##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 For the quarter ended March 31, 2009
 of
 ARRIS GROUP, INC.
 
 3871 Lakefield Drive
Suwanee, GA 30024
(678) 473-2000




---



##### 



ARRIS GROUP, INC.
FORM 10-Q
For the Three Months Ended March 31, 2009
 INDEX
 PagePart I. Financial InformationItem 1.
Financial Statements (unaudited)a) Consolidated Balance Sheets
as of March 31, 2009 and December 31, 2008
    
    
    2b) Consolidated Statements of Operations for the
Three Months Ended March 31, 2009 and 2008
    
    
    3c) Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2009 and 2008
    
    
    4d) Notes to the Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures on Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30Part II. Other InformationItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    32Item 6. Exhibits
    
    
    37Signatures
    
    
    38EX-10.24EX-10.25EX-31.1EX-31.2EX-32.1EX-32.2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 ARRIS GROUP, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands, except share data) (unaudited)
 March 31,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    398,938
    
    
    $
    409,894Short-term investments, at fair value
    
    
    25,494
    
    
    
    17,371Total cash, cash equivalents and short-term investments
    
    
    424,432
    
    
    
    427,265Restricted cash
    
    
    4,550
    
    
    
    5,673Accounts receivable (net of allowances for doubtful
accounts of $3,745 in 2009 and $3,988 in 2008)
    
    
    155,792
    
    
    
    159,443Other receivables
    
    
    6,636
    
    
    
    4,749Inventories (net of reserves of $19,099 in 2009 and $18,811 in 2008)
    
    
    120,774
    
    
    
    129,752Prepaids
    
    
    6,994
    
    
    
    8,004Current deferred income tax assets
    
    
    49,027
    
    
    
    44,004Other current assets
    
    
    18,315
    
    
    
    19,782Total current assets
    
    
    786,520
    
    
    
    798,672Property, plant and equipment (net of accumulated
depreciation of $105,158 in 2009 and $100,313 in 2008)
    
    
    59,438
    
    
    
    59,204Goodwill
    
    
    231,684
    
    
    
    231,684Intangible assets (net of accumulated amortization of $162,625 in
2009 and $153,362 in 2008)
    
    
    218,085
    
    
    
    227,348Investments, at fair value
    
    
    14,593
    
    
    
    14,681Noncurrent deferred income tax assets
    
    
    3,771
    
    
    
    12,157Other assets
    
    
    5,483
    
    
    
    6,576$
    1,319,574
    
    
    $
    1,350,322LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    44,422
    
    
    $
    75,863Accrued compensation, benefits and related taxes
    
    
    15,583
    
    
    
    27,024Accrued warranty
    
    
    5,306
    
    
    
    5,652Deferred revenue
    
    
    44,006
    
    
    
    44,461Current portion of long-term debt
    
    
    147
    
    
    
    146Current deferred income tax liability
    
    
    241
    
    
    
    1,059Other accrued liabilities
    
    
    31,922
    
    
    
    25,410Total current liabilities
    
    
    141,627
    
    
    
    179,615Long-term debt, net of current portion (net of discount of $58,069
in 2009 and $64,267 in 2008
    
    
    203,080
    
    
    
    211,870Accrued pension
    
    
    19,289
    
    
    
    18,820Noncurrent income taxes payable
    
    
    12,441
    
    
    
    9,607Noncurrent deferred income tax liabilities
    
    
    42,530
    
    
    
    41,598Other long-term liabilities
    
    
    14,391
    
    
    
    15,343Total liabilities
    
    
    433,358
    
    
    
    476,853Stockholders equity:Preferred stock, par value $1.00 per share, 5.0 million shares
authorized; none issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share, 320.0 million shares
authorized; 123.3 million and 123.1 million shares issued and
outstanding in 2009 and 2008, respectively
    
    
    1,368
    
    
    
    1,362Capital in excess of par value
    
    
    1,159,054
    
    
    
    1,159,097Treasury stock at cost, 13 million shares in 2009 and 13
million shares in 2008
    
    
    (75,960
    )
    
    
    (75,960
    )Accumulated deficit
    
    
    (189,620
    )
    
    
    (202,502
    )Unrealized loss on marketable securities
    
    
    (372
    )
    
    
    (274
    )Unfunded pension liability
    
    
    (8,070
    )
    
    
    (8,070
    )Cumulative translation adjustments
    
    
    (184
    )
    
    
    (184
    )Total stockholders equity
    
    
    886,216
    
    
    
    873,469$
    1,319,574
    
    
    $
    1,350,322
  2




---



##### Table of Contents



ARRIS GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 in thousands, except per share data and percentages) (unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008Net sales
    
    $
    253,518
    
    
    $
    273,506Cost of sales
    
    
    158,008
    
    
    
    188,258Gross margin
    
    
    95,510
    
    
    
    85,248Gross margin %
    
    
    37.7
    %
    
    
    31.2
    %Operating expenses:Selling, general, and administrative expenses
    
    
    35,343
    
    
    
    36,982Research and development expenses
    
    
    28,395
    
    
    
    28,122Restructuring charges
    
    
    120
    
    
    
    405Amortization of intangible assets
    
    
    9,263
    
    
    
