ARRS
$26.62
Arris Group
($.05)
(.19%)
Earnings Details
4th Quarter December 2016
Wednesday, February 22, 2017 4:06:00 PM
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Summary

Arris Guides Below Estimates

Arris Group (ARRS) reported 4th Quarter December 2016 earnings of $0.70 per share on revenue of $1.8 billion. The consensus earnings estimate was $0.64 per share on revenue of $1.7 billion. Revenue grew 59.7% on a year-over-year basis.

The company said it expects first quarter non-GAAP earnings of $0.36 to $0.40 per share on revenue of $1.44 billion to $1.49 billion. The current consensus earnings estimate is $0.67 per share on revenue of $1.66 billion for the quarter ending March 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
$0.70
Earnings Whisper
-
Consensus Estimate
$0.64
Reported Revenue
$1.76 Bil
Revenue Estimate
$1.69 Bil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

ARRIS Announces Preliminary and Unaudited Fourth Quarter and Full Year 2016 Results

ARRIS International plc (ARRS) today announced preliminary and unaudited financial results for the fourth quarter and full year 2016.

Fourth Quarter 2016 Financial Highlights

-- GAAP revenues were $1.759 billion

-- Adjusted revenues (a non-GAAP measure) were $1.775 billion

-- GAAP net income was $0.45 per diluted share

-- Adjusted net income (a non-GAAP measure) was $0.79 per diluted share

-- End-of-quarter cash resources were $1.107 billion

-- Cash from operating activities was $40.0 million

-- Order backlog was $1.106 billion

-- Book-to-bill ratio was 1.04

On January 4, 2016, the Company completed its combination with 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 ended the year with a strong fourth quarter, delivering results ahead of both our quarterly and annual guidance," said Bruce McClelland, ARRIS CEO. "I’m proud of the work the ARRIS team has done in 2016, completing the integration of Pace and strengthening our relationship with customers. With respect to the first quarter 2017, we are estimating revenues in the range of $1.435 billion to $1.485 billion and adjusted revenues in the range of $1.440 billion to $1.490 billion. We expect GAAP net loss per diluted share in the range of $(0.13) to $(0.09) and adjusted net income per diluted share in the range of $0.36 to $0.40. With regards to the remainder of 2017, we expect the year to follow a similar trend to 2016. Guidance does not include the pending acquisition of the Ruckus Wireless and ICX Switch business announced today." ARRIS will host its 2017 Investor Day on Thursday, March 23 at The Westin New York at Times Square. Registration for the event can be found at the Company’s website: www.arris.com in the Investor Relations section.

GAAP revenues in the fourth quarter 2016 of $1.759 billion were up $657 million, or 60%, as compared to fourth quarter 2015 revenues of $1.102 billion. Fourth quarter 2016 revenues were up $34 million, or 2%, as compared to third quarter 2016 revenues of $1.725 billion. Full year 2016 revenues were $6.829 billion, up $2.031 billion, or 42%, as compared to the full year 2015 revenues of $4.798 billion. GAAP revenues include a $16 million reduction for the fourth quarter 2016 and a $30 million reduction for the full year ended December 31, 2016 as a result of the accounting for our customer warrant programs.

Adjusted revenues (a non-GAAP measure) in the fourth quarter 2016 were $1.775 billion as compared to $1.102 billion for the fourth quarter 2015, and the third quarter 2016 revenue of $1.735 billion. Year to date, adjusted revenues were $6.859 billion for 2016 as compared to 2015 adjusted revenues of $4.798 billion. As noted above, the adjustments to revenues solely relate to the accounting for our 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 fourth quarter 2016 was $0.45 per diluted share, as compared to GAAP net income of $0.20 per diluted share in the fourth quarter 2015 and a GAAP net income of $0.25 per diluted share in the third quarter 2016.

Full year 2016 GAAP net income was $0.09 per diluted share for 2016, as compared to 2015 GAAP net income of $0.62 per diluted share.

