##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 For the quarter ended September 30, 2009
 of
 ARRIS GROUP, INC.
 A Delaware Corporation
IRS Employer Identification No. 58-2588724
SEC File Number 000-31254
 3871 Lakefield Drive
Suwanee, GA 30024
(678) 473-2000
  o o
  Large accelerated filer o
    
    Accelerated filer
o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)




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##### 



ARRIS GROUP, INC.
FORM 10-Q
For the Three and Nine Months Ended September 30, 2009
 INDEX
 PagePart I. Financial InformationItem 1.
Condensed Financial Statements (unaudited)a) Consolidated Balance Sheets
as of September 30, 2009 and December 31, 2008
    
    
    1b) Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2009 and 2008
    
    
    2c) Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2009 and 2008
    
    
    3d) Notes to the Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures on Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30Part II. Other InformationItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    33Item 6. Exhibits
    
    
    38Signatures
    
    
    39EX-31.1EX-31.2EX-32.1EX-32.2
  ii




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1.
CONDENSED  FINANCIAL STATEMENTS
 
 ARRIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) (unaudited)
 September 30,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    461,795
    
    
    $
    409,894Short-term investments, at fair value
    
    
    99,917
    
    
    
    17,371Total cash, cash equivalents and short-term investments
    
    
    561,712
    
    
    
    427,265Restricted cash
    
    
    4,473
    
    
    
    5,673Accounts receivable (net of allowances for doubtful
accounts of $3,809 in 2009 and $3,988 in 2008)
    
    
    119,125
    
    
    
    159,443Other receivables
    
    
    2,235
    
    
    
    4,749Inventories (net of reserves of $20,281 in 2009 and $18,811 in
2008)
    
    
    100,024
    
    
    
    129,752Prepaids
    
    
    10,764
    
    
    
    8,004Current deferred income tax assets
    
    
    32,883
    
    
    
    44,004Other current assets
    
    
    17,193
    
    
    
    19,782Total current assets
    
    
    848,409
    
    
    
    798,672Property, plant and equipment (net of accumulated
depreciation of $102,302 in 2009 and $100,313 in 2008)
    
    
    58,339
    
    
    
    59,204Goodwill
    
    
    234,416
    
    
    
    231,684Intangibles (net of accumulated amortization of $181,169 in
2009 and $153,362 in 2008)
    
    
    201,351
    
    
    
    227,348Investments
    
    
    30,574
    
    
    
    14,681Noncurrent deferred income tax assets
    
    
    3,593
    
    
    
    12,157Other assets
    
    
    7,648
    
    
    
    6,576$
    1,384,330
    
    
    $
    1,350,322LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    42,659
    
    
    $
    75,863Accrued compensation, benefits and related taxes
    
    
    27,054
    
    
    
    27,024Accrued warranty
    
    
    5,292
    
    
    
    5,652Deferred revenue
    
    
    35,423
    
    
    
    44,461Current portion of long-term debt
    
    
    148
    
    
    
    146Other accrued liabilities
    
    
    35,229
    
    
    
    26,469Total current liabilities
    
    
    145,805
    
    
    
    179,615Long-term debt, net of current portion
    
    
    208,433
    
    
    
    211,870Accrued pension
    
    
    18,914
    
    
    
    18,820Noncurrent income taxes payable
    
    
    10,632
    
    
    
    9,607Noncurrent deferred income tax liabilities
    
    
    35,188
    
    
    
    41,598Other noncurrent liabilities
    
    
    15,301
    
    
    
    15,343Total liabilities
    
    
    434,273
    
    
    
    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; 125.4 million and 123.1 million shares issued
and outstanding in 2009 and 2008, respectively
    
    
    1,385
    
    
    
    1,362Capital in excess of par value
    
    
    1,177,958
    
    
    
    1,159,097Treasury stock at cost, 13 million shares in 2009 and 2008
    
    
    (75,960
    )
    
    
    (75,960
    )Accumulated deficit
    
    
    (145,012
    )
    
    
    (202,502
    )Unrealized loss on marketable securities
    
    
    (60
    )
    
    
    (274
    )Unfunded pension losses
    
    
    (8,070
    )
    
    
    (8,070
    )Cumulative translation adjustments
    
    
    (184
    )
    
    
    (184
    )Total stockholders equity
    
    
    950,057
    
    
    
    873,469$
    1,384,330
    
    
    $
    1,350,322
  1




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ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited  (in thousands, except per share data and percentages)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net sales
    
    $
    275,772
    
    
    $
    297,551
    
    
    $
    807,811
    
    
    $
    852,167Cost of sales
    
    
    160,299
    
    
    
    191,417
    
    
    
    479,548
    
    
    
    567,901Gross margin
    
    
    115,473
    
    
    
    106,134
    
    
    
    328,263
    
    
    
    284,266Gross margin %
    
    
    41.9
    %
    
    
    35.7
    %
    
    
    40.6
    %
    
    
    33.4
    %Operating expenses:Selling, general and administrative expenses
    
    
    36,311
    
    
    
    33,012
    
    
    
    110,782
    
    
    
    107,040Research and development expenses
    
    
    30,909
    
    
    
    27,473
    
    
    
    89,447
    
    
    
    83,257Restructuring charges
    
    
    73
    
    
    
    202
    
    
    
    785
    
    
    
    782Amortization of intangible assets
    
    
    9,281
    
    
    
    9,146
    
    
    
    27,807
    
    
    
    34,854Total operating expenses
    
    
    76,574
    
    
    
    69,833
    
    
    
    228,821
    
    
    
    225,933Operating income
    
    
    38,899
    
    
    
    36,301
    
    
    
    99,442
    
    
    
    58,333Other expense (income):Interest expense
    
    
    4,356
    
    
    
