Note 10. 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.

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, home office general and administrative expenses, annual bonus and equity compensation. “Corporate and Unallocated Costs” also includes corporate sales and marketing for the CPE and N&C segments. 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):


	2017			2016			2015
Net sales to external customers:
CPE	$	4,475,670		$	4,747,445		$	3,136,585
N&C		2,094,113			2,111,708			1,661,594
Enterprise		45,749			—			—
Other		(1,140	)		(30,035	)		153

Total		6,614,392			6,829,118			4,798,332

Direct contribution:
CPE		497,986			684,744			548,840
N&C		806,355			681,608			487,166
Enterprise		6,094			—			—

Segment total		1,310,435			1,366,352			1,036,006

Corporate and unallocated costs		(658,659	)		(697,834	)		(568,336	)
Amortization of intangible assets		(375,407	)		(397,464	)		(227,440	)
Impairment of goodwill and intangible assets		(55,000	)		(2,200	)		—
Integration, acquisition, restructuring and other		(98,357	)		(158,137	)		(29,277	)

Operating income		123,012			110,717			210,953

Interest expense		87,088			79,817			70,936
Loss on investments		11,066			21,194			6,220
Loss (gain) on foreign currency		9,757			(13,982	)		20,761
Interest income		(7,975	)		(4,395	)		(2,379	)
Other expense (income), net		1,873			3,991			8,362

Income before income taxes	$	21,203		$	24,092		$	107,053

For the years ended December 31, 2017, 2016 and 2015, the compositions of our corporate and unallocated costs that are reflected in the consolidated statement of operations were as follows (in thousands):


	2017		2016		2015
Corporate and unallocated costs:
Cost of sales	$	90,791	$	150,588	$	56,311
Selling, general and administrative expenses		389,753		375,747		349,993
Research and development expenses		178,115		171,499		162,032

Total	$	658,659	$	697,834	$	568,336

The following table summarizes the Company’s net intangible assets and goodwill by reportable segment as of December 31, 2017 and 2016 (in thousands):


	CPE		N&C		Enterprise		Total
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
December 31, 2016
Goodwill	$	1,391,171	$	624,998	$	—	$	2,016,169
Intangible assets, net		1,064,692		612,486		—		1,677,178

The following table summarizes the Company’s revenues by products and services as of December 31, 2017, 2016 and 2015 (in thousands):


	2017			2016			2015
CPE:
Broadband CPE	$	1,808,600		$	1,683,491		$	1,452,164
Video CPE		2,667,070			3,063,954			1,684,421

Sub-total		4,475,670			4,747,445			3,136,585

Network & Cloud:
Networks		1,747,936			1,789,097			1,390,283
Software and services		346,177			322,611			271,311

Sub-total		2,094,113			2,111,708			1,661,594

Enterprise Networks:
Enterprise Networks		45,749			—			—
Other:
Other		(1,140	)		(30,035	)		153

Total net sales	$	6,614,392		$	6,829,118		$	4,798,332

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 2017, 2016 and 2015 is set forth below (in thousands, except percentages):


	Years ended December 31,
	2017			2016			2015
Charter and affiliates	$	985,237		$	1,064,408	⁽¹⁾	$	960,497
% of sales		14.9	%		15.6	%		20.0	%

Comcast and affiliates	$	1,479,415		$	1,637,519	⁽¹⁾	$	1,007,376
% of sales		22.4	%		24.0	%		21.0	%

(1)	Revenues were reduced $30.2 million in 2016, as a result of warrants held by Charter and Comcast that are intended to incent additional purchases from them. (see Note 17 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 34.2%, 28.1% and 28.8% of total sales for the years ended December 31, 2017, 2016 and 2015, respectively. International sales for the years ended December 31, 2017, 2016 and 2015 were as follows (in thousands):


	For the Years Ended December 31,
	2017		2016		2015
Domestic — U.S.	$	4,351,843	$	4,909,698	$	3,418,583
International
Americas, excluding U.S.		1,080,456		982,769		880,581
Asia Pacific		374,772		291,504		142,893
EMEA		807,321		645,147		356,275

Total international	$	2,262,549	$	1,919,420	$	1,379,749

Total sales	$	6,614,392	$	6,829,118	$	4,798,332

The following table summarizes plant and equipment assets by geographic region as of December 31, 2017 and 2016 (in thousands):


	For the Years Ended December 31,
	2017		2016
Domestic — U.S.	$	250,866	$	220,397
International
Americas, excluding U.S.		12,746		12,838
Asia Pacific		85,236		81,655
EMEA		23,619		38,487

Total international	$	121,601	$	132,980

Total property, plant and equipment assets	$	372,467	$	353,377