    13,254Total operating expenses
    
    
    73,121
    
    
    
    78,763Operating income
    
    
    22,389
    
    
    
    6,485Other expense (income):Interest expense
    
    
    4,487
    
    
    
    4,021Loss on investments
    
    
    297
    
    
    
    2Loss (gain) on foreign currency
    
    
    958
    
    
    
    (990
    )Interest income
    
    
    (385
    )
    
    
    (2,685
    )Gain on debt retirement
    
    
    (4,152
    )
    
    
    Other (income), net
    
    
    (102
    )
    
    
    (36
    )Income from continuing operations before income taxes
    
    
    21,286
    
    
    
    6,173Income tax expense
    
    
    8,404
    
    
    
    2,344Net income
    
    $
    12,882
    
    
    $
    3,829Net income per common share:Basic
    
    $
    0.10
    
    
    $
    0.03Diluted
    
    $
    0.10
    
    
    $
    0.03Weighted average common shares:Basic
    
    
    123,281
    
    
    
    130,763Diluted
    
    
    124,920
    
    
    
    131,981
  3




---



##### Table of Contents



ARRIS GROUP, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands) (unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008Operating activities:Net income
    
    $
    12,882
    
    
    $
    3,829Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    4,827
    
    
    
    4,963Amortization of intangible assets
    
    
    9,263
    
    
    
    13,254Stock compensation expense
    
    
    3,401
    
    
    
    2,551Deferred income tax provision (benefit)
    
    
    4,689
    
    
    
    (6,389
    )Amortization of deferred finance fees
    
    
    189
    
    
    
    191Provision for doubtful accounts
    
    
    6
    
    
    
    205Loss on investments
    
    
    297
    
    
    
    2Excess income tax benefits from stock-based compensation plans
    
    
    (431
    )
    
    
    Non-cash interest expense
    
    
    2,818
    
    
    
    2,605Gain on debt retirement
    
    
    (4,152
    )
    
    
    Changes in operating assets and liabilities, net of effect of acquisitions and
dispositions:Accounts receivable
    
    
    3,645
    
    
    
    (5,336
    )Other receivables
    
    
    (2,032
    )
    
    
    (1,744
    )Inventory
    
    
    8,978
    
    
    
    10,245Income taxes payable/recoverable
    
    
    (1,123
    )
    
    
    (1,734
    )Accounts payable and accrued liabilities
    
    
    (35,789
    )
    
    
    9,300Prepaids and other, net
    
    
    6,377
    
    
    
    (1,427
    )Net cash provided by operating activities
    
    
    13,845
    
    
    
    30,515Investing activities:Purchases of property, plant and equipment
    
    
    (5,066
    )
    
    
    (6,429
    )Cash paid for acquisition, net of cash acquired
    
    
    (200
    )
    
    
    (4,192
    )Cash proceeds from sale of property, plant & equipment
    
    
    
    
    
    
    224Purchases of short-term investments
    
    
    (23,870
    )
    
    
    (16,887
    )Sale of short-term investments
    
    
    15,806
    
    
    
    30,500Net cash provided by (used in) investing activities
    
    
    (13,330
    )
    
    
    3,216Financing activities:Payment of debt and capital lease obligations
    
    
    (10,592
    )
    
    
    (35,097
    )Repurchase of common stock
    
    
    
    
    
    
    (75,960
    )Excess income tax benefits from stock-based compensation plans
    
    
    431
    
    
    
    Repurchase of shares to satisfy tax withholdings
    
    
    (1,807
    )
    
    
    (239
    )Proceeds from issuance of common stock, net
    
    
    497
    
    
    
    (2,717
    )Net cash (used in) financing activities
    
    
    (11,471
    )
    
    
    (114,013
    )Net decrease in cash and cash equivalents
    
    
    (10,956
    )
    
    
    (80,282
    )Cash and cash equivalents at beginning of period
    
    
    409,894
    
    
    
    323,797Cash and cash equivalents at end of period
    
    $
    398,938
    
    
    $
    243,515
  4




---



##### Table of Contents



ARRIS GROUP, INC.
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited
 Note 1. Organization and Basis of Presentation
   Note 2. Impact of Recently Adopted Accounting Standards
 Disclosures about Derivative Instruments and Hedging
Activitiesan amendment of FASB Statement No. 133.
 Accounting for Convertible Debt
Instruments That May be Settled in Cash upon Conversion (including Partial Cash Settlement)
 5




---



##### Table of Contents



Three Months Ended March 31, 2008As Originally
    
    As
    
    IncreaseReported
    
    Adjusted
    
    (Decrease)Statement of Operations:Interest expense
    
    $
    1,504
    
    
    $
    4,021
    
    
    $
    2,517Income from continuing operations before income taxes
    
    
    8,690
    
    
    
    6,173
    
    
    
    (2,517
    )Income tax expense
    
    
    3,285
    
    
    
    2,344
    
    
    
    (941
    )Net income
    
    
    5,405
    
    
    
    3,829
    
    
    
    (1,576
    )Basic net income per share:Income from continuing operations before income taxes
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    (0.02
    )Basic net income per share
    
    
    0.04
    
    
    