    4,360
    
    
    
    13,121
    
    
    
    12,672Loss (gain) on investments
    
    
    (238
    )
    
    
    37
    
    
    
    (453
    )
    
    
    210Interest income
    
    
    (424
    )
    
    
    (1,504
    )
    
    
    (1,172
    )
    
    
    (5,891
    )Loss (gain) on foreign currency
    
    
    1,114
    
    
    
    382
    
    
    
    3,642
    
    
    
    (258
    )Gain on debt retirement
    
    
    
    
    
    
    
    
    
    
    (4,152
    )
    
    
    Other expense (income), net
    
    
    (263
    )
    
    
    (72
    )
    
    
    (887
    )
    
    
    (43
    )Income from continuing operations before income taxes
    
    
    34,354
    
    
    
    33,098
    
    
    
    89,343
    
    
    
    51,643Income tax expense
    
    
    12,655
    
    
    
    10,664
    
    
    
    31,853
    
    
    
    17,551Net income
    
    $
    21,699
    
    
    $
    22,434
    
    
    $
    57,490
    
    
    $
    34,092Net income per common share:Basic
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.46
    
    
    $
    0.27Diluted
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.45
    
    
    $
    0.27Weighted average common shares:Basic
    
    
    125,326
    
    
    
    122,922
    
    
    
    124,381
    
    
    
    125,466Diluted
    
    
    129,695
    
    
    
    125,420
    
    
    
    127,916
    
    
    
    127,249
 .
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ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited  (in thousands)
 Nine Months Ended September 30,2009
    
    
    2008Operating activities:Net income
    
    $
    57,490
    
    
    $
    34,092Depreciation
    
    
    15,370
    
    
    
    15,521Amortization of intangible assets
    
    
    27,807
    
    
    
    34,854Stock compensation expense
    
    
    11,714
    
    
    
    8,286Deferred income tax provision
    
    
    13,678
    
    
    
    2,863Amortization of deferred finance fees
    
    
    548
    
    
    
    571Provision for doubtful accounts
    
    
    1
    
    
    
    365Gain on disposal of fixed assets
    
    
    (46
    )
    
    
    (15
    )Loss (gain) on investments
    
    
    (453
    )
    
    
    210Excess tax benefits from stock-based compensation plans
    
    
    (2,027
    )
    
    
    (24
    )Non-cash interest expense
    
    
    8,308
    
    
    
    7,972Gain on debt retirement
    
    
    (4,152
    )
    
    
    Changes in operating assets and liabilities, net of effect of acquisitions and
dispositions:Accounts receivable
    
    
    40,801
    
    
    
    (12,103
    )Other receivables
    
    
    539
    
    
    
    (4,001
    )Inventory
    
    
    30,449
    
    
    
    (6,028
    )Income taxes payable/recoverable
    
    
    (2,868
    )
    
    
    (657
    )Accounts payable and accrued liabilities
    
    
    (32,620
    )
    
    
    9,743Prepaids and other, net
    
    
    6,665
    
    
    
    (5,117
    )Net cash provided by operating activities
    
    
    171,204
    
    
    
    86,532Investing activities:Purchases of property, plant and equipment
    
    
    (14,327
    )
    
    
    (16,444
    )Cash paid for acquisitions, net of cash acquired
    
    
    (8,130
    )
    
    
    (10,066
    )Cash proceeds from sale of property, plant and equipment
    
    
    208
    
    
    
    250Purchases of short-term investments
    
    
    (151,845
    )
    
    
    (86,998
    )Sales of short-term investments
    
    
    54,416
    
    
    
    122,486Net cash provided by (used in) investing activities
    
    
    (119,678
    )
    
    
    9,228Financing activities:Payment of debt and capital lease obligations
    
    
    (10,677
    )
    
    
    (35,518
    )Repurchase of common stock
    
    
    
    
    
    
    (75,960
    )Excess tax benefits from stock-based compensation plans
    
    
    2,027
    
    
    
    24Employer repurchase of shares to satisfy minimum tax withholdings
    
    
    (2,180
    )
    
    
    (1,035
    )Proceeds from issuance of common stock, net
    
    
    11,205
    
    
    
    (1,081
    )Net cash provided by (used in) financing activities
    
    
    375
    
    
    
    (113,570
    )Net increase (decrease) in cash and cash equivalents
    
    
    51,901
    
    
    
    (17,810
    )Cash and cash equivalents at beginning of period
    
    
    409,894
    
    
    
    323,797Cash and cash equivalents at end of period
    
    $
    461,795
    
    
    $
    305,987
  3




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ARRIS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited
 Note 1. Organization and Basis of Presentation
   Note 2. Impact of Recently Issued Accounting Standards
   4




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Three Months Ended September 30, 2008
    
    Nine Months Ended September 30, 2008As
    
    
    
    
    
    
    
    
    
    AsOriginally
    
    As
    
    Increase
    
    Originally
    
    As
    
    IncreaseReported
    
    Adjusted
    
    (Decrease)
    
    Reported
    
    Adjusted
    
    (Decrease)Statement of Operations:Interest expense
    
    $
    1,738
    
    
    $
    4,360
    
    
    $
    2,622
    
    
    $
    4,964
    
    
    $
    12,672
    
    
    $
    7,708Income from continuing
operations before income
taxes
    
    
    35,720
    
    
    
    33,098
    
    
    
    (2,622
    )
    
    
    59,351
    
    
    
    51,643
    
    
    
    (7,708
    )Income tax expense
    
    
    11,645
    
    
    
    10,664
    
    
    
    (981
    )
    
    
    20,434
    
    
    
    17,551
    
    
    
