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8-K - FORM 8-K - ARRIS International plcd363590d8k.htm

Exhibit 99.1

ARRIS Announces Preliminary and Unaudited Second Quarter 2016 Results

SUWANEE, Ga., July 27 2016 – ARRIS International plc (NASDAQ:ARRS) today announced preliminary and unaudited financial results for the second quarter 2016.

Second Quarter 2016 Financial Highlights

 

    GAAP revenues were $1.730 billion

 

    Adjusted revenues (a non-GAAP measure) were $1.734 billion

 

    GAAP net income was $0.44 per diluted share

 

    Adjusted net income (a non-GAAP measure) was $0.84 per diluted share

 

    End-of-quarter cash resources were $902.9 million

 

    Cash from operating activities was $260.8 million

 

    Order backlog was $1.239 billion

 

    Book-to-bill ratio was 0.94

On January 4, 2016 the Company completed the acquisition of Pace plc (the “Combination”) and, as a result, comparisons to prior year periods are materially affected and the results include several restructuring and acquisition related items.

“We entered the second quarter with great momentum as reflected in results that came in stronger than our guidance. The integration of Pace continues to be on track and is mostly complete. With respect to the third quarter 2016, we expect revenues will be in the range of $1.700 billion to $1.750 billion, with GAAP net income per diluted share in the range of $0.28 to $0.33 and adjusted net income per diluted share in the range of $0.72 to $0.77. As a result, we are now estimating our full year 2016 revenue to be at the high end of our annual guidance while net income per diluted share is trending above our annual guidance,” said Bob Stanzione, ARRIS Chairman and CEO.

The Company’s GAAP revenues and earnings may be affected by the variability associated with the accounting required for the Company’s outstanding warrants issued to a customer. In establishing the Company’s guidance, certain assumptions regarding product volume, product mix and the fair value of the warrants have been made and actual results could materially differ. The Company intends to adjust for the accounting impact, which is non-cash, in its non-GAAP results.

GAAP revenues in the second quarter 2016 of $1.730 billion were up $470 million, or 37%, as compared to second quarter 2015 revenues of $1.260 billion. Second quarter revenues were also up $115 million, or 7%, as compared to first quarter 2016 revenues of $1.615 billion. The second quarter 2016 revenues reflect a reduction of $4.3 million related to outstanding warrants.

Through the first two quarters of 2016, revenues of $3.345 billion were up $870 million, or 35% as compared to the first two quarters of 2015 revenues of $2.475 billion.

Adjusted revenues (a non-GAAP measure) in the second quarter 2016 were $1.734 billion as compared to $1.260 billion for the second quarter 2015, and the first quarter 2016 revenue of $1.615 billion.

Year to date, adjusted revenues were $3.349 billion for 2016 as compared to the first six months of 2015 adjusted revenues of $2.475 billion.

A reconciliation of adjusted revenue to GAAP revenue is attached to this release and also can be found on the Company’s website (www.arris.com).

GAAP net income in the second quarter 2016 was $0.44 per diluted share, as compared to GAAP net income of $0.11 per diluted share in the second quarter of 2015 and a GAAP net loss of $(1.06) per diluted share in the first quarter 2016.

Year to date, GAAP net loss was $(0.62) per diluted share for 2016, as compared to the first six months of 2015 GAAP net income of $0.24 per diluted share.


Adjusted net income (a non-GAAP measure) in the second quarter 2016 was $0.84 per diluted share, as compared to $0.53 per diluted share for the second quarter 2015, and the first quarter 2016 adjusted net income of $0.47 per diluted share.

Year to date, adjusted net income was $1.30 per diluted share for 2016 as compared to the first six months of 2015 adjusted net income of $0.97 per diluted share.

A reconciliation of adjusted net income per diluted share to GAAP net income per diluted share is attached to this release and also can be found on the Company’s website (www.arris.com).

Cash & Cash Equivalents - The Company ended the second quarter 2016 with $902.9 million of cash resources, as compared to $676.2 million at the end of the first quarter 2016. The Company generated $260.8 million of cash from operating activities during the second quarter 2016, as compared to $71.9 million during the second quarter of 2015. Through the first six months of 2016, the Company generated $38.2 million of cash from operating activities. This compares to $8.6 million generated during the same period in 2015.

