Revenue from Contracts with Customers | Note 3. Revenue from Contracts with Customers On January 1, 2018, the Company adopted the new accounting standard Revenue from Contracts with Customers Revenue Recognition ARRIS generates revenue from varying activities, including the delivery of stand-alone equipment, custom design and installation services, and bundled sales arrangements inclusive of equipment, software and services. Revenue is recognized when performance obligations in a contract are satisfied through the transfer of control of the good or service at an amount of consideration expected to receive. The following are required before revenue is recognized. • Identify the contract with the customer. A variety of arrangements are considered contracts; however, these are usually the Master Purchase Agreement and amendments or customer purchase orders. • Identify the performance obligations in the contract. Performance obligations are identified as promised goods or services in an arrangement that are distinct. • Determine the transaction price. Transaction price is the amount of consideration the Company expects in exchange for transferring the promised goods or services. The consideration may include fixed or variable amounts or both. • Allocate the transaction price to the performance obligations. The transaction price is allocated to the performance obligations on a relative standalone selling price basis. • Recognize revenue as the performance obligations are satisfied. Revenue is recognized when transfer of control of the promised goods or services has occurred. This is either at a point in time or over time. Revenue is deferred for any performance obligations in which payment is received or due prior to the transfer of control of the good or service. Equipment ARRIS’s equipment deliverables typically include proprietary operating system software, which isn’t considered separately identifiable. Therefore, ARRIS’s equipment deliverables are considered one distinct performance obligation. Multiple Performance Obligation Arrangements To determine the standalone selling price (“SSP”), the Company first looks to establish SSP through an observable price when the good or service is sold separately in similar circumstances. If SSP cannot be established through an observable price, the Company will estimate the SSP considering market conditions, customer specific factors, and customer class. The Company typically uses a combination of approaches to estimate SSP. Software Sold Without Tangible Equipment Standalone Services Incentives – Value Added Resellers (VAR), Distribution Channels and Retail back-end Enterprise sales distributors are granted rights of stock rotation that are limited to contractually specified percentage of the distributors aggregate purchase volume. These stock rotation rights are subject to expiration 180 days from the time of product shipment by us to the distributor. Upon shipment of the product, ARRIS reduces revenue for an estimate of potential future stock rotation returns related to the current period product revenue. ARRIS analyzes historical returns, channel inventory levels, current economic trends and changes in customer demand for our products when evaluating the adequacy of the allowance for sales returns, namely stock rotation returns. Regarding the various sales incentive programs, the Company can reasonably estimate its backend rebates, discounts and similar incentives due to an established sales history with its customers and records the estimated reserves and allowances at the time the related revenue is recognized. The Company recognizes marketing development funds at the later of when the related revenue is recognized, or the program is offered to the channel partner. ARRIS’s sales incentives to its channel partners are recorded as a reduction to revenue. ARRIS’s estimated allowances for returns due to stock rotation and various sales incentive programs can vary from actual results that could materially impact our financial position and results of operations. Based on the relevant facts and circumstances, the Company believes the methodologies applied to calculate these reserves fairly represents our expected results at the point in time in which they are made. Disaggregation of Revenue The following table summarizes the revenues from contracts with customers by major product line for the three and six months ended June 30, 2018 (in thousands): Three months ended Six months ended CPE: Broadband CPE $ 405,082 $ 728,367 Video CPE 603,049 1,154,990 Sub-total 1,008,131 1,883,357 Network & Cloud: Networks 479,386 932,387 Software and services 70,110 155,373 Sub-total 549,496 1,087,760 Enterprise Networks: Enterprise Networks 172,240 342,154 Other: Other (3,327 ) (9,021 ) Total net sales $ 1,726,540 $ 3,304,250 Customer Premises Equipment — The CPE segment’s product solutions include Broadband products, such as DSL and DOCSIS gateways and modems, and Video products, such as video gateways, clients and set-tops, Network & Cloud — The N&C segment’s product solutions include cable modem termination system, video infrastructure, distribution and transmission equipment and cloud solutions that enable facility-based service providers to construct a state-of-the-art end-to-end Enterprise