    (2,883
    )Net income
    
    
    24,075
    
    
    
    22,434
    
    
    
    (1,641
    )
    
    
    38,917
    
    
    
    34,092
    
    
    
    (4,825
    )Basic net income per share:Income from continuing
operations before income
taxes
    
    $
    0.29
    
    
    $
    0.27
    
    
    $
    (0.02
    )
    
    $
    0.47
    
    
    $
    0.41
    
    
    $
    (0.06
    )Basic net income per share
    
    $
    0.20
    
    
    $
    0.18
    
    
    $
    (0.02
    )
    
    $
    0.31
    
    
    $
    0.27
    
    
    $
    (0.04
    )Diluted net income per share:Income from continuing
operations before income
taxes
    
    $
    0.28
    
    
    $
    0.26
    
    
    $
    (0.02
    )
    
    $
    0.47
    
    
    $
    0.41
    
    
    $
    (0.06
    )Diluted net income per share
    
    $
    0.19
    
    
    $
    0.18
    
    
    $
    (0.01
    )
    
    $
    0.31
    
    
    $
    0.27
    
    
    $
    (0.04
    )
 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
    )
 Note 3. Investments
  Fair ValueAs of September 30,
    
    
    As of December 31,2009
    
    
    2008Current Assets:Trading securities
    
    $
    4,954
    
    
    $
    Available-for-sale securities
    
    
    94,963
    
    
    
    17,371Total classified as current assets
    
    
    99,917
    
    
    
    17,371Noncurrent Assets:Trading securities
    
    
    
    
    
    
    4,908Available-for-sale securities
    
    
    26,574
    
    
    
    5,773Cost method investments
    
    
    4,000
    
    
    
    4,000Total classified as noncurrent assets
    
    
    30,574
    
    
    
    14,681Total
    
    $
    126,491
    
    
    $
    32,052
  5




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Note 4. Fair Value Measurements
      Level 1
    
    Level 2
    
    Level 3
    
    TotalCurrent investments
    
    $
    90,243
    
    
    $
    4,720
    
    
    $
    
    
    
    $
    94,963Noncurrent investments
    
    
    20,366
    
    
    
    6,208
    
    
    
    
    
    
    
    26,574Auction rate securities
    
    
    
    
    
    
    
    
    
    
    4,954
    
    
    
    4,954Foreign currency contracts
    
    
    164
    
    
    
    
    
    
    
    
    
    
    
    1645Total
    
    $
    110,773
    
    
    $
    10,928
    
    
    $
    4,954
    
    
    $
    126,655
  6




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Level 3Estimated fair value January 1, 2009
    
    $
    4,909First quarter 2009 change in fair value
    
    
    15Second quarter 2009 change in fair value
    
    
    15Third quarter 2009 change in fair value
    
    
    15Estimated fair value September 30, 2009
    
    $
    4,954
   Note 5. Derivative Instruments and Hedging Activities
   Asset Derivatives
    
    Liability DerivativesBalance Sheet Location
    
    Fair Value
    
    Balance Sheet Location
    
    Fair ValueDerivatives Not
Designated as Hedging
Instruments:Foreign exchange contracts
    
    Other current assets
    
    $
    164
    
    
    Other accrued liabilities
    
    $
    3,067
  7




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Statement of Operations Location
    
    2009
    
    2008
    
    2009
    
    2008Derivatives Not
Designated as Hedging
Instruments:Foreign exchange contracts
    
    Loss (gain) on foreign currency
    
    $
    1,425
    
    
    $(2,057)
    
    $
    3,099
    
    
    $
    (1,096
    )
 Note 6. Pension Benefits
 Components of Net Periodic Pension Benefit Cost
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands)Service cost
    
    $
    245
    
    
    $
    190
    
    
    $
    735
    
    
    $
    570Interest cost
    
    
    530
    
    
    
    472
    
    
    
    1,590
    
    
    
    1,412Expected gain on plan assets
    
    
    (281
    )
    
    
    (354
    )
    
    
    (844
    )
    
    
    (1,064
    )Amortization of prior service cost
    
    
    115
    
    
    
    119
    
    
    
    346
    
    
    
    358Amortization of net loss
    
    
    119
    
    
    
    
    
    
    
    358
    
    
    
    Net periodic pension cost
    
    $
    728
    
    
    $
    427
    
    
    $
    2,185
    
    
    $
    1,276
 Employer Contributions
  Note 7. Guarantees
 Warranty
   8




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(in thousands)Balance at December 31, 2008
    
    $
    10,184Accruals related to warranties (including changes in
estimates)
    
    
    4,588Settlements made (in cash or in kind)
    
    
    (5,244
    )Balance at September 30, 2009
    
    $
    9,528
 Note 8. Business Acquisitions
 Acquisition of EG Technology, Inc.
  Acquisition of Auspice Corporation
  Cash Paid For Acquisitions
  2009 Cash Paid for Acquisitions:
    2008 Cash Paid for Acquisitions:
   9




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Note 9. Restructuring
  (in thousands)Balance as of December 31, 2008
    
    $
    545Q1 2009 payments
    
    
    (396
    )Q1 2009 adjustments to accrual
    
    
    41Q2 2009 payments
    
    
    ( 192
    )Q2 2009 adjustments to accrual
    
    
    86Q3 2009 payments
    
    
    (84
    )Balance as of September 30, 2009
    
    $
    0
  (in thousands)Balance as of December 31, 2008
    
    $
    494Q1 2009 payments
    
    
    (93
    )Q1 2009 adjustments to accrual
    
    
    72Q2 2009 payments
    
    
    (93
    )Q2 2009 adjustments to accrual
    
    
    73Q3 2009 payments
    
    
    (93
    )Q3 2009 adjustments to accrual
    
    
    73Balance as of September 30, 2009
    
    $
    433
  (in thousands)Balance as of May 2009
    
    $
    212Q2 2009 payments
    
    
    (74
    )Q3 2009 payments
    
    
    (48
    )Balance as of September 30, 2009
    
    $
    90
 Note 10. Inventories
  September 30,
    
    
    December 31,2009
    
    
    2008Raw material
    
    $
    17,939
    
    
    $
    19,247Work in process
    
    
    3,861
    
    
    
