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8-K - 8-K - ARRIS International plcd44636d8k.htm

Exhibit 99.1

ARRIS Announces Preliminary and Unaudited Third Quarter 2016 Results

SUWANEE, Ga., October 26, 2016 – ARRIS International plc (NASDAQ:ARRS) today announced preliminary and unaudited financial results for the third quarter 2016.

Third Quarter 2016 Financial Highlights

 

    GAAP revenues were $1.725 billion

 

    Adjusted revenues (a non-GAAP measure) were $1.735 billion

 

    GAAP net income was $0.25 per diluted share

 

    Adjusted net income (a non-GAAP measure) was $0.77 per diluted share

 

    End-of-quarter cash resources were $1.110 billion

 

    Cash from operating activities was $297 million

 

    Order backlog was $1.034 billion

 

    Book-to-bill ratio was 0.88

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

“We had a strong third quarter with revenue solidly in line with our guidance. Cash generation was very robust, with our combined success in the market and the integration of Pace and planned synergies ahead of schedule. I am very proud of what the ARRIS team has accomplished so far in 2016, and excited to lead the organization going forward,” said Bruce McClelland, newly appointed ARRIS CEO. “The industry shift to enable the delivery of video content over robust high performance broadband networks continues to accelerate and is at the heart of our strategy. I am very confident we have the talent and product pipeline to capitalize on this global opportunity.”

“With respect to the fourth quarter 2016, we expect revenues will be in the range of $1.665 billion to $1.715 billion, adjusted revenues in the range of $1.675 billion to $1.725 billion. GAAP net income per diluted share in the range of $0.23 to $0.27 and adjusted net income per diluted share in the range of $0.68 to $0.72,” said David Potts, ARRIS CFO.

GAAP revenues in the third quarter 2016 of $1.725 billion were up $504 million, or 41%, as compared to third quarter 2015 revenues of $1.221 billion. Third quarter revenues were down $5 million, or less than 1%, as compared to second quarter 2016 revenues of $1.730 billion. Through the first three quarters of 2016, revenues of $5.070 billion were up $1.373 billion, or 37%, as compared to the first three quarters of 2015 revenues of $3.697 billion. GAAP revenues include a $9.6 million reduction for the third quarter 2016 and a $14.0 million reduction for the nine months ended September 30, 2016 as a result of the accounting for the customer warrant programs.

Adjusted revenues (a non-GAAP measure) in the third quarter 2016 were $1.735 billion as compared to $1.221 billion for the third quarter 2015, and the second quarter 2016 revenue of $1.734 billion. Year to date, adjusted revenues were $5.084 billion for 2016 as compared to the first nine months of 2015 adjusted revenues of $3.697 billion. As noted above, the adjustments to revenues are non-cash and solely relate to the accounting for the customer warrant programs.

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 third quarter 2016 was $0.25 per diluted share, as compared to GAAP net income of $0.18 per diluted share in the third quarter 2015 and a GAAP net income of $0.44 per diluted share in the second quarter 2016.

Year to date, GAAP net loss was $(0.37) per diluted share for 2016, as compared to the first nine months of 2015 GAAP net income of $0.42 per diluted share.


Adjusted net income (a non-GAAP measure) in the third quarter 2016 was $0.77 per diluted share, as compared to $0.56 per diluted share for the third quarter 2015, and the second quarter 2016 adjusted net income of $0.84 per diluted share.

Year to date, adjusted net income was $2.07 per diluted share for 2016 as compared to the first nine months of 2015 adjusted net income of $1.53 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 third quarter 2016 with $1.110 billion of cash resources, as compared to $903 million at the end of the second quarter 2016. The Company generated $297 million of cash from operating activities during the third quarter 2016, as compared to $208 million during the third quarter 2015. Through the first nine months of 2016, the Company generated $335 million of cash from operating activities as compared to $216 million generated during the same period in 2015.

Order backlog at the end of the third quarter 2016 was $1.034 billion as compared to $559 million and $1.239 billion at the end of the third quarter 2015 and the second quarter 2016, respectively. The Company’s book-to-bill ratio in the third quarter 2016 was 0.88 as compared to the third quarter 2015 of 0.92 and the second quarter 2016 of 0.94.

