 8, 2018, we entered into the
Acquisition Agreement under which we will be acquired by CommScope. Completion of the Acquisition is subject to various closing
conditions, including but not limited to, obtaining necessary approvals and consents from our shareholders and various regulatory
agencies, including the High Court of Justice of England and Wales, the European Commission and other antitrust authorities. The
regulatory agencies from which the parties will seek certain of these clearances have broad discretion in administering the governing
regulations. As a condition to their clearance of the Acquisition, agencies may impose requirements, limitations or costs or require
divestitures or place restrictions on the conduct of the parties’ business. These requirements, limitations, costs, divestitures
or restrictions could jeopardize or delay the consummation of the Acquisition or may reduce the anticipated benefits of the Transaction.
There can be no assurance that the parties to the Acquisition Agreement will receive the necessary approvals for the transaction
or receive them within the expected timeframe.
The announcement and pendency of the Acquisition,
as well as any delays in the expected timeframe, could cause disruption in and create uncertainties, which could have an adverse
effect on our business, results of operations and financial condition, regardless of whether the Acquisition is completed. These
risks include:
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an adverse effect on our relationships with vendors, customers, and employees;
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a diversion of a significant amount of management time and resources towards the completion of
the Acquisition;
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being subject to certain restrictions on the conduct of our business;
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possibly foregoing certain business opportunities that we might otherwise pursue absent the pending
Acquisition; and
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difficulties attracting and retaining key employees.
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Failure to complete the Acquisition
could adversely affect our business and the market price of our ordinary shares.
There is
no assurance that the closing of the Acquisition will occur. The Acquisition may be terminated under certain
specified circumstances, including, but not limited to, a termination of the Acquisition Agreement by us to enter into an
agreement for a “superior proposal” or the occurrence of an “intervening event.” If the Acquisition
Agreement is terminated by us under certain circumstances, we may be required to pay the buyer a termination fee of $58
million, except that the termination fee shall be $29 million if the Scheme is not sanctioned by the High Court of Justice of
England and Wales or the requisite shareholder approvals are not obtained. Payment of this termination fee may require us to use
available cash that would otherwise be used for general purposes or strategic initiatives, which could adversely affect our
business, results of operations or financial condition.
The Acquisition Agreement contains
provisions that limit our ability to pursue alternatives to the Acquisition.
Under the Acquisition Agreement, we are
restricted, subject to certain exceptions, from soliciting, knowingly encouraging, or furnishing information with regard to, any
inquiry, proposal or offer for a competing acquisition proposal with any person. We may terminate the Acquisition Agreement and
enter into an agreement with respect to a superior proposal only if specified conditions have been satisfied, including a determination
by our board of directors (after consultation with our financial advisor and legal counsel) that such proposal would result in
a transaction more likely to promote our success for the benefit of our shareholders than the Acquisition, and such a termination
would result in us being required to pay the termination fee referenced above. These provisions could discourage a third party
that may have an interest in acquiring all or a significant part of our business from considering or proposing that acquisition,
even if such third party were prepared to pay consideration with a higher value than the value of the consideration in the Acquisition.
Potential litigation instituted against
us and our directors challenging the proposed Acquisition may prevent the Acquisition from becoming effective within the expected
timeframe or at all.
Potential litigation related to the Acquisition
may result in injunctive or other relief prohibiting, delaying or otherwise adversely affecting our ability to complete the Acquisition.
Such relief may prevent the Acquisition from becoming effective within the expected timeframe or at all. In addition, defending
against such claims may be expensive and divert management's attention and resources, which could adversely affect our business.
Changes to United States tax, tariff and import/export
regulations may have a negative effect on global economic conditions, financial markets and our business.
We import a significant amount of our products
and components from our partner manufacturers in China. The Office of the U.S. Trade Representative (the “USTR”) recently
enacted tariffs ranging from 10% to 25% on imports into the U.S. of a broad array of Chinese products that includes many of our
broadband CPE products. The current 10% tariff on many of these products is scheduled to increase to 25% effective January 1, 2019.
The administration has also indicated that it is considering proposing an additional lot of products that would be subject to tariffs,
which list may include more of our products. While we currently have agreement to pass on over 80% of the current tariff costs
to our customers, it could reduce the amount of impacted products that customers in the U.S. will purchase, the timing of those
purchases and may impact cash flow due to the timing of payments for the tariffs and collection from our customers. We are
in the process of shifting the manufacturing locations for impacted products to locations that would not be subject to the proposed
tariffs, manufacturing in such locations may increase our manufacturing costs and it will take time, likely in excess of six months,
for us to fully establish manufacturing in the locations for all impacted products.
As evidenced by the USTR proposed tariffs,
the current administration, along with Congress, has created significant uncertainty about the future relationship between the
United States and other countries with respect to the trade policies, treaties, taxes, government regulations and tariffs that
would be applicable. In addition to the potential direct impact to us of proposed tariffs as discussed above, these developments,
or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability
of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations
and the United States. Any of these factors could depress economic activity and restrict our access to suppliers or customers
and have a material adverse effect on our business, financial condition and results of operations.
Our gross margins and operating margins will vary over
time, and our aggregate gross margin may decrease from historical levels.
We expect our product gross margins to
vary over time, and the aggregate gross margin we have achieved in recent years may continue to decrease and be adversely affected
in the future by numerous factors, including customer, product and geographic mix shifts, the introduction of new products, customer
acceptance of designed products with a lower cost to us, fluctuations in our license sales or services we provide, changes in the
actions of our competitors, currency fluctuations that impact our costs or the cost of our products and services to our customers,
tariffs, increases in material, labor, or inventory carrying costs, and increased costs due to changes in component pricing, such
as flash memory and multilayer ceramic capacitors, for our CPE products. We will continue to focus on increasing revenues and operating
margins and managing our operating expenses; however, no assurance can be provided that we will be able to achieve all or any of
these goals.
The markets on which our business is focused is significantly
impacted by technological change.
The broadcast and broadband communication
systems industry has gone through dramatic technological change resulting in service providers rapidly migrating their business
from a one-way television service to a two-way communications network enabling multiple services, such as residential and business
high-speed Internet access, residential and business telephony services, digital television, video on demand and advertising services.
New services, such as home security, power monitoring and control, and 4K (UHD) television that are or may be offered by service
providers, are also based on, and will be characterized by, rapidly evolving technology. The development of increasing transmission
speed, density and bandwidth for Internet traffic has also enabled the provision of high quality, feature length video over the
Internet. This over-the-top IP video service enables content providers such as Netflix and Hulu, programmers such as HBO and ESPN
and portals like Google to provide video services on-demand, by-passing traditional video service providers. As these service providers
enhance their quality and scalability, many are also introducing similar OTT services over their existing networks, for delivery
not only to televisions but to computers, tablets, and telephones to remain competitive. In addition, service providers continue
to explore ways to virtualize portions of their networks, reducing dependence on specifically designed equipment, including our
products, by utilizing software that provide the same functions. We must retain skilled and experienced personnel, as well as deploy
substantial resources to meet the changing demands of the industry and must be nimble to be able to capitalize on change.
We compete with international, national
and regional manufacturers, distributors and wholesalers including some companies that are larger than we are. In some instances,
our customers themselves may be our competition. Some of our customers may develop their own software requiring support within
our products and/or may design and develop products of their own which are produced to their own specifications directly by a contract
manufacturer.
Our business is dependent on our ability
to develop products that enable current and new customers to exploit these rapid technological changes. To the extent that we are
unable to adapt our technologies to serve these emerging demands, including obtaining necessary certifications from content providers
and programmers to include their over-the-top video applications as part of our product offerings and software to provide virtualized
network functions, our business may be adversely affected.