Order backlog at the end of the second quarter 2016 was $1.239 billion as compared to $651.3 million and $1.335 billion at the end of the second quarter 2015 and the first quarter 2016, respectively. The Company’s book-to-bill ratio in the second quarter 2016 was 0.94 as compared to the second quarter 2015 of 0.94 and the first quarter 2016 of 1.24.

ARRIS management will conduct a conference call at 5:00 pm EDT, today, Wednesday, July 27, 2016, to discuss these results in detail. You may participate in this conference call by dialing 888-680-0878 or 617-213-4855 for international calls prior to the start of the call and providing the ARRIS International plc name, conference pass code 83685467# and Bob Puccini as the moderator. Please note that ARRIS will not accept any calls related to this earnings release until after the conclusion of the conference call. A replay of the conference call can be accessed approximately two hours after the call through August 3, 2016, by dialing 888-286-8010 or 617-801-6888 for international calls and using the pass code 39999710. A replay also will be made available for a period of 12 months following the conference call on ARRIS’ website at www.arris.com.

Forward-Looking Statements

Statements made in this press release, including those related to:

 

    revenues and net income for the third quarter 2016, and beyond;

 

    integration of the recently acquired Pace business;

 

    expected sales levels and acceptance of new ARRIS products; and

 

    the general market outlook and industry trends

are forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. Among other things,

 

    projected results for the third quarter and full year 2016, as well as the general outlook for 2016 and beyond are based on preliminary estimates, assumptions and projections that management believes to be reasonable at this time, but are beyond management’s control;

 

    the strengthening U.S. Dollar may adversely impact our international customer’s ability or willingness to purchase products and the pricing of our products;

 

    we may fail to realize the expected benefits of the recently completed Pace acquisition and may incur significant additional transaction costs and/or unknown liabilities;

 

    impacts of the recent U.K. referendum to leave the European Union, and the timing with respect to the same, remain largely unknown, and could have an adverse impact on our results of operations;

 

    regulatory changes, including those related to tax and the FCC, could have an adverse impact on our operations and results of operations;

 

    the outstanding warrants held by a customer will result in fluctuations in our GAAP revenues as a result of the required accounting adjustments;

 

    our customers operate in a capital intensive consumer based industry, and volatility in the capital markets or changes in customer spending may adversely impact their ability or willingness to purchase the products that we offer;


    because the market in which we operate is volatile, actions taken and contemplated may not achieve the desired impact relative to changing market conditions and the success of these strategies will be dependent on the effective implementation of those plans while minimizing organizational disruption; and

 

    recently completed transactions within our customer base, including the acquisition of Cablevision by Altice, and the acquisition of Time Warner by Charter, may have an impact on the amount and/or timing of customer’s spending.

In addition to the factors set forth elsewhere in this release, other factors that could cause results to differ from current expectations include: rights to intellectual property, including related litigation; the impact of rapidly changing technologies; market trends and the adoption of industry standards. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the Company’s business. Additional information regarding these and other factors can be found in the Company’s reports filed with the Securities and Exchange Commission, including its Form 10-Q for the quarter ended March 31, 2016. In providing forward-looking statements, the Company expressly disclaims any obligation to update publicly or otherwise these statements, whether as a result of new information, future events or otherwise.

About ARRIS

ARRIS International plc (NASDAQ: ARRS) is a world leader in entertainment and communications technology. Our innovations combine hardware, software, and services across the cloud, network, and home to power TV and Internet for millions of people around the globe. The people of ARRIS collaborate with the world’s top service providers, content providers, and retailers to advance the state of our industry and pioneer tomorrow’s connected world. For more information, visit www.arris.com.

For the latest ARRIS news:

 

    Check out our blog: ARRIS EVERYWHERE

 

    Follow us on Twitter: @ARRIS

###

Contact:

Bob Puccini

Investor Relations

+1.720.895.7787

ARRIS and the ARRIS Logo are trademarks or registered trademarks of ARRIS Enterprises, LLC. All other trademarks are the property of their respective owners. © ARRIS Enterprises, LLC. 2016. All rights reserved.


