Segment Information

12 Months Ended

Dec. 31, 2018

Segment Reporting [Abstract]

Segment Information

Note 11. Segment Information

The “management approach” has been used to present the following segment information. This approach is based upon the way the management of the Company organizes segments for making operating decisions and assessing performance. Financial information is reported on the basis that it is used internally by the chief operating decision maker (“CODM”) for evaluating segment performance and deciding how to allocate resources to segments. The Company’s chief executive officer has been identified as the CODM.

As of January 1, 2018, the Company changed the composition of its measurement of segment profit and loss (direct contribution) used by the Company’s chief operating decision maker. Beginning in 2018, the Company charges bonus, equity compensation and certain other costs which are now directly aligned with each of its segments within its measurement of segment profit and loss (direct contribution). These costs historically were included as part of “Corporate and Unallocated Costs”. Consequently, the Company’s segment information for the 2016 and 2017 period has been restated to reflect such change.

The CODM manages the Company under three segments:

• Customer Premises Equipment (“CPE”) — The CPE segment’s product solutions include set-tops, gateways, and subscriber premises equipment that enable service providers to offer voice, video and high-speed data services to residential and business subscribers.

• Network & Cloud (“N&C”) — The N&C segment’s product solutions include cable modem termination system, video infrastructure, distribution and transmission equipment and cloud solutions that enable facility-based service providers to construct a state-of-the-art residential and metro distribution network. The portfolio also includes a full suite of global services that offer technical support, professional services and system integration offerings to enable solutions sales of ARRIS’s end-to-end product portfolio.

• Enterprise Networks (“Enterprise”) — The Enterprise Networks segment focuses on enabling constant, wireless and wired connectivity across complex and varied networking environments. It offers dedicated engineering, sales and marketing resources to serve customers across a spectrum of verticals—including hospitality, education, smart cities, government, venues, service providers and more.

These operating segments are determined based on the nature of the products and services offered. The measures that are used to assess the reportable segment’s operating performance are sales and direct contribution. Direct contribution is defined as gross margin less direct operating expense. The “Corporate and Unallocated Costs” category of expenses include corporate sales and marketing (excluding Enterprise segment), home office general and administrative expenses. Marketing and sales expenses related to the Enterprise segment are considered a direct operating expense for that segment and are not included in the “Corporate and Unallocated Costs.” These expenses are not included in the measure of segment direct contribution and as such are reported as “Corporate and Unallocated Costs” and are included in the reconciliation to income (loss) before income taxes. A measure of assets is not applicable, as segment assets are not regularly reviewed by the CODM for evaluating performance or allocating resources.

The tables below present information about the Company’s reportable segments (in thousands):

	2018			2017			2016
Net sales to external customers:
CPE	$	3,923,894		$	4,475,670		$	4,747,445
N&C		2,156,577			2,094,113			2,111,708
Enterprise		675,352			45,749			—
Other		(13,183	)		(1,140	)		(30,035	)
Total		6,742,640			6,614,392			6,829,118
Direct contribution:
CPE		270,510			456,562			647,117
N&C		848,938			724,597			595,866
Enterprise		64,667			1,389			—
Segment total		1,184,115			1,182,548			1,242,983
Corporate and unallocated costs		(576,347	)		(530,772	)		(581,991	)
Amortization of intangible assets		(383,561	)		(375,407	)		(397,464	)
Impairment of goodwill and intangible assets		(3,400	)		(55,000	)		(2,200	)
Integration, acquisition, restructuring and other costs, net		(41,922	)		(98,357	)		(150,611	)
Operating income		178,885			123,012			110,717
Interest expense		95,086			87,088			79,817
Loss on investments		308			11,066			21,194
Loss (gain) on foreign currency		3,834			9,757			(13,982	)
Interest income		(8,341	)		(7,975	)		(4,395	)
Other expense (income), net		5,056			1,873			3,991
Income before income taxes	$	82,942		$	21,203		$	24,092