Another trend that could affect us is the
emerging interest in Distributed Access Architectures, which disaggregates some of the functions of CCAP and the Access and Transport
platforms to enable deployment of these functions in ways that could reduce operator capital expenditures. ARRIS is developing
a line of DAA products but operators are not aligned on the specific implementations of DAA and ARRIS could lose market share to
competitors. Service providers also have the goal of virtualizing CCAP management and control functions as they deploy DAA as well,
potentially enabling new competitors to enter the market and reducing their dependence on ARRIS products.
The Wi-Fi and wireless networking markets
for both service providers and enterprises is generally characterized by rapidly changing technology, changing end customer needs,
evolving industry standards and frequent introductions of new products and services.
To succeed, we must effectively anticipate,
and adapt in a timely manner to, end customer requirements and continue to develop or acquire new products and features that meet
market demands, technology trends and regulatory requirements. Likewise, if our competitors introduce new products and services
that compete with ours, we may be required to reposition our product and service offerings or introduce new products and services
in response to such competitive pressure. If we fail to develop new products or product enhancements, or our end customers or potential
end customers do not perceive our products to have compelling technical advantages, our business could be adversely affected, particularly
if our competitors are able to introduce solutions with such increased functionality earlier than we do. Developing our products
is expensive, complex and involves uncertainties. Each phase in the development of our products presents serious risks of failure,
rework or delay, any one of which could impact the timing and cost-effective development of such product and could jeopardize end
customer acceptance of the product. We have experienced in the past and may in the future experience design, manufacturing, marketing
and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements.
In addition, the introduction of new or enhanced products requires that we carefully manage the transition from older products
to minimize disruption in customer ordering practices and ensure that new products can be timely delivered to meet our customers’
demand. As a result, we may not be successful in modifying our current products or introducing new products in a timely or appropriately
responsive manner, or at all. If we fail to address these changes successfully, our business and operating results could be materially
harmed.
Consolidations in the broadcast and broadband communication
systems industry could have a material adverse effect on our business.
The broadcast and broadband communication
systems industry historically has experienced, and continues to experience, the consolidation of many industry participants. For
example, Comcast acquired Sky, Vodafone merged its mobile operations in India with Idea Cellular, LGI sold certain of its properties
to T-Mobile, Wave Broadband consolidated with RCN under common ownership, Atlantic Broadband/Cogeco purchased MetroCast, Cable
One bought NewWave Communications, T-Mobile US acquired TV service provider Layer3, and Cablevision SA (Argentina) merged with
Telecom Argentina SA. When consolidations occur, it is possible that the acquirer will not continue using the same suppliers, possibly
resulting in an immediate or future elimination of sales opportunities for us. Even if sales are not reduced, consolidations also
could result in delays in purchasing decisions by the affected companies prior to completion of the transaction. Further, even
if we believe we will receive additional sales from a customer following a transaction as a result of, for example, typical network
upgrades that follow combinations or otherwise, no assurance can be provided that such anticipated sales will be realized. In addition,
consolidations can also result in increased pressure from customers for lower prices or better terms, reflecting the increase in
the total volume of products purchased or the elimination of a price differential between the acquiring customer and the company
acquired. Any of these results could have a material adverse effect on our business.
We have significant indebtedness, which could limit our
operations and opportunities, make it more difficult for us to pay or refinance our debts and/or may cause us to issue additional
equity in the future, which would increase the dilution of our stockholders or reduce earnings.
As of September 30, 2018, we had approximately
$2,095.8 million in total indebtedness and $498.5 million available under our revolving line of credit to support our working capital
needs. Our debt service obligations with respect to this indebtedness could have an adverse impact on our earnings and cash flows
for as long as the indebtedness is outstanding.
This significant indebtedness also could have important consequences
to stockholders. For example, it could:
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make it more difficult for us to pay or refinance our debts as they become due during adverse economic
and industry conditions because any decrease in revenues could cause us to not have sufficient cash flows from operations to make
our scheduled debt payments;
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limit our flexibility to pursue other strategic opportunities or react to changes in our business
and the industry in which we operate and, consequently, place us at a competitive disadvantage to competitors with less debt;
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require a substantial portion of our cash flows from operations to be used for debt service payments,
thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general
corporate purposes; and
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result in higher interest expense in the event of increases in interest rates since the majority
of our debt is subject to variable rates.
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Based upon current levels of operations,
we expect to be able to generate sufficient cash on a consolidated basis to make all the principal and interest payments on our
indebtedness when such payments are due, but there can be no assurance that we will be able to repay or refinance such borrowings
and obligations.
We may consider it appropriate to reduce
the amount of indebtedness currently outstanding. This may be accomplished in several ways, including issuing additional ordinary
shares or securities convertible into ordinary shares, reducing discretionary uses of cash or a combination of these and other
measures. Issuances of additional ordinary shares or securities convertible into ordinary shares would have the effect of diluting
the ownership percentage that stockholders will hold in the company and may reduce our reported earnings per share.
We face risks relating to currency fluctuations and currency
exchange.
On an ongoing basis we are exposed to various
changes in foreign currency rates because certain sales are denominated in foreign currencies. Additionally, certain intercompany
transactions are denominated in foreign currencies and subject to revaluation. These changes can impact our results of operations,
cash flows and financial position. We manage these risks through regular operating and financing activities and periodically use
derivative financial instruments such as foreign exchange forward and option contracts. There can be no assurance that our risk
management strategies will be effective. In addition, many of our international customers make purchases from us that are denominated
in U.S dollars. During periods where the U.S. dollar strengthens, it may impact these customers’ ability to purchase products,
which could have a material impact on our sales in the affected countries.
We also may encounter difficulties in converting
our earnings from international operations to U.S. dollars for use in the United States. These obstacles may include problems moving
funds out of the countries in which the funds were earned and difficulties in collecting accounts receivable in foreign countries
where the usual accounts receivable payment cycle is longer.
We may have difficulty in forecasting our sales and may
experience volatility in revenues and inventory levels.
Because a significant portion of our customers’
purchases are discretionary, accurately forecasting our sales is difficult. In addition, our customers have increasingly submitted
their purchase orders less evenly over the course of each quarter and lead times for manufacturing products have increased from
where they have historically been. The combination of our dependence on relatively few key customers and the award by those customers
of irregular but sizeable orders, together with the size of our operations, make it difficult to forecast sales and can result
in revenue volatility, which could further result in maintaining inventory levels that are not optimal for our ultimate needs and
could have a negative impact on our business.
We also have outstanding warrants with
a customer to purchase our ordinary shares. Vesting of the warrants is subject to both the volume of purchases by the customers
and product mix. Under applicable accounting guidance, if we believe that vesting of a tranche of the warrants is probable, we
are required to mark-to-market the fair value of the warrant until it vests, and any change in the fair value is treated as a change
in revenues from sales to the customer. The amount of the change in revenues that will be recorded is difficult to predict as both
sales to the customer and changes in our stock price impact the calculation and are outside of our control. As a result, the warrants
also could increase our revenue volatility.
The IRS may not agree that we are a foreign corporation
for U.S. federal income tax purposes.
Following the Pace combination, we are
incorporated under the laws of England and Wales and are a tax resident in the United Kingdom for U.K. tax purposes, the IRS may
assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal income tax purposes.
For U.S. federal income tax purposes, a corporation generally is considered to be a tax resident in the jurisdiction of its organization
or incorporation. Because we are incorporated under the laws of England and Wales, we generally would be classified as a non-U.S.
corporation (and, therefore, a non-U.S. tax resident) under these rules. Section 7874 of the Internal Revenue Code of 1986,
as amended (the “Code”), however, provides an exception to this general rule under which a foreign incorporated entity
may, in certain circumstances, be treated as a U.S. corporation for U.S. federal income tax purposes.