ARRIS INTERNATIONAL PLC

PRELIMINARY CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

     June 30,
2016
    March 31,
2016
    December 31,
2015
    September 30,
2015
    June 30,
2015
 

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 870,992      $ 659,181      $ 863,582      $ 673,346      $ 490,939   

Short-term investments, at fair value

     21,881        17,069        15,470        107,777        128,852   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash, cash equivalents and short term investments

     892,873        676,250        879,052        781,123        619,791   

Accounts receivable, net

     1,053,760        972,540        651,893        647,726        785,869   

Other receivables

     55,698        31,868        12,233        8,684        11,268   

Inventories, net

     647,497        662,287        401,592        367,536        389,556   

Prepaid income taxes

     23,950        22,349        25,624        29,071        26,413   

Prepaids

     39,388        37,285        19,319        26,430        36,746   

Current deferred income tax assets

     —          —          —          104,345        105,384   

Other current assets

     136,177        123,858        120,490        148,385        102,987   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     2,849,344        2,526,437        2,110,203        2,113,300        2,078,014   

Property, plant and equipment, net

     367,696        369,255        312,311        319,443        324,154   

Goodwill

     2,090,615        2,068,274        1,013,963        1,016,696        1,017,430   

Intangible assets, net

     1,902,864        2,036,791        810,448        868,054        923,837   

Investments

     77,749        72,115        69,542        74,924        75,381   

Noncurrent deferred income tax assets

     224,889        221,315        185,439        70,557        87,291   

Other assets

     21,626        18,849        21,610        26,843        27,842   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 7,534,782      $ 7,313,036      $ 4,523,516      $ 4,489,817      $ 4,533,949   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

          

Current liabilities:

          

Accounts payable

   $ 1,016,956      $ 818,494      $ 514,877      $ 558,371      $ 608,133   

Accrued compensation, benefits and related taxes

     98,048        97,346        111,389        97,326        78,333   

Accrued warranty

     66,568        58,812        27,630        35,488        29,176   

Deferred revenue

     147,284        144,603        137,606        97,490        107,632   

Current portion of LT debt & financing lease obligations

     94,217        94,119        43,591        43,506        43,446   

Current income tax liabilities

     2,892        65,543        8,368        13,139        9,587   

Other accrued liabilities

     262,604        248,812        169,169        168,870        155,482   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,688,570        1,527,729        1,012,630        1,014,190        1,031,789   

Long-term debt & financing lease obligations, net of current portion

     2,221,383        2,242,071        1,496,243        1,507,172        1,518,063   

Accrued pension

     55,742        55,287        64,052        67,570        68,865   

Noncurrent income taxes payable

     84,694        68,974        42,197        38,145        43,586   

Noncurrent deferred income tax liabilities

     342,531        385,690        503        329        332   

Other noncurrent liabilities

     138,013        126,330        66,930        71,560        92,544   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     4,530,933        4,406,081        2,682,555        2,698,966        2,755,179   

Stockholders’ equity:

          

Ordinary shares

     2,835        2,824        —          —          —     

Common stock

     —          —          1,790        1,819        1,814   

Capital in excess of par value

     3,227,758        3,204,853        1,777,276        1,762,111        1,765,804   

Treasury stock at cost

     —          —          (331,329     (331,329     (331,331

Accumulated other comprehensive loss

     (28,973     (20,476     (12,646     (20,236     (12,664

Retained earnings

     (240,424     (324,667     358,823        328,782        302,525   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ARRIS Group Inc. stockholders’ equity

     2,961,195        2,862,534        1,793,914        1,741,147        1,726,150   

Stockholders’ equity attributable to noncontrolling interest

     42,655        44,421        47,047        49,704        52,620   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     3,003,851        2,906,955        1,840,961        1,790,851        1,778,770   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 7,534,782      $ 7,313,036      $ 4,523,516      $ 4,489,817      $ 4,533,949   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


ARRIS INTERNATIONAL PLC

PRELIMINARY CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2016     2015     2016     2015  

Net sales

   $ 1,730,044      $ 1,260,077      $ 3,344,750      $ 2,475,234   

Cost of sales

     1,285,310        895,716        2,515,983        1,774,317   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     444,734        364,361        828,766        700,917   

Operating expenses:

        

Selling, general, and administrative expenses

     105,746        107,209        225,710        207,534   

Research and development expenses

     152,580        136,260        313,726        268,728   

Amortization of intangible assets

     109,883        56,783        208,376        113,930   

Integration, acquisition, restructuring and other costs

     43,137        12,566        134,057        13,465   
  

 

 

   

 

 

   

 

 

   

 

 

 
     411,346        312,818        881,868        603,657   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     33,388        51,542        (53,102     97,260   

Other expense (income):

        