    4,814Finished goods
    
    
    78,224
    
    
    
    105,691Total net inventories
    
    $
    100,024
    
    
    $
    129,752
 10




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Note 11. Property, Plant and Equipment
  September 30,
    
    
    December 31,2009
    
    
    2008Land
    
    $
    2,612
    
    
    $
    2,612Building and leasehold improvements
    
    
    22,271
    
    
    
    20,048Machinery and equipment
    
    
    135,758
    
    
    
    136,857160,641
    
    
    
    159,517Less: Accumulated depreciation
    
    
    (102,302
    )
    
    
    (100,313
    )Total property, plant and equipment, net
    
    $
    58,339
    
    
    $
    59,204
 Note 12. Long-Term Obligations
  September 30,
    
    
    December 31,2009
    
    
    20082.00% convertible senior notes due 2026 (net of discount of $52,630 in 2009 and
$64,267 in 2008)
    
    $
    208,420
    
    
    $
    211,7332.00% Pennsylvania Industrial Development Authority debt, net of current portion
    
    
    13
    
    
    
    137Total long-term debt
    
    
    208,433
    
    
    
    211,870Other long-term liabilities:Deferred compensation
    
    $
    5,580
    
    
    $
    4,896Accrued warranty
    
    
    4,236
    
    
    
    4,532Deferred revenue
    
    
    2,554
    
    
    
    2,671Landlord funded leasehold improvements
    
    
    1,012
    
    
    
    1,308Other noncurrent liabilities
    
    
    1,919
    
    
    
    1,936Total other long-term liabilities
    
    $
    15,301
    
    
    $
    15,343
     11




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##### Table of Contents



Note 13. Comprehensive Income
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2009
    
    2008
    
    2009
    
    2008Net income
    
    $
    21,699
    
    
    $
    22,434
    
    
    $
    57,490
    
    
    $
    34,092Changes in the following equity accounts:Unrealized (loss)/gain on marketable
securities
    
    
    101
    
    
    
    (195
    )
    
    
    214
    
    
    
    (149
    )Comprehensive income
    
    $
    21,800
    
    
    $
    22,239
    
    
    $
    57,704
    
    
    $
    33,943
 Note 14. Segment Information
   Broadband Communications Systems
 Access, Transport & Supplies
 Media & Communications Systems
 12




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##### Table of Contents



BCS
    
    ATS
    
    MCS
    
    TotalThree Months Ended September 30,
2009Net sales
    
    $
    211,288
    
    
    $
    45,488
    
    
    $
    18,996
    
    
    $
    275,772Gross margin
    
    
    94,317
    
    
    
    10,650
    
    
    
    10,506
    
    
    
    115,473Amortization of intangible assets
    
    
    18
    
    
    
    5,654
    
    
    
    3,609
    
    
    
    9,281Three Months Ended September 30,
2008Net sales
    
    $
    217,729
    
    
    $
    62,100
    
    
    
    17,722
    
    
    $
    297,551Gross margin
    
    
    79,278
    
    
    
    16,624
    
    
    
    10,232
    
    
    
    106,134Amortization of intangible assets
    
    
    
    
    
    
    5,654
    
    
    
    3,492
    
    
    
    9,146Nine Months Ended September 30, 2009Net sales
    
    $
    617,188
    
    
    $
    131,946
    
    
    $
    58,677
    
    
    $
    807,811Gross margin
    
    
    265,952
    
    
    
    29,733
    
    
    
    32,578
    
    
    
    328,263Amortization of intangible assets
    
    
    18
    
    
    
    16,962
    
    
    
    10,827
    
    
    
    27,807Nine Months Ended September 30, 2008Net sales
    
    $
    597,777
    
    
    $
    211,961
    
    
    $
    42,429
    
    
    $
    852,167Gross margin
    
    
    198,756
    
    
    
    62,370
    
    
    
    23,140
    
    
    
    284,266Amortization of intangible assets
    
    
    
    
    
    
    19,118
    
    
    
    15,736
    
    
    
    34,854
  BCS
    
    ATS
    
    MCS
    
    TotalSeptember 30, 2009Goodwill
    
    $
    154,314
    
    
    $
    37,738
    
    
    $
    42,364
    
    
    $
    234,416Intangible assets, net
    
    
    1,792
    
    
    
    121,422
    
    
    
    78,137
    
    
    
    201,351December 31, 2008Goodwill
    
    $
    150,569
    
    
    $
    38,366
    
    
    $
    42,749
    
    
    $
    231,684Intangible assets, net
    
    
    
    
    
    
    138,384
    
    
    
    88,964
    
    
    
    227,348
 Note 15. Sales Information
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2009
    
    2008
    
    2009
    
    2008Comcast
    
    $
    101,975
    
    
    $
    100,920
    
    
    $
    263,843
    
    
    $
    181,872% of sales
    
    
    37.0
    %
    
    
    33.9
    %
    
    
    32.7
    %
    
    
    21.3
    %Time Warner Cable
    
    $
    45,992
    
    
    $
    43,862
    
    
    $
    147,959
    
    
    $
    190,081% of sales
    
    
    16.7
    %
    
    
    14.7
    %
    
    
    18.3
    %
    
    
    22.3
    %
 13




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Note 16. Earnings Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Basic:Net income
    