Adjusted net income (a non-GAAP measure) in the fourth quarter 2016 was $0.79 per diluted share, as compared to $0.62 per diluted share for the fourth quarter 2015, and third quarter 2016 adjusted net income of $0.77 per diluted share.

Adjusted net income was $2.86 per diluted share for 2016 as compared to 2015 adjusted net income of $2.16 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 fourth quarter 2016 with $1.107 billion of cash resources, as compared to $1.110 billion at the end of the third quarter 2016. The Company generated $40 million of cash from operating activities during the fourth quarter 2016, as compared to generating $127 million during the fourth quarter 2015. For full year 2016, the Company generated $367 million of cash from operating activities as compared to $344 million generated during the full year 2015.

Order backlog at the end of the fourth quarter 2016 was $1.106 billion as compared to $716 million and $1.034 billion at the end of the fourth quarter 2015 and the third quarter 2016, respectively. The Company’s book-to-bill ratio in the fourth quarter 2016 was 1.04 as compared to the fourth quarter 2015 of 1.14 and the third quarter 2016 of 0.88.

ARRIS management will conduct a conference call at 5:00 pm EDT, today, Wednesday, February 22, 2017, to discuss fourth quarter 2016 results, first quarter guidance and the pending acquisition of the Ruckus Wireless and ICX Switch business. You may participate in this conference call by dialing 888-713-4209 or 617-213-4863 prior to the start of the call and providing the ARRIS International plc name, conference pass code 776 161 08# 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 March 1, 2017, by dialing 888-286-8010 or 617-801-6888 for international calls and using the pass code 23890201. 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 first quarter 2017 and beyond;

-- integration of the acquired Pace business;

-- expected sales levels and acceptance of new ARRIS products;

-- expectations for the Ruckus Wireless and ICX Switch Business acquisition; 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 first quarter 2017 as well as the general outlook for 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 Wireless and ICX Switch business may not be completed as a result of failure to obtain regulatory approvals or other reasons;

-- the anticipated benefits from the acquisition may not be realized;

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

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

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; and

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.

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 September 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 (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. 2017. All rights reserved.