Interest expense

     19,102        28,454        38,728        41,821   

Loss on investments

     6,389        1,410        8,348        3,119   

(Gain) loss on foreign currency

     (9,801     (6,659     2,440        (6,639

Interest income

     (1,185     (558     (1,968     (1,281

Other (income) expense, net

     5,219        934        4,869        7,997   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     13,664        27,962        (105,519     52,241   

Income tax (benefit) expense

     (68,795     12,819        17,218        17,973   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     82,459        15,143        (122,737     34,268   

Net loss attributable to noncontrolling interests

     (1,769     (1,615     (4,392     (1,615
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ARRIS International plc

   $ 84,228      $ 16,758      ($ 118,345   $ 35,883   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share (1):

        

Basic

   $ 0.44      $ 0.11      $ (0.62   $ 0.25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.44      $ 0.11      $ (0.61   $ 0.24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares:

        

Basic

     190,409        146,293        191,743        145,823   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     191,250        149,276        193,591        149,132   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Calculated based on net income attributable to shareowners of ARRIS International plc


ARRIS INTERNATIONAL PLC

PRELIMINARY CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2016     2015     2016     2015  

Operating Activities:

        

Consolidated net income (loss)

   $ 82,459      $ 15,143        (122,737   $ 34,268   

Depreciation

     22,172        17,053        46,043        36,937   

Amortization of intangible assets

     111,541        57,849        211,307        115,701   

Amortization of deferred finance fees and debt discount

     1,935        4,112        3,864        6,293   

Impairment of intangible assets

     2,300        —          2,300        —     

Deferred income tax provision (benefit)

     (48,271     11,399        (85,184     (6,790

Stock compensation expense

     11,901        16,293        26,177        30,267   

Provision for doubtful accounts

     209        1,982        1,054        2,249   

Provision for non-cash warrants

     4,283        —          4,283        —     

Loss on disposal of property, plant & equipment and other

     3,945        145        3,929        6,022   

Impairment / loss on investments

     6,389        1,410        8,348        3,119   

Excess tax benefits from stock-based compensation plans

     —          3,595        (2,354     (12,842

Changes in operating assets & liabilities, net of effects of acquisitions and disposals:

        

Accounts receivable

     (81,428     33,222        49,033        (188,360

Other receivables

     (23,285     4,308        (14,022     (2,687

Inventories

     15,560        (17,177     181,737        11,609   

Accounts payable and accrued liabilities

     208,068        (27,772     (327,583     28,178   

Prepaids and other, net

     (57,014     (49,705     52,034        (55,370
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     260,764        71,857        38,229        8,594   

Investing Activities:

        

Purchases of investments

     (17,470     (20,040     (22,248     (31,103

Sales of investments

     348        19,446        2,441        29,615   

Purchases of property, plant & equipment, net

     (14,612     (13,402     (23,752     (24,321

Proceeds from sale-leaseback transaction

     —          —          —          24,960   

Acquisition, net of cash acquired

     —          (97,905     (340,118     (97,905

Purchases of intangible assets

     (2,000     —          (3,310     (34,340

Other, net

     575        —          3,507        2,904   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (33,159     (111,901     (383,480     (130,190

Financing Activities:

        

Proceeds from issuance of debt

     —          —          800,000        —     

Proceeds from sale-leaseback financing transaction

     —          —          —          58,729   

Repayment of accounts receivable financing facility

     —          —          (12,042     —     

Payment of financing lease obligation

     (150     (105     (314     (105

Payment of debt obligations

     (22,375     (15,000     (275,000     (28,750

Payment for deferred financing fees and debt discount

     —          (8,239     (2,304     (8,239

Repurchase of common stock

     —          —          (150,003     (24,999

Excess income tax benefits from stock-based compensation plans

     —          (3,595     2,354        12,842   

Repurchase of shares to satisfy employee minimum tax withholdings

     (148     (3,792     (14,193     (24,986

Fees and proceeds from issuance of common stock, net

     6,879        7,983        4,163        8,004   

Capital contribution from non-controlling interest

     —          54,250        —          54,250   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (15,794     31,502        352,661        46,746   

Net decrease in cash and cash equivalents

     211,811        (8,542     7,410        (74,850

Cash and cash equivalents at beginning of period

     659,181        499,482        863,582        565,790   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 870,992      $ 490,940      $ 870,992      $ 490,940   
  

 

 

   

 

 

   

 

 

   

 

 

 


ARRIS INTERNATIONAL PLC

PRELIMINARY SUPPLEMENTAL SALES & NET INCOME RECONCILIATION

(in thousands, except per share data) (unaudited)