    $
    21,699
    
    
    $
    22,434
    
    
    $
    57,490
    
    
    $
    34,092Weighted average shares outstanding
    
    
    125,326
    
    
    
    122,922
    
    
    
    124,381
    
    
    
    125,466Basic earnings per share
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.46
    
    
    $
    0.27Diluted:Net income
    
    $
    21,699
    
    
    $
    22,434
    
    
    $
    57,490
    
    
    $
    34,092Weighted average shares outstanding
    
    
    125,326
    
    
    
    122,922
    
    
    
    124,381
    
    
    
    125,466Net effect of dilutive equity
awards
    
    
    4,369
    
    
    
    2,498
    
    
    
    3,535
    
    
    
    1,783Total
    
    
    129,695
    
    
    
    125,420
    
    
    
    127,916
    
    
    
    127,249Diluted earnings per share
    
    $
    0.17
    
    
    $
    0.18
    
    
    $
    0.45
    
    
    $
    0.27
   14




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##### Table of Contents



Note 17. Income Taxes
  Nine Months Ended September 30,2009
    
    
    2008Income
    
    
    Income
    
    
    
    
    
    
    Income
    
    
    IncomeBefore
    
    
    Tax
    
    
    Effective
    
    
    Before
    
    
    Tax
    
    
    EffectiveTax
    
    
    Expense
    
    
    Tax Rate
    
    
    Tax
    
    
    Expense
    
    
    Tax RateNon-Discrete Items
    
    $
    85,191
    
    
    $
    29,016
    
    
    
    34.1
    %
    
    $
    51,643
    
    
    $
    19,081
    
    
    
    36.9
    %Discrete Accounting Events
    
    
    4,152
    
    
    
    1,383
    
    
    
    33.3
    %
    
    
    
    
    
    
    
    
    
    
    Discrete Tax Events -
Valuation Allowances /
Uncertain tax positions
    
    
    
    
    
    
    1,454
    
    
    
    
    
    
    
    
    
    
    
    (1,530
    )Total
    
    $
    89,343
    
    
    $
    31,853
    
    
    
    35.7
    %
    
    $
    51,643
    
    
    $
    17,551
    
    
    
    34.0
    %
 
    
    In the third quarter of 2009, the Company reported a discrete income tax benefit of $0.1
million arising predominately from U.S. Federal return-to-provision adjustments for the
2008 corporate income tax return. In the second quarter of 2009, there was no tax or
accounting discrete event. 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 33.3%. Additionally,
during the first quarter, the Company identified $1.5 million of discrete income tax
expense relating primarily to adjustments of valuation allowances.
 
    
    In the third quarter of 2008, the Company reported $1.5 million of discrete income tax
benefit, mostly attributable to U.S. Federal return-to-provision adjustments for the 2007
corporate income tax return. There was no discrete accounting event during the first nine
months of 2008.
  Note 18. Contingencies
     15




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Note 19. Subsequent Events
   16




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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
   
    
    Broadband Communications Systems (BCS)
 
    
    Access, Transport & 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 decreased only slightly (from
$0.18 in the third quarter 2008 to $0.17 in the third quarter 2009),
despite a 7% decline in sales.
 
    
    Gross margin percentage increased 6.2 percentage points to 41.9% in the third quarter
2009 as compared to the period in 2008, reflecting a stronger product mix including notably
higher sales of our higher margin CMTS product line.
 
    
    We ended the third quarter 2009 with $576.7 million of cash resources which includes
$561.7 of cash, cash equivalents, and short-term investments and $15.0 million of long-term
U.S. treasury notes that mature in Q4 2010. We generated approximately $63.1 million of
cash from operating activities in the third quarter and $171.2 million during the first
nine months of 2009.
 17




---



##### Table of Contents




    
    We used $10.6 million of cash in the first quarter of 2009 to retire $15.0 million of
the 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 in the
first quarter as a result of the retirement.
 
    
    We ended the third quarter of 2009 with an order backlog of approximately $169 million
and a book-to-bill ratio of 1.01. Both order backlog and book-to-bill are up moderately
compared to the third quarter of 2008.
 Product Line Highlights
 
    
    Broadband Communications SystemsExpanded Video Capability
 Through two recent acquisitions ARRIS has expanded its expertise in video processing and
multimedia video delivery systems for delivery of programming from multiple sources to a
variety of consumer devices. The acquired expertise and talent will accelerate the
introduction of next generation IP based consumer video products and services. The two
acquisitions are:
 o
    
    The purchase of the assets, including the video processing intellectual
property, of EG Technologies which includes a portfolio of encoding, transcoding
and multiplexing products.
 o
    
    On October 1, 2009, the purchase of the assets, including the
intellectual property, of Digeo, Inc. The assets include an extensive patent
portfolio in digital video recording, home networking, e-commerce and multimedia
technologies, as well as the Moxi® line of home video delivery products.
 CMTS
 o
    
    Downstream port shipments reached a record level of 33,955 in the third
quarter of 2009, and were 90,476 through the first nine months of 2009.
 o
    
    Operators continue to focus on deploying DOCSIS 3.0 technology in order
to increase overall capacity as well as compete aggressively with higher speed
service tiers. The ARRIS solution has been adopted broadly across the industry,
with strong domestic US shipments and increased business internationally in CALA,
Asia, and Europe.
 o
    
    Continued improvement in gross margins resulting from both customer and
product mix (increased CMTS shipments).
 o
    
    The first in-service deployment of a DOCSIS 3.0 Upstream Channel
Bonding service with JCN in Japan
 o
    
    Achieved #1 CMTS world-wide market share for the first time in the
second quarter of 2009.
 CPE
 o
    
    Approximately 1.2 million and 3.6 million EMTAs were shipped in the
third quarter and first nine months of 2009, respectively, which was down 21% and
18% from the third quarter and first nine months of 2008, respectively, a result of
overall VoIP net subscriber additions leveling off. We have retained number one
market share for EMTAs for 17 consecutive quarters.
 o
    
    We increased shipments of Multi-line and Wireless Gateways in the third
quarter of 2009.
 o
    
    DOCSIS 3.0 CPE shipments increased substantially in third quarter 2009.
We expect a continuing transition from deployment of DOCSIS 2.0 to DOCSIS 3.0 CPE
throughout the remainder of 2009.
 