Generally, for us to be treated as a non-U.S.
corporation for U.S. federal income tax purposes under Section 7874, the former stockholders of ARRIS Group must own (within
the meaning of Section 7874) less than 80% (by both vote and value) of all of the outstanding shares of ARRIS (the “Ownership
Test”). Based on the terms of the Pace combination, we believe historic ARRIS stockholders owned less than 80% of all the
outstanding shares in ARRIS and, thus, the Ownership Test has been satisfied. However, ownership for purposes of Section 7874
is subject to various adjustments under the Code and the Treasury Regulations promulgated thereunder, and there is limited guidance
regarding the Section 7874 provisions, including regarding the application of the Ownership Test. There can be no assurance
that the IRS will agree with the position that the Ownership Test was satisfied following the Pace combination and/or would not
successfully challenge the status of ARRIS as a non-U.S. corporation for U.S. federal income tax purposes.
If we were to be treated as a U.S. corporation
for U.S. federal income tax purposes, we could be subject to substantial additional U.S. taxes. For U.K. tax purposes, we are expected,
regardless of any application of Section 7874, to be treated as a U.K. tax resident. Consequently, if we are treated as a
U.S. corporation for U.S. federal income tax purposes under Section 7874, we could be liable for both U.S. and U.K. taxes,
which could have a material adverse effect on our financial condition and results of operations.
Our status as a foreign corporation for U.S. tax purposes
could be affected by a change in law.
Under current law, we expect to be treated
as a non-U.S. corporation for U.S. federal income tax purposes. However, changes to Section 7874 or the Treasury Regulations
promulgated thereunder, or other changes in law, could adversely affect our status as a non-U.S. corporation for U.S. federal income
tax purposes, our effective tax rate and/or future tax planning, and any such changes could have prospective or retroactive application
to us and our stockholders.
In 2016, the U.S. Treasury issued proposed
and temporary Regulations under Section 7874 and other sections of the Code, which, among other things, make it more difficult
for the Ownership Test to be satisfied and would limit or eliminate certain tax benefits to so-called inverted corporations. These
temporary Regulations generally apply to transactions occurring on or after April 4, 2016. Accordingly, with respect to the
Pace combination, as it occurred prior to that date, we do not expect these temporary Regulations to adversely affect the tax status
of ARRIS. However, these Regulations, among other things, may affect how, or limit options for how, ARRIS will be able to structure
future acquisitions. We continue to monitor this situation, we will review any comments on these proposed Regulations that are
made public, we will review the final Regulations when issued, and we will review any additional guidance issued by the U.S. Treasury
and the IRS. Any such future guidance could have a material adverse impact on our financial position and results of operations.
Section 7874 of the Code may limit our ability to
utilize certain U.S. tax attributes.
Following the acquisition of a U.S. corporation
by a non-U.S. corporation, Section 7874 of the Code can limit the ability of the acquired U.S. corporation and its U.S. affiliates
to utilize certain U.S. tax attributes (including net operating losses and certain tax credits) to offset, during the ten-year
period following the acquisition, their U.S. taxable income, or related income tax liability, resulting from certain (a) transfers
to related foreign persons of stock or other properties of the acquired U.S. corporation and its U.S. affiliates and (b) income
received or accrued from related foreign persons during such period by reason of a license of any property by the acquired U.S.
corporation and its U.S. affiliates (collectively, “inversion gain”). Based on the limited guidance available and as
a result of the Pace transaction, we believe that this limitation under Section 7874 will apply and, as a result, we do not
currently expect that the Company or its U.S. affiliates will be able to utilize certain U.S. tax attributes to reduce the amount
of any inversion gain and/or to offset applicable U.S. federal income tax liability attributable to any inversion, but may continue
to be used to reduce our taxable income from ordinary operations.
Changes to, interpretations of, and rulings related to,
U.S., U.K., Luxembourg and other tax laws could adversely affect ARRIS.
Our business operations are subject to
taxation in the U.S., U.K., Luxembourg and a number of other jurisdictions. Changes in tax laws or tax rulings, or changes in interpretations
of existing laws, could materially affect our financial position and results from operations. Recently, the U.S. Congress,
the Organization for Economic Co-operation and Development and other government agencies in jurisdictions where ARRIS and its affiliates
do business have had an extended focus on issues related to the taxation of multinational corporations. One example is in the area
of “base erosion and profit shifting,” including situations where payments are made between affiliates from a jurisdiction
with high tax rates to a jurisdiction with lower tax rates. In this regard, on December 22, 2017, the President signed into law
the “Tax Cuts and Jobs Act” (the “Act”). The Act significantly reforms the Internal Revenue Code of 1986,
as amended. The Act, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations
on the deductibility of interest, imposes limitations on the deductibility of certain payments between affiliates, allows for the
immediate expensing of certain capital expenditures, and puts into effect the migration from a worldwide system of taxation to
a territorial system and imposes several other changes to tax law on U.S. corporations. As many of the provisions of the Act did
not come into effect until 2018 and further clarification of the law is expected, the total impact on our financial position is
uncertain and could be materially adverse.
Another example involves “illegal
state aid” as determined by the EU Competition Commission, which would require EU member states to recover unlawful aid given
to multinational enterprises in the form of favorable transfer pricing treatment. In November of 2017, the European Commission
issued a decision letter to the U.K. government asserting that Chapter 9 of the U.K. Controlled Foreign Company legislation provided
illegal state aid. If the European Commission ultimately prevails in this dispute, we could owe additional taxes. Based on our
current assessment of the issue no additional tax expense has been accrued. The tax laws, and the interpretation thereof, in the
United States, the United Kingdom, Luxembourg and other countries in which we and our affiliates do business could change on a
prospective or retroactive basis, including as part of the treaty changes that could result from the U.K.’s decision to leave
the EU, and any such changes could adversely affect us and our affiliates. Further, the IRS or other applicable taxing authorities
may disagree with positions we have taken in our tax filings, which could result in the requirement to pay additional tax, interest
and penalties, which amounts could be significant.
Proposed changes to U.S. Model Income Tax Treaty could
adversely affect ARRIS.
On May 20, 2015, the U.S. Treasury
released proposed revisions to the U.S. model income tax convention (the “Model”), the baseline text used by the U.S.
Treasury to negotiate tax treaties. The proposed revisions address certain aspects of the Model by modifying existing provisions
and introducing entirely new provisions. Specifically, the proposed revisions target (1) exempt permanent establishments,
(2) special tax regimes, (3) expatriated entities, (4) the anti-treaty shopping measures of the limitation on benefits
article, and (5) subsequent changes in treaty partners’ tax laws.
With respect to the proposed changes to
the Model pertaining to expatriated entities, because the Pace combination is otherwise subject to Section 7874, if applicable
treaties were subsequently amended to adopt such proposed changes, payments of interest, dividends, royalties and certain other
items of income by ARRIS U.S. Holdings, Inc. (our primary U.S. holding company) or its U.S. affiliates to non-U.S. persons would
become subject to full U.S. withholding tax at a 30% rate. This could result in material U.S. taxes being paid by recipients of
payments from ARRIS Holdings and its U.S. affiliates. Additionally, revisions to the Model may influence the international community’s
discussion of approaches to treaty abuse and harmful tax practices with respect to the Organization for Economic Cooperation and
Development’s ongoing work regarding base erosion and profit shifting. We are unable to predict the likelihood that the proposed
revisions to the Model become a part of the Model or any U.S. income tax treaty. However, any revisions to a U.S. income tax treaty,
including the proposed revisions described in this paragraph, could adversely affect ARRIS and its affiliates.
Consequences of the UK’s delivering notice to leave
the European Union could materially adversely affect our business.
