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8-K - 8-K - ARRIS International plcd580194d8k.htm

Exhibit 99.1

ARRIS Announces Preliminary and Unaudited First Quarter 2018 Results

SUWANEE, Ga., May 1, 2018 – ARRIS International plc (NASDAQ:ARRS) today announced preliminary and unaudited financial results for the first quarter 2018.

First Quarter 2018 Financial Highlights

 

    Revenues were $1.578 billion

 

    GAAP net loss was ($0.07) per diluted share

 

    Adjusted net income (a non-GAAP measure) was $0.73 per diluted share

 

    End-of-quarter cash resources were $543 million

 

    Cash from operating activities was $96 million

 

    Order backlog was $1.3 billion

 

    Book-to-bill ratio was 1.11

 

    Repurchased ~986,000 shares for $25 million

“We delivered strong profitability to start the year, led by a great quarter of E6000 DOCSIS® 3.1 capacity sales and Enterprise Networks’ results,” said Bruce McClelland, ARRIS CEO. “This marked the first full quarter for Enterprise Networks with better than expected results from both wired and wireless product lines. Performance from Enterprise Networks and Network & Cloud more than offset a lower quarter in CPE sales. Overall our results demonstrated good progress toward our goals of driving profitable growth by diversifying into higher-margin products, expanding internationally and broadening the capabilities of ARRIS to deliver innovative services to address the explosive demand for bandwidth capacity.

“With respect to the second quarter 2018, we expect revenues will be in the range of $1.760 billion to $1.810 billion, GAAP net income per diluted share in the range of $0.24 to $0.29, and adjusted net income per diluted share in the range of $0.72 to $0.77. The strong start to the year creates good momentum to achieve our full year targets.”

On December 1, 2017, the Company completed the acquisition of Ruckus Networks, and, as a result, comparisons to prior year periods are materially affected.

Revenues in the first quarter 2018 of $1.578 billion were up $95 million, or 6%, as compared to first quarter 2017 revenues of $1.483 billion. First quarter revenues were down $161 million, or 9%, as compared to fourth quarter 2017 revenues of $1.739 billion.

GAAP net loss in the first quarter 2018 was ($0.07) per diluted share. First quarter 2017 GAAP net loss was ($0.21) per diluted share, and fourth quarter 2017 GAAP net income was $0.07 per diluted share.

Adjusted net income (a non-GAAP measure) in the first quarter 2018 was $0.73 per diluted share, as compared to $0.40 per diluted share for the first quarter 2017, and the fourth quarter 2017 adjusted net income of $0.88 per diluted share.

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

Cash resources of the Company at the end of the first quarter, 2018 were $543 million of cash resources as compared to $511 million at the end of the fourth quarter 2017. The Company generated $96 million of cash from operating activities during the first quarter 2018, as compared to generating $250 million during the first quarter of 2017.

The Company repurchased approximately 986,000 ordinary shares for $25 million during the first quarter. Since the end of the first quarter 2018, the Company has repurchased approximately 895,000 additional ordinary shares for $24 million. As of May 1, 2018, the Company has $476 million remaining in available share repurchase authorization.

Order backlog at the end of the first quarter 2018 was $1.293 billion, as compared to $1.304 billion and $1.121 billion at the end of the first quarter 2017 and the fourth quarter 2017, respectively. The Company’s book-to-bill ratio in the first quarter 2018 was 1.11, as compared to the first quarter 2017 of 1.13 and the fourth quarter 2017 of 1.02.

ARRIS management will conduct a conference call at 5:00 pm EDT, today, Tuesday, May 1, 2018, to discuss these results in detail. You may participate in this conference call by dialing 888-655-5028 or 503-343-6025 for international calls prior to the start of the call. 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 May 8, 2018, by dialing 855-859-2056 or 404-537-3406 for international calls and using passcode 3398479. A replay also will be made available for a period of 12 months following the conference call on ARRIS’s website site at (www.arris.com).