ARRIS INTERNATIONAL PLC
PRELIMINARY CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
December 31,
September 30,
June 30,
March 31,
December 31,
2016
2016
2016
2016
2015
ASSETS
Current assets:
Cash and cash equivalents
$988,445
$1,031,978
$870,992
$659,181
$863,582
Short-term investments, at fair value
107,230
67,567
21,881
17,069
15,470
Total cash, cash equivalents and short term investments
1,095,676
1,099,545
892,873
676,250
879,052
Accounts receivable, net
1,359,430
1,104,596
1,053,760
972,540
651,893
Other receivables
73,193
45,456
55,698
31,868
12,233
Inventories, net
550,567
598,105
647,497
662,287
401,592
Prepaid income taxes
53,605
30,123
29,797
22,349
25,624
Prepaids
21,163
30,992
39,388
37,285
19,319
Other current assets
127,593
140,895
136,177
123,858
120,490
Total current assets
3,281,226
3,049,712
2,855,190
2,526,437
2,110,203
Property, plant and equipment, net
353,378
352,380
367,696
369,255
312,311
Goodwill
2,016,169
2,083,567
2,089,840
2,068,274
1,013,963
Intangible assets, net
1,677,178
1,772,243
1,902,864
2,036,791
810,448
Investments
72,932
80,914
77,749
72,115
69,542
Noncurrent deferred income tax assets
302,098
269,011
224,889
221,315
185,439
Other assets
59,877
43,989
21,626
18,849
21,611
$7,762,857
$7,651,816
$7,539,853
$7,313,036
$4,523,516
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$1,047,879
$1,010,152
$1,016,956
$818,494
$514,877
Accrued compensation, benefits and related taxes
139,794
123,449
97,273
97,346
111,389
Accrued warranty
49,618
56,795
66,568
58,812
27,630
Deferred revenue
132,128
160,899
147,284
144,603
137,606
Current portion of LT debt & financing lease obligations
82,734
82,762
94,217
94,119
43,591
Current income tax liabilities
23,134
1,434
2,892
65,543
8,368
Other accrued liabilities
357,823
317,638
262,603
248,812
169,169
Total current liabilities
1,833,109
1,753,129
1,687,793
1,527,729
1,012,630
Long-term debt & financing lease obligations, net of current portion
2,180,009
2,200,642
2,221,383
2,242,071
1,496,243
Accrued pension
52,652
51,878
55,742
55,287
64,052
Noncurrent income taxes payable
127,913
109,955
84,694
68,974
42,197
Noncurrent deferred income tax liabilities
223,529
337,582
348,378
385,690
503
Other noncurrent liabilities
117,957
138,227
138,013
126,330
66,930
Total liabilities
4,535,168
4,591,412
4,536,004
4,406,081
2,682,555
Stockholders’ equity:
Ordinary shares
2,831
2,825
-
-
-
Common stock
-
-
2,834
2,824
1,790
Capital in excess of par value
3,317,193
3,259,143
3,227,758
3,204,853
1,777,276
Treasury stock at cost
-
-
-
(0)
(331,329)
Accumulated other comprehensive loss
3,291
(21,410)
(28,973)
(20,476)
(12,646)
Retained earnings (deficit)
(133,548)
(220,296)
(240,424)
(324,667)
358,823
Total ARRIS International plc stockholders’ equity
3,189,768
3,020,262
2,961,195
2,862,534
1,793,914
Stockholders’ equity attributable to noncontrolling interest
37,921
40,142
42,655
44,421
47,047
Total stockholders’ equity
3,227,688
3,060,404
3,003,850
2,906,955
1,840,961
$7,762,857
$7,651,816
$7,539,853
$7,313,036
$4,523,516
ARRIS INTERNATIONAL PLC
PRELIMINARY CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
For the Three Months
For the Twelve Months
Ended December 31,
Ended December 31,
2016
2015
2016
2015
Net sales
$1,759,223
$1,101,681
$6,829,118
$4,798,331
Cost of sales
1,323,620
743,008
5,121,898
3,379,409
Gross margin
435,603
358,673
1,707,220
1,418,922
Operating expenses:
Selling, general, and administrative expenses
116,577
107,866
455,171
417,086
Research and development expenses
133,459
133,236
585,967
534,168
Amortization of intangible assets
100,046
56,377
397,464
227,441
Integration, acquisition, restructuring and other costs 7,922
8,280
152,810
29,277
358,005
305,760
1,591,411
1,207,971
Operating income
77,598
52,912
115,809
210,951
Other expense (income):
Interest expense
20,985
14,367
79,817
70,936
Loss (gain) on investments
7,788
(345)
21,193
6,219
Loss (gain) on foreign currency
(22,151)
16,557
(13,982)