    0.03
    
    
    $
    (0.01
    )Diluted net income per share:Income from continuing operations before income taxes
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    (0.02
    )Diluted net income per share
    
    
    0.04
    
    
    
    0.03
    
    
    $
    (0.01
    )
 As of December 31, 2008As Originally
    
    As
    
    IncreaseReported
    
    Adjusted
    
    (Decrease)Balance Sheet:Noncurrent deferred income tax assets
    
    $
    11,514
    
    
    $
    12,157
    
    
    $
    643Other assets
    
    
    8,294
    
    
    
    6,576
    
    
    
    (1,718
    )Long-term debt, net of current portion
    
    
    276,137
    
    
    
    211,870
    
    
    
    (64,267
    )Noncurrent deferred income tax liabilities
    
    
    17,565
    
    
    
    41,598
    
    
    
    24,033Capital in excess of par value
    
    
    1,105,998
    
    
    
    1,159,097
    
    
    
    53,099Accumulated deficit
    
    
    (188,562
    )
    
    
    (202,502
    )
    
    
    (13,940
    )
 6




---



##### Table of Contents



Note 3. Investments
  Fair ValueAs of March 31,
    
    
    As of December 31,2009
    
    
    2008Current Assets:Commercial paper
    
    $
    
    
    
    
    15,771Certificates of deposit
    
    
    8,900
    
    
    
    U.S. Government agency bonds
    
    
    14,994
    
    
    
    Variable rate demand notes
    
    
    1,600
    
    
    
    1,600Total classified as current assets
    
    
    25,494
    
    
    
    17,371Non-Current Assets:Cash surrender value of
company owned life insurance
    
    
    4,286
    
    
    
    4,527Auction rate securities
    
    
    4,924
    
    
    
    4,908Mutual funds
    
    
    19
    
    
    
    22Money market funds
    
    
    437
    
    
    
    437Corporate obligations
    
    
    20
    
    
    
    20Investment in private company
    
    
    4,000
    
    
    
    4,000SERP investments
    
    
    907
    
    
    
    767Total classified as non-current assets
    
    
    14,593
    
    
    
    14,681Total
    
    $
    40,087
    
    
    
    32,052
  Note 4. Fair Value Measurement
      March 31, 2009Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalCurrent investments
    
    $
    
    
    
    $
    25,494
    
    
    $
    
    
    
    $
    25,494Non-current investments
    
    
    456
    
    
    
    5,213
    
    
    
    
    
    
    
    5,669Auction rate securities
    
    
    
    
    
    
    
    
    
    
    4,924
    
    
    
    4,924Investment in private company
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    4,000Foreign currency contracts
    
    
    1,653
    
    
    
    
    
    
    
    
    
    
    
    1,653Total
    
    $
    2,109
    
    
    $
    30,707
    
    
    $
    8,924
    
    
    $
    41,740
 7




---



##### Table of Contents



Level 3Estimated fair value January 1, 2009
    
    $
    4,909First quarter 2009 change in fair value
    
    
    15Estimated fair value March 31, 2009
    
    $
    4,924
    Note 5. Derivative Instruments and Hedging Activities
 Accounting for Derivative Instruments and Hedging Activities, Disclosures about Derivative Instruments and Hedging Activities,
 8




---



##### Table of Contents



Asset Derivatives
    
    Liability DerivativesBalance Sheet Location
    
    Fair Value
    
    Balance Sheet Location
    
    Fair ValueDerivatives Not
Designated as Hedging
Instruments:Foreign exchange contracts
    
    Other current assets
    
    $1,654
    
    Other accrued liabilities
    
    $
    837
   Three Months Ended March 31,Statement of Operations Location
    
    2009
    
    2008Derivatives Not
Designated as Hedging
Instruments:Foreign exchange contracts
    
    Loss (gain) on foreign currency
    
    $(1,080)
    
    $1,074
 Note 6. Pension Benefits
 Components of Net Periodic Pension Cost
 Three Months Ended March 31,2009
    
    
    2008(in thousands)Service cost
    
    $
    245
    
    
    $
    190Interest cost
    
    
    530
    
    
    
    470Expected return on plan assets
    
    
    (281
    )
    
    
    (355
    )Amortization of prior service cost
    
    
    115
    
    
    
    119Amortization of net loss
    
    
    119
    
    
    
    Net periodic pension cost
    
    $
    728
    
    
    $
    424
 Employer Contributions
  9




---



##### Table of Contents



Note 7. Guarantees
 Warranty
    Balance at December 31, 2008
    
    $
    10,184Accruals related to warranties (including changes in estimates)
    
    
    1,255Settlements made (in cash or in kind)
    
    
    (1,773
    )Balance at March 31, 2009
    
    $
    9,666
 Note 8. Restructuring Charges
 Accounting for Costs Associated with Exit or Disposal Activities
  (in thousands)Balance as of December 31, 2008
    
