##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 For the quarter ended March 31, 2010
 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




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##### 



ARRIS GROUP, INC.
FORM 10-Q
For the Three Months Ended March 31, 2010
 INDEX
 PagePart I. Financial InformationItem 1. Condensed Financial Statements (unaudited)a) Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
    
    
    2b) Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and
2009
    
    
    3c) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and
2009
    
    
    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 About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34Part II. Other InformationItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    36Item 6. Exhibits
    
    
    41Signatures
    
    
    42EX-31.1EX-31.2EX-32.1EX-32.2




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PART I. FINANCIAL INFORMATION
 
 Item 1. CONDENSED FINANCIAL STATEMENTS
 
 ARRIS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data) (unaudited)
 March 31,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    500,044
    
    
    $
    500,565Short-term investments, at fair value
    
    
    161,012
    
    
    
    125,031Total cash, cash equivalents and short-term investments
    
    
    661,056
    
    
    
    625,596Restricted cash
    
    
    4,476
    
    
    
    4,475Accounts receivable (net of allowances for doubtful
accounts of $2,549 in 2010 and $2,168 in 2009)
    
    
    139,207
    
    
    
    143,708Other receivables
    
    
    3,057
    
    
    
    6,113Inventories (net of reserves of $21,639 in 2010 and $22,151 in
2009)
    
    
    79,907
    
    
    
    95,851Prepaids
    
    
    10,546
    
    
    
    11,675Current deferred income tax assets
    
    
    37,324
    
    
    
    35,994Other current assets
    
    
    14,328
    
    
    
    18,896Total current assets
    
    
    949,901
    
    
    
    942,308Property, plant and equipment (net of accumulated
depreciation of $111,962 in 2010 and $106,744 in 2009)
    
    
    56,223
    
    
    
    57,195Goodwill
    
    
    235,256
    
    
    
    235,388Intangible assets (net of accumulated amortization of $199,744 in
2010 and $190,722 in 2009)
    
    
    195,551
    
    
    
    204,572Investments
    
    
    25,435
    
    
    
    20,618Noncurrent deferred income tax assets
    
    
    6,298
    
    
    
    6,759Other assets
    
    
    8,050
    
    
    
    8,776$
    1,476,714
    
    
    $
    1,475,616LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    44,523
    
    
    $
    53,979Accrued compensation, benefits and related taxes
    
    
    23,639
    
    
    
    36,936Accrued warranty
    
    
    3,632
    
    
    
    4,265Deferred revenue
    
    
    53,024
    
    
    
    47,044Current portion of long-term debt
    
    
    87
    
    
    
    124Other accrued liabilities
    
    
    42,978
    
    
    
    46,203Total current liabilities
    
    
    167,883
    
    
    
    188,551Long-term debt, net of current portion (net of discount of
$46,919 in 2010 and $49,802 in 2009
    
    
    214,131
    
    
    
    211,248Accrued pension
    
    
    16,733
    
    
    
    16,408Noncurrent income taxes payable
    
    
    16,248
    
    
    
    14,815Noncurrent deferred income tax liabilities
    
    
    33,577
    
    
    
    37,204Other long-term liabilities
    
    
    16,871
    
    
    
    16,021Total liabilities
    
    
    465,443
    
    
    
    484,247Stockholders 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; 126.7 million and 125.6 million shares
issued and outstanding in 2010 and 2009, respectively
    
    
    1,402
    
    
    
    1,388Capital in excess of par value
    
    
    1,187,854
    
    
    
    1,183,872Treasury stock at cost, 13.3 million shares in 2010 and 13
million shares in 2009
    
    
    (79,019
    )
    
    
    (75,960
    )Accumulated deficit
    
    
    (92,743
    )
    
    
    (111,734
    )Unrealized gain on marketable securities
    
    
    2
    
    
    
    28Unfunded pension liability, including income tax impact of
$1,169 in 2010 and 2009
    
    
    (6,041
    )
    
    
    (6,041
    )Cumulative translation adjustments
    
    
    (184
    )
    
    
    (184
    )Total stockholders equity
    
    
    1,011,271
    
    
    
    991,369$
    1,476,714
    
    
    $
    1,475,616
  2




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ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS  in thousands, except per share data and percentages) (unaudited)
 Three Months Ended March 31,2010
    
    
    2009Net sales:Products
    
    $
    240,141
    
    
    $
    232,934Services
    
    
    26,556
    
    
    
    20,584Total net sales
    
    
    266,697
    
    
    
    253,518Cost of sales:Products
    
    
    139,820
    
    
    
    146,043Services
    
    
    14,366
    
    
    
    11,965Total cost of sales
    
    
    154,186
    
    
    
    158,008Gross margin
    
    
    112,511
    
    
    
    95,510Operating expenses:Selling, general, and administrative expenses
    
    
    35,117
    
    
    
    35,343Research and development expenses
    
    
    34,365
    
    
    
    28,395Restructuring charges
    
    
    52
    
    
    
    120Amortization of intangible assets
    
    
    9,022
    
    
    
    9,263Total operating expenses
    
    
    78,556
    
    
    
    73,121Operating income
    
    
    33,955
    
    
    
    22,389Other expense (income):Interest expense
    
    
    4,430
    
    
    