ARRIS management will conduct a conference call at 5:00 pm EDT, today, Wednesday, October 26, 2016, to discuss these results in detail. You may participate in this conference call by dialing 888-679-8034 or 617-213-4847 for international calls prior to the start of the call and providing the ARRIS International plc name, conference pass code 26216592# 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 November 9, 2016, by dialing 888-286-8010 or 617-801-6888 for international calls and using the pass code 95195329. 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 fourth quarter 2016;

 

    integration of the 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 fourth quarter 2016 as well as the general outlook are based on preliminary estimates, assumptions and projections that management believes to be reasonable at this time, but are beyond management’s control;

 

    volatility in the currency fluctuation 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 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 customers will result in fluctuations in our GAAP revenues and GAAP net income per diluted share 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 June 30, 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)

 

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

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 1,031,978      $ 870,992      $ 659,181      $ 863,582      $ 673,346   

Short-term investments, at fair value

     67,567        21,881        17,069        15,470        107,777   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash, cash equivalents and short term investments

     1,099,545        892,873        676,250        879,052        781,123   

Accounts receivable, net

     1,104,596        1,053,760        972,540        651,893        647,726   

Other receivables

     45,456        55,698        31,868        12,233        8,684   

Inventories, net

     598,105        647,497        662,287        401,592        367,536   

Prepaid income taxes

     30,123        29,797        22,349        25,624        29,071   

Prepaids

     30,992        39,388        37,285        19,319        26,430   

Current deferred income tax assets

     —          —          —          —          104,345   

Other current assets

     140,895        136,177        123,858        120,490        148,385   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     3,049,712        2,855,191        2,526,437        2,110,203        2,113,300   

Property, plant and equipment, net

     352,380        367,696        369,255        312,311        319,443   

Goodwill

     2,083,567        2,089,840        2,068,274        1,013,963        1,016,696   

Intangible assets, net

     1,772,243        1,902,864        2,036,791        810,448        868,054   

Investments

     80,914        77,749        72,115        69,542        74,924   

Noncurrent deferred income tax assets

     269,011        224,889        221,315        185,439        70,557   

Other assets

     43,989        21,626        18,849        21,610        26,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 7,651,816      $ 7,539,853      $ 7,313,036      $ 4,523,516      $ 4,489,817   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

       

Current liabilities:

          

Accounts payable

   $ 1,010,152      $ 1,016,956      $ 818,494      $ 514,877      $ 558,371   

Accrued compensation, benefits and related taxes

     123,449        97,273        97,346        111,389        97,326   

Accrued warranty

     56,795        66,568        58,812        27,630        35,488   

Deferred revenue

     160,899        147,284        144,603        137,606        97,490   

Current portion of LT debt & financing lease obligations

     82,762        94,217        94,119        43,591        43,506   

Current income taxes liability

     4,581        2,892        65,543        8,368        13,139   

Other accrued liabilities

     317,638        262,603        248,812        169,169        168,870   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,756,276        1,687,793        1,527,729        1,012,630        1,014,190   

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

     2,200,642        2,221,383        2,242,071        1,496,243        1,507,172   

Accrued pension

     51,878        55,742        55,287        64,052        67,570   

Noncurrent income taxes payable

     109,955        84,694        68,974        42,197        38,145   

Noncurrent deferred income tax liabilities

     334,434        348,378        385,690        503        329   

Other noncurrent liabilities

     138,227        138,013        126,330        66,930        71,560   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     4,591,412        4,536,004        4,406,081        2,682,555        2,698,966   

Stockholders’ equity:

          

Ordinary shares

     2,825        2,834        —          —          —     

Common stock

     —          —          2,824        1,790        1,819   

Capital in excess of par value

     3,259,143        3,227,758        3,204,853        1,777,276        1,762,111   

Treasury stock at cost

     —          —          —          (331,329     (331,329

Accumulated other comprehensive loss

     (21,410     (28,973     (20,476     (12,646     (20,236

Retained earnings (deficit)

     (220,296     (240,424     (324,667     358,823        328,782   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ARRIS International plc stockholders’ equity

     3,020,262        2,961,195        2,862,534        1,793,914        1,741,147   

Stockholders’ equity attributable to noncontrolling interest

     40,142        42,655        44,421        47,047        49,704   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     3,060,404        3,003,850        2,906,955        1,840,961        1,790,851   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 7,651,816      $ 7,539,853      $ 7,313,036      $ 4,523,516      $ 4,489,817   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


ARRIS INTERNATIONAL PLC

PRELIMINARY CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2016     2015     2016     2015  

Net sales

   $ 1,725,145      $ 1,221,416      $ 5,069,895      $ 3,696,650   

Cost of sales

     1,282,295        862,083        3,798,278        2,636,400   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     442,850        359,333        1,271,617        1,060,250   

Operating expenses:

        

Selling, general, and administrative expenses

     112,883        101,685        338,593        309,219   

Research and development expenses

     138,781        132,204        452,508        400,932   

Amortization of intangible assets

     89,042        57,132        297,417        171,062   

Integration, acquisition, restructuring and other costs

     10,831        7,531        144,888        20,996   
  

 