(in thousands, except per share data)

 

     Q2 2015     Q1 2016     Q2 2016     YTD Jun 2015     YTD Jun 2016  
     Amount     Per Diluted
Share
    Amount     Per Diluted
Share
    Amount     Per Diluted
Share
    Amount     Per Diluted
Share
    Amount     Per Diluted
Share
 

Sales

   $ 1,260,077        $ 1,614,706        $ 1,730,044        $ 1,225,017        $ 3,344,750     

Highlighted items:

                    

Reduction in revenue related to warrants

     —            —            4,283          —            4,283     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Sales excluding highlighted items

   $ 1,260,077        $ 1,614,706        $ 1,734,327        $ 1,225,017        $ 3,349,033     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   
     Q2 2015     Q1 2016     Q2 2016     YTD Jun 2015     YTD Jun 2016  
     Amount     Per Diluted
Share
    Amount     Per Diluted
Share
    Amount     Per Diluted
Share
    Amount     Per Diluted
Share
    Amount     Per Diluted
Share
 

Net income (loss) attributable to ARRIS International plc

   $ 16,758      $ 0.11      $ (202,573   $ (1.06   $ 84,228      $ 0.44      $ 35,883      $ 0.24      $ (118,347   $ (0.62

Highlighted items:

                    

Impacting gross margin:

                    

Stock compensation expense

     2,214        0.01        2,239        0.01        1,997        0.01        4,005        0.03        4,236        0.02   

Reduction in revenue related to warrants

     —          —          —          —          4,283        0.02        —          —          4,283        0.02   

Acquisition accounting impacts of fair valuing inventory

     —          —          30,292        0.16        20,039        0.10        —          —          50,331        0.26   

Impacting operating expenses:

                    

Integration, acquisition, restructuring and other costs

     12,566        0.08        90,921        0.47        43,138        0.23        13,464        0.09        134,059        0.70   

Amortization of intangible assets

     56,783        0.38        98,493        0.51        109,883        0.57        113,930        0.76        208,376        1.08   

Stock compensation expense

     14,079        0.09        12,037        0.06        9,905        0.05        26,262        0.18        21,942        0.11   

Noncontrolling interest share of Non-GAAP adjustments

     (799     (0.01     (776     —          (776     —          (799     (0.01     (1,552     (0.01

Impacting other (income) / expense:

                    

Impairment of Investments

     150        —          —          —          5,000        0.03        150        —          5,000        0.03   

Debt amendment fees

     14,382        0.10        —          —          —          —          14,382        0.10        —          —     

Credit facility - ticking fees

     —          —          (9     —          —          —          —          —          (9     —     

Foreign exchange contract losses related to cash consideration of Pace acquisition

     (6,845     (0.05     1,610        0.01        —          —          (6,845     (0.05     1,610        0.01   

Loss on sale of building

     —          —          —          —          —          —          5,142        0.03        —          —     

Impacting income tax expense:

                    

Foreign withholding tax

     —          —          54,741        0.28        —          —          —          —          54,741        0.28   

Net tax items

     (30,122     (0.20     3,417        0.02        (117,291     (0.61     (60,655     (0.41     (113,874     (0.59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total highlighted items

     62,408        0.42        292,965        1.51        76,178        0.40        109,036        0.73        369,143        1.92   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding highlighted items

   $ 79,166      $ 0.53      $ 90,392      $ 0.47      $ 160,406      $ 0.84      $ 144,919      $ 0.97      $ 250,796      $ 1.30   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares - basic

       146,293          191,743          190,409          145,823          191,076   
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Weighted average common shares - diluted

       149,276          193,591          191,250          149,133          192,421   
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 


ARRIS INTERNATIONAL PLC

PRELIMINARY SUPPLEMENTAL GAAP TO NON-GAAP SALES & GROSS MARGIN RECONCILATION

 

     Q2 2015     Q1 2016     Q2 2016  

Sales - GAAP

     1,260.1        1,614.7        1,730.0   

Fair value of Warrants Adjustment

     —          —          4.3   
  

 

 

   

 

 

   

 

 

 

Adjusted Sales - Non- GAAP

     1,260.1        1,614.7        1,734.3   
  

 

 

   

 

 

   

 

 

 

GAAP Gross Margin

     364.4        384.0        444.7   

Fair Value of Inventory Adjustment

     —          30.3        20.0   

Equity Compensation

     2.2        2.2        2.0   

Fair value of Warrants Adjustment

     —          —          4.3   
  

 

