ARRS
$29.12
Arris Group
$.09
.31%
Earnings Details
3rd Quarter September 2017
Wednesday, November 01, 2017 4:03:00 PM
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Summary

Arris Guides Revenue Below Estimates

Arris Group (ARRS) reported 3rd Quarter September 2017 earnings of $0.75 per share on revenue of $1.7 billion. The consensus earnings estimate was $0.62 per share on revenue of $1.8 billion. Revenue grew 0.2% on a year-over-year basis.

The company said it expects fourth quarter earnings of $0.74 to $0.80 per share on revenue of $1.675 billion to $1.750 billion. The current consensus earnings estimate is $0.78 per share on revenue of $1.81 billion for the quarter ending December 31, 2017.

ARRIS Group Inc provides entertainment & communications solutions. It provides Customer Premises Equipment including set-top, gateway, DSL & cable modem; and Network & Cloud including video infrastructure, access & transport, & cloud solutions.

Results
Reported Earnings
$0.75
Earnings Whisper
-
Consensus Estimate
$0.62
Reported Revenue
$1.73 Bil
Revenue Estimate
$1.77 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

ARRIS Announces Preliminary and Unaudited Third Quarter 2017 Results

ARRIS International plc (ARRS) today announced preliminary and unaudited financial results for the third quarter 2017.

https://mma.prnewswire.com/media/595284/ARRIS_Vertical_4c_PMS.jpg

Third Quarter 2017 Financial Highlights

-- GAAP revenues were $1.729 billion

-- Adjusted revenues (a non-GAAP measure) were $1.732 billion

-- GAAP net income was $0.47 per diluted share

-- Adjusted net income (a non-GAAP measure) was $0.80 per diluted share

-- End-of-quarter cash resources were $1.413 billion

-- Cash from operating activities was $116 million

-- Order backlog was $1.083 billion

-- Book-to-bill ratio was 0.86

"We entered the third quarter with good velocity in both of our segments. In particular, momentum returned with strong demand for our E6000? Converged Edge Router product line, and I am pleased with our results. Operators continue to invest in broadband capacity and connectivity which, combined with our pending Ruckus Networks acquisition, positions us well to capitalize on service providers’ growth plans. With respect to the fourth quarter 2017, we expect revenues in a range of $1.675 billion to $1.750 billion, GAAP net income per diluted share of $0.31 to $0.37, and adjusted net income per diluted share of $0.74 to $0.80, excluding the pending acquisition. As we have highlighted before, the fourth quarter is often the most difficult to forecast, and that variability is reflected in our guidance," said Bruce McClelland, ARRIS CEO.

GAAP revenues in the third quarter 2017 of $1.729 billion were up $4 million, or 0.2%, as compared to third quarter 2016 revenues of $1.725 billion. Third quarter 2017 revenues were up $65 million, or 4%, as compared to second quarter 2017 revenues of $1.664 billion. Through the first three quarters of 2017, revenues of $4.876 billion were down $194 million, or 4%, as compared to the first three quarters of 2016 revenues of $5.070 billion.

Adjusted revenues (a non-GAAP measure) in the third quarter 2017 were $1.732 billion as compared to $1.735 billion for the third quarter 2016, and the second quarter 2017 revenue of $1.667 billion. Year to date, adjusted revenues were $4.884 billion for 2017 as compared to the first nine months of 2016 adjusted revenues of $5.084 billion. Adjusted revenues reflect a $3 million increase for the third quarter 2017 and an $8 million increase for the nine months ended September 30, 2017, as a result of the accounting for customer warrant programs. The adjustments to revenues are non-cash in nature.

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

GAAP net income in the third quarter 2017 was $0.47 per diluted share, as compared to GAAP net income of $0.25 per diluted share in the third quarter 2016 and GAAP net income of $0.16 per diluted share in the second quarter 2017.

Year to date, GAAP net income is $0.42 per diluted share for 2017, as compared to the first nine months of 2016 GAAP net loss of $(0.37) per diluted share.

Adjusted net income (a non-GAAP measure) in the third quarter 2017 was $0.80 per diluted share, as compared to $0.77 per diluted share for the third quarter 2016, and the second quarter 2017 adjusted net income of $0.63 per diluted share.

Year to date, adjusted net income was $1.83 per diluted share for 2017 as compared to the first nine months of 2016 adjusted net income of $2.07 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 2017 with $1.413 billion of cash resources, as compared to $1.385 billion at the end of the second quarter 2017. The Company generated $116 million of cash from operating activities during the third quarter 2017, as compared to $289 million during the third quarter 2016. Through the first nine months of 2017, the Company generated $612 million of cash from operating activities as compared to $327 million generated during the same period in 2016.