    
    Access, Transport & Supplies
 o
    
    Business continues to be impacted by macro economic factors, which
resulted in lower sales year over year with a small sequential gain over the first
quarter of 2009.
 o
    
    DOCSIS 3.0 bandwidth efficiency improvements allow for network
investments to be delayed.
 o
    
    CORWave multi-wavelength optical transport platforms are continuing to
gain traction with both domestic and international customers. These platforms will
allow operators to multiply network capacity in support of narrowcast services at a
fraction of traditional infrastructure upgrade costs. We expect these platforms to
become more widely adopted as bandwidth demands continue to increase.o
    
    Product mix and lower volumes negatively impacted margins.
 18




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##### Table of Contents




    
    Media & Communications Systems
 o
    
    Completed WorkAssureTM deployments for several Time Warner Cable regions.o
    
    Demand for Assurance products continue to be strong based on:
 §
    
    DOCSIS 3.0 rollouts§
    
    A continued focus on Opex management and control
 o
    
    Began ConvergeMedia backoffice and server deployments in several US
MSOs including Charter.
 Significant Customers
  Three Months Ended September 30
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Comcast
    
    $
    101,975
    
    
    $
    100,920
    
    
    $
    263,843
    
    
    $
    181,872% of sales
    
    
    37.0
    %
    
    
    33.9
    %
    
    
    32.7
    %
    
    
    21.3
    %Time Warner Cable
    
    $
    45,992
    
    
    $
    43,862
    
    
    $
    147,959
    
    
    $
    190,081% of sales
    
    
    16.7
    %
    
    
    14.7
    %
    
    
    18.3
    %
    
    
    22.3
    %
 Comparison of Operations for the Three and Nine Months Ended September 30, 2009 and 2008
 Net Sales
  Net Sales
    
    
    Increase (Decrease) Between 2009 and 2008For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %
    
    
    $
    
    
    %Business Segment:BCS
    
    $
    211,288
    
    
    $
    217,729
    
    
    $
    617,188
    
    
    $
    597,777
    
    
    $
    (6,441
    )
    
    
    (3.0
    )
    
    $
    19,411
    
    
    
    3.2ATS
    
    
    45,488
    
    
    
    62,100
    
    
    
    131,946
    
    
    
    211,961
    
    
    
    (16,612
    )
    
    
    (26.8
    )
    
    
    (80,015
    )
    
    
    (37.7
    )MCS
    
    
    18,996
    
    
    
    17,722
    
    
    
    58,677
    
    
    
    42,429
    
    
    
    1,274
    
    
    
    7.2
    
    
    
    16,248
    
    
    
    38.3Total sales
    
    $
    275,772
    
    
    $
    297,551
    
    
    $
    807,811
    
    
    $
    852,167
    
    
    $
    (21,779
    )
    
    
    (7.3
    )
    
    $
    (44,356
    )
    
    
    (5.2
    )
  Net Sales
    
    
    Increase (Decrease) Between 2009 and 2008For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %
    
    
    $
    
    
    %Domestic
    
    $
    196,729
    
    
    $
    220,105
    
    
    $
    587,604
    
    
    $
    602,967
    
    
    $
    (23,376
    )
    
    
    (10.6
    )
    
    $
    (15,363
    )
    
    
    (2.5
    )International
    
    
    79,043
    
    
    
    77,446
    
    
    
    220,207
    
    
    
    249,200
    
    
    
    1,597
    
    
    
    2.1
    
    
    
    (28,993
    )
    
    
    (11.6
    )Total sales
    
    $
    275,772
    
    
    $
    297,551
    
    
    $
    807,811
    
    
    $
    852,167
    
    
    $
    (21,779
    )
    
    
    (7.3
    )
    
    $
    (44,356
    )
    
    
    (5.2
    )
 19




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##### Table of Contents



Broadband Communications Systems (BCS) Net Sales 2009 vs. 2008
  
    
    In the third quarter of 2009, we had lower sales of EMTAs as compared to the third
quarter of 2008.
 
    
    The decline in EMTAs was partially offset by higher sales of CMTSs to several customers
including Time Warner Cable and Cablevision Mexico.
  
    
    Higher sales to multiple customers of our CMTS products.
 
    
    The increase in our CMTS product sales was partially offset by a decrease in EMTA sales
to several customers.
 Access, Transport and Supplies (ATS) Net Sales 2009 vs. 2008
  
    
    The decrease was primarily the result of the reduced spending by cable operators as a
result of the slowdown of the US economy, and in particular new housing construction that
drives capital equipment spending for plant upgrades and rebuilds by cable operators.
 