In March 2017, the U.K. government delivered
formal notice of its intention to withdraw from the European Union. As a result, it now has up to two years to negotiate the terms
of its exit, unless all the remaining member states of the European Union agree to an extension. Given the lack of precedent, it
is unclear how the withdrawal of the U.K. from the European Union will affect the U.K.’s access to the EU Single Market and
other important financial and trade relationships and how it will affect us. The withdrawal could, among other outcomes, disrupt
the free movement of goods, services and people between the U.K. and the European Union, undermine bilateral cooperation in key
policy areas and significantly disrupt trade between the U.K. and the European Union. Additionally, absent planning and restructuring,
the withdrawal will impact the application of the limitation on benefit clause under Article 24 of the U.S. – Luxembourg
tax treaty to impose a full U.S. withholding tax at a 30% rate on certain payments made by ARRIS Holdings. Under current European
Union rules, following the withdrawal the U.K. will not be able to negotiate bilateral trade agreements with member states of the
European Union. In addition, a withdrawal of the U.K. from the European Union could significantly affect the fiscal, monetary,
legal and regulatory landscape within the U.K. and could have a material impact on its economy and the future growth of its various
industries, including the broadcast and broadband communication systems industry in which we operate. Although it is not possible
to predict fully the effects of the withdrawal of the U.K. from the European Union, the possible exit of the U.K. from the European
Union or prolonged periods of uncertainty in relation to it could have a material adverse effect on our business and our results
of operations.
Although certain technical problems
experienced by users may not be caused by our products, our business and reputation may be harmed if users perceive our products
as the cause of a slow or unreliable network connection, or a high-profile network failure.
Our products have been deployed in many
different locations and user environments and are capable of providing services and connectivity to many different types of devices
operating a variety of applications. The ability of our products to operate effectively can be negatively impacted by many different
elements unrelated to our products. For example, a user’s experience may suffer from an incorrect setting in a Wi-Fi device.
Although certain technical problems experienced by users may not be caused by our products, users often may perceive the underlying
cause to be a result of poor performance of the wireless network. This perception, even if incorrect, could harm our business and
reputation. Similarly, a high-profile network failure may be caused by improper operation of the network or failure of a network
component that we did not supply, but other service providers may perceive that our products were implicated, which, even if incorrect,
could harm our business, operating results and financial condition.
If our Enterprise segment products
do not interoperate with cellular networks and mobile devices, future sales of our products could be negatively affected.
Our Enterprise segment products are designed
to interoperate with cellular networks and mobile devices using Wi-Fi technology. These networks and devices have varied and complex
specifications. As a result, we must attempt to ensure that our products interoperate effectively with these existing and planned
networks and devices. To meet these requirements, we must continue to undertake development and testing efforts that require significant
capital and employee resources. We may not accomplish these development efforts quickly or cost-effectively, or at all. If our
products do not interoperate effectively, orders for our products could be delayed or cancelled, which would harm our revenue,
operating results and our reputation, potentially resulting in the loss of existing and potential end customers. The failure of
our products to interoperate effectively with cellular networks or mobile devices may result in significant warranty, support and
repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer
relations problems. In addition, our end customers may require our products to comply with new and rapidly evolving security or
other certifications and standards. If our products are late in achieving or fail to achieve compliance with these certifications
and standards, or our competitors achieve compliance with these certifications and standards, such end customers may not purchase
our products, which would harm our business, operating results and financial condition.
The continued industry move to open standards may impact
our future results.
Our industry has and will continue to demand
products based on open standards. The move toward open standards is expected to increase the number of providers that will offer
services to the market. This trend is also expected to increase the number of competitors who are able to supply products to service
providers and the enterprise market and drive down the capital costs. These factors may adversely impact both our future revenues
and margins. In addition, many of our customers participate in “technology pools” and increasingly request that we
donate a portion of our source code used by the customer to these pools, which may impact our ability to recapture the R&D
investment made in developing such code.
We believe that we will be increasingly
required to work with third party technology providers. As a result, we expect the shift to more open standards may require us
to license software and other components indirectly to third parties via various open source or royalty-free licenses. In some
circumstances, our use of such open source technology may include technology or protocols developed by standards settings bodies,
other industry forums or third-party companies. The terms of the open source licenses granted by such parties, or the granting
of royalty-free licenses, may limit our ability to commercialize products that utilize such technology, which could have a material
adverse effect on our results.
Our business is concentrated in a couple key customers.
The loss of any of these customers or a significant reduction in sales to any of these customers would have a material adverse
effect on our business.
For the three months ended September 30,
2018, sales to our two largest customers (including their affiliates, as applicable) accounted for approximately 30% of our total
revenue. The loss of any of our large customers, or a significant reduction in the products or services provided to any of them
would have a material adverse impact on our business. For many of these customers, we also are one of their largest suppliers.
As a result, if from time-to-time customers elect to purchase products from our competitors in order to diversify their supplier
base and to dual-source key products or to curtail purchasing due to budgetary or market conditions, such decisions could have
material consequences to our business. In addition, because of the magnitude of our sales to these customers, the terms and timing
of our sales are heavily negotiated, and even minor changes can have a significant impact upon our business.
Also, many of our service provider or larger
enterprise customers have substantial purchasing power and leverage in negotiating contractual arrangements with us. These end
customers may require us to develop additional product features, may require penalties for non-performance of certain obligations,
such as delivery, outages or response time. The leverage held by these large end customers could result in lower revenues and gross
margins. The loss of a single large end customer could materially harm our business and operating results.
Our Enterprise Networks segment sales
may be impacted as a result of changes in public funding for the Federal Government and educational institutions.
Customers in the Enterprise Networks segment
include agencies of the U.S. Federal Government and both public and private K-12 institutions in the United States. These markets
typically operate on limited budgets and depend on the U.S. federal government to provide supplemental funding. For example, the
Federal Communications Commission, or FCC, through its E-rate program (also known as the Schools and Libraries Program of the Universal
Service Fund), provides supplemental funding to school districts to fund upgrades to technical infrastructure, including Wi-Fi
infrastructure. The most recently announced order under the E-rate program provides for a significant increase to the annual E-rate
funding cap, to $3.9 billion with inflation adjustments annually, and increases funding availability from a two-year period to
five-year period. However, the E-rate program continues to be subject to uncertainty regarding eligibility criteria and specific
timing of actual federal funding as well as subject to further federal program guidelines and funding appropriation. This uncertainty
and potential further changes to the E-rate program may affect or delay purchasing decisions by our end customers in the education
market and will continue to cause fluctuations in our overall revenue forecasts and financial results and create greater uncertainty
regarding the level of customer orders in this market during the term of the E-rate program. Similarly, fluctuations in the annual
budgeting process for U.S. Federal Government IT spending may result in deferral or cancellation of projects from which ARRIS expected
to derive revenue for the Enterprise Networks segment.
We may face higher costs associated with protecting our
intellectual property or obtaining necessary access to the intellectual property of others.
Our future success depends in part upon
our proprietary technology, product development, technological expertise and distribution channels, in addition to a number of
important patents and licenses. We cannot predict whether we can protect our technology or whether competitors will be able to
develop similar technology independently, and such technology could be subject to challenge, unlawful copying or other unfair competitive
practices. Given the dependence on technology within the market in which we compete, there are frequent claims and related litigation
regarding patent and other intellectual property rights. We have received, directly or indirectly, and expect to continue to receive,
from third parties, including some of our competitors, notices claiming that we, or our customers using our products, have infringed
upon third-party patents or other proprietary rights. We are involved in several proceedings (and other proceedings have been threatened)
in which our customers were sued for patent infringement. (See Part II, Item 1, “Legal Proceedings”) In these
cases our customers have made claims against us and other suppliers for indemnification. We may become involved in similar litigation
involving these and other customers in the future. These claims, regardless of their merit, could result in costly litigation,
divert the time, attention and resources of our management, delay our product shipments, and, in some cases, require us to enter
into royalty or licensing agreements. If a claim of patent infringement against us or our customer is successful, and we fail to
obtain a license or develop non-infringing technology, we or our customer may be prohibited from marketing or selling products
containing the infringing technology which could materially affect our business and operating results. In addition, the payment
of any damages or any necessary licensing fees or indemnification costs associated with a patent infringement claim could be material
and could also materially adversely affect our operating results.