    4,487Loss (gain) on investments
    
    
    (146
    )
    
    
    297Loss (gain) on foreign currency
    
    
    (268
    )
    
    
    958Interest income
    
    
    (374
    )
    
    
    (385
    )Gain on debt retirement
    
    
    
    
    
    
    (4,152
    )Other income, net
    
    
    (42
    )
    
    
    (102
    )Income from continuing operations before income taxes
    
    
    30,355
    
    
    
    21,286Income tax expense
    
    
    11,364
    
    
    
    8,404Net income
    
    $
    18,991
    
    
    $
    12,882Net income per common share:Basic
    
    $
    0.15
    
    
    $
    0.10Diluted
    
    $
    0.15
    
    
    $
    0.10Weighted average common shares:Basic
    
    
    125,967
    
    
    
    123,281Diluted
    
    
    129,975
    
    
    
    124,920
  3




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ARRIS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
 Three Months Ended March 31,2010
    
    
    2009Operating activities:Net income
    
    $
    18,991
    
    
    $
    12,882Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    5,359
    
    
    
    4,827Amortization of intangible assets
    
    
    9,021
    
    
    
    9,263Stock compensation expense
    
    
    4,521
    
    
    
    3,401Deferred income tax provision (benefit)
    
    
    (4,495
    )
    
    
    4,689Amortization of deferred finance fees
    
    
    180
    
    
    
    189Provision for doubtful accounts
    
    
    295
    
    
    
    6Loss (gain) on investments
    
    
    (146
    )
    
    
    297Loss on disposal of fixed assets
    
    
    11
    
    
    
    Excess income tax benefits from stock-based compensation plans
    
    
    (2,486
    )
    
    
    (431
    )Non-cash interest expense
    
    
    2,883
    
    
    
    2,818Gain on debt retirement
    
    
    
    
    
    
    (4,152
    )Changes in operating assets and liabilities, net of effect of
acquisitions and dispositions:Accounts receivable
    
    
    4,206
    
    
    
    3,645Other receivables
    
    
    2,420
    
    
    
    (2,032
    )Inventory
    
    
    15,944
    
    
    
    8,978Income taxes payable/recoverable
    
    
    9,167
    
    
    
    (1,123
    )Accounts payable and accrued liabilities
    
    
    (24,935
    )
    
    
    (35,789
    )Prepaids and other, net
    
    
    7,274
    
    
    
    6,377Net cash provided by operating activities
    
    
    48,210
    
    
    
    13,845Investing activities:Purchases of property, plant and equipment
    
    
    (4,654
    )
    
    
    (5,066
    )Cash paid for acquisition, net of cash acquired
    
    
    
    
    
    
    (200
    )Cash proceeds from sale of property, plant and equipment
    
    
    240
    
    
    
    Purchases of short-term investments
    
    
    (42,436
    )
    
    
    (23,870
    )Sales of short-term investments
    
    
    2,100
    
    
    
    15,806Net cash used in investing activities
    
    
    (44,750
    )
    
    
    (13,330
    )Financing activities:Payment of debt and capital lease obligations
    
    
    (37
    )
    
    
    (10,592
    )Repurchase of common stock
    
    
    (3,059
    )
    
    
    Excess income tax benefits from stock-based compensation plans
    
    
    2,486
    
    
    
    431Repurchase of shares to satisfy tax withholdings
    
    
    (5,993
    )
    
    
    (1,807
    )Proceeds from issuance of common stock, net
    
    
    2,622
    
    
    
    497Net cash used in financing activities
    
    
    (3,981
    )
    
    
    (11,471
    )Net decrease in cash and cash equivalents
    
    
    (521
    )
    
    
    (10,956
    )Cash and cash equivalents at beginning of period
    
    
    500,565
    
    
    
    409,894Cash and cash equivalents at end of period
    
    $
    500,044
    
    
    $
    398,938
  4




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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 Adopted Accounting Standards
   (i)
    
    provide updated guidance on whether multiple deliverables exist, how
the deliverables in an arrangement should be separated, and how the
consideration should be allocated;(ii)
    
    require an entity to allocate revenue in an arrangement using best
estimated selling prices (BESP) of
deliverables if a vendor does not have vendor-specific objective
evidence of selling price (VSOE) or
third-party evidence of selling price (TPE); and(iii)
    
    eliminate the use of the residual method and require an entity to
allocate revenue using the relative selling price method.
  Note 3. Change in Significant Accounting Policies
  Revenue Recognition
  5




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
    
    When persuasive evidence of an arrangement exists. Contracts and customer purchase
orders are used to determine the existence of an arrangement.
    
    Delivery has occurred. Shipping documents, proof of delivery and customer acceptance
(when applicable) are used to verify delivery.
    
    The fee is fixed or determinable. Pricing is considered fixed and determinable at the
execution of a customer arrangement, based on specific products and quantities to be
delivered at specific prices. This determination includes a review of the payment terms
associated with the transaction and whether the sales price is subject to refund or
adjustment or future discounts.
    
    Collectability is reasonably assured. The Company assesses the ability to collect from
customers based on a number of factors that include information supplied by credit
agencies, analyzing customer accounts, reviewing payment history and consulting bank
references. Should a circumstance arise where a customer is deemed not creditworthy, all
revenue related to the transaction will be deferred until such time that payment is
received and all other criteria to allow the Company to recognize revenue have been met.
  