For the years ended December 31, 2018, 2017 and 2016, the composition of our corporate and unallocated costs that are reflected in the Consolidated Statements of Income were as follows (in thousands):

	2018		2017		2016
Corporate and unallocated costs:
Cost of sales	$	85,838	$	56,952	$	118,001
Selling, general and administrative expenses		385,273		374,933		367,225
Research and development expenses		105,236		98,887		96,765
Total	$	576,347	$	530,772	$	581,991

The following table summarizes the Company’s net intangible assets and goodwill by reportable segment as of December 31, 2018 and 2017 (in thousands):  

	CPE		N&C		Enterprise		Total
December 31, 2018
Goodwill	$	1,380,817	$	570,852	$	288,973	$	2,240,642
Intangible assets, net		587,728		398,856		417,075		1,403,659
December 31, 2017
Goodwill	$	1,386,680	$	573,798	$	318,034	$	2,278,512
Intangible assets, net		807,314		501,998		462,050		1,771,362

The following table summarizes the Company’s revenues by products and services as of December 31, 2018, 2017 and 2016 (in thousands):  

	2018			2017			2016
CPE:
Broadband CPE	$	1,643,152		$	1,808,600		$	1,683,491
Video CPE		2,280,742			2,667,070			3,063,954
Sub-total		3,923,894			4,475,670			4,747,445
Network & Cloud:
Networks		1,850,416			1,747,936			1,789,097
Software and services		306,161			346,177			322,611
Sub-total		2,156,577			2,094,113			2,111,708
Enterprise Networks:
Enterprise Networks		675,352			45,749			—
Other:
Other (1)		(13,183	)		(1,140	)		(30,035	)
Total net sales	$	6,742,640		$	6,614,392		$	6,829,118

(1) Includes adjustments related to acquisition accounting impacts on deferred revenues in 2018 and 2017 and reduction in revenue related to warrants in 2016.

The Company’s two largest customers (including their affiliates, as applicable) are Charter and Comcast. Over the past year, certain customers’ beneficial ownership may have changed as a result of mergers and acquisitions. Therefore, the revenue for ARRIS’s customers for prior periods has been adjusted to include the affiliates under common control. A summary of sales to these customers for 2018, 2017 and 2016 is set forth below (in thousands, except percentages):

	Years ended December 31,
	2018			2017			2016
Charter and affiliates	$	928,403		$	985,237		$	1,064,408	(1)
% of sales		13.8	%		14.9	%		15.6	%
Comcast and affiliates	$	1,114,238		$	1,479,415		$	1,637,519	(1)
% of sales		16.5	%		22.4	%		24.0	%

⁽¹⁾ Revenues were reduced $30.2 million in 2016, as a result of warrants held by Charter and Comcast. (see Note 18 Warrants for additional information).

ARRIS sells its products primarily in the United States. The Company’s international revenue is generated from Asia Pacific, Canada, Europe and Latin America. Sales to customers outside of United States were approximately 41.1%, 34.2% and 28.1% of total sales for the years ended December 31, 2018, 2017 and 2016, respectively. Sales for the years ended December 31, 2018, 2017 and 2016 were as follows (in thousands):  

	For the Years Ended December 31,
	2018		2017		2016
Domestic — U.S.	$	3,973,247	$	4,351,843	$	4,909,698
International
Americas, excluding U.S.		1,182,289		1,080,456		982,769
Asia Pacific		431,045		374,772		291,504
EMEA		1,156,059		807,321		645,147
Total international	$	2,769,393	$	2,262,549	$	1,919,420
Total sales	$	6,742,640	$	6,614,392	$	6,829,118

The following table summarizes net property, plant and equipment by geographic region as of December 31, 2018 and 2017 (in thousands):  

	December 31,
	2018		2017
Domestic — U.S.	$	236,003	$	250,866
International
Americas, excluding U.S.		12,185		12,746
Asia Pacific		23,994		85,236
EMEA		15,489		23,619
Total international	$	51,668	$	121,601
Net property, plant and equipment	$	287,671	$	372,467