We may not realize the anticipated benefits of past or
future acquisitions, divestitures, and strategic investments, including the recently completed Ruckus Networks acquisition, and
the integration of acquired companies or technologies or divestiture of businesses may negatively impact our business and financial
results.
We have acquired or made strategic investments
in other companies, products, or technologies, and expect to make additional acquisitions and strategic investments in the future.
For example, in 2016, we acquired Pace and sold our whole-home solutions business, and in December 2017, we acquired the Ruckus
Networks business. Our ability to realize the anticipated benefits from acquisitions and strategic investments involves numerous
risks, including, but not limited to, the following:
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The ability to satisfy closing conditions necessary to complete an acquisition, including receipt
of applicable regulatory approvals;
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Difficulties in successfully integrating the acquired businesses and realizing any expected synergies,
including failure to integrate successfully the sales organizations;
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Unanticipated costs, litigation, and other contingent liabilities;
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Diversion of management’s attention from our daily operations and business;
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Adverse effects on existing business relationships with customers and suppliers;
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Risks associated with entering into markets in which we have limited or no prior experience;
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Inability to attract and retain key employees; and
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The impact of acquisition and integration related costs, goodwill or in-process research and development
impairment charges, amortization costs for acquired intangible assets, and acquisition accounting treatment, including the loss
of deferred revenue and increases in the fair values of inventory and other acquired assets, on our GAAP operating results and
financial condition.
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The Ruckus Networks acquisition has resulted
in an expansion on our current technologies, and we have established a new business unit to focus on this business. The expansion
into new technologies, markets and distributions where we have not previously operated may not be successful and may adversely
impact our ability to realize the benefits of the acquisition in the time expected or at all.
We may also divest or reduce our investment
in certain businesses or product lines from time to time. Such divestitures involve risks, such as difficulty separating portions
of our business, distracting employees, incurring potential loss of revenue, negatively impacting margins, and potentially disrupting
customer relationships. We may also incur significant costs associated with exit or disposal activities, related impairment charges,
or both.
We have substantial goodwill and amortizable intangible
assets.
Our financial statements reflect substantial
goodwill and intangible assets, approximately $2.3 billion and $1.5 billion, respectively, as of September 30, 2018, that was recognized
in connection with acquisitions, including the Ruckus Networks acquisition.
We annually (and more frequently if changes
in circumstances indicate that the asset may be impaired) review the carrying amount of our goodwill to determine whether it has
been impaired for accounting purposes. In general, if the fair value of the corresponding reporting unit is less than the carrying
amount of the reporting unit, we record an impairment. The determination of fair value is dependent upon a number of factors, including
assumptions about future cash flows and growth rates that are based on our current and long-term business plans. With respect to
the amortizable intangible assets, we test 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. If we determine that an asset or asset group is not recoverable,
then we would record an impairment charge if the carrying amount 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.
As the ongoing expected cash flows and
carrying amounts of our remaining goodwill and intangible assets 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 impairment charges
in the future, including as a result of restructuring undertaken in connection with the integration of acquisitions.
As of October 1, 2017 (the date of our
annual impairment testing), the fair value of our CPE reporting unit exceeded its carrying amount by 34% and, accordingly, did
not result in a goodwill impairment. Over the last twelve months, near-term trends impacting revenue and gross margin, including
higher product costs associated with memory and other components have decreased the amount by which the fair value exceeds the
carrying amount to less than 10%, such that our CPE reporting unit could be at risk of failing the impairment test if future projections
are not realized. Further, the proposed tariffs may also have an adverse impact on our business. The estimated fair value of our
CPE reporting unit is closely aligned with the ultimate amount of revenue and operating income that it achieves over the projection
period. At this time, our projections assume limited revenue growth and some recovery in gross margins over current levels in subsequent
years, which is dependent on product cost improving and ability to pass on increased costs through price increases. Our CPE reporting
unit has approximately $1.4 billion of goodwill as of September 30, 2018.
In addition, we adopted new guidance on
revenue recognition as of January 1, 2018. As a result of retrospective application of this guidance in our Cloud TV reporting
unit, a goodwill impairment of approximately $3.4 million was recognized in first quarter of 2018 resulting from the indirect effect
of the change in accounting principle, effecting changes in the composition and carrying amount of the net assets.
We continue to evaluate the anticipated
discounted cash flows from the Cloud TV reporting unit. If current long-term projections for this unit are not realized or materially
decrease, we may be required to write off all or a portion of the remaining $26.5 million of goodwill and $25.6 million of associated
intangible assets.
If we determine an impairment exists, we
may be required to write off all or a portion of the goodwill and associated intangible assets related to any impaired business.
For additional information, see the discussion under “Critical Accounting Policies” in Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations on Form 10-K for the year ended December 31, 2017.
Products currently under development may fail to realize
anticipated benefits.
Rapidly changing technologies, evolving
industry standards, frequent new product introductions and relatively short product life cycles characterize the markets for our
products. The technology applications that we currently are developing are subject to technological, supply chain, product development
and other related risks that could delay successful delivery. The market in which we operate is subject to a rapid rate of technological
change, reflected in increased development and manufacturing complexity and increasingly demanding customer requirements, all of
which can result in unforeseen delivery problems. Even if the products in development are successfully brought to market, they
may be late, may not be widely used or we may not be able to capitalize successfully on the developed technology. To compete successfully,
we must quickly design, develop, manufacture and sell new or enhanced products that provide increasingly higher levels of performance
and reliability. However, we may not be able to develop or introduce these products successfully if such products:
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are not cost-effective;
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are not brought to market in a timely manner;
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fail to achieve market acceptance; or
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fail to meet industry certification standards.
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Furthermore, our competitors may develop
similar or alternative technologies that, if successful, could have a material adverse effect on us. Our strategic alliances are
generally based on business relationships that have not been the subject of written agreements expressly providing for the alliance
to continue for a significant period of time and the loss of any such strategic relationship could have a material adverse effect
on our business and results of operations.
Defects within our products could have a material impact
on our results.
Many of our products are complex technology
that include both hardware and software components. It is not unusual for software, especially in earlier versions, to contain
bugs that can unexpectedly interfere with expected operations. While we employ rigorous testing prior to the shipment of our products,
defects, including those resulting from components we purchase, can still occur from time to time. Product defects, including hardware
failures, could impact our reputation with our customers which may result in fewer sales. In addition, depending on the number
of products affected, the cost of fixing or replacing such products could have a material impact on our operating results. In some
cases, we are dependent on a sole supplier for components used in our products. Defects in sole-sourced components subject us to
additional risk of being able to quickly address any product issues or failures experienced by our customers as a result of the
component defect and could delay our ability to deliver new products until the defective components are corrected or a new supplier
is identified and qualified. This could increase our costs in resolving the product issue, result in decreased sales of the impacted
product, or damage our reputation with customers, any of which could have the effect of negatively impacting our operating results.
Hardware or software defects could also
permit unauthorized users to gain access to our customers’ networks and/or a consumer’s home network. In addition to
potentially damaging our reputation with customers, such defects may also subject us to claims for damages under agreements with
our customers and subject us to fines by regulatory authorities.