    
    When undelivered products or services that are essential to the functionality of the
delivered product exist, revenue is deferred until such undelivered products or services
are delivered as the customer would not have full use of the delivered elements.
    
    When required acceptance has not occurred.
    
    When trade-in rights are granted at the time of sale, that portion of the sale is
deferred until the trade-in right is exercised or the right expires. In determining the
deferral amount, management estimates the expected trade-in rate and future value of the
product upon trade-in. These factors are periodically reviewed and updated by management,
and the updates may result in either an increase or decrease in the deferral.
 Equipment 
 Software Sold Without Tangible Equipment 
 6




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Standalone Services 
 Incentives 
 Value Added Resellers
 Multiple Element Arrangements 
  Multiple Element Arrangements Originating Before January 1, 2010
  .
   7




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Multiple Element Arrangements Originating or Materially Modified After January 1, 2010
    8




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Note 4. Investments
  Fair ValueAs of March 31,
    
    
    As of December 31,2010
    
    
    2009Current Assets:Trading securities
    
    $
    2,885
    
    
    $
    4,970Available-for-sale securities
    
    
    158,127
    
    
    
    120,061161,012
    
    
    
    125,031Noncurrent Assets:Available-for-sale securities
    
    
    21,435
    
    
    
    16,618Cost method investments
    
    
    4,000
    
    
    
    4,00025,435
    
    
    
    20,618Total
    
    $
    186,447
    
    
    $
    145,649
    Note 5. Fair Value Measurement
     9




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Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalCurrent investments
    
    $
    60,016
    
    
    
    98,111
    
    
    
    
    
    
    
    158,127Non-current investments
    
    
    2,001
    
    
    
    19,434
    
    
    
    
    
    
    
    21,435Auction rate securities
    
    
    
    
    
    
    
    
    
    
    2,885
    
    
    
    2,885Foreign currency contracts
    
    
    567
    
    
    
    
    
    
    
    
    
    
    
    567Total
    
    $
    62,584
    
    
    
    117,545
    
    
    
    2,885
    
    
    
    183,014
   Level 3Estimated fair value January 1, 2010
    
    $
    4,970First quarter 2010 change in fair value
    
    
    15First quarter 2010 disposal
    
    
    (2,100
    )Estimated fair value March 31, 2010
    
    $
    2,885
   Note 6. Derivative Instruments and Hedging Activities
  10




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Asset Derivatives
    
    Liability DerivativesBalance Sheet Location
    
    Fair Value
    
    Balance Sheet Location
    
    Fair ValueDerivatives Not
Designated as Hedging
Instruments:Foreign exchange contracts
    
    Other current assets
    
    $
    567
    
    
    Other accrued
liabilities
    
    $
    254
  Three Months Ended March 31,Statement of Operations Location
    
    2010
    
    2009Derivatives Not
Designated as Hedging
Instruments:Foreign exchange contracts
    
    Gain on foreign currency
    
    $
    609
    
    
    $
    1,080
 Note 7. Pension Benefits
 Components of Net Periodic Pension Cost
 Three Months Ended March 31,2010
    
    
    2009(in thousands)Service cost
    
    $
    68
    
    
    $
    245Interest cost
    
    
    529
    
    
    
    530Expected return on plan assets
    
    
    (380
    )
    
    
    (281
    )Amortization of prior service cost
    
    
    65
    
    
    
    115Amortization of net loss
    
    
    70
    
    
    
    119Net periodic pension cost
    
    $
    352
    
    
    $
    728
 Employer Contributions
  Note 8. Guarantees
 Warranty
  11




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Balance at December 31, 2009
    
    $
    7,679Accruals related to warranties (including changes in estimates)
    
    
    397Settlements made (in cash or in kind)
    
    
    (1,386
    )Balance at March 31, 2010
    
    $
    6,690
 Note 9. Restructuring Charges
  (in thousands)Balance as of December 31, 2009
    
    $
    1,890Q1 2010 payments
    
    
    (93
    )Q1 2010 adjustments to accrual
    
    
    Balance as of March 31, 2010
    
    $
    1,797
  (in thousands)Balance as of December 31, 2009
    
    $
    53Q1 2010 payments
    
    
    (46
    )Q1 2010 adjustments to accrual
    
    
    8Balance as of March 31, 2010
    
    $
    15
 12




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(in thousands)Balance as of December 31, 2009
    
    $
    835Q1 2010 payments
    
    
    (797
    )Q1 2010 adjustments to accrual
    
    
    44Balance as of March 31, 2010
    
    $
    82
 Note 10. Inventories
  March 31,
    
    
    December 31,2010
    
    
    2009Raw material
    
    
    10,757
    
    
    
    14,665Work in process
    
    
    4,171
    
    
    
    3,480Finished goods
    
    
    64,979
    
    
    
    77,706Total
inventories, net
    
    $
    79,907
    
    
    $
    95,851
 Note 11. Property, Plant and Equipment
  March 31,
    
    
    December 31,2010
    
    
    2009Land
    
    $
    2,612
    
    
    $
    2,612Building and leasehold improvements
    
    
    22,362
    
    
    
    22,304Machinery and equipment
    
    
    143,211
    
    
    