 

   

 

 

   

 

 

   

 

 

 
     351,537        298,552        1,233,406        902,209   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     91,313        60,781        38,211        158,041   

Other expense (income):

        

Interest expense

     20,104        14,749        58,832        56,570   

Loss on investments

     5,058        3,446        13,406        6,565   

Loss on foreign currency

     5,729        10,843        8,169        4,204   

Interest income

     (804     (513     (2,772     (1,792

Other expense (income), net

     6,723        (2,827     11,592        5,170   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     54,503        35,083        (51,016     87,324   

Income tax expense

     8,851        11,737        26,069        29,710   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income (loss)

     45,652        23,346        (77,085     57,614   

Net loss attributable to noncontrolling interests

     (2,510     (2,911     (6,902     (4,526
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ARRIS International plc

   $ 48,162      $ 26,257      ($ 70,183   $ 62,140   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 0.25      $ 0.18      $ (0.37   $ 0.43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.25      $ 0.18      $ (0.37   $ 0.42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares:

        

Basic

     190,515        146,781        190,888        146,146   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     191,508        149,313        190,888        149,196   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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


ARRIS INTERNATIONAL PLC

PRELIMINARY CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2016     2015     2016     2015  

Operating Activities:

        

Consolidated net income (loss)

   $ 45,652      $ 23,346        (77,085   $ 57,614   

Depreciation

     22,770        17,306        68,813        54,243   

Amortization of intangible assets

     90,521        58,283        301,828        173,984   

Amortization of deferred finance fees and debt discount

     1,926        1,682        5,790        7,975   

Impairment of intangible assets

     (100     —          2,200        —     

Deferred income tax (benefit) provision

     (18,628     21,758        (97,965     14,968   

Share-based compensation expense

     17,875        16,289        44,052        46,556   

Provision for non-cash warrants

     9,611        —          13,894        —     

Provision for doubtful accounts

     86        4        1,140        2,253   

Loss on disposal of property, plant & equipment and other

     949        36        4,878        6,058   

Loss on investments

     5,059        3,446        13,407        6,565   

Excess tax benefits from stock-based compensation plans

     (1,206     12,488        (3,560     (354

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

        

Accounts receivable

     (50,922     138,139        (1,889     (50,221

Other receivables

     10,242        3,436        (3,780     749   

Inventories

     49,392        15,762        231,129        27,371   

Accounts payable and accrued liabilities

     79,639        (22,050     (247,945     6,128   

Prepaids and other, net

     34,058        (82,032     80,246        (137,402
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     296,924        207,893        335,153        216,487   

Investing Activities:

        

Purchases of investments

     (55,564     (8,511     (77,812     (39,614

Sales of investments

     885        31,810        3,326        61,425   

Purchases of property, plant and equipment, net

     (16,894     (13,377     (40,646     (37,698

Proceeds from sale-leaseback transaction

     —          —          —          24,960   

Acquisitions, net of cash acquired

     —          —          (340,118     (97,905

Purchases of intangible assets

     —          (3,000     (3,310     (37,340

Other, net

     —          67        3,507        2,971   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (71,573     6,989        (455,053     (123,201

Financing Activities:

        

Proceeds from issuance of debt

     —          —          800,000        —     

Proceeds from sale-leaseback financing transaction

     —          —          —          58,729   

Payment of accounts receivable financing facility

     (11,549     —          (23,591     —     

Payment of financing lease obligation

     (198     (159     (512     (264

Payment of debt obligations

     (22,375     (12,375     (297,375     (41,125

Payment for deferred financing fees and debt discount

     —          —          (2,304     (8,239

Repurchase of shares

     (28,032     —          (178,035     (24,999

Excess income tax benefits from stock-based compensation plans

     1,206        (12,488     3,560        354   

Repurchase of shares to satisfy employee minimum tax withholdings

     (3,569     (7,466     (17,762     (32,452

Proceeds from issuance of shares, net

     152        12        4,315        8,016   

Contribution from noncontrolling interest

     —          —          —          54,250   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (64,365     (32,476     288,296        14,270   

Net increase in cash and cash equivalents

     160,986        182,406        168,396        107,556   

Cash and cash equivalents at beginning of period

     870,992        490,940        863,582        565,790   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,031,978      $ 673,346      $ 1,031,978      $ 673,346   
  

 

 

   

 

 

   

 

 

   

 

 

 


ARRIS INTERNATIONAL PLC

PRELIMINARY SUPPLEMENTAL SALES & NET INCOME RECONCILIATION

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

 