    $
    545Q1 2009 payments
    
    
    (396
    )Q1 2009 adjustments to accrual
    
    
    41Balance as of March 31, 2009
    
    $
    190
 10




---



##### Table of Contents



(in thousands)Balance as of December 31, 2008
    
    $
    211Q1 2009 payments
    
    
    (218
    )Q1 2009 adjustments to accrual
    
    
    7Balance as of March 31, 2009
    
    $
    
  (in thousands)Balance as of December 31, 2008
    
    $
    494Q1 2009 payments
    
    
    (93
    )Q1 2009 adjustments to accrual
    
    
    72Balance as of March 31, 2009
    
    $
    473
 Note 9. Inventories
  March 31,
    
    
    December 31,2009
    
    
    2008Raw material
    
    $
    21,598
    
    
    $
    19,247Work in process
    
    
    5,929
    
    
    
    4,814Finished goods
    
    
    93,247
    
    
    
    105,691Total net inventories
    
    $
    120,774
    
    
    $
    129,752
 Note 10. Property, Plant and Equipment
  March 31,
    
    
    December 31,2009
    
    
    2008Land
    
    $
    2,612
    
    
    $
    2,612Building and leasehold improvements
    
    
    21,629
    
    
    
    20,048Machinery and equipment
    
    
    140,355
    
    
    
    136,857164,596
    
    
    
    159,517Less: Accumulated depreciation
    
    
    (105,158
    )
    
    
    (100,313
    )Total property, plant and equipment, net
    
    $
    59,438
    
    
    $
    59,204
 11




---



##### Table of Contents



Note 11. Long-Term Obligations
  March 31,
    
    
    December 31,2009
    
    
    20082.00% convertible senior notes due 2026 (net of discount of $58,069 in 2009 and
$64,267 in 2008)
    
    $
    202,981
    
    
    $
    211,7332.00% Pennsylvania Industrial Development Authority debt, net of current portion
    
    
    99
    
    
    
    137Total long-term debt
    
    
    203,080
    
    
    
    211,870Other long-term liabilities:Deferred compensation
    
    $
    4,784
    
    
    $
    4,896Accrued warranty
    
    
    4,360
    
    
    
    4,532Deferred revenue
    
    
    2,110
    
    
    
    2,671Landlord funded leasehold improvements
    
    
    1,237
    
    
    
    1,308Other long-term liabilities
    
    
    1,900
    
    
    
    1,936Total other long-term liabilities
    
    $
    14,391
    
    
    $
    15,343
    12




---



##### Table of Contents



Note 12. Comprehensive Income
  Three Months Ended March 31,2009
    
    
    2008Net income
    
    $
    12,882
    
    
    $
    3,829Changes in the following equity accounts:Unrealized gain (loss) on marketable securities
    
    
    (98
    )
    
    
    131Comprehensive income
    
    $
    12,784
    
    
    $
    3,960
 Note 13. Segment Information
 Disclosures about Segments of an Enterprise
and Related Information
  Broadband Communications Systems   Access, Transport & Supplies   Media & Communications Systems
 13




---



##### Table of Contents



BCS
    
    ATS
    
    MCS
    
    TotalQuarter Ended March 31, 2009Net sales
    
    $
    194,131
    
    
    $
    42,990
    
    
    $
    16,397
    
    
    $
    253,518Gross margin
    
    
    78,921
    
    
    
    9,268
    
    
    
    7,321
    
    
    
    95,910Amortization of intangible assets
    
    
    
    
    
    
    5,654
    
    
    
    3,609
    
    
    
    9,263Quarter Ended March 31, 2008Net sales
    
    $
    189,637
    
    
    $
    72,894
    
    
    $
    10,975
    
    
    $
    273,506Gross margin
    
    
    57,991
    
    
    
    21,876
    
    
    
    5,381
    
    
    
    85,248Amortization of intangible assets
    
    
    
    
    
    
    6,852
    
    
    
    6,402
    
    
    
    13,254
  Note 14. Sales Information
  Three Months EndedMarch 31,2009
    
    2008Comcast and affiliates
    
    $
    65,210
    
    
    $
    34,226% of sales
    
    
    25.7
    %
    
    
    12.5
    %Time Warner Cable and affiliates
    
    $
    49,083
    
    
    $
    70,921% of sales
    
    
    19.4
    %
    
    
    25.9
    %
  14




---



##### Table of Contents



Note 15. Earnings Per Share
  Three Months EndedMarch 31,2009
    
    
    2008Basic:Net income
    
    $
    12,882
    
    
    $
    3,829Weighted average shares outstanding
    
    
    123,281
    
    
    
    130,763Basic earnings per share
    
    $
    0.10
    
    
    $
    0.03Diluted:Net income
    
    $
    12,882
    
    
    $
    3,829Weighted average shares outstanding
    
    
    123,281
    
    
    
    130,763Net effect of dilutive equity awards
    
    
    1,639
    
    
    
    1,218Total
    
    
    124,920
    
    
    
    131,981Diluted earnings per share
    
    $
    0.10
    
    
    $
    0.03
  Note 16. Income Taxes
  Three Months Ended March 31,2009
    
    
    2008Income Before Tax
    
    
    Income Tax Expense
    
    
    Effective Tax Rate
    
    
    Income Before Tax
    
    
    Income Tax Expense
    
    
    Effective Tax RateNon-Discrete Items
    
    
    17.0
    
    
    $
    5.5
    
    
    
    32.3
    %
    
    $
    8.7
    
    
    $
    3.3
    
    
    