    139,023168,185
    
    
    
    163,939Less: Accumulated depreciation
    
    
    (111,962
    )
    
    
    (106,744
    )Total property, plant and equipment, net
    
    $
    56,223
    
    
    $
    57,195
 13




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Note 12. Long-Term Obligations
  March 31,
    
    
    December 31,2010
    
    
    20092.00% convertible senior notes due 2026 (net of discount
of $46,919 in 2010 and $49,802 in 2009)
    
    $
    214,131
    
    
    $
    211,248Total long-term debt
    
    
    214,131
    
    
    
    211,248Other long-term liabilities:Deferred compensation
    
    
    6,233
    
    
    
    5,673Accrued warranty
    
    
    3,058
    
    
    
    3,413Deferred revenue
    
    
    2,852
    
    
    
    2,969Landlord funded leasehold improvements.
    
    
    842
    
    
    
    900Accrued restructuring
    
    
    1,423
    
    
    
    1,517Accrued rent
    
    
    791
    
    
    
    Other long-term liabilities
    
    
    1,672
    
    
    
    1,549Total other long-term liabilities
    
    $
    16,871
    
    
    $
    16,021
    14




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Note 13. Comprehensive Income
  Three Months Ended March 31,2010
    
    
    2009Net income
    
    $
    18,991
    
    
    $
    12,882Changes in the following equity accounts:Unrealized loss on marketable securities
    
    
    (26
    )
    
    
    (98
    )Comprehensive income
    
    $
    18,965
    
    
    $
    12,784
 Note 14. Segment Information
  Broadband Communications Systems
 Access, Transport & Supplies
 Media & Communications Systems
 15




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BCS
    
    ATS
    
    MCS
    
    TotalQuarter Ended March 31, 2010Net sales
    
    $
    208,653
    
    
    $
    42,243
    
    
    $
    15,801
    
    
    $
    266,697Gross margin
    
    
    94,674
    
    
    
    9,702
    
    
    
    8,135
    
    
    
    112,511Amortization of intangible assets
    
    
    397
    
    
    
    5,259
    
    
    
    3,366
    
    
    
    9,022Quarter Ended March 31, 2009Net sales
    
    $
    194,131
    
    
    $
    42,990
    
    
    $
    16,397
    
    
    $
    253,518Gross margin
    
    
    78,921
    
    
    
    9,268
    
    
    
    7,321
    
    
    
    95,510Amortization of intangible assets
    
    
    
    
    
    
    5,654
    
    
    
    3,609
    
    
    
    9,263
  Note 15. Sales Information
  Three Months EndedMarch 31,2010
    
    
    2009Comcast and affiliates
    
    $
    46,263
    
    
    $
    65,210% of sales
    
    
    17.3
    %
    
    
    25.7
    %Time Warner Cable and affiliates
    
    $
    41,065
    
    
    $
    49,083% of sales
    
    
    15.4
    %
    
    
    19.4
    %
  16




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Note 16. Earnings Per Share
  Three Months EndedMarch 31,2010
    
    
    2009Basic:Net income
    
    $
    18,991
    
    
    $
    12,882Weighted average shares outstanding
    
    
    125,967
    
    
    
    123,281Basic earnings per share
    
    $
    0.15
    
    
    $
    0.10Diluted:Net income
    
    $
    18,991
    
    
    $
    12,882Weighted average shares outstanding
    
    
    125,967
    
    
    
    123,281Net effect of dilutive equity awards
    
    
    4,008
    
    
    
    1,639Total
    
    
    129,975
    
    
    
    124,920Diluted earnings per share
    
    $
    0.15
    
    
    $
    0.10
  Note 17. Income Taxes
  Three Months Ended March 31,2010
    
    
    2009Income
    
    
    Income
    
    
    Effective
    
    
    Income
    
    
    Income
    
    
    EffectiveBefore
    
    
    Tax
    
    
    Tax
    
    
    Before
    
    
    Tax
    
    
    TaxTax
    
    
    Expense
    
    
    Rate
    
    
    Tax
    
    
    Expense
    
    
    RateNon-Discrete Items
    
    $
    30,355
    
    
    $
    10,142
    
    
    
    33.4
    %
    
    $
    17,134
    
    
    $
    5,487
    
    
    
    32.0
    %Discrete Accounting Events
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,152
    
    
    
    1,462
    
    
    
    35.2
    %Discrete Tax Events -
Valuation Allowances /
FIN 48 Reserves/State
DTAs
    
    
    
    
    
    
    1,222
    
    
    
    
    
    
    
    
    
    
    
    1,455Total
    
    $
    30,355
    
    
    $
    11,364
    
    
    
    37.4
    %
    
    $
    21,286
    
    
    $
    8,404
    
    
    
    39.5
    %
 
    
    During the first quarter of 2010, the Company identified $1.2 million of discrete tax
adjustments relating to state deferred tax assets.
    