The Company purchased 0.7 million ordinary shares for $20 million during the third quarter of 2017. Through the first nine months of 2017 the Company has purchased 5.7 million ordinary shares for $147 million. As of September 30, the Company had $275 million remaining in available repurchase authorization.

Order backlog at the end of the third quarter 2017 was $1.083 billion as compared to $1.034 billion and $1.326 billion at the end of the third quarter 2016 and the second quarter 2017, respectively. The Company’s book-to-bill ratio in the third quarter 2017 was 0.86 as compared to the third quarter 2016 of 0.88 and the second quarter 2017 of 1.01.

ARRIS management will conduct a conference call at 5:00 pm EDT, today, Wednesday, November 1, 2017, to discuss these results in detail. You may participate in this conference call by dialing 1-888-655-5028 or 1-503-343-6025 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 November 8, 2017, by dialing 1-855-859-2056 or 1-404-537-3406 for international calls and using the pass code 1483380. A replay also will be made available for a period of 12 months following the conference call on the 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 2017, the proposed acquisition of the Ruckus Networks business, component pricing, 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 2017, are based on preliminary estimates, assumptions and projections that management believes to be reasonable at this time, but are beyond management’s control;

the proposed acquisition of the Ruckus Networks business may not be completed as a result of failure to obtain regulatory approvals or other reasons and, if completed, the anticipated benefits from the Ruckus Networks acquisition may not be realized;

we may encounter significant transaction costs and unknown liabilities in connection with the Ruckus Networks acquisition;

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

volatility in component pricing and supply could impact revenues and gross margins more than currently anticipated;

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

regulatory changes, including those related to tax, could have an adverse impact on our 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

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.

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-Q for the quarter ended June 30, 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 (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

ARRIS and the ARRIS Logo are trademarks or registered trademarks of ARRIS Enterprises, LLC. All other trademarks are the property of their respective owners. ? 2017 ARRIS Enterprises, LLC. All rights reserved.