Forward-Looking Statements

Statements made in this press release, including those related to revenues and net income for the second quarter and full year 2018, growth expectations, cost initiatives, 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 second quarter 2018, as well as the general outlook for 2018, 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 component pricing and supply could impact revenues and gross margins more than currently anticipated;

 

    the anticipated benefits from the Ruckus Networks acquisition may not be realized;

 

    proposed tariffs on the import of certain products into the U.S., and any retaliatory tariffs imposed on U.S. products, could have a material adverse result on our financials results;

 

    volatility in currency fluctuation may adversely impact our international customers’ ability or willingness to purchase products and the pricing of products;

 

    impacts of the U.K. invoking Article 50 of the Lisbon Treaty to leave the European Union, could have an adverse impact on results of operations;

 

    regulatory changes, including those related to recently completed changes to the U.S. income tax code, could have an adverse impact on operations and results of operations;

 

    the impact of litigation and similar regulatory proceedings that we are involved in or may become involved in, including the costs of such litigation; and

 

    the Company’s 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 the Company offers.

These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the Company’s business and results from operations. 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-K for the year ended December 31, 2017. In providing forward-looking statements, the Company expressly disclaims any obligation to update these statements publicly or otherwise, whether as a result of new information, future events or otherwise, except as required by law.

About ARRIS

ARRIS International plc (NASDAQ: ARRS) is powering a smart, connected world. The company’s leading hardware, software and services transform the way that people and businesses stay informed, entertained and connected. 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. © 2018 ARRIS Enterprises, Inc. All rights reserved.


ARRIS INTERNATIONAL PLC

PRELIMINARY CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

     March 31,
2018
    December 31,
2017
    September 30,
2017
    June 30,
2017
    March 31,
2017
 

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 506,240     $ 487,573     $ 1,379,827     $ 1,346,028     $ 1,126,248  

Short-term investments, at fair value

     36,804       23,874       33,309       38,759       90,673  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash, cash equivalents and short term investments

     543,044       511,447       1,413,136       1,384,787       1,216,921  

Accounts receivable, net

     1,008,603       1,218,089       1,056,225       991,539       1,018,108  

Other receivables

     169,681       157,845       145,658       132,742       109,117  

Unbilled receivables

     26,005       —         —         —         —    

Inventories, net

     849,069       825,211       775,142       657,881       556,264  

Prepaid income taxes

     26,409       28,351       41,780       16,354       21,845  

Prepaids

     36,308       26,644       27,954       32,149       27,898  

Other current assets

     172,993       145,953       109,568       119,405       132,339  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     2,832,112       2,913,540       3,569,462       3,334,856       3,082,491  

Property, plant and equipment, net

     309,457       372,467       347,506       355,033       354,049  

Goodwill

     2,336,820       2,278,512       2,016,580       2,014,550       2,018,012  

Intangible assets, net

     1,583,299       1,771,362       1,406,592       1,491,103       1,586,187  

Investments

     69,858       71,082       73,199       61,047       65,035  

Deferred income taxes

     131,417       115,436       193,703       199,102       190,037  

Other assets

     103,525       101,858       57,246       54,844       58,920  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 7,366,488     $ 7,624,257     $ 7,664,287     $ 7,510,535     $ 7,354,732  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

          

Current liabilities:

          

Accounts payable

   $ 1,010,812     $ 1,206,656     $ 1,266,214     $ 1,201,883     $ 1,020,234  

Accrued compensation, benefits and related taxes

     113,029       155,966       102,222       81,356       73,221  

Accrued warranty

     42,434       44,507       45,036       44,812       46,330  

Deferred revenue

     143,740       115,224       118,598       130,454       145,197  

Current portion of LT debt & financing lease obligations

     83,633       83,559       89,156       89,336       82,767  

Income taxes payable

     4,937       6,244       4,420       9,487       20,277  

Other accrued liabilities

     316,206       321,113       327,099       303,013       300,861  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,714,791       1,933,269       1,952,746       1,860,341       1,688,888  