    37.8
    %Discrete Accounting Events
    
    
    4.2
    
    
    
    1.4
    
    
    
    35.2
    %
    
    
    
    
    
    
    
    
    
    
    Discrete Tax Events 
Valuation Allowances /
FIN 48 Reserves
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    21.2
    
    
    $
    8.4
    
    
    
    39.6
    %
    
    $
    8.7
    
    
    $
    3.3
    
    
    
    37.8
    %
 
    
    In the first quarter of 2009, the Company reported a discrete accounting gain of $4.2
million on the repurchase of convertible debt. Income tax expense of $1.4 million was
recorded on the gain, reflecting a tax rate of 35.2%. Additionally, during the first
quarter, the Company identified $1.5 million of discrete tax expense relating to
adjustments of FIN 48 allowances.
    
    In the first quarter of 2008, the Company recorded income tax expense at the applicable
federal rate and state rates. There was no discrete tax or accounting events pursuant to
the guidance of APB Opinion 28, Interim Financial Reportingand FIN 18, Accounting for
Income Taxes in Interim Periods.
  15




---



##### Table of Contents



Note 17. Contingencies
  ®
     16




---



##### Table of Contents



Note 18. Purchases of ARRIS Common Stock
   17




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
   
    
    Broadband Communications Systems (BCS)
    
    Access, Transport and Supplies (ATS)
    
    Media & Communications Systems (MCS)
  Our Strategy and Key Highlights
  
    
    Maintain a strong capital structure, mindful of our 2013 debt maturity, share
repurchase opportunities and other capital needs including mergers and acquisitions.
    
    Grow our current business into a more complete portfolio including a strong video
product suite.
    
    Continue to invest in the evolution toward enabling true network convergence onto an
all IP platform.
    
    Continue to expand our product/service portfolio through internal developments,
partnerships and acquisitions.
    
    Expand our international business and begin to consider opportunities in markets other
than cable.
    
    Continue to invest in and evolve the ARRIS talent pool to implement the above
strategies.
   Financial Highlights
 
    
    Earnings per diluted share increased to $0.10 in the first quarter 2009 as compared to
$0.03 in the first quarter 2008 despite a 7% decline in sales.
    
    Gross margin percentage increased 6.5 percentage points year over year to 37.7% in the
first quarter 2009 reflecting a stronger product mix notably higher sales of our higher
margin CMTS product line.
    
    We ended the first quarter 2009 with $424.4 million of cash & short-term investments.
We generated approximately $13.8 million of cash from operating activities in the quarter.
    
    We used $10.6 million of cash to retire $15.0 million principal amount of our
convertible debt which represented a 29% discount. The Company also wrote off
approximately $0.2 million of deferred finance fees associated with the portion of the
notes retired. We recorded a pre-tax net gain of $4.2 million as a result of the
retirement.
    
    We ended the first quarter with an order backlog of approximately $155 million and a
book-to-bill ratio of 1.16. Both order backlog and book-to-bill are up relative to the
first and fourth quarters of 2008.
 18




---



##### Table of Contents



Product Line Highlights
 
    
    CMTS
 o
    
    Downstream port shipments were 24,516 in the first quarter of 2009o
    
    DOCSIS 3.0 equipment has had wide market acceptanceo
    
    Key wins occurred in Korea, Japan and North Americao
    
    Worldwide market share improved in the fourth quarter of 2008 (source: Infonetics)
 
    
    CPE
 o
    
    1.3 million EMTAs were shipped in the first quarter of 2009. We have
retained number one market share for 16 consecutive quarters (source: Infonetics)o
    
    We have twice as large a market share as our nearest competitor in the fourth quarter of 2008o
    
    We increased shipments of Multi-line and Wireless Gateways in the first quarter of 2009o
    
    DOCSIS 3.0 CPE shipments increased over fourth quarter of 2008, but we
still expect more significant transition to this product later in 2009
 
    
    Access, Transport & Supplies
 o
    
    Business continues to be impacted by macro economics which resulted in
lower sales year over year and sequentiallyo
    
    Product mix and lower volumes impacted margins
 
    
    Media & Communications Systems
 o
    
    We have seen strong acceptance of WorkAssure projectso
    
    Won a new WorkAssure customer in Latin America in the first quarter of 2009o
    
    Experienced mix shift toward On-Demand and Ad insertion in the first quarter of 2009o
    
    Introduced two new video distribution platforms
 Significant Customers
  Three Months EndedMarch 31,2009
    
    2008Comcast and affiliates
    
    $
    65,210
    
    
    $
    34,226% of sales
    
    
    25.7
    %
    
    
    12.5
    %Time Warner Cable and affiliates
    
    $
    49,083
    
    
    $
    70,921% of sales
    
    
    19.4
    %
    
    
    25.9
    %
 19




---



##### Table of Contents



Comparison of Operations for the Three Months Ended March 31, 2009 and 2008
 Net Sales
  Net SalesThree Months Ended
    
    
    Increase (Decrease) -March 31,
    
    
    2009 vs. 20082009
    
    
    2008
    
    
    $
    
    
    %Business Segment:Broadband Communications Systems
    
    $
    194,131
    
    
    $
    189,637
    
    
    $
    4,494
    
    
    