    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.
 Note 18. Purchases of ARRIS Common Stock
  17




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##### Table of Contents



Note 19. Contingencies
  
 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 debt (which could potentially be
repaid in 2013), 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
 
    
    Revenues of $266.7 million increased $13.2 million or 5.2%, as compared to the first
quarter of 2009, as a result of higher DOCSIS 3.0 CMTS sales. As expected, revenues
declined from the fourth quarter of 2009 as a result of seasonality and accelerated
purchases by certain customers in the fourth quarter of 2009.
 18




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##### Table of Contents




    
    Domestic and international sales were 59.2% and 40.8% of revenues respectively in the
first quarter of 2010 as compared to 73.4% and 26.6% respectively in the first quarter of
2009. The geographic mix changed as a result of lower sales to Comcast and Time Warner
domestically, and higher sales internationally, in particular in Central America and Latin
America.
    
    Gross margin percentage increased 4.5 percentage points year over year to 42.2% in the
first quarter 2010 reflecting higher sales of our DOCSIS3.0 CMTS.
    
    Combined selling, general and administrative and research and development expenses
increased $5.7 million year over year as a result of increased spending on IP video,
particularly as a result of acquisitions in 2009.
    
    GAAP earnings per diluted share increased to $0.15 in the first quarter 2010 as compared
to $0.10 in the first quarter 2009. Non-GAAP earnings per diluted share were $0.24 in the
first quarter of 2010 as compared to $0.18 in the first quarter of 2009. Higher revenues
and gross margin led to the increases. See GAAP to Non-GAAP reconciliations.
    
    We ended the first quarter with an order backlog of approximately $195 million and a
book-to-bill ratio of 1.19. Both order backlog and book-to-bill are up relative to the
first and fourth quarters of 2009.
    
    We ended the first quarter 2010 with $661.1 million of cash and cash equivalents and
short-term investments. We generated approximately $48.2 million of cash from operating
activities in the quarter.
    
    In the quarter we repurchased 250 thousand shares of our common stock at an average
price of $12.22 per share for an aggregate consideration of approximately $3.1 million.
 Product Line Highlights
 CMTS
 o
    
    Downstream port shipments were 34 thousand in the first quarter of 2010o
    
    DOCSIS 3.0 equipment has had wide market acceptanceo
    
    Worldwide market share leader for the last two quarters of 2009 (source: Infonetics)
 CPE
 o
    
    1.1 million EMTAs were shipped in the first quarter of 2010. We have
retained number one market share for 19 consecutive quarters (source: Infonetics)o
    
    Shipments of DOCSIS 3.0 EMTAs increased to 14% of the total EMTA unit
shipments in the first quarter of 2010 as compared to 1.1% in the same quarter last
year.
 
    
    Access, Transport & Supplies
 o
    
    Business continues to be impacted by macro economics.o
    
    First residential RFoG deployment.o
    
    RFoG and EPON field trials at multiple MSOs in North America and Europe.
 
    
    Media & Communications Systems
 o
    
    Strong acceptance of WorkAssure projects.o
    
    Significant deployments of Converged Media Manager.
 19




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##### Table of Contents



Non-GAAP Measures
  For the Three Months Ended March 31, 2010Operating
    
    
    Operating
    
    
    Other (Income)
    
    
    Income Tax
    
    
    Net Income(in thousands, except per share data)
    
    Gross Margin
    
    
    Expense
    
    
    Income
    
    
    Expense
    
    
    Expense
    
    
    (Loss)GAAP
    
    
    112,511
    
    
    
    78,556
    
    
    
    33,955
    
    
    
    3,600
    
    
    
    11,364
    
    
    
    18,991Stock compensation expense
    
    
    433
    
    
    
    (4,088
    )
    
    
    4,521
    
    
    
    
    
    
    
    
    
    
    
    4,521Acquisition costs, restructuring, and integration costs
    
    
    
    
    
    
    (52
    )
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    52Amortization of intangible assets
    
    
    
    
    
    
    (9,022
    )
    
    
    9,022
    
    
    
    
    
    
    
    
    
    
    
    9,022Non-cash interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,883
    )
    
    
    
    
    
    
    2,883Tax related to items above
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,505
    
    
    
    (5,505
    )Adjustments of income tax valuation allowances, R&D
credits, and other discrete tax items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,222
    )
    
    
    1,222Non-GAAP
    
    
    112,944
    
    
    
    65,394
    
    
    
    47,550
    
    
    
    717
    
    
    
    15,647
    
    
    
    31,186GAAP net income per share  diluted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.15Non-GAAP net income per share  diluted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.24GAAP weighted average common shares  diluted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,975Non-GAAP weighted average common shares  diluted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,975
 For the Three Months Ended March 31, 2009Operating
    
    
    Operating
    
    
    Other (Income)
    
    
    Income Tax
    
    
    Net Income(in thousands, except per share data)
    
    Gross Margin
    
    
    Expense
    
    
    Income
    
    
    Expense
    
    
    Expense
    
    
    (Loss)GAAP
    
    
    95,510
    
    
    
    73,121
    
    
    
    22,389
    
    
    
    1,103
    
    
    
    8,404
    
    
    
    12,882Stock compensation expense
    
    
    303
    
    
    
    (3,098
    )
    
    
    3,401
    
    
    
    
    
    
    
    
    
    
    
    3,401Acquisition costs, restructuring, and integration costs
    
    
    
    
    
    
    (120
    )
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    120Amortization of intangible assets
    
    
    
    
    
    
    (9,263
    )
    
    
    9,263
    
    
    
    
    
    
    
    
    
    
    