We offer warranties of various lengths
to our customers on many of our products and have established warranty reserves based on, among other things, our historic experience,
failure rates and cost to repair. In the event of a significant non-recurring product failure, the amount of the warranty reserve
may not be sufficient. From time to time we may also make repairs on defects that occur outside of the provided warranty period.
Such costs would not be covered by the established reserves and, depending on the volume of any such repairs, may have a material
adverse effect on our results from operations or financial condition.
Our success depends on our ability to attract and retain
qualified personnel in all facets of our operations.
Competition for qualified personnel is
intense, and we may not be successful in attracting and retaining key personnel, which could impact our ability to maintain and
grow our operations. Our future success will depend, to a significant extent, on the ability of our management to operate effectively.
In the past, competitors and others have attempted to recruit our employees and their attempts may continue. The loss of services
of any key personnel, the inability to attract and retain qualified personnel in the future or delays in hiring required personnel,
particularly engineers and other technical professionals, could negatively affect our business.
Our ability to sell our products is highly dependent on
the quality of our support and services offerings, and our failure to offer high quality support and services would have a material
adverse effect on our sales and results of operations.
Once our products are deployed, our channel
partners and end customers depend on our support organization to resolve any issues relating to our products. A high level of support
is important for the successful marketing and sale of our products. In many cases, our channel partners provide support directly
to our end-customers. We do not have complete control over the level or quality of support provided by our channel partners. These
channel partners may also provide support for other third-party products, which may potentially distract resources from support
for our products. If we and our channel partners do not effectively assist our end customers in deploying our products, succeed
in helping our end customers quickly resolve post-deployment issues or provide effective ongoing support, it would adversely affect
our ability to sell our products to existing end-customers and could harm our reputation with potential end customers. In some
cases, we guarantee a certain level of performance to our channel partners and end customers, which could prove to be resource-intensive
and expensive for us to fulfill if unforeseen technical problems were to arise.
Many of our service provider and large
enterprise end customers have more complex networks and require higher levels of support than our smaller end customers. If our
support organization fails to meet the requirements of our service provider or large enterprise end customers, it may be more difficult
to execute on our strategy to increase our sales to large end customers. In addition, given the extent of our international operations,
our support organization faces challenges, including those associated with delivering support, training and documentation in languages
other than English. As a result of these factors, our failure to maintain high quality support and services would have a material
adverse effect on our business, operating results and financial condition.
We are dependent on a limited number of suppliers, and
inability to obtain adequate and timely delivery of supplies could have a material adverse effect on our business.
Many components, subassemblies and modules
necessary for the manufacture or integration of our products are obtained from a sole supplier or a limited group of suppliers.
Likewise, we have only a limited number of potential suppliers for certain materials and hardware used in our products, and a number
of our agreements with suppliers are short-term in nature. Our reliance on sole or limited suppliers, particularly foreign suppliers,
and our reliance on subcontractors involves several risks including a potential inability to obtain an adequate supply of required
components, subassemblies, modules and other materials and reduced control over pricing, quality and timely delivery of components,
subassemblies, modules and other products. Current supply of components in the memory and passives (MLCC) categories could impact
our ability to deliver on a timely basis and overall product costs. An inability to obtain adequate deliveries or any other circumstance
that would require us to seek alternative sources of supply could affect our ability to ship products on a timely basis which could
damage relationships with current and prospective customers and potentially have a material adverse effect on our business. Our
ability to ship products could also be impacted by country laws and/or union labor disruptions. Disputes of this nature may have
a material impact on our financial results.
Where we rely on third parties to manufacture our products,
our ability to supply products to our customers may be disrupted.
We outsource the majority of the manufacturing
of our products to third-party manufacturers. Our reliance on these third-party manufacturers reduces our control over the manufacturing
process and exposes us to risks, including reduced control over quality assurance, product costs, and product supply and timing.
Any manufacturing disruption by these third-party manufacturers could severely impair our ability to fulfill orders. Our reliance
on outsourced manufacturers also yields the potential for infringement or misappropriation of our intellectual property. If we
are unable to manage our relationships with these third-party manufacturers effectively, or if these third-party manufacturers
suffer delays or disruptions for any reason, experience increased manufacturing lead-times, capacity constraints or quality control
problems in their manufacturing operations, or fail to meet our future requirements for timely delivery, our ability to ship products
to our customers may be severely impaired, and our business and operating results could be seriously harmed.
These manufacturers typically fulfill our
supply requirements on the basis of individual orders. We do not have long term contracts with our third-party manufacturers that
guarantee capacity, the continuation of particular pricing terms or the extension of credit limits. Accordingly, our third-party
manufacturers are not obligated to continue to fulfill our supply requirements, which could result in supply shortages, and the
prices we are charged for manufacturing services could be increased on short notice. In addition, as a result of fluctuating global
financial market conditions, natural disasters or other causes, it is possible that any of our manufacturers could experience interruptions
in production, cease operations or alter our current arrangements. If our manufacturers are unable or unwilling to continue manufacturing
our products in required volumes, we will be required to identify one or more acceptable alternative manufacturers. Additionally,
with the current U.S. trade tariff environment, we are transitioning manufacturing for many impacted products to non-tariff countries.
It is time-consuming and costly, and changes in our third-party manufacturers or manufacturing locations may cause significant
interruptions in supply if the manufacturers have difficulty manufacturing products to our specification. As a result, our ability
to meet our scheduled product deliveries to our customers could be adversely affected, which could cause the loss of sales to existing
or potential customers, delayed revenue or an increase in our costs. Any production interruptions for any reason, such as a natural
disaster, epidemic, capacity shortages or quality problems, at one of our manufacturers would negatively affect sales of our product
lines manufactured by that manufacturer and adversely affect our business and operating results.
We are subject to the economic, political
and social instability risks associated with doing business in certain foreign countries.
For the nine months ended September
30, 2018, approximately 42% of our sales were made outside of the United States. In addition, a significant portion of our
products are manufactured or assembled in Brazil, China, Mexico and Taiwan. As a result, we are exposed to risk of
international operations, including:
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fluctuations in currency exchange rates;
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inflexible employee contracts or labor laws in the event of business downturns;
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compliance with United States and foreign laws concerning trade and employment practices;
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the challenges inherent in consistently maintaining compliance with the Foreign Corrupt Practice
Act and similar laws in other jurisdictions;
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the imposition of government controls;
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difficulties in obtaining or complying with export license requirements;
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labor unrest, including strikes, and difficulties in staffing;
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economic boycott for doing business in certain countries;
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coordinating communications among and managing international operations;
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changes in tax and trade laws, including tariffs, that increase our local costs;
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exposure to heightened corruption risks; and
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reduced protection for intellectual property rights.
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Political instability and military and
terrorist activities may have significant impacts on our customers’ spending in these regions and can further enhance many
of the risks identified above. Any of these risks could impact our sales, interfere with the operation of our facilities and result
in reduced production, increased costs, or both, which could have an adverse effect on our financial results.
We depend on channel partners to sell our products in
certain regions and are subject to risks associated with these arrangements.
We utilize distributors, value-added resellers,
system integrators, and manufacturers’ representatives to sell our products to certain customers and in certain geographic
regions to improve our access to these customers and regions and to lower our overall cost of sales and post-sales support. Our
sales through channel partners are subject to a number of risks, including:
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ability of our selected channel partners to effectively sell our products to end customers;
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our ability to continue channel partner arrangements into the future since most are for a limited term and subject to mutual
agreement to extend;
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a reduction in gross margins realized on sale of our products;
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compliance by our channel partners with our policies and procedures as well as applicable laws; and
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a diminution of contact with end customers which, over time, could adversely impact our ability
to develop new products that meet customers’ evolving requirements.