    Q3 2015     Q2 2016     Q3 2016     YTD Sep 2015     YTD Sep 2016  
    Amount     Per Diluted
Share
    Amount     Per Diluted
Share
    Amount     Per Diluted
Share
    Amount     Per Diluted
Share
    Amount     Per Diluted
Share
 

Net sales

  $ 1,221,416        $ 1,730,044        $ 1,725,145        $ 3,696,650        $ 5,069,895     

Highlighted items:

                   

Reduction in net sales related to warrants

    —            4,283          9,611          —            13,894     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net sales excluding highlighted items

  $ 1,221,416        $ 1,734,327        $ 1,734,756        $ 3,696,650        $ 5,083,789     
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   
    Q3 2015     Q2 2016     Q3 2016     YTD Sep 2015     YTD Sep 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

  $ 26,257      $ 0.18      $ 84,227      $ 0.44      $ 48,162      $ 0.25      $ 62,140      $ 0.42      $ (70,183   $ (0.37

Highlighted items:

                   

Impacting gross margin:

                   

Stock compensation expense

    2,284        0.02        1,997        0.01        2,773        0.01        6,289        0.04        7,009        0.04   

Reduction in net sales related to warrants

    —          —          4,283        0.02        9,611        0.05        —          —          13,894        0.07   

Acquisition accounting impacts of inventory valuation

    —          —          20,039        0.10        493        —          —          —          50,824        0.26   

Impacting operating expenses:

                   

Integration, acquisition, restructuring and other costs

    7,532        0.05        43,138        0.23        10,831        0.06        20,996        0.14        144,888        0.75   

Amortization of intangible assets

    57,132        0.38        109,883        0.57        89,042        0.46        171,063        1.15        297,417        1.55   

Stock compensation expense

    14,005        0.09        9,905        0.05        15,102        0.08        40,267        0.27        37,044        0.19   

Noncontrolling interest share of non-GAAP adjustments

    (791     (0.01     (776     —          (776     —          (1,590     (0.01     (2,328     (0.01

Impacting other (income) / expense:

    —                       

Impairment on investments

    —          —          5,000        0.03        2,851        0.01        150        —          7,851        0.04   

Debt amendment fees

    669        —          —          —          (237     —          15,051        0.10        (237     —     

Credit facility - ticking fees

    678        —          —          —          —          —          678        —          (9     —     

Foreign exchange contract losses related to cash consideration of Pace acquisition

    15,429        0.10        —          —          —          —          8,584        0.06        1,610        0.01   

Adjustment to liability related to foreign tax credit benefits

    (3,669     (0.02             (3,669     (0.02     —          —     

France R&D tax credit

    —          —          —          —          4,992        0.03        —            4,992        0.03   

Loss on sale of building

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

Impacting income tax expense:

                    —       

Foreign withholding tax

    —          —          —          —            —          —          —          54,741        0.28   

Net tax items

    (35,845     (0.24     (117,291     (0.61     (36,140     (0.19     (96,500     (0.65     (150,014     (0.78
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total highlighted items

    57,424        0.38        76,178        0.40        98,542        0.51        166,461        1.12        467,682        2.43   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding highlighted items

  $ 83,681      $ 0.56      $ 160,405      $ 0.84      $ 146,704      $ 0.77      $ 228,601      $ 1.53      $ 397,499      $ 2.07   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares - basic

      146,781          190,409          190,515          146,146          190,888   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Weighted average common shares - diluted

      149,313          191,250          191,508          149,196          192,115   
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 


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:

Reduction in Revenue Related to Warrants: We entered into agreements with customers for the issuance of warrants to purchase up to 14.0 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 change in 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.

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.

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 cost of goods sold 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).

Adjustment to Liability Related to Foreign Tax Credit Benefits: In connection with our acquisition of Motorola Home, we have obtained certain foreign tax credit benefits for which we have recorded a liability to Google resulting from certain provisions in the acquisition agreement. The expense and subsequent adjustments related to this liability has been recorded as part of other expense (income). We have excluded the effect of the expense in the calculation of our non-GAAP financial measures. We believe it is useful to understand the effects of this item on our total other expense (income).

France R&D Tax Credit: France R&D tax credits were recorded as an other asset on the date of our acquisition of Pace, as Pace France had a history of losses and did not expect to utilize their R&D Tax Credits against a future France income tax liability. Our restructuring in France required a reclassification of the R&D tax credits from other assets to deferred tax assets prior to the utilization of the tax credits. This impact of the reclassification was a charge to other expense with an offsetting tax benefit. We have excluded the effect of the other expense and tax benefit in the calculation of our non-GAAP financial measures. We believe it is useful to understand the effects of this event on our total other expense (income) and income tax.

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.