ARRIS INTERNATIONAL PLC
PRELIMINARY CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
September 30,
June 30,
March 31,
December 31,
September 30,
2017
2017
2017
2016
2016
ASSETS
Current assets:
Cash and cash equivalents
$1,379,827
$1,346,028
$1,126,248
$980,123
$1,031,978
Short-term investments, at fair value
33,309
38,759
90,673
115,554
67,568
Total cash, cash equivalents and short term investments
1,413,136
1,384,787
1,216,921
1,095,677
1,099,546
Accounts receivable, net
1,056,225
991,539
1,018,108
(1) 1,359,430
1,104,596
Other receivables
145,658
132,742
109,117
(1) 73,193
45,456
Inventories, net
775,142
657,881
556,264
551,541
598,105
Prepaid income taxes
41,780
16,354
21,845
51,476
30,123
Prepaids
27,954
32,149
27,898
21,163
30,992
Other current assets
109,567
119,406
132,340
127,593
140,894
Total current assets
3,569,462
3,334,857
3,082,491
3,280,072
3,049,712
Property, plant and equipment, net
347,506
355,033
354,050
353,378
352,380
Goodwill
2,016,580
2,014,550
2,018,012
2,016,169
2,083,567
Intangible assets, net
1,406,592
1,491,103
1,586,187
1,677,178
1,772,243
Investments
73,199
61,047
65,035
72,932
80,914
Noncurrent deferred income tax assets
193,703
199,102
190,037
298,757
269,011
Other assets
57,246
54,843
58,920
59,878
43,990
$7,664,287
$7,510,535
$7,354,732
$7,758,362
$7,651,816
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$1,266,214
$1,201,883
$1,020,234
$1,048,904
$1,010,152
Accrued compensation, benefits and related taxes
102,222
81,356
73,221
139,795
123,449
Accrued warranty
45,036
44,812
46,330
49,618
56,795
Deferred revenue
118,598
130,454
145,197
132,128
160,899
Current portion of LT debt & financing lease obligations
89,156
89,336
82,767
82,734
82,762
Current income taxes liability
4,420
9,487
20,278
23,134
1,434
Other accrued liabilities
327,099
303,013
300,861
357,823
317,638
Total current liabilities
1,952,745
1,860,341
1,688,888
1,834,135
1,753,129
Long-term debt & financing lease obligations, net of current portion
2,112,494
2,134,506
2,159,300
2,180,009
2,200,642
Accrued pension
54,867
55,532
54,808
52,652
51,878
Noncurrent income taxes payable
115,433
114,187
120,493
123,344
109,955
Noncurrent deferred income tax liabilities
83,058
83,516
89,261
223,529
337,582
Other noncurrent liabilities
118,420
120,381
112,977
117,957
138,227
Total liabilities
4,437,018
4,368,462
4,225,727
4,531,626
4,591,413
Stockholders’ equity:
Ordinary shares
2,788
2,786
2,802
2,831
2,825
Capital in excess of par value
3,367,940
3,356,184
3,322,803
3,314,707
3,259,143
Accumulated other comprehensive loss
8,838
2,211
10,628
3,291
(21,410)
Retained earnings (deficit)
(188,375)
(256,705)
(243,207)
(132,013)
(220,296)
Total ARRIS International plc stockholders’ equity
3,191,191
3,104,474
3,093,026
3,188,816
3,020,263
Stockholders’ equity attributable to noncontrolling interest
36,078
37,599
35,979
37,921
40,141
Total stockholders’ equity
3,227,269
3,142,073
3,129,005
3,226,737
3,060,404
$7,664,287
$7,510,535
$7,354,732
$7,758,362
$7,651,816
(1) The presentation of accounts receivable and other receivables has been revised as of March 31, 2017, to classify approximately $51 million of other receivable previously reflected in trade accounts receivable.
ARRIS INTERNATIONAL PLC
PRELIMINARY CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
For the Three Months
For the Nine Months
Ended September 30,
Ended September 30,
2017
2016
2017
2016
Net sales
$1,728,524
$1,725,145
$4,875,799
$5,069,895
Cost of sales
1,297,369
1,282,295
3,704,029
3,798,278
Gross margin
431,155
442,850
1,171,770
1,271,617
Operating expenses:
Selling, general, and administrative expenses
114,407
112,883
332,966
338,593
Research and development expenses
131,593
138,781
397,653
452,508
Amortization of intangible assets
90,162
89,042
274,819
297,417
Integration, acquisition, restructuring and other costs
10,836
10,831
30,622
144,888
346,998
351,537
1,036,060
1,233,406
Operating income
84,157
91,313
135,710
38,211
Other expense (income):
Interest expense
20,211
20,104
63,238
58,832
Loss (gain) on investments
839
5,058
8,978
13,406
Loss (gain) on foreign currency
(8,543)
5,729
5,570
8,169
Interest income
(2,288)
(804)
(5,997)
(2,772)
Other (income) expense, net
1,434
6,723
2,275
11,592
Income (loss) before income taxes
72,503
54,502
61,646
(51,016)
Income tax (benefit) expense
(14,311)
8,851
(12,613)
26,069
Consolidated net income (loss)
86,815
45,651
74,258
(77,085)
Net loss attributable to noncontrolling interests
(1,505)
(2,510)
(5,299)
(6,902)
Net income (income) attributable to ARRIS International plc $88,320
$48,161
$79,558
($70,183)
Net income (loss) per ordinary share (1):
Basic
$
0.47
$
0.25
$
0.42
$
(0.37)
Diluted
$
0.47
$
0.25
$
0.42
$
(0.37)
Weighted average ordinary shares:
Basic
187,064
190,515
187,878
190,888
Diluted
188,941
191,508
190,264