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

     2,095,320       2,116,244       2,112,494       2,134,506       2,159,300  

Accrued pension

     43,443       42,637       54,867       55,533       54,808  

Noncurrent income taxes

     159,148       144,665       115,433       114,187       120,493  

Deferred income taxes

     68,825       68,888       83,058       83,515       89,261  

Other noncurrent liabilities

     127,587       134,520       118,420       120,381       112,977  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     4,209,114       4,440,223       4,437,018       4,368,463       4,225,727  

Stockholders’ equity:

          

Ordinary shares

     2,769       2,768       2,788       2,786       2,802  

Capital in excess of par value

     3,392,415       3,387,128       3,367,939       3,356,184       3,322,803  

Accumulated other comprehensive loss

     12,545       4,552       8,838       2,211       10,628  

Accumulated deficit

     (266,264     (225,881     (188,375     (256,705     (243,207
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ARRIS International plc stockholders’ equity

     3,141,465       3,168,567       3,191,190       3,104,475       3,093,026  

Stockholders’ equity attributable to noncontrolling interest

     15,909       15,467       36,079       37,598       35,979  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     3,157,374       3,184,034       3,227,269       3,142,073       3,129,005  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 7,366,488     $ 7,624,257     $ 7,664,287     $ 7,510,535     $ 7,354,732  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


ARRIS INTERNATIONAL PLC

PRELIMINARY CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     For the Three Months
Ended March 31,
 
     2018     2017  

Net sales

   $ 1,577,710     $ 1,483,105  

Cost of sales

     1,102,027       1,145,848  
  

 

 

   

 

 

 

Gross margin

     475,683       337,257  

Operating expenses:

    

Selling, general, and administrative expenses

     161,203       104,638  

Research and development expenses

     169,797       132,962  

Amortization of intangible assets

     114,708       93,646  

Impairment of goodwill

     3,400       —    

Integration, acquisition, restructuring and other costs

     13,655       10,095  
  

 

 

   

 

 

 
     462,764       341,341  
  

 

 

   

 

 

 

Operating income (loss)

     12,919       (4,084

Other expense (income):

    

Interest expense

     22,525       19,683  

Loss on investments

     527       4,530  

Loss on foreign currency

     4,833       4,739  

Interest income

     (1,532     (1,922

Other (income) expense, net

     109       (85
  

 

 

   

 

 

 

Loss before income taxes

     (13,543     (31,030

Income tax expense

     3,489       10,001  
  

 

 

   

 

 

 

Consolidated net loss

     (17,032     (41,031

Net loss attributable to noncontrolling interests

     (3,432     (1,933
  

 

 

   

 

 

 

Net loss attributable to ARRIS International plc

   ($ 13,600   ($ 39,098
  

 

 

   

 

 

 

Net loss per ordinary share (1):

    

Basic

   $ (0.07   $ (0.21
  

 

 

   

 

 

 

Diluted

   $ (0.07   $ (0.21
  

 

 

   

 

 

 

Weighted average ordinary shares:

    

Basic

     184,805       189,796  
  

 

 

   

 

 

 

Diluted

     184,805       189,796  
  

 

 

   

 

 

 

 

(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 March 31,  
     2018     2017  

Operating Activities:

    

Consolidated net loss

   $ (17,032   $ (41,031

Depreciation

     22,874       21,313  

Amortization of acquired intangible assets

     116,595       95,306  

Amortization of deferred finance fees and debt discount

     1,215       1,903  

Impairment of goodwill

     3,400       —    

Deferred income taxes

     (13,327     (15,667

Foreign currency remeasurement of deferred income taxes

     3,697       2,112  

Stock compensation expense

     19,256       19,415  

Provision for non-cash warrants

     —         2,423  

Provision (recovery) for doubtful accounts

     (292     (179

Loss on disposal of plant, property and equipment and other

     156       292  

Loss on investments and others

     662       4,530  

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

    