 

   

 

 

   

 

 

 

Adjusted Gross Margin - Non-GAAP

     366.6        416.6        471.1   
  

 

 

   

 

 

   

 

 

 

GAAP Gross Margin - %

     28.9     23.8     25.7

Adjusted Gross Margin - Non-GAAP - %

     29.1     25.8     27.2


ARRIS INTERNATIONAL PLC

PRELIMINARY SUPPLEMENTAL GAAP TO NON-GAAP SALES & DIRECT CONTRIBUTION RECONCILATION

 

     Q2 2016  
     Network &
Cloud
    CPE     Corp/ Other     Total  

Net Sales

     563.5        1,170.3        (3.7     1,730.0   

Non GAAP Adjustments (1)

     —          —          4.3        4.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Sales

     563.5        1,170.3        0.6        1,734.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Direct Contribution (2)

     183.3        177.5        (174.4     186.4   

Non GAAP Adjustments (3)

     —          —          36.2        36.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Direct Contribution

     183.3        177.5        (138.2     222.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Direct Contribution % of sales

     32.5     15.2       12.8

 

(1) Impact of warrants adjustment.
(2) Defined as gross margin less direct operating expenses, excluding amortization of intangible assets, restructuring charges, acquisition, integration and other costs.
(3) Equity compensation expense, adjustments related to the acquisition accounting impacts and warrants adjustment.


ARRIS INTERNATIONAL PLC

PRELIMINARY SUPPLEMENTAL GAAP TO NON-GAAP EPS GUIDANCE RECONCILATION

 

     Q3 2016 Guidance

Estimated GAAP Sales - $M

   1,698 - 1,748

Warrants - $M

   2
  

 

Estimated Adjusted (Non-GAAP) Sales - $M

   1,700 - 1,750
  

 

Estimated GAAP EPS

   $0.28 - $0.33

Reconciling Items:

  

Amortization of Intangibles

   0.49

Stock Compensation Expense

   0.10

Integration and Other Costs

   0.06

Warrants

   0.01

Net tax items

   (0.22)
  

 

Subtotal

   0.44
  

 

Estimated Adjusted (Non-GAAP) EPS

   $0.72 - $0.77
  

 

Note: GAAP sales and EPS will be impacted by the fair value of warrants issued which can vary depending upon the ultimate volumes, product mix and fair value calculation.


Notes to GAAP to Adjusted Non-GAAP Financial Measures

The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP” or referred to herein as “reported”). However, management believes that certain non-GAAP financial measures provide management and other users with additional meaningful financial information that should be considered when assessing our ongoing performance. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the factors management uses in planning for and forecasting future periods. Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, the Company’s reported results prepared in accordance with GAAP. Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:

Stock-Based Compensation Expense: We have excluded the effect of stock-based compensation expenses in calculating our non-GAAP operating expenses and net income (loss) measures. Although stock-based compensation is a key incentive offered to our employees, we continue to evaluate our business performance excluding stock-based compensation expenses. We record non-cash compensation expense related to grants of restricted stock units. Depending upon the size, timing and the terms of the grants, the non-cash compensation expense may vary significantly but will recur in future periods.

Reduction in Revenue Related to Warrants: We entered into an agreement with a customer for the issuance of warrants to purchase up to 8.0 million of ARRIS’ ordinary shares. Vesting of the warrants is subject to certain purchase volume commitments, and therefore the accounting guidance requires that we record the fair value of warrants as a reduction in revenue. Until final vesting, changes in the fair value of the warrants will be marked to market and any adjustment recorded in revenue. We have excluded the effect of the implied fair value in calculating our non-GAAP financial measures. We believe it is useful to understand the effects of these items on our total revenues and gross margin.

Acquisition Accounting Impacts Related to Inventory Valuation: In connection with the accounting related to our acquisitions, business combinations rules require the inventory be recorded at fair value on the opening balance sheet. This is different from historical cost. Essentially we are required to write the inventory up to end customer price less a reasonable margin as a distributor. We have excluded the resulting adjustments in inventory and cost of goods sold as the historic and forward gross margin trends will differ as a result of the adjustments. We believe it is useful to understand the effects of this on revenue and margin.