    2.4
    %Access, Transport & Supplies
    
    
    42,990
    
    
    
    72,894
    
    
    
    (29,904
    )
    
    
    (41.0
    )%Media & Communications Systems
    
    
    16,397
    
    
    
    10,975
    
    
    
    5,422
    
    
    
    49.4
    %Total sales
    
    $
    253,518
    
    
    $
    273,506
    
    
    $
    (19,988
    )
    
    
    (7.3
    )%
  Net SalesThree Months Ended
    
    
    Increase (Decrease) -March 31,
    
    
    2009 vs. 20082009
    
    
    2008
    
    
    $
    
    
    %Domestic sales
    
    $
    186,025
    
    
    $
    188,743
    
    
    $
    (2,718
    )
    
    
    (1.4
    )%International sales
    
    
    67,493
    
    
    
    84,763
    
    
    
    (17,270
    )
    
    
    (20.4
    )%Total sales
    
    $
    253,518
    
    
    $
    273,506
    
    
    $
    (19,988
    )
    
    
    (7.3
    )%
 Broadband Communication Systems Net Sales 2009 vs. 2008
  
    
    Higher sales to Comcast of both CMTS and EMTAs. Sales to Comcast were lower in the
first quarter of 2008 as they awaited the launch of our DOCSIS 3.0 product in the third
quarter of 2008.
    
    Comcast sales were partially offset by decreases in sales to several customers, notably
Charter and Liberty Media International.
 Access, Transport and Supplies Net Sales 2009 vs. 2008
  Media & Communication Systems Net Sales 2009 vs. 2008
  20




---



##### Table of Contents



Gross Margin
  Gross Margin $Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2009 vs. 20082009
    
    
    2008
    
    
    $
    
    
    %Business Segment:Broadband
Communications Systems
    
    $
    78,921
    
    
    $
    57,991
    
    
    $
    20,930
    
    
    
    36.1
    %Access, Transport and Supplies
    
    
    9,268
    
    
    
    21,876
    
    
    
    (12,608
    )
    
    
    (57.6
    )%Media & Communications Systems
    
    
    7,321
    
    
    
    5,381
    
    
    
    1,940
    
    
    
    36.1
    %Total
    
    $
    95,510
    
    
    $
    85,248
    
    
    $
    10,262
    
    
    
    12.0
    %
  Gross Margin %Percentage PointThree Months Ended
    
    IncreaseMarch 31,
    
    (Decrease)2009
    
    2008
    
    2009 vs. 2008Business Segment:Broadband Communications Systems
    
    
    40.7
    %
    
    
    30.6
    %
    
    
    10.1Access, Transport and Supplies
    
    
    21.6
    %
    
    
    30.0
    %
    
    
    (8.4
    )Media & Communications Systems
    
    
    44.6
    %
    
    
    49.0
    %
    
    
    (4.4
    )Total
    
    
    37.7
    %
    
    
    31.2
    %
    
    
    6.5
 Broadband Communications Systems Gross Margin 2009 vs. 2008
  
    
    The increase in gross margin dollars was primarily the result of higher sales and
product mix.
    
    The increase in gross margin percentage in the first quarter of 2009 as compared to the
first quarter of 2008 primarily reflects product mix, as we sold more CMTS products and
fewer EMTA products. CMTS products carry a higher gross margin percentage than the EMTA
products.
 Access, Transport and Supplies Gross Margin 2009 vs. 2008
  
    
    The decrease in gross margin dollars was primarily the result of a decrease in sales.
    
    The decrease in gross margin percentage was primarily the result of both a change in
product mix and a decrease in sales. Access and Transport sales decreased proportionally
more than the Supplies sales decreased, in particular the higher gross margin optics gear.
 Media & Communications Systems Gross Margin 2009 vs. 2008
  
    
    The increase in gross margin dollars was primarily the result of increased sales.
    
    The decrease in gross margin percentage was primarily the result of product mix.
 21




---



##### Table of Contents



Operating Expenses
  Operating ExpensesThree Months Ended
    
    
    Increase (Decrease)  2009March 31,
    
    
    vs. 20082009
    
    
    2008
    
    
    $
    
    
    %Selling general and
administrative
    
    $
    35,343
    
    
    $
    36,982
    
    
    $
    (1,639
    )
    
    
    (4.4
    )%Research and development
    
    
    28,395
    
    
    
    28,122
    
    
    
    273
    
    
    
    1.0
    %Restructuring
    
    
    120
    
    
    
    405
    
    
    
    (285
    )
    
    
    (70.4
    )%Amortization of intangible assets
    
    
    9,263
    
    
    
    13,254
    
    
    
    (3,991
    )
    
    
    (30.1
    )%Total
    
    $
    73,121
    
    
    $
    78,763
    
    
    $
    (5,642
    )
    
    
    (7.2
    )%
 Selling, General, and Administrative, or SG&A, Expenses
  
    
    The synergies we achieved during 2008 primarily related to the C-COR acquisition.
    