    9,263Non-cash interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,818
    )
    
    
    
    
    
    
    2,818Gain on repurchase of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,152
    
    
    
    
    
    
    
    (4,152
    )Tax related to items above
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,606
    
    
    
    (3,606
    )Adjustments of income tax valuation allowances, R&D
credits, and other discrete tax items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,456
    )
    
    
    1,456Non-GAAP
    
    
    95,813
    
    
    
    60,640
    
    
    
    35,173
    
    
    
    2,437
    
    
    
    10,554
    
    
    
    22,182GAAP net income per share  diluted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.10Non-GAAP net income per share  diluted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.18GAAP weighted average common shares  diluted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,920Non-GAAP weighted average common shares  diluted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,920
  
    
    Stock compensation expense  ARRIS records non-cash compensation expense related to
grants of options and restricted stock. Depending upon the size, timing and the terms of
the grants, this non-cash compensation expense may vary significantly.
    
    The acquisition costs, restructuring, and integration costs reflect that, although they
or similar items might recur, are of a nature and magnitude that identifying them
separately provides investors with a greater ability to project ARRIS future performance.
 20




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##### Table of Contents




    
    Amortization of intangibles  non-cash amortization of the intangibles related to our
acquisitions.
    
    Non-cash interest expense  ARRIS records non-cash interest expense related to the 2013
convertible debt. Disclosing the non-cash piece provides investors with the information
regarding interest that will not be paid out in cash.
    
    Gain on retirement of debt  during the first quarter of 2009, ARRIS repurchased a
portion of their convertible debt and recognized a gain of approximately $4.2 million.
    
    Adjustments of income taxes valuation allowances, R&D credits, and other discrete tax
items  During the first quarter of 2010, ARRIS identified $1.2 million of discrete tax
adjustment relating to state deferred tax assets. In the first quarter of 2009, a tax
expense of approximately $1.5 million was recorded for state valuation allowances and
research and development tax credits.
 Significant Customers
  Three Months Ended March 31,2010
    
    
    2009Comcast and affiliates
    
    $
    46,263
    
    
    $
    65,210% of sales
    
    
    17.3
    %
    
    
    25.7
    %Time Warner Cable and affiliates
    
    $
    41,065
    
    
    $
    49,083% of sales
    
    
    15.4
    %
    
    
    19.4
    %
 Comparison of Operations for the Three Months Ended March 31, 2010 and 2009
 Net Sales
  Net SalesThree Months
    
    
    Increase (Decrease) Ended March 31,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %Business Segment:Broadband Communications Systems
    
    $
    208,653
    
    
    $
    194,131
    
    
    $
    14,522
    
    
    
    7.5
    %Access, Transport & Supplies
    
    
    42,243
    
    
    
    42,990
    
    
    
    (747
    )
    
    
    (1.7
    )%Media & Communications Systems
    
    
    15,801
    
    
    
    16,397
    
    
    
    (596
    )
    
    
    (3.6
    )%Total sales
    
    $
    266,697
    
    
    $
    253,518
    
    
    $
    13,179
    
    
    
    5.2
    %
 21




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##### Table of Contents



Net SalesThree Months
    
    
    Increase (Decrease) Ended March 31,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %Domestic sales
    
    $
    157,905
    
    
    $
    186,025
    
    
    $
    (28,120
    )
    
    
    (15.1
    )%International sales
    
    
    108,792
    
    
    
    67,493
    
    
    
    41,299
    
    
    
    61.2
    %Total sales
    
    $
    266,697
    
    
    $
    253,518
    
    
    $
    13,179
    
    
    
    5.2
    %
 Broadband Communication Systems Net Sales 2010 vs. 2009
  
    
    Higher sales to multiple customers of our CMTS products. Continued increased demand for
bandwidth has driven increased demand for our CMTS products from our customers.
    
    As expected, domestic sales were lower year over year, primarily as a result of lower
purchases from Comcast and Time Warner.
    
    International CMTS sales increased year over year, most notably in Central and Latin
America, as operators deploy DOCSIS 3.0.
 Access, Transport & Supplies Net Sales 2010 vs. 2009
  Media & Communication Systems Net Sales 2010 vs. 2009
  Gross Margin
  Gross Margin $Three Months Ended
    
    
    Increase (Decrease)March 31,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %Business Segment:Broadband Communications Systems
    
    $
    94,674
    
    
    $
    78,921
    
    
    $
    15,753
    
    
    
    20.0
    %Access, Transport & Supplies
    
    
    9,702
    
    
    
    9,268
    
    
    
    434
    
    
    
    4.7
    %Media & Communications Systems
    
    
    8,135
    
    
    
    7,321
    
    
    
    814
    
    
    
    11.1
    %Total
    
    $
    112,511
    
    
    $
    95,510
    
    
    $
    17,001
    
    
    
    17.8
    %
 22




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##### Table of Contents



Gross Margin %Percentage PointThree Months Ended
    
    IncreaseMarch 31,
    
    (Decrease)2010
    
    2009
    
    2010 vs. 2009Business Segment:Broadband Communications Systems
    
    
    45.4
    %
    
    
    40.7
    %
    
    
    4.7Access, Transport & Supplies
    
    
    23.0
    %
    
    
    21.6
    %
    
    
    1.4Media & Communications Systems
    
    
    51.5
    %
    
    
    44.6
    %
    
    
    6.9Total
    
    
    42.2
    %
    
    
    37.7
    %
    
    
    4.5
 Broadband Communications Systems Gross Margin 2010 vs. 2009
  
    
    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 2010 as compared to the
first quarter of 2009 primarily reflects higher sales of our higher
margin DOCSIS3.0 CMTS.
 Access, Transport & Supplies Gross Margin 2010 vs. 2009
  
    
    The increase in gross margin dollars was primarily the result of a change in product mix
in the first quarter of 2010 as compared to 2009.
    
