Note 15. 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 has 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 2017 period has been restated to reflect such change.

Our CODM manages the Company under three 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 and system integration offerings to enable solutions sales of ARRIS’s end-to-end product portfolio.

•

Enterprise Networks (“Enterprise”) — The Enterprise 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 enterprises—including hospitality, education, smart cities, government, venues, service providers and more.

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. “Corporate and Unallocated Costs” also includes corporate sales and marketing for the CPE and N&C segments. Marketing and sales expense 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 table below represents information about the Company’s reportable segments (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net sales to external customers:
CPE	$	1,008,131		$	1,155,883		$	1,883,357		$	2,210,939
N&C		549,496			510,972			1,087,760			941,408
Enterprise		172,240			—			342,154			—
Other ⁽¹⁾		(3,327	)		(2,685	)		(9,021	)		(5,071	)

Total		1,726,540			1,664,170			3,304,250			3,147,276

Direct contribution:
CPE		85,723			113,852			135,484			222,764
N&C		201,282			172,658			429,820			284,758
Enterprise		17,774			—			43,302			—

Segment total		304,779			286,510			608,606			507,522

Corporate and unallocated costs		(146,577	)		(130,172	)		(305,722	)		(251,527	)
Amortization of intangible assets		(90,485	)		(91,012	)		(205,193	)		(184,657	)
Impairment of goodwill		—			—			(3,400	)		—
Integration, acquisition, restructuring and other		(22,844	)		(9,690	)		(36,499	)		(19,785	)

Operating income (loss)		44,873			55,636			57,792			51,553

Interest expense		23,647			23,344			46,173			43,027
(Gain) loss on investments		(844	)		3,609			(317	)		8,139
Interest income		(1,792	)		(1,788	)		(3,324	)		(3,709	)
(Gain) loss on foreign currency		(824	)		9,373			4,009			14,113
Other expense (income), net		(169	)		926			(61	)		841

Income (loss) before income taxes	$	24,855		$	20,172		$	11,312		$	(10,858	)

(1)	Adjustments related acquisition accounting impacts related to deferred revenue

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,
	2018		2017		2018		2017
Corporate and unallocated costs:
Cost of sales	$	17,383	$	13,549	$	54,181	$	28,022
Selling, general and administrative expenses		100,820		92,191		194,491		175,846
Research and development expenses		28,374		24,432		57,050		47,659

Total	$	146,577	$	130,172	$	305,722	$	251,527