    
    Operators were also able to delay node segmentations by taking advantage of bandwidth
efficiency improvements brought about by the implementation of DOCSIS 3.0.
 Media & Communications Systems (MCS) Net Sales 2009 vs. 2008
  Gross Margin
  Gross Margin $
    
    
    Increase (Decrease) Between 2009 and 2008For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %
    
    
    $
    
    
    %Business Segment:BCS
    
    $
    94,317
    
    
    $
    79,278
    
    
    $
    265,952
    
    
    $
    198,756
    
    
    $
    15,039
    
    
    
    19.0
    
    
    $
    67,196
    
    
    
    33.8ATS
    
    
    10,650
    
    
    
    16,624
    
    
    
    29,733
    
    
    
    62,370
    
    
    
    (5,974
    )
    
    
    (35.9
    )
    
    
    (32,637
    )
    
    
    (52.3
    )MCS
    
    
    10,506
    
    
    
    10,232
    
    
    
    32,578
    
    
    
    23,140
    
    
    
    274
    
    
    
    2.7
    
    
    
    9,438
    
    
    
    40.8Total
    
    $
    115,473
    
    
    $
    106,134
    
    
    $
    328,263
    
    
    $
    284,266
    
    
    $
    9,339
    
    
    
    8.8
    
    
    $
    43,997
    
    
    
    15.5
 20




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##### Table of Contents



Gross Margin %
    
    Increase (Decrease) Between 2009 and 2008For the Three Months
    
    For the Nine Months
    
    For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,
    
    Ended September 30
    
    Ended September 302009
    
    2008
    
    2009
    
    2008
    
    Percentage PointsBusiness Segment:BCS
    
    
    44.6
    %
    
    
    36.4
    %
    
    
    43.1
    %
    
    
    33.2
    %
    
    
    8.2
    
    
    
    9.9ATS
    
    
    23.4
    %
    
    
    26.8
    %
    
    
    22.5
    %
    
    
    29.4
    %
    
    
    (3.4
    )
    
    
    (6.9
    )MCS
    
    
    55.3
    %
    
    
    57.7
    %
    
    
    55.5
    %
    
    
    54.5
    %
    
    
    (2.4
    )
    
    
    1.0Total
    
    
    41.9
    %
    
    
    35.7
    %
    
    
    40.6
    %
    
    
    33.4
    %
    
    
    6.2
    
    
    
    7.2
 Broadband Communications Systems Gross Margin 2009 vs. 2008
  
    
    The increase in gross margin dollars was primarily the result of higher sales due to the
successful introduction of our DOCSIS 3.0 CMTS in the second half of last year and product
mix.
 
    
    The increase in gross margin percentage primarily reflects product mix, as we sold more
CMTS products and fewer EMTA products in the three and nine month periods in 2009 as
compared to the same periods in 2008. CMTS products carry 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 in
both the three and nine month periods in 2009.
 
    
    The decrease in gross margin percentage was primarily the result of both a change in
product mix and a decrease in sales. In the three and nine month periods in 2009, Access
and Transport sales decreased proportionally more than the Supplies sales decreased. In
addition, our gross margin was negatively impacted by the decline in the overall volume
resulting in a higher manufacturing cost per unit due to the allocation of fixed factory
overhead costs as well as lower gross margin on certain headend optics gear.
 Media & Communications Systems Gross Margin 2009 vs. 2008
  
    
    Both the decrease during the three months ended and the increase during the nine months
ended are primarily a result of product mix.
 
    
    Performance in this segment is variable as revenue recognition is significantly tied to
customer acceptances associated with multiple month and quarter projects, and non linear
orders for licenses and hardware.
 21




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##### Table of Contents



Operating Expenses
  Operating Expenses
    
    
    Increase (Decrease) Between 2009 and 2008For the Three Months
    
    
    For the Nine Months
    
    
    For the Three Months
    
    
    For the Nine MonthsEnded September 30,
    
    
    Ended September 30,
    
    
    Ended September 30
    
    
    Ended September 302009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %
    
    
    $
    
    
    %SG&A
    
    $
    36,311
    
    
    $
    33,012
    
    
    $
    110,782
    
    
    $
    107,040
    
    
    $
    3,299
    
    
    
    10.0
    
    
    $
    3,742
    
    
    
    3.5Research &
development
    
    
    30,909
    
    
    
    27,473
    
    
    
    89,447
    
    
    
    83,257
    
    
    
    3,436
    
    
    
    12.5
    
    
    
    6,190
    
    
    
    7.4Restructuring Charges
    
    
    73
    
    
    
    202
    
    
    
    785
    
    
    
    782
    
    
    
    (129
    )
    
    
    (63.9
    )
    
    
    3
    
    
    
    0.4Amortization of
intangibles
    
    
    9,281
    
    
    
    9,146
    
    
    
    27,807
    
    
    
    34,854
    
    
    
    135
    
    
    
    1.5
    
    
    
    (7,047
    )
    
    
    (20.2
    )Total
    
    $
    76,574
    
    
    $
    69,833
    
    
    $
    228,821
    
    
    $
    225,933
    
    
    $
    6,741
    
    
    
    9.7
    
    
    $
    2,888
    
    
    
    1.3
 Selling, General, and Administrative, or SG&A, Expenses
  
    
    Higher variable compensation costs, in particular sales commissions and incentive
accruals.
 
    
    An increase in stock compensation expense of $0.9 million as a result of the annual
grant in March of 2009.
 
    
    An increase in legal expenses of $0.8 million as a result of increased costs associated
with various patent and other litigation matters (see Legal Proceedings).
  
    
    Higher variable compensation costs, in particular incentive accruals.
 
    
    An increase in stock compensation expense of $2.1 million as a result of the annual stock
grant in March of 2009.
 
    
    An increase in legal expenses of $3.7 as a result of increased costs including
settlement costs associated with various patent and other litigation matters (see Legal
Proceedings).
 
    
    The increases were partially offset by decreases in travel and entertainment and
professional fees.
 Research & Development Expenses
  
    
    Higher compensation costs, fringe benefits and incentive accruals.
 