Integration, Acquisition, Restructuring and Other Costs: We have excluded the effect of acquisition, integration, and other expenses and the effect of restructuring expenses in calculating our non-GAAP operating expenses and net income (loss) measures. We incurred expenses in connection with the ActiveVideo and the Pace acquisitions, which we generally would not otherwise incur in the periods presented as part of our continuing operations. Acquisition and integration expenses consist of transaction costs, costs for transitional employees, other acquired employee related costs, and integration related outside services. Restructuring consists of employee severance and abandoned facilities. We believe it is useful to understand the effects of these items on our total operating expenses.

Amortization of Intangible Assets: We have excluded the effect of amortization of intangible assets in calculating our non-GAAP operating expenses and net income (loss) measures. Amortization of intangible assets is non-cash, and is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of intangible assets will recur in future periods.

Noncontrolling Interest share of Non-GAAP Adjustments: The joint venture formed with Charter for the acquisition of ActiveVideo is accounted for by ARRIS under the consolidation method. As a result, the consolidated statement of operations include the revenues, expenses, and gains and losses of the noncontrolling interest. The amount of net income (loss) related to the noncontrolling interest are reported and presented separately in the consolidated statement of operations. We have excluded the noncontrolling share of any non GAAP adjusted measures recorded by the joint venture, as we believe it is useful to understand the effect of excluding this item when evaluating our ongoing performance.

Impairment of Investments: We have excluded the effect of an other-than-temporary impairment of a cost method investment in calculating our non-GAAP financial measures. We believe it is useful to understand the effect of this non-cash item in our other expense (income).

Debt Amendment Fees: In 2015, the Company amended its credit agreement. This debt modification allowed us to improve the terms and conditions of the credit agreement, extend the maturities of certain loan facilities, increase the amount of the revolving credit facility, and add a new term A-1 loan facility. We have excluded the effect of the associated fees in calculating our non-GAAP financial measures. We believe it is useful to understand the effect of this item in our other expense (income).

Credit Facility - Ticking Fees: In connection with our acquisition of Pace, the cash portion of the consideration was funded through debt financing commitments. A ticking fee is a fee paid to our banks to compensate for the time lag between the commitment allocation on a loan and the actual funding. We have excluded the effect of the ticking fee in calculating our non-GAAP financial measures. We believe it is useful to understand the effect of this item in our other expense (income).

Foreign Exchange Contract (Gains) Losses Related to Cash Consideration of Pace Acquisition: In the second quarter of 2015, the Company announced its intent to acquire Pace plc in exchange for stock and cash. We subsequently entered into foreign exchange forward contracts in order to hedge the foreign currency risk associated with the cash consideration of the Pace acquisition. These foreign exchange forward contracts were not designated as hedges, and accordingly, all changes in the fair value of these instruments are recognized as a loss (gain) on foreign currency in the Consolidated Statements of Operations. We believe it is useful to understand the effect of this on our other expense (income).

Loss on Sale of Building: In the first quarter of 2015, the Company sold land and a building that qualified for sale-leaseback accounting and was classified as an operating lease. A loss has been recorded on the sale. We have excluded the effect of the loss on sale of property in calculating our non-GAAP financial measures. We believe it is useful to understand the effect of excluding this item when evaluating our ongoing performance.

Foreign Withholding Tax: In connection with our acquisition of Pace, ARRIS US Holdings, Inc. transferred shares of its subsidiary ARRIS Financing II Sarl to ARRIS International plc. Under U.S. tax law, based on the best available information, we believe the transfer constituted a deemed distribution from ARRIS U.S. Holdings Inc. to ARRIS International plc that is treated as a dividend for U.S. tax purposes. A deemed dividend of this type is subject to U.S. withholding tax to the extent of the current and accumulated earnings and profits (as computed for tax purposes) (“E&P”) of ARRIS U.S. Holdings Inc., which include the E&P of the former ARRIS Group, Inc. and subsidiaries through


December 31, 2016. Accordingly, ARRIS U.S. Holdings Inc. remitted U.S. withholding tax in the amount of $55 million based upon its estimated E&P of $1.1 billion and the U.S. dividend withholding tax rate of 5 percent (as provided in Article 10 (Dividends) of the United Kingdom-United States Tax Treaty). We have excluded the withholding tax in calculating our non-GAAP financial measures.

Income Tax Expense (Benefit): We have excluded the tax effect of the non-GAAP items mentioned above. Additionally, we have excluded the effects of certain tax adjustments related to tax and legal restructuring, state valuation allowances, research and development tax credits and provision to return differences.