    The increase in gross margin percentage was primarily the result of a change in product
mix, higher gross margin on optics product lines and cost reduction initiatives late in
2009 to align production-related activities with current levels of demand.
 Media & Communications Systems Gross Margin 2010 vs. 2009
  
    
    The increase in gross margin dollars was primarily the result of a change in product
mix, in particular a higher demand of the Assurance solutions products.
 Operating Expenses
  Operating ExpensesThree Months
    
    
    Increase (Decrease) Ended March 31,
    
    
    2010 vs. 20092010
    
    
    2009
    
    
    $
    
    
    %Selling, general, and
administrative
    
    $
    35,117
    
    
    $
    35,343
    
    
    $
    (226
    )
    
    
    (0.6
    )%Research and development
    
    
    34,365
    
    
    
    28,395
    
    
    
    5,970
    
    
    
    21.0
    %Restructuring
    
    
    52
    
    
    
    120
    
    
    
    (68
    )
    
    
    (56.7
    )%Amortization of intangible assets
    
    
    9,022
    
    
    
    9,263
    
    
    
    (241
    )
    
    
    (2.6
    )%Total
    
    $
    78,556
    
    
    $
    73,121
    
    
    $
    5,435
    
    
    
    7.4
    %
 23




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##### Table of Contents



Selling, General, and Administrative, or SG&A, Expenses
  
    
    Higher compensation costs, in particular sales commissions and salaries associated with
increased sales personnel, offset by lower legal expenses as a result of decreased cost
associated with various patents and other litigation matters.
 Research & Development Expenses
  Restructuring Charges
  Amortization of Intangibles
  Goodwill Impairment
  Other Expense (Income)
 Interest Expense
  Loss (Gain) in Foreign Currency
  Interest Income
  24




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##### Table of Contents



Other Income, net
  Income
Taxes
  Financial Liquidity and Capital Resources
 Overview
  Liquidity & Capital Resources Data
 Three Months Ended March 31,2010
    
    2009(in thousands, except DSO and turns)Key Working Capital ItemsCash provided by operating activities
    
    $
    48,210
    
    
    $
    13,845Cash, cash equivalents, and short-term
investments
    
    $
    661,056
    
    
    $
    424,432Accounts receivable, net
    
    $
    139,207
    
    
    $
    155,792Days Sales Outstanding (DSOs)
    
    
    48
    
    
    
    57Inventory
    
    $
    79,907
    
    
    $
    120,774Inventory turns
    
    
    7.0
    
    
    
    5.0Convertible notes at face value
    
    $
    261,050
    
    
    $
    261,050Convertible notes at book value
    
    $
    214,131
    
    
    $
    203,080Capital Expenditures
    
    $
    4,654
    
    
    $
    5,066
 Accounts Receivable & Inventory
    
    
    ATS inventory declined as we adjusted to lower sales levels over the past 18 months.
    
    BCS inventory declined as a result of product mix and timing. We anticipate an increase
in inventory levels of our BCS products to ensure adequate supply.
 25




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##### Table of Contents



Summary of Current Liquidity Position and Potential for Future Capital Raising
    Commitments
  Cash Flow
  For the Three Months EndedMarch 31,2010
    
    2009Cash provided by operating activities
    
    $
    48,210
    
    
    $
    13,845Cash used in investing activities
    
    
    (44,750
    )
    
    
    (13,330
    )Cash used in financing activities
    
    
    (3,981
    )
    
    
    (11,471
    )Net decrease in cash
    
    $
    (521
    )
    
    $
    (10,956
    )
 Operating Activities:
  For the Three Months Ended
    
    For the Year EndedMarch 31,
    
    December 31,2010
    
    2009
    
    2009Net income
    
    $
    18,991
    
    
    $
    12,882
    
    
    $
    90,769Adjustments to reconcile net income
to cash provided by operating
activities
    
    
    15,143
    
    
    
    20,907
    
    
    
    90,338Net income including adjustments
    
    
    34,134
    
    
    
    33,789
    
    
    
    181,107Decrease in accounts receivable
    
    
    4,206
    
    
    
    3,645
    
    
    
    21,704Decrease in inventory
    
    
    15,944
    
    
    
    8,978
    
    
    
    38,906(Decrease) /increase in accounts
payable and accrued liabilities
    
    
    (24,935
    )
    
    
    (35,789
    )
    
    
    4,707All other  net
    
    
    18,861
    
    
    
    3,222
    
    
    
    (5,447
    )Cash provided by operating activities
    
    $
    48,210
    
    
    $
    13,845
    
    
    $
    240,977
  26




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##### Table of Contents



Investing Activities:
  Three Months EndedMarch 31,2010
    
    2009Capital expenditures
    
    $
    (4,654
    )
    