Accounts receivable

     209,405       343,960  

Other receivables

     (11,836     (35,924

Unbilled receivables

     (25,829     —    

Inventories

     (24,397     (3,152

Accounts payable and accrued liabilities

     (228,151     (144,640

Prepaids and other, net

     39,517       (601
  

 

 

   

 

 

 

Net cash provided by operating activities

     95,913       250,060  

Investing Activities:

    

Purchases of investments

     (26,500     (55,879

Sales of investments

     11,000       91,885  

Purchases of property, plant & equipment, net

     (15,196     (21,867

Deposit proceeds for sale of property, plant and equipment

     10,000       —    

Other, net

     171       826  
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (20,525     14,965  

Financing Activities:

    

Payment of financing lease obligation

     (190     (204

Payment of debt obligations

     (21,875     (22,375

Repurchase of shares

     (25,000     (83,110

Repurchase of shares to satisfy employee minimum tax withholdings

     (13,976     (13,754

Proceeds from issuance of shares, net

     22       23  

Contribution from noncontrolling interest

     1,207       —    
  

 

 

   

 

 

 

Net cash used in financing activities

     (59,812     (119,420

Effect of exchange rate changes on cash, cash equivalents and restricted cash

     3,791       597  

Net (decrease) increase in cash, cash equivalents and restricted cash

     19,367       146,202  

Cash, cash equivalents and restricted cash at beginning of period

     489,116       981,692  
  

 

 

   

 

 

 

Cash, cash equivalents and restricted cash at end of period

   $ 508,483     $ 1,127,894  
  

 

 

   

 

 

 

Reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets

    

Cash and cash equivalents

   $ 506,240     $ 1,126,248  

Restricted cash included in other current assets

     1,491       162  

Restricted cash included in other assets

     752       1,484  
  

 

 

   

 

 

 

Total

   $ 508,483     $ 1,127,894  
  

 

 

   

 

 

 


ARRIS INTERNATIONAL PLC

PRELIMINARY ADJUSTED SALES & NET INCOME RECONCILIATION

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

 

     Q1 2017     Q4 2017     Q1 2018  
     Amount     Per
Diluted
Share
    Amount     Per
Diluted
Share
    Amount     Per
Diluted
Share
 

Sales

   $ 1,483,105       $ 1,738,593       $ 1,577,710    

Highlighted items:

            

Adjustment to revenue related to warrants

     2,423         (8,145       —      

Acquisition accounting impacts of deferred revenue

     —           1,120         5,694    
  

 

 

     

 

 

     

 

 

   

Adjusted sales

   $ 1,485,528       $ 1,731,568       $ 1,583,404    
  

 

 

     

 

 

     

 

 

   

Net income (loss) attributable to ARRIS International plc

   $ (39,098   $ (0.21   $ 12,469     $ 0.07     $ (13,600   $ (0.07

Highlighted Items:

            

Impacting gross margin:

            

Stock compensation expense

     3,252       0.02       3,303       0.02       3,253       0.02  

Adjustment to revenue related to warrants

     2,423       0.01       (8,145     (0.04     —         —    

Acquisition accounting impacts of deferred revenue

     —         —         1,120       0.01       5,694       0.03  

Acquisition accounting impacts of fair valuing inventory

     908       0.00       7,560       0.04       16,971       0.09  

Impacting operating expenses:

            

Integration, acquisition, restructuring and other costs

     10,095       0.05       67,736       0.36       13,655       0.07  

Amortization of intangible assets

     93,646       0.49       100,588       0.53       114,708       0.61  

Impairment on goodwill and intangible assets

     —         —         55,000       0.29       3,400       0.02  

Stock compensation expense

     16,163       0.08       15,403       0.08       16,003       0.09  

Noncontrolling interest share of non-GAAP adj

     (804     —         (20,026     (0.11     (2,321     (0.01

Impacting other (income)/expense:

            