    
    We have incrementally invested year over year in research and development, a trend which
we anticipate will continue.
 
    
    We anticipate an increase in research and development expense of approximately $3
million per quarter associated with the acquisitions of EGT and Digeo.
 Restructuring Charges
  Amortization of Intangible Assets
  22




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Goodwill Impairment
  Other Expense (Income)
 Interest Expense
  Loss (Gain) in Foreign Currency
  Interest Income
  Other (Income)/Expense
  Income Taxes
  Financial Liquidity and Capital Resources
 Overview
  23




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##### Table of Contents



Liquidity & Capital Resources Data
 Nine Months Ended September 30,2009
    
    2008(in thousands, except DSO and turns)Key Working Capital ItemsCash provided by operating activities
    
    $
    171,204
    
    
    $
    86,532Cash, cash equivalents, and
short-term investments
    
    $
    561,712
    
    
    $
    329,558Long-term U.S. treasury notes
    
    $
    15,041
    
    
    
    Total cash, cash equivalents,
short-term investments and
long-term U.S. treasury notes
    
    $
    576,753
    
    
    $
    329,558Accounts receivable, net
    
    $
    119,125
    
    
    $
    180,367Days Sales Outstanding (DSOs)
    
    
    47
    
    
    
    56Inventory, net
    
    $
    100,024
    
    
    $
    139,598Inventory turns
    
    
    5.6
    
    
    
    5.6Convertible notes at face value
    
    $
    261,050
    
    
    $
    276,000Convertible notes at book value
    
    $
    208,420
    
    
    $
    208,969Capital Expenditures
    
    $
    14,327
    
    
    $
    16,444
 Accounts Receivable & Inventory
    Summary of Current Liquidity Position and Potential for Future Capital Raising
  Commitments
  24




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Cash Flow
  For the Nine Months EndedSeptember 302009
    
    2008Cash provided by operating activities
    
    $
    171,204
    
    
    $
    86,532Cash provided by (used in) investing activities
    
    
    (119,678
    )
    
    
    9,228Cash provided by (used in) financing activities
    
    
    375
    
    
    
    (113,570
    )Net increase (decrease) in cash
    
    $
    51,901
    
    
    $
    (17,810
    )
 Operating Activities:
  For the Nine Months EndedSeptember 30,2009
    
    2008Net income
    
    $
    57,490
    
    
    $
    34,092Adjustments to reconcile net income to
cash provided by operating activities
    
    
    70,748
    
    
    
    70,603Net income including adjustments
    
    
    128,238
    
    
    
    104,695Decrease/(Increase) in accounts receivable
    
    
    40,801
    
    
    
    (12,103
    )Decrease/ (Increase) in inventory
    
    
    30,449
    
    
    
    (6,028
    )(Decrease) /Increase in accounts payable
and accrued liabilities
    
    
    (32,620
    )
    
    
    9,743All other  net
    
    
    4,336
    
    
    
    (9,775
    )Cash provided by operating activities
    
    $
    171,204
    
    
    $
    86,532
      25




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Investing Activities:
  Nine Months EndedSeptember 302009
    
    2008Capital expenditures
    
    $
    (14,327
    )
    
    $
    (16,444
    )Cash paid for acquisitions
    
    
    (8,130
    )
    
    
    (10,066
    )Cash proceeds from sale of property, plant & equipment
    
    
    208
    
    
    
    250Purchases of investments
    
    
    (151,845
    )
    
    
    (86,998
    )Disposals of investments
    
    
    54,416
    
    
    
    122,486Cash provided by (used in) investing activities
    
    $
    (119,678
    )
    
    $
    9,228
 Capital Expenditures
  Cash Paid for Acquisitions
  Purchases and Sales of Investments
  Financing Activities:
  For the Nine Months EndedSeptember 302009
    
    2008Payment of debt and capital lease obligations
    
    $
    (10,677
    )
    
    $
    (35,518
    )Repurchase of common stock
    
    
    
    
    
    
    (75,960
    )Excess tax benefits from stock-based compensation plans
    
    
    2,027
    
    
    
    24Employer repurchase of shares to satisfy minimum tax
withholdings
    
    
    (2,180
    )
    
    
    (1,035
    )Fees and proceeds from issuance of common stock, net
    
    
    11,205
    
    
    
    (1,081
    )Cash provided by (used in) financing activities
    
    $
    375
    
    
    $
    (113,570
    )
 Payment of Debt and Capital Lease Obligation
  Repurchase of Common Stock
  26




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Employer Repurchase of Shares to Satisfy Minimum Tax Withholdings
  Excess Tax Benefits from Stock-Based Compensation Plans
  Fees and Proceeds from Issuance of Common Stock, Net
  Interest Rates
  Foreign Currency
   Financial Instruments
   Cash, Short-Term Investments and Available-For-Sale Investments
  27




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Capital Expenditures
  Critical Accounting Estimates
  Forward-Looking Statements
  28




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Item 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
      29




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Item 4.
    
    CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting
 30




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PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
          31




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32




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##### 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.
  33




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##### 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.
  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.
  34




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##### Table of Contents



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.
  Our success depends in large part on our ability to attract and retain qualified personnel in all
facets of our operations.
  35




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##### Table of Contents



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.
  We face risks relating to currency fluctuations and currency exchange.
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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.
  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.
  37




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W e hav e th e abilit y t o issu e preferre d share s withou t stockholde r approval .
  
 Item 6.
    
    EXHIBITS
 Exhibit No.
    
    Description of Exhibit31.1
    
    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
 38




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SIGNATURES
  ARRIS GROUP, INC./s/ David B. PottsDavid B. PottsExecutive Vice President, Chief
Financial Officer, Chief Accounting
Officer, and Chief Information Officer  39