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We depend on cloud computing infrastructure operated by
third-parties and any disruption in these operations could adversely affect our business.
For our service offerings, in particular
our Wi-Fi-related cloud services, we rely on third-parties to provide cloud computing infrastructure that offers storage capabilities,
data processing and other services. We currently operate our cloud-dependent services using Amazon Web Service (“AWS”)
or Google Compute Engine (“GCE”). We cannot easily switch our AWS or GCE operations to another cloud provider. Any
disruption of or interference with our use of these cloud services would impact our operations and our business could be adversely
impacted.
Problems faced by our third-party cloud
services, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications
providers allocate capacity among their customers, including us, could adversely affect the experience of our end customers. If
AWS and GCE are unable to keep up with our needs for capacity, this could have an adverse effect on our business. Any changes in
third-party cloud services or any errors, defects, disruptions, or other performance problems with our applications could adversely
affect our reputation and may damage our end customers’ stored files or result in lengthy interruptions in our services.
Interruptions in our services might adversely affect our reputation and operating results, cause us to issue refunds or service
credits, subject us to potential liabilities, or result in contract terminations.
We and our end customers may be subject
to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters and violations
of these laws and regulations may result in claims, changes to our business practices, monetary penalties, increased costs of operations,
and/or other harms to our business.
There has been an increase in laws in Europe,
the U.S. and elsewhere imposing requirements for the handling of personal data, including data of employees, consumers and business
contacts as well as privacy-related matters. For example, several U.S. states, including recently California, have adopted legislation
requiring companies to protect the security of personal information that they collect from consumers over the Internet, and more
states have proposed similar legislation in the future. Foreign data protection, privacy, and other laws and regulations can be
more restrictive than those in the U.S. In 2016 the EU Parliament approved the EU General Data Protection Regulation (“GDPR”).
GDPR was designed to harmonize data privacy laws across Europe, to protect and empower all EU citizens data privacy and
to reshape the way organizations across the region approach data privacy. Compliance with the GDPR will require changes to existing
products, designs of future products, internal and external software systems, including our web sites, and changes to many company
processes and policies. Failure to comply with GDPR, which became effective in May of 2018, could cause significant penalties and
loss of business.
In addition, some countries are considering
legislation requiring local storage and processing of data that, if enacted, could increase the cost and complexity of offering
our solutions or maintaining our business operations in those jurisdictions. The introduction of new solutions or expansion of
our activities in certain jurisdictions may subject us to additional laws and regulations. Our channel partners and end customers
also may be subject to such laws and regulations in the use of our products and services.
These U.S. federal and state and foreign
laws and regulations, which often can be enforced by private parties or government entities, are constantly evolving. In addition,
the application and interpretation of these laws and regulations are often uncertain and may be interpreted and applied inconsistently
from country to country and inconsistently with our current policies and practices and may be contradictory with each other. For
example, a government entity in one jurisdiction may demand the transfer of information forbidden from transfer by a government
entity in another jurisdiction. If our actions were determined to be in violation of any of these disparate laws and regulations,
in addition to the possibility of fines, we could be ordered to change our data practices, which could have an adverse effect on
our business and results of operations and financial condition. There is also a risk that we, directly or as the result of a third-party
service provider we use, could be found to have failed to comply with the laws or regulations applicable in a jurisdiction regarding
the collection, consent, handling, transfer, or disposal of personal data, which could subject us to fines or other sanctions,
indemnification claims from customers as well as adverse reputational impact.
Compliance with these existing and proposed
laws and regulations can be costly, increase our operating costs and require significant management time and attention, and failure
to comply can result in negative publicity and subject us to inquiries or investigations, claims or other remedies, including fines
or demands that we modify or cease existing business practices. Channel partners and end customers may demand or request additional
functionality in our products or services that they believe are necessary or appropriate to comply with such laws and regulations,
which can cause us to incur significant additional costs and can delay or impede the development of new solutions. In addition,
there is a risk that failures in systems designed to protect private, personal or proprietary data held by us or our channel partners
and end customers using our solutions will allow such data to be disclosed to or seen by others, resulting in application of regulatory
penalties, enforcement actions, remediation obligations, private litigation by parties whose data were improperly disclosed, or
claims from our channel partners and end customers for costs or damages they incur.
The planned upgrade of our enterprise resource planning
(“ERP”) software solution could result in significant disruptions to our operations.
We have initiated the process of upgrading
our ERP software solution to a newer, cloud-based version. We expect the upgrade to be completed in 2019. Implementation of the
upgraded solution will have a significant impact on our business processes and information systems. The transition will require
significant change management, meaningful investment in capital and personnel resources, and coordination of numerous software
and system providers and internal business teams. We may experience difficulties as we manage these changes and transitions to
the upgraded systems, including loss or corruption of data, delayed shipments, decreases in productivity as personnel implement
and become familiar with new systems and processes, unanticipated expenses (including increased costs of implementation or costs
of conducting business), and lost revenues. Difficulties in implementing the upgraded solution or significant system failures could
disrupt our operations, divert management’s attention from key strategic initiatives, and have an adverse effect on our capital
resources, financial condition, results of operations, or cash flows. In addition, any delays in completing the upgrade process
could exacerbate these transition risks as well as expose us to additional risks in the event that the support for our existing
ERP software solution is reduced or eliminated.
The import of our products is subject to trade regulations
and could be impacted by orders prohibiting the importation of products.
The import of our products into the United
States and certain other countries is subject to the trade regulations in the countries where they are imported. Products may be
subject to customs duties that we pay to the applicable government agency and then collect from our customers in connection with
the sale of the imported products. The amount of the customs duty owed, if any, is based on classification of the products within
the applicable customs regulations. A significant portion of our overall shipments import into the United States, any change to
trade regulations may challenge our classifications and the amount of any duty or tax payable. While we believe that our products
have been properly classified, the U.S. Customs Agency or other applicable foreign regulatory agencies, may challenge our classifications
and the amount of any duty payable. For example, we currently have a case pending in the U.S. Court of International Trade regarding
the challenge by the U.S. Customs Agency with respect to certain digital television adapters that we import into the United States
and believe are duty free. If it is ultimately determined that a product has been misclassified for customs purposes, we may be
required to pay additional duties for products previously imported and we may not be successful in collecting the increased duty
from the customer that purchased the products. In addition, we could be required to pay interest and/or fines to the applicable
regulator, which amounts could be significant and negatively impact our results of operations. Further, if we do not comply with
the applicable trade regulations, delivery of products to customers may be delayed which could negatively impact our sales and
results of operations.
From time to time, we, our customers and
our suppliers, may be subject to proceedings at the U.S. International Trade Commission (the “ITC”) with respect to
alleged infringement of U.S. patents. If the ITC finds a party infringed a U.S. patent, it can issue an exclusion order barring
importation into the United States of the product that infringes, or includes components, of the product that infringes the identified
patents. An exclusion order impacting our products could have a material adverse effect on our revenues and results of operations.
Our stock price has been and may continue to be volatile.
Our ordinary shares are traded on The NASDAQ
Global Select Market. The trading price of our shares has been and may continue to be subject to large fluctuations. Our stock
price may increase or decrease in response to a number of events and factors including:
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future announcements concerning us, key customers or competitors;
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variations in operating results from period to period;
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changes in financial estimates and recommendations by securities analysts;
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developments with respect to technology or litigation;
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the operating and stock price performance of our competitors; and
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acquisitions and financings.