Impairment (gain) on investments

     2,750       0.01       —         —         —         —    

Debt amendment fees

     —         —         3,069       0.02       —         —    

Remeasurement of certain deferred tax liabilities

     2,112       0.01       852       —         3,697       0.02  

Impacting income tax expense:

            

Net tax items

     (13,333     (0.07     (73,267     (0.39     (24,541     (0.13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total highlighted items

     117,212       0.61       153,193       0.81       150,519       0.80  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income

   $ 78,114     $ 0.40     $ 165,662     $ 0.88     $ 136,919     $ 0.73  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average ordinary shares - basic

       189,796         186,548         184,805  
    

 

 

     

 

 

     

 

 

 

Weighted average ordinary shares - diluted

       192,879         188,829         187,175  
    

 

 

     

 

 

     

 

 

 


ARRIS INTERNATIONAL PLC

PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED SALES & GROSS MARGIN RECONCILIATION

(in thousands)

(unaudited)

 

     Q1 2017     Q4 2017     Q1 2018  

Sales - GAAP

     1,483,105       1,738,593       1,577,710  

Adjustment to revenue related to warrants

     2,423       (8,145     —    

Acquisition accounting impacts of deferred revenue

     —         1,120       5,694  
  

 

 

   

 

 

   

 

 

 

Adjusted Sales - Non- GAAP

     1,485,528       1,731,569       1,583,404  
  

 

 

   

 

 

   

 

 

 

GAAP Gross Margin

     337,257       494,469       475,683  

Acquisition accounting impacts of fair valuing inventory

     908       7,560       16,971  

Acquisition accounting impacts of deferred revenue

     —         1,120       5,694  

Stock compensation expense

     3,252       3,303       3,253  

Adjustment to revenue related to warrants

     2,423       (8,145     —    
  

 

 

   

 

 

   

 

 

 

Adjusted Gross Margin - Non-GAAP

     343,840       498,307       501,601  
  

 

 

   

 

 

   

 

 

 

GAAP Gross Margin - %

     22.7     28.4     30.2

Adjusted Gross Margin - Non-GAAP - %

     23.1     28.8     31.7


ARRIS INTERNATIONAL PLC

PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED SALES & ADJUSTED DIRECT CONTRIBUTION RECONCILIATION

(in thousands)

(unaudited)

 

     Q1 2018  
     Network &
Cloud
    CPE     Enterprise     Corp/ Other     Total  

Net Sales

     538,264       875,226       169,914       (5,694     1,577,710  

Non GAAP Adjustments (1)

     —         —         —         5,694       5,694  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Sales

     538,264       875,226       169,914       0       1,583,404  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Direct Contribution (2)

     228,538       49,761       25,528       (159,145     144,683  

Adjusted Direct Contribution (3)

     214,717       43,154       25,927       (96,980     186,818  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Direct Contribution % of sales

     39.9     4.9     15.3       11.8

Other Items

          

Amortization of intangibles

     25,135       63,248       25,510       815       114,708  

Impairment of goodwill

     3,400       —         —         —         3,400  

Integration, acquisition, restructuring and other costs

     —         —         3,066       10,589       13,655  

Depreciation expense

     6,900       7,716       3,565       4,698       22,880  

Equity compensation expense

     7,771       5,298       2,387       3,801       19,256  

 

(1) Impact of adjustment related to acquisition accounting impacts
(2) Defined as gross margin less direct operating expenses, excluding amortization of intangible assets, restructuring charges, acquisition, integration and other costs.
(3) Defined as direct contribution less allocated facility costs, service provider sales and marketing costs plus equity compensation and depreciation expense


ARRIS INTERNATIONAL PLC

PRELIMINARY SUPPLEMENTAL DIRECT CONTRIBUTION TO ADJUSTED DIRECT CONTRIBUTION RECONCILIATION

(in thousands)

(unaudited)

 

     Q1 2018  
     Network &
Cloud
    CPE     Enterprise     Corp/ Other     Total  

Direct Contribution (1)