    The decrease achieved by the synergies was partially offset by an increase in legal
costs of approximately $1.2 million associated with patent and other litigation matters.
 Research & Development Expenses
  Restructuring Charges
  Amortization of Intangibles
  Goodwill Impairment
  Other Expense (Income)
 Interest Expense
  22




---



##### Table of Contents



Accounting for Convertible Debt Instruments That
May be Settle in Cash Upon Conversion (including Partial Cash Settlement
 Loss (Gain) in Foreign Currency
  Interest Income
  Other Income
  Income Taxes
  23




---



##### Table of Contents



Financial Liquidity and Capital Resources
 Overview
  Liquidity & Capital Resources Data
 Three Months Ended March 31,2009
    
    2008(in thousands, except DSO and turns)Key Working Capital ItemsCash provided by operating activities
    
    $
    13,845
    
    
    $
    30,515Cash, cash equivalents, and short-term
investments
    
    $
    424,432
    
    
    $
    293,028Accounts receivable, net
    
    $
    155,792
    
    
    $
    172,719Days Sales Outstanding (DSOs)
    
    
    57
    
    
    
    57Inventory
    
    $
    120,774
    
    
    $
    122,361Inventory turns
    
    
    5.0
    
    
    
    5.9Convertible notes at face value*
    
    $
    261,050
    
    
    $
    276,000Capital Expenditures
    
    $
    5,066
    
    
    $
    6,429
 
 *
    
    The face value of our convertible notes will not agree to the amount on our balance sheet as
a result of the accounting treatment in accordance with FSP APB 14-1. See Notes 2 and 11 of
Notes to the Consolidated Financial Statements for more details. Accounts Receivable & Inventory
    
    
    With the market driven decline in the ATS sales, inventory was not reduced at a similar
rate resulting in higher inventory turns for this segment. We anticipate that inventory
turns for the ATS segment will improve over the next several quarters.
    
    Despite a year over year increase in BCS segment sales of $4.5 million, the cost of
goods sold decreased by approximately $16.4 million reflecting a shift in product mix.
This resulted in lower inventory turns for the BCS segment year over year.
 Summary of Current Liquidity Position and Potential for Future Capital Raising
  24




---



##### Table of Contents



Commitments
  Cash Flow
  For the Three Months EndedMarch 31,2009
    
    2008Cash provided by operating activities
    
    $
    13,845
    
    
    $
    30,515Cash provided by (used in) investing activities
    
    
    (13,330
    )
    
    
    3,216Cash (used in) financing activities
    
    
    (11,471
    )
    
    
    (114,013
    )Net decrease in cash
    
    $
    (10,956
    )
    
    $
    (80,282
    )
 Operating Activities:
  For the Three Months EndedMarch 31,2009
    
    2008Net income
    
    $
    12,882
    
    
    $
    3,829Adjustments to reconcile net income to
cash provided by operating activities
    
    
    20,907
    
    
    
    17,382Net income including adjustments
    
    
    33,789
    
    
    
    21,211Decrease/(increase) in accounts receivable
    
    
    3,645
    
    
    
    (5,336
    )Decrease in inventory
    
    
    8,978
    
    
    
    10,245(Decrease) /increase in accounts payable
and accrued liabilities
    
    
    (35,789
    )
    
    
    9,300All other
 net
    
    
    3,222
    
    
    
    (4,905
    )Cash provided by operating activities
    
    $
    13,845
    
    
    $
    30,515
     25




---



##### Table of Contents



Investing Activities:
  Three Months EndedMarch 31,2009
    
    2008Capital expenditures
    
    $
    (5,066
    )
    
    $
    (6,429
    )Cash paid for acquisition
    
    
    (200
    )
    
    
    (4,192
    )Cash proceeds from sale of property, plant &
equipment
    
    
    
    
    
    
    224Purchases of short-term investments
    
    
    (23,870
    )
    
    
    (16,887
    )Disposals of short-term investments
    
    
    15,806
    
    
    
    30,500Cash provided by (used in) investing activities
    
    $
    (13,330
    )
    
    $
    3,216
 Capital
Expenditures 
  Cash
Paid for Acquisition 
  Purchases
and Disposals of Short-Term Investments 
  Financing Activities:
  For the Three Months EndedMarch 31,2009
    
    2008Payment of debt and capital lease obligations
    
    $
    (10,592
    )
    
    $
    (35,097
    )Repurchase of common stock
    
    
    
    
    
    
    (75,960
    )Excess income tax benefits from stock-based compensation plans
    
    
    431
    
    
    
    Repurchase of shares to satisfy tax withholdings
    
    
    (1,807
    )
    
    
    (239
    )Proceeds from issuance of common stock, net
    
    
    497
    
    
    
    (2,717
    )Cash (used in) financing activities
    
    $
    (11,471
    )
    
    $
    (114,013
    )
 Payment
of Debt and Capital Lease Obligation 
  Repurchase of Common Stock 
  26




---



##### Table of Contents



Repurchase of Shares to Satisfy Tax Withholdings
  Excess Income Tax Benefits from Stock-Based Compensation Plans
  Proceeds from Issuance of Common Stock, Net
  Interest Rates
  Foreign Currency
   Financial Instruments
   Cash, Cash Equivalents, and Investments
  27