190,888
(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
For the Nine Months
Ended September 30,
Ended September 30,
2017
2016
2017
2016
Operating Activities:
Consolidated net income (loss)
$
86,815
$
45,652
$
74,258
$
(77,085)
Depreciation
22,337
22,770
65,340
68,813
Amortization of intangible assets
91,983
90,521
279,961
301,828
Amortization of deferred finance fees and debt discount
1,730
1,926
5,621
5,790
Impairment of intangibles
-
(100)
-
2,200
Deferred income tax (benefit) provision
983
(15,481)
(36,540)
(94,818)
Foreign currency remeasurement of certain income tax accounts
2,979
-
10,170
-
Share-based compensation expense
20,213
17,875
61,953
44,052
Provision for non-cash warrants
3,064
9,611
8,145
13,894
Provision for doubtful accounts
(311)
86
(559)
1,140
Loss on disposal of plant, property and equipment and other
4,286
949
5,876
4,878
Loss/impairment on investments
838
5,059
8,977
13,407
Excess tax benefits from stock-based compensation plans
-
(1,206)
-
(3,560)
Changes in operating assets & liabilities, net of effects of acquisitions and disposals:
Accounts receivable
(62,808)
(50,922)
305,212
(1)
(1,889)
Other receivables
(12,916)
10,242
(72,465)
(1)
(3,780)
Inventory
(115,892)
49,392
(222,733)
231,129
Accounts payable and accrued liabilities
96,454
79,639
133,335
(247,945)
Prepaids and other, net
(23,932)
22,954
(14,939)
69,142
Net cash provided by operating activities
115,823
288,967
611,612
327,196
Investing Activities:
Purchases of investments
(6,000)
(47,607)
(68,250)
(69,855)
Sales of investments
5,000
885
155,301
3,326
Purchases of property, plant & equipment, net
(19,489)
(16,894)
(62,389)
(40,646)
Proceeds from sale-leaseback transaction
-
-
826
-
Acquisitions, net of cash acquired
-
-
-
(340,118)
Purchases of intangible assets
(6,000)
-
(6,422)
(3,310)
Other, net
-
-
-
3,507
Net cash (used in) provided by investing activities
(26,489)
(63,616)
19,066
(447,096)
Financing Activities:
Proceeds from issuance of debt
-
-
30,314
800,000
Payment of accounts receivable financing facility
-
(11,549)
-
(23,546)
Payment of financing lease obligation
(185)
(198)
(590)
(557)
Payment of debt obligations
(23,737)
(22,375)
(98,976)
(297,375)
Payment for deferred financing costs and debt discount
-
-
(1,462)
(2,304)
Repurchase of shares
(20,000)
(28,032)
(146,965)
(178,035)
Excess income tax benefits from stock-based compensation plans
-
1,206
-
3,560
Repurchase of shares to satisfy employee minimum tax withholdings
(12,477)
(3,569)
(26,359)
(17,762)
Proceeds from issuance of shares, net
70
152
8,623
4,315
Contribution from noncontrolling interest
-
-
3,500
-
Net cash (used in) provided by financing activities
(56,329)
(64,365)
(231,915)
288,296
Effect of exchange rate changes on cash and cash equivalents
794
-
941
-
Net increase in cash and cash equivalents
33,799
160,986
399,704
168,396
Cash and cash equivalents at beginning of period
1,346,028
870,992
980,123
863,582
Cash and cash equivalents at end of period
$
1,379,827
$
1,031,978
$
1,379,827
$
1,031,978
(1)
The presentation of accounts receivable and other receivables has been revised as of March 31, 2017, to classify approximately $51 million of other receivable previously reflected in trade accounts receivable.
ARRIS INTERNATIONAL PLC
PRELIMINARY ADJUSTED SALES & NET INCOME RECONCILIATION
(in thousands, except per share data) (unaudited)
Q3 2016
Q2 2017
Q3 2017
SEPT YTD 2016
SEPT YTD 2017
Amount
Per Diluted Share
Amount
Per Diluted Share
Amount
Per Diluted Share
Amount
Per Diluted Share
Amount
Per
Diluted Share
Sales
$1,725,145
$1,664,170
$1,728,524
$5,069,895
$4,875,799
Highlighted items:
9,611
2,658
3,064
13,894
8,145
Reduction in revenue related to warrants
Adjusted sales
$1,734,756
$1,666,828
$1,731,588
$5,083,789
$4,883,944
Net income (loss) attributable to ARRIS International plc
$
48,162 $
0.25
$
30,336 $
0.16
$
88,320 $
0.47
$
(70,183) $
(0.37)
$
79,558 $
0.42
Highlighted Items:
Impacting gross margin:
Stock compensation expense
2,773
0.01
3,495
0.02
3,897
0.02
7,009
0.04
10,644
0.06
Reduction in revenue related to warrants
9,611
0.05
2,658
0.01
3,064
0.02
13,894
0.07
8,145
0.04
Acquisition accounting impacts of fair valuing inventory
493
0.00
-
-
-
-
50,824
0.26
908
0.00
Impacting operating expenses:
Integration, acquisition, restructuring and other costs
10,831
0.06
9,690
0.05
10,836
0.06
144,888
0.75
30,621
0.16
Amortization of intangible assets
89,042
0.46
91,012
0.48
90,162
0.48
297,417
1.55
274,819
1.44
Stock compensation expense
15,102
0.08
18,829
0.10
16,316
0.09
37,044
0.19
51,308
0.27
Noncontrolling interest share of non-GAAP adj
(776)
-
(811)
-
(711)
-
(2,328)
(0.01)
(2,326)
(0.01)
Impacting other (income)/expense:
Impairment (gain) on investments
2,851
0.01
-
-
(1,821)
(0.01)
7,851
0.04
929
0.00
Debt amendment fees
(237)
-
2,782
0.01
-
-
(237)