    $
    (5,066
    )Cash paid for acquisition, net of cash acquired
    
    
    
    
    
    
    (200
    )Cash proceeds from sale of property, plant and
equipment
    
    
    240
    
    
    
    Purchases of short-term investments
    
    
    (42,436
    )
    
    
    (23,870
    )Sales of short-term investments
    
    
    2,100
    
    
    
    15,806Cash used in investing activities
    
    $
    (44,750
    )
    
    $
    (13,330
    )
 Capital Expenditures
  Cash Paid for Acquisition
  Purchases and Disposals of Short-Term Investments
  27




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Financing Activities:
  For the Three Months
EndedMarch
31,2010
    

2009Payment of debt and capital lease obligations
    
    $
    (37
    )
    
    $
    (10,592
    )Repurchase of common stock
    
    
    (3,059
    )
    
    
    Excess income tax benefits from stock-based compensation plans
    
    
    2,486
    
    
    
    431Repurchase of shares to satisfy tax withholdings
    
    
    (5,993
    )
    
    
    (1,807
    )Proceeds from issuance of common stock, net
    
    
    2,622
    
    
    
    497Cash used in financing activities
    
    $
    (3,981
    )
    
    $
    (11,471
    )
 Payment of Debt and Capital Lease Obligation
  Repurchase of Common Stock
   Excess Income Tax Benefits from Stock-Based Compensation Plans
  Repurchase of Shares to Satisfy Tax Withholdings
  Proceeds from Issuance of Common Stock, Net
  Interest Rates
  28




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Foreign Currency
   Financial Instruments
   Cash, Cash Equivalents, and Investments
     29




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Capital Expenditures
  Critical Accounting Policies and Estimates
   Revenue Recognition
   
    
    When persuasive evidence of an arrangement exists. Contracts and customer purchase
orders are used to determine the existence of an arrangement.
    
    Delivery has occurred. Shipping documents, proof of delivery and customer acceptance
(when applicable) are used to verify delivery.
    
    The fee is fixed or determinable. Pricing is considered fixed and determinable at the
execution of a customer arrangement, based on specific products and quantities to be
delivered at specific prices. This determination includes a review of the payment terms
associated with the transaction and whether the sales price is subject to refund or
adjustment or future discounts.
    
    Collectability is reasonably assured. We assess the ability to collect from our
customers based on a number of factors that include information supplied by credit
agencies, analyzing customer accounts, reviewing payment history and consulting bank
references. Should we have a circumstance arise where a customer is deemed not
creditworthy, all revenue related to the transaction will be deferred until such time that
payment is received and all other criteria to allow us to recognize revenue have been met.
  
    
    When undelivered products or services that are essential to the functionality of the
delivered product exist, revenue is deferred until such undelivered products or services
are delivered as the customer would not have full use of the delivered elements.
    
    When required acceptance has not occurred.
    
    When trade-in rights are granted at the time of sale, that portion of the sale is
deferred until the trade-in right is exercised or the right expires. In determining the
deferral amount, management estimates the
 30




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##### Table of Contents



expected trade-in rate and future value of the
product upon trade-in. These factors are periodically reviewed and updated by management,
and the updates may result in either an increase or decrease in the deferral.
 Equipment 
 Software Sold Without Tangible Equipment 
 Standalone Services 
 Incentives 
 Value Added Resellers
 Multiple Element Arrangements 
  Multiple Element Arrangements Originating Before January 1, 2010
  31




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.
    Multiple Element Arrangements Originating or Materially Modified After January 1, 2010
  32




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Forward-Looking Statements
  
 Item 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    33




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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
    34




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35




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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;
    
    demands for network services;
    
    competition from other providers of broadband and high speed services;
    
    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.
  
    
    Aurora Networks;
    
    BigBand Networks;
    
    Casa Systems, Inc.:
    
    Cisco Systems, Inc.;
    
    Commscope, Inc.;
    
    Concurrent Computer Corporation;
    
    Ericsson (TandbergTV);
    
    Harmonic, Inc.;
    
    Motorola, Inc.;
    
    SeaChange, Inc.;
    
    SMC Networks;
    
    Technicolor, Inc.;
    
    TVC Communications, Inc.:
    
    Ubee Interactive, Inc
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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.
   Our business is highly concentrated in the cable television portion of the telecommunications
industry which is significantly impacted by technological change.
   We may pursue acquisitions and investments that could adversely affect our business.
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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.
  We may have difficulty in forecasting our sales.
  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.
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
    
    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.
  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.
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
    
    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.
   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 stock price has been and may continue to be volatile.
  
    
    future announcements concerning us, key customers or competitors;
    
    quarterly variations in operating results;
    
    changes in financial estimates and recommendations by securities analysts;
    
    developments with respect to technology or litigation;
    
    the operating and stock price performance of our competitors; and
    
    acquisitions and financings
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We may face higher costs associated with protecting our intellectual property or obtaining access
necessary to intellectual property of others.
  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.
  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 Exhibit3.2
    
    Amended and Restated By-Laws, dated March 8, 2010, as filed on March 11, 2010 Form 8-K,
Exhibit 3.231.1
    
    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
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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  42