---



##### Table of Contents



Fair Value Measurements
 Accounting for Certain Investments in Debt and Equity Securities
 Accounting for Deferred Compensation Arrangements
Where Amounts Earned Are Held in a Rabbi Trust and Invested
 Accounting for Certain Investments in Debt and Equity
Securities
 Capital Expenditures
  Critical Accounting Estimates
  28




---



##### Table of Contents



Forward-Looking Statements
  
 Item 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     29




---



##### Table of Contents



Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting
 
 PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  ®
   30




---



##### Table of Contents



31




---



##### Table of Contents



Item 1A. Risk Factors
 Our business is dependent on customers capital spending on broadband communication systems, and
reductions by customers in capital spending adversely affect our business.
  
    
    general economic conditions;
    
    customer specific financial or stock market conditions;
    
    availability and cost of capital;
    
    governmental regulation;
    
    demand for network services;
    
    competition from other providers of broadband and high speed services;
    
    technological change;
    
    new housing starts;
    
    acceptance of new services offered by our customers; and
    
    real or perceived trends or uncertainties in these factors.
  The markets in which we operate are intensely competitive, and competitive pressures may adversely
affect our results of operations.
  
    
    Ambit Microsystems;
    
    Aurora Networks;
    
    BigBand Networks;
    
    Cisco Systems, Inc.;
    
    Commscope, Inc;
    
    Concurrent Computer Corporation;
    
    Ericsson (TandbergTV);
    
    Harmonic, Inc.;
    
    Motorola, Inc.;
    
    SeaChange, Inc.;
    
    Thomson; and
    
    TVC Communications, Inc.
  32




---



##### Table of Contents



Consolidations in the telecommunications industry could result in delays or reductions in purchases
of products, which would have a material adverse effect on our business.
   We may pursue acquisitions and investments that could adversely affect our business.
  We have substantial goodwill.
 Goodwill and Other Intangible
Assets
 33




---



##### Table of Contents



Our business comes primarily from a few key customers. The loss of one of these customers or a
significant reduction in sales to one of these customers would have a material adverse effect on
our business.
  We may have difficulty in forecasting our sales.
  The broadband products that we develop and sell are subject to technological change and a trend
toward open standards, which may impact our future sales and margins.
  Fluctuations in our Media & Communications Systems sales result in greater volatility in our
operating results.
  Products currently under development may fail to realize anticipated benefits.
  
    
    are not cost-effective;
    
    are not brought to market in a timely manner;
    
    fail to achieve market acceptance; or
    
    fail to meet industry certification standards.
  34




---



##### Table of Contents



Our success depends in large part on our ability to attract and retain qualified personnel in all
facets of our operations.
  We are substantially dependent on contract manufacturers, and an inability to obtain adequate and
timely delivery of supplies could adversely affect our business.
  Our international operations may be adversely affected by any decline in the demand for broadband
systems designs and equipment in international markets.
  Our international operations may be adversely affected by changes in the foreign laws in the
countries in which we and our manufacturers and assemblers have plants.
   
    
    changes in international trade laws, such as the North American Free Trade Agreement and
Prosec, affecting our import and export activities;
    
    changes in, or expiration of, the Mexican governments IMMEX (Manufacturing Industry
Maquiladora and Export Services) program, which provides economic benefits to us;
    
    changes in labor laws and regulations affecting our ability to hire and retain
employees;
    
    fluctuations of foreign currency and exchange controls;
    
    potential political instability and changes in the Mexican government;
    
    potential regulatory changes; and
    
    general economic conditions in Mexico.
  35




---



##### Table of Contents



We face risks relating to currency fluctuations and currency exchange.
   We depend on channel partners to sell our products in certain regions and are subject to risks
associated with these arrangements.
  
    
    ability of our selected channel partners to effectively sell our products to end
customers;
    
    our ability to continue channel partner arrangements into the future since most are for
a limited term and subject to mutual agreement to extend;
    
    a reduction in gross margins realized on sale of our products; and
    
    a diminution of contact with end customers which, over time, could adversely impact our
ability to develop new products that meet customers evolving requirements.
 Our profitability has been, and may continue to be, volatile, which could adversely affect the
price of our stock.
  We may face higher costs associated with protecting our intellectual property or obtaining access
necessary to intellectual property of others.
  36




---



##### Table of Contents



Changes in accounting pronouncements can impact our business.
  We do not intend to pay cash dividends in the foreseeable future.
  We have anti-takeover defenses that could delay or prevent an acquisition of our company.
  We  have  the  ability  to  issue  preferred  shares  without  stockholder  approval.
  
 Item 6. EXHIBITS
 Exhibit No.
    
    Description of Exhibit10.24*
    
    Form of Restricted Stock Agreement10.25*
    
    Form of Restricted Stock Unit31.1
    
    Section 302 Certification of Chief Executive Officer, filed herewith31.2
    
    Section 302 Certification of Chief Financial Officer, filed herewith32.1
    
    Section 906 Certification of Chief Executive Officer, filed herewith32.2
    
    Section 906 Certification of Chief Financial Officer, filed herewith
 37




---



##### Table of Contents



SIGNATURES
  ARRIS GROUP, INC./s/ David B. PottsDavid B. PottsExecutive Vice President, Chief
Financial Officer, Chief Accounting
Officer, and Chief Information
Officer  38