-
2,782
0.01
Credit facility - ticking fees
-
-
-
-
-
-
(9)
-
-
-
FX contract losses related to cash consideration of Pace acquisition -
-
-
-
-
-
1,610
0.01
-
-
Remeasurement of certain deferred tax liabilities
-
-
2,828
0.01
3,569
0.02
-
-
8,508
0.04
France R&D tax credit
4,992
0.03
-
-
-
-
4,992
0.03
-
-
Impacting income tax expense:
Foreign withholding tax
-
-
-
-
-
-
54,741
0.28
-
-
Net tax items
(36,140)
(0.19)
(40,937)
(0.22)
(62,698)
(0.33)
(150,014)
(0.78)
(116,884)
(0.61)
Total highlighted items
98,542
0.51
89,546
0.47
62,614
0.33
467,682
2.43
269,454
1.42
Adjusted net income
$
146,704
$
0.77
$
119,882
$
0.63
$
150,934
$
0.80
$
397,499
$
2.07
$
349,012
$
1.83
Weighted average ordinary shares - basic
190,515
186,803
187,064
190,888
187,878
Weighted average ordinary shares - diluted
191,508
189,002
188,941
192,115
190,264
ARRIS INTERNATIONAL PLC
PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED SALES & GROSS MARGIN RECONCILIATION
(in thousands)
(unaudited)
Q3 2016
Q2 2017
Q3 2017
Sep YTD 2016
Sep YTD 2017
Sales - GAAP
1,725,145
1,664,170
1,728,524
5,069,890
4,875,799
Fair Value of Warrants Adjustment
9,611
2,658
3,064
13,894
8,145
Adjusted Sales - Non- GAAP
1,734,756
1,666,828
1,731,587
5,083,785
4,883,946
GAAP Gross Margin
442,850
403,357
431,155
1,271,611
1,171,770
Fair Value of Inventory Adjustment
494
-
-
50,825
908
Equity Compensation
2,773
3,495
3,897
7,008
10,644
Fair Value of Warrants Adjustment
9,611
2,658
3,064
13,894
8,145
Adjusted Gross Margin - Non-GAAP
455,727
409,511
438,116
1,343,339
1,191,467
GAAP Gross Margin - %
25.7%
24.2%
24.9%
25.1%
24.0%
Adjusted Gross Margin - Non-GAAP -
% 26.3%
24.6%
25.3%
26.4%
24.4%
ARRIS INTERNATIONAL PLC
PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED SALES & DIRECT CONTRIBUTION RECONCILIATION
(in thousands)
(unaudited)
Q3 2017
Network &
CPE
Corp/ Other
Total
Cloud
Net Sales
556,863
1,174,725
(3,064)
1,728,524
Non GAAP Adjustments (1)
-
-
3,064
3,064
Adjusted Net Sales
556,863
1,174,725
(0)
1,731,587
Direct Contribution(2)
218,995
132,168
(166,007)
185,156
Non GAAP Adjustments (3)
-
-
23,277
23,277
Adjusted Direct Contribution
218,995
132,168
(142,730)
208,433
Direct Contribution % of sales
39.3%
11.3%
12.0%
(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 and warrants adjustment.
ARRIS INTERNATIONAL PLC
PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED EPS GUIDANCE RECONCILIATION (2)
(in millions, except per share data)
Q4 2017 Guidance
Estimated GAAP Sales - $M
1,670 - 1,745
Warrants - $M (1)
5
Estimated Adjusted (Non-GAAP) Sales - $M
1,675 - 1,750
Estimated GAAP EPS
$ 0.31 - $ 0.37
Reconciling Items:
Amortization of Intangibles
0.48
Stock Compensation Expense
0.10
Integration and Other Costs
0.09
Warrants (1)
0.02
Net tax items
(0.26)
Subtotal
0.43
Estimated Adjusted (Non-GAAP) EPS
$ 0.74 - $ 0.80
(1) 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.
(2) Excludes pending Ruckus Acquisition

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.

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 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 Costs 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, Pace Combination and pending Ruckus Networks acquisition, 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 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 for the ActiveVideo acquisition is accounted for by ARRIS under the consolidation method. As a result, the consolidated statements 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 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 effects 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, the Company amended its credit agreement. This debt modification allowed us to improve the terms and conditions of the credit agreement and extend the maturitity of the Term Loan B. 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 interest expense.

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 was 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 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).

Remeasurement of Certain Deferred Tax Liabilities: The Company recorded a foreign currency remeasurement (gain) loss related to a deferred income tax liability, in the United Kingdom, arising from the assignment of intangibles acquired in the Pace acquisition. This deferred income tax liability is denominated in GBP. The foreign currency remeasurement gain derives from the remeasurement of the GBP deferred income tax liability to the USD, since the date of the acquisition. We have excluded the impact of this gain in the calculation of our non-GAAP measures. We believe it is useful to understand the effect of this item on our total other expense (income).

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.

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