     228,538       49,761       25,528       (159,145     144,683  

Allocated costs (2)

     (28,492     (19,622     (5,553     53,666       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Direct Contribution after allocation

     200,046       30,139       19,976       (105,479     144,683  

Equity compensation expense

     7,771       5,298       2,387       3,801       19,256  

Depreciation expense

     6,900       7,716       3,565       4,698       22,880  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Direct Contribution

     214,717       43,154       25,927       (96,980     186,818  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Defined as gross margin less direct operating expenses, excluding amortization of intangible assets, restructuring charges, acquisition, integration and other costs.
(2) Allocated facility costs and service provider sales and marketing costs


ARRIS INTERNATIONAL PLC

PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED EPS GUIDANCE RECONCILIATION

(in millions, except per share data)

 

     Q2 2018 Guidance   FY 2018 Guidance

Estimated GAAP EPS

   $0.24 - $0.29   $0.73 - $0.98

Reconciling Items:

    

Amortization of intangibles

   0.47   1.98

Stock compensation expense

   0.13   0.50

Integration, acquisition, restructuring and other costs

   0.05   0.13

Purchase accounting Items

   0.01   0.16

Impairment of goodwill

   0.00   0.02

NettTax items

   (0.18)   (0.72)
  

 

 

 

Subtotal

   0.48   2.07
  

 

 

 

Estimated Adjusted (Non-GAAP) EPS

   $0.72 - $0.77   $2.80 - $3.05  
  

 

 

 


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 two customers for the issuance of warrants to purchase up to 14.0 million of ARRIS’s ordinary shares. Vesting of the warrants is subject to certain purchase volume commitments, and therefore the accounting guidance requires that we record any 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.

Acquisition Accounting Impacts Related to Deferred Revenue: In connection with the accounting related to our acquisitions, business combination rules require us to account for the fair values of deferred revenue arrangements for post contract support in our purchase accounting. The non-GAAP adjustment to our sales and cost of sales is intended to include the full amounts of such revenues as if these purchase accounting adjustments had not been applied. We believe the adjustment to these revenues is useful as a measure of the ongoing performance of our business. We historically have experienced high renewal rates related to our support agreements, and our objective is to increase the renewal rates on acquired post contract support agreements. However, we cannot be certain that our customers will renew their contracts.

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 acquired 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 the 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 measures. We incurred expenses in connection with the Pace and Ruckus Networks 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 expenses consist of employee severance, abandoned facilities, product line disposition and other exit costs. We believe it is useful to understand the effects of these items on our total operating expenses.

Impairment of Goodwill and Intangible Assets: We have excluded the effect of the estimated impairment of goodwill and intangible assets in calculating our non-GAAP operating expenses and net income measures. Although an impairment does not directly impact the Company’s current cash position, such expense represents the declining value of the business, technology and other intangible assets that were acquired. We exclude these impairments when significant and they are not reflective of ongoing business and operating results.

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 for the ActiveVideo acquisition is accounted for by ARRIS under the consolidation method. As a result, the consolidated Statements of Income 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 Statements of Income. We have excluded the noncontrolling share of any non- GAAP adjusted measures recorded by the venture, as we believe it is useful to understand the effect of excluding this item when evaluating our ongoing performance.


Impairment (Gain) on Investments: We have excluded the effect of other-than-temporary impairments and certain gains on investments 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 2017 and 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 new term 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).

Remeasurement of Deferred Taxes: The Company records foreign currency remeasurement gains and losses related to deferred tax liabilities in the United Kingdom. The foreign currency remeasurement gains and losses derived from the remeasurement of the deferred income taxes from GBP to USD. We have excluded the impact of these gains and losses in the calculation of our non-GAAP measures. We believe it is useful to understand the effects of this item on our total other expense (income).

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 and non-US valuation allowances, benefits for releases of uncertain tax positions due to settlement, change in law or statute of limitations and provision to return differences.