Networks — The Enterprise Networks segment focuses on enabling constant, wireless and wired connectivity across complex and varied networking environments. It offers dedicated engineering, sales and marketing resources to serve customers across a spectrum of enterprises—including hospitality, education, smart cities, government, venues, service providers and more. The following table summarizes the revenues from contracts with customers by geographic areas for the three and six months ended June 30, 2018 (in thousands): For the three months ended June 30, 2018 CPE N&C Enterprise Other (1) Total Domestic – U.S. $ 540,452 $ 345,828 $ 111,967 $ (4,404 ) $ 993,843 Americas, excluding U.S. 220,350 105,981 1,770 (8 ) 328,093 Asia Pacific 29,081 39,578 23,477 (39 ) 92,097 EMEA 218,248 58,109 35,026 1,124 312,507 Total international 467,679 203,668 60,273 1,077 732,697 Total net revenues $ 1,008,131 $ 549,496 $ 172,240 $ (3,327 ) $ 1,726,540 For the six months ended June 30, 2018 CPE N&C Enterprise Other (1) Total Domestic – U.S. $ 1,014,614 $ 672,311 $ 207,682 $ (7,606 ) $ 1,887,001 Americas, excluding U.S. 376,213 199,881 7,622 (5 ) 583,711 Asia Pacific 51,205 95,343 53,102 (39 ) 199,611 EMEA 441,325 120,225 73,748 (1,371 ) 633,927 Total international 868,743 415,449 134,472 (1,415 ) 1,417,249 Total net revenues $ 1,883,357 $ 1,087,760 $ 342,154 $ (9,021 ) $ 3,304,250 (1) Adjustments include acquisition accounting impacts related to deferred revenue Impact of New Revenue Guidance on Financial Statement Line Items The following table compares the reported condensed balance sheet and statement of operations, as of and for the three and six months ended June 30, 2018, to the pro-forma As reported June 30, 2018 Pro forma – as if previous Assets Accounts receivable $ 1,183,360 $ 1,163,234 Other current assets 196,014 195,950 Deferred income taxes 146,443 140,831 Liabilities Deferred revenue (current and non-current) $ 181,823 $ 190,220 Three Months Ended June 30, 2018 Six Months Ended June 30, 2018 As reported Pro-forma As reported Pro-forma Revenues Net sales $ 1,726,540 $ 1,714,584 $ 3,304,250 $ 3,275,727 Costs and expenses Cost of sales $ 1,227,785 $ 1,227,785 $ 2,329,812 $ 2,329,876 Income tax (benefit) expense (9,944 ) (6,964 ) (6,454 ) (843 ) Consolidated net income (loss) 34,799 19,863 17,766 (16,432 ) Net loss attributable to non-controlling (955 ) (1,540 ) (4,388 ) (5,130 ) Net income (loss) attributable to ARRIS International plc 35,754 21,403 22,154 (11,302 ) Net income (loss) per ordinary share: Basic $ 0.19 $ 0.12 $ 0.12 $ (0.06 ) Diluted $ 0.19 $ 0.12 $ 0.12 $ (0.06 ) Pro-forma Other Contract Assets and Liabilities The unbilled receivables are included in Accounts Receivable on the unaudited Consolidated Balance Sheets. As of June 30, 2018, the Company has unbilled receivables of $37.2 million. The changes in the contract asset account relate to license revenue is now being recognized upon delivery instead of being recognized ratably over the license term. The following table summarizes the changes in deferred revenue for the six months ended of June 30, 2018 (in thousands) Opening balance at January 1, 2018 $ 168,757 Deferral of revenue 106,506 Recognition of unearned revenue (92,470 ) Other (970 ) Balance at June 30, 2018 $ 181,823 As of the end of the current reporting period, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied that have a duration of one year or more was $64.8 million. The majority of ARRIS’ contracts that have performance obligations that are unsatisfied are part of contracts have a duration of one year or less. Practical Expedients Sales commissions are incremental contract acquisition costs which are expected to be recovered. The Company has elected to recognize these expenses as incurred due to the amortization period of these costs being one year or less. Costs to obtain or fulfill a contract are incremental costs that are expected to be recovered. The Company has elected to recognize these expenses as incurred due to the amortization period of these costs being one year or less. Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained are recognized in expense when incurred. The Company has elected not to adjust the promised amount of consideration for the effects of a significant financing component when it expects, at contract inception, that the period between when ARRIS transfers a promised good or service to a customer, and when the customer pays will be one year or less. The Company has elected the expedient that states an entity does not need to evaluate whether shipping and handling activities are promised services to its customers. If revenue is recognized for the related good before the shipping and handling activities occur, the related costs of those shipping and handling activities are accrued. The Company has also elected to exclude from the transaction price certain types of taxes collected from a customer and remitted to a third-party (e.g., governmental agency), including sales, use and value-added taxes. As a result, revenue is presented net of these taxes. Additionally, the Company has elected for contracts that were modified before the beginning of the earliest reporting period to reflect the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price. |