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Fluctuations in the stock market, generally,
also impact the volatility of our stock price. General stock market movements may adversely affect the price of our ordinary shares,
regardless of our operating performance. Volatility in our stock price will also impact the fair value determination of our outstanding
warrants with customers. A significant increase in our stock price while we are required to mark-to-market the fair value of the
outstanding warrants to customers may increase the reduction in revenues we are required to record under the required accounting
treatment for the warrants which could have a significant impact on our operating results.
Our business is subject to the risks of earthquakes, fire,
floods and other natural catastrophic events, and to interruption by manmade problems such as network security breaches, computer
software or system errors or viruses or terrorism.
We and our contract manufacturers maintain
facilities in many areas known for seismic activity including the San Francisco Bay area and eastern Asia. A significant natural
disaster, such as an earthquake, a fire or a flood, occurring near any of our major facilities, or near the facilities of our contract
manufacturers, could have a material adverse impact on our business, operating results and financial condition. In addition, we
have major development and support operations concentrated in India. A natural disaster in this location could have a material
adverse impact on our support operations. In addition, natural disasters, acts of terrorism or war could cause disruptions in our
or our customers’ businesses, our suppliers’ or manufacturers’ operations or the economy as a whole. We also
rely on IT systems to operate our business and to communicate among our workforce and with third parties. For example, we use business
management and communication software products provided by third parties, such as Oracle, Microsoft Online, SAP and salesforce.com, and
security flaws or outages in such products would adversely affect our operations. Any disruption to these systems, whether caused
by a natural disaster or by manmade problems, such as power disruptions, could adversely affect our business. To the extent that
any such disruptions result in delays or cancellations of customer orders or impede our suppliers’ and/or our manufacturers’
ability to timely deliver our products and product components, or the deployment of our products, our business, operating results
and financial condition would be adversely affected.
Cyber-security incidents, including data security breaches
or computer viruses, could harm our business by disrupting our delivery of services, damaging our reputation or exposing us to
liability.
We receive, process, store and transmit,
often electronically, the confidential data of our clients and others. Unauthorized access to our computer systems or stored data
could result in the theft or improper disclosure of confidential information, the deletion or modification of records or could
cause interruptions in our operations. These cyber-security risks increase when we transmit information from one location to another,
including transmissions over the Internet or other electronic networks. Despite implemented security measures, our facilities,
systems and procedures, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism,
software viruses, misplaced or lost data, programming and/or human errors or other similar events which may disrupt our delivery
of services or expose the confidential information of our clients and others.
In addition, defects in the hardware or
software we develop and sell, or in their implementation by our customers, could also result in unauthorized access to our customers’
and/or consumers’ networks. Any security breach involving the misappropriation, loss or other unauthorized disclosure or
use of confidential information of our customers or others, whether by us or a third party, could (i) subject us to civil
and criminal penalties, (ii) have a negative impact on our reputation, or (iii) expose us to liability to our customers,
third parties or government authorities. Any of these developments could have a material adverse effect on our business, results
of operations and financial condition. We have not experienced any such incidents that have had material consequences to date.
We expect the U.S. and other countries to adopt additional cyber-security legislation that, if enacted, could impose additional
obligations upon us that may negatively impact our operating results.
Regulations related to conflict minerals may adversely
affect us.
We are subject to the SEC disclosure obligations
relating to our use of so-called “conflict minerals”—columbite-tantalite, cassiterite (tin), wolframite (tungsten)
and gold. These minerals are present in substantially all of our products. We are required to file a report with the SEC annually
covering our use of these materials and their source.
In preparing these reports, we are dependent
upon information supplied by suppliers of products that contain, or potentially contain, conflict minerals. To the extent that
the information that we receive from our suppliers is inaccurate or inadequate or our processes in obtaining that information do
not fulfill the SEC’s requirements, we could face reputational risks. Further, if in the future we are unable to certify
that our products are conflict mineral free, we may face challenges with our customers, which could place us at a competitive disadvantage.
We have not historically paid cash dividends.
We have not historically paid cash dividends
on our ordinary shares. In addition, our ability to pay dividends is limited by the terms of our credit facilities. Payment of
dividends in the future will depend on, among other things, business conditions, our results of operations, cash requirements,
financial condition, contractual restrictions, provisions of applicable law and other factors that our board of directors may deem
relevant.
As a result of shareholder voting requirements in the
United Kingdom, we have less flexibility with respect to certain aspects of capital management.
Under English law, our directors may issue
new ordinary shares up to a maximum amount equal to the allotment authority granted to the directors under our articles of association
or by an ordinary resolution of our shareholders, subject to a five-year limit on such authority. Additionally, subject to specified
exceptions, English law grants preemptive rights to existing shareholders to subscribe for new issuances of shares for cash but
allows shareholders to waive these rights by way of a special resolution with respect to any particular allotment of shares or
generally, subject to a five-year limit on such waiver. Our articles of association contain, as permitted by English law, a provision
authorizing our Board to issue new shares for cash without preemptive rights. The authorization of the directors to issue shares
without further shareholder approval and the authorization of the waiver of the statutory preemption rights must both be renewed
by the shareholders at least every five years, and we cannot provide any assurance that these authorizations always will be approved,
which could limit our ability to issue equity and, thereby, adversely affect the holders of our ordinary shares. While we do not
believe that English laws relating to our capital management will have a material adverse effect on us, situations may arise where
the flexibility to provide certain benefits to our shareholders is not available under English law.
Any attempted takeovers of us will be governed by English
law.
As a U.K. incorporated company, we are
subject to English law. An English public limited company is potentially subject to the protections afforded by the U.K. Takeover
Code if, among other factors, a majority of its directors are resident within the U.K., the Channel Islands or the Isle of Man.
We do not believe that the U.K. Takeover Code applies to us, and, as a result, our articles of association include measures similar
to what may be found in the charters of U.S. companies, including the power for our Board to allot shares where in the opinion
of the Board it is necessary to do so in the context of an acquisition of 20% or more of the issued voting shares in specified
circumstances (this power is subject to renewal by our shareholders at least every five years and will cease to be applicable if
the U.K. Takeover Code is subsequently deemed to be applicable to ARRIS). Further, it could be more difficult for us to obtain
shareholder approval for a merger or negotiated transaction because the shareholder approval requirements for certain types of
transactions differ, and in some cases, are greater under English law. The provisions of our articles of association and English
law may have an anti-takeover impact on us and our ordinary shares.
Transfers of our ordinary shares, other than one effected
by means of the transfer of book-entry interests in the Depository Trust Company (“DTC”), may be subject to U.K. stamp
duty.
Substantially all of our outstanding shares
are currently represented by book-entry interests in DTC. Transfers of our ordinary shares within DTC should not be subject to
stamp duty or stamp duty reserve tax (“SDRT”) provided no instrument of transfer is entered into and no election that
applies to our ordinary shares is made or has been made by DTC or Cede, its nominee, under Section 97A of the U.K. Finance
Act 1986. In this regard DTC has confirmed that neither DTC nor Cede (its nominee) has made an election under Section 97A
of the Finance Act that would affect our shares issued to Cede. If such an election is or has been made, transfers of our ordinary
shares within DTC generally will be subject to SDRT at the rate of 0.5% of the amount or value of the consideration. Transfers
of our ordinary shares held in certificated form generally will be subject to stamp duty at the rate of 0.5% of the consideration
given (rounded up to the nearest £5). SDRT will also be chargeable on an agreement to transfer such shares, although such
liability would be discharged if stamp duty is duly paid on the instrument of transfer implementing such agreement within a period
of six years from the agreement. Subsequent transfer of our ordinary shares to an issuer of depository receipts or into a clearance
system (including DTC) may be subject to SDRT at a rate of 1.5% of the consideration given or received or, in certain cases, the
value of our ordinary shares transferred. The purchaser or transferee of the ordinary shares generally will be responsible for
paying any stamp duty or SDRT payable.