Note 14. 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 within an enterprise 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.

Our CODM manages the Company under two segments:

•

Customer Premises Equipment (“CPE”) – The CPE segment’s product solutions include set-top boxes, 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, repair services and system integration offerings to enable solutions sales of ARRIS’s end-to-end product portfolio.

These operating segments were 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, home office general and administrative expenses, annual bonus and equity compensation. 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 table below represents information about the Company’s reportable segments (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net sales to external customers:
CPE	$	1,155,883		$	1,170,254		$	2,210,939		$	2,261,082
N&C		510,972			563,493			941,408			1,087,730
Other		(2,685	)		(3,703	)		(5,071	)		(4,062	)

Total		1,664,170			1,730,044			3,147,276			3,344,750

Direct contribution:
CPE		123,724			177,545			242,139			309,509
N&C		192,775			183,298			324,493			340,282

Segment total		316,499			360,843			566,632			649,791

Corporate and unallocated costs		(160,161	)		(174,435	)		(310,637	)		(360,461	)
Amortization of intangible assets		(91,012	)		(109,883	)		(184,657	)		(208,375	)
Integration, acquisition, restructuring and other		(9,690	)		(43,137	)		(19,785	)		(134,057	)

Operating income (loss)		55,636			33,388			51,553			(53,102	)

Interest expense		23,344			19,102			43,027			38,728
Loss on investments		3,609			6,389			8,139			8,348
Interest income		(1,788	)		(1,185	)		(3,709	)		(1,968	)
(Gain) loss on foreign currency		9,373			(9,801	)		14,113			2,440
Other expense ( income), net		926			5,219			841			4,869

Income (loss) before income taxes	$	20,172		$	13,664		$	(10,858	)	$	(105,519	)

The compositions of our corporate and unallocated costs that are reflected in the consolidated statement of operations were as follow (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Corporate and unallocated costs:
Cost of sales	$	21,461	$	41,277	$	43,544	$	88,665
Selling, general and administrative expenses		95,835		88,598		182,860		183,971
Research and development expenses		42,865		44,560		84,233		87,825

Total	$	160,161	$	174,435	$	310,637	$	360,461