20,761
Interest income
(1,623)
(587)
(4,395)
(2,379)
Other (income) expense, net
(74)
3,192
11,519
8,361
Income before income taxes
72,673
19,729
21,657
107,052
Income tax (benefit) expense
(11,838)
(7,116)
14,231
22,594
Consolidated net income
84,511
26,845
7,426
84,458
Net loss attributable to noncontrolling interests
(2,237)
(3,197)
(9,139)
(7,723)
Net income attributable to ARRIS International plc
$86,748
$30,041
$16,565
$92,181
Net income per common share (1):
Basic
$
0.46
$
0.20
$
0.09
$
0.63
Diluted
$
0.45
$
0.20
$
0.09
$
0.62
Weighted average common shares:
Basic
190,145
147,109
190,701
146,388
Diluted
192,400
149,842
192,185
149,359
(1)
Calculated based on net income attributable to shareowners of ARRIS International plc
ARRIS INTERNATIONAL PLC
PRELIMINARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Three Months
For the Twelve Months
Ended December 31,
Ended December 31,
2016
2015
2016
2015
Operating Activities:
Consolidated net income
$
84,511
$
26,845
7,426
$
84,459
Depreciation
21,764
17,537
90,577
71,780
Amortization of intangible assets
102,647
57,606
404,475
231,590
Amortization of deferred finance fees and debt discount
1,915
1,671
7,705
9,646
Impairment of intangible assets
-
-
2,200
-
Deferred income tax (benefit) provision
(76,924)
(9,550)
(171,742)
5,418
Remeasurement of certain deferred tax liabilities
(16,356)
-
(16,356)
-
Stock compensation expense
18,483
17,662
62,535
64,218
Provision for non-cash warrants
16,264
-
30,158
-
Provision for doubtful accounts
246
744
1,386
2,997
Loss on disposal of plant, property and equipment and other
3,828
1,718
8,706
7,776
Loss on investments
7,788
(345)
21,194
6,220
Excess tax benefits from stock-based compensation plans
(96)
(3,643)
(3,656)
(3,997)
Changes in operating assets & liabilities, net of effects of acquisitions and disposals:
Accounts receivable
(255,441)
(4,911)
(257,330)
(55,132)
Other receivables
(27,737)
(6,766)
(31,517)
(6,017)
Inventory
47,538
(34,056)
278,667
(6,685)
Accounts payable and accrued liabilities
58,026
8,937
(189,919)
15,065
Prepaids and other, net
53,174
53,936
122,317
(83,466)
Net cash provided by operating activities
39,630
127,385
366,826
343,872
Investing Activities:
Purchases of investments
(63,365)
(8,952)
(133,220)
(48,566)
Sales of investments
22,605
100,399
25,931
161,824
Purchases of property, plant & equipment, net
(26,114)
(12,192)
(66,760)
(49,890)
Proceeds from sale-leaseback transaction
-
-
-
24,960
Acquisitions, net of cash acquired
-
-
(340,118)
(97,905)
Purchases of intangible assets
(2,216)
(2,000)
(5,526)
(39,340)
Other, net
-
-
3,507
2,971
Net cash (used in) provided by investing activities
(69,090)
77,255
(516,186)
(45,946)
Financing Activities:
Proceeds from issuance of debt
-
-
800,000
-
Proceeds from sale-leaseback financing transaction
-
-
-
58,729
Payment of accounts receivable financing facility
-
-
(23,546)
-
Payment of financing lease obligation
(201)
(161)
(758)
(425)
Payment of debt obligations
(22,375)
(12,375)
(319,750)
(53,500)
Payment for deferred financing costs and debt discount
-
-
(2,304)
(8,239)
Repurchase of ordinary shares
-
-
(178,035)
(24,999)
Excess income tax benefits from stock-based compensation plans
96
3,643
3,656
3,997
Repurchase of shares to satisfy employee minimum tax withholdings
(163)
(14,228)
(17,925)
(46,680)
Proceeds from issuance of shares, net
8,570
8,173
12,885
16,189
Contribution from noncontrolling interest
-
544
-
54,794
Net cash (used in) provided by financing activities
(14,073)
(14,404)
274,223
(134)
Net (decrease) increase in cash and cash equivalents
(43,533)
190,236
124,863
297,792
Cash and cash equivalents at beginning of period
1,031,978
673,346
863,582
565,790
Cash and cash equivalents at end of period
$
988,445
$
863,582
$
988,445
$
863,582
ARRIS INTERNATIONAL PLC
PRELIMINARY ADJUSTED SALES & NET INCOME RECONCILIATION
(in thousands, except per share data) (unaudited)
Q4 2015
Q3 2016
Q4 2016
DEC YTD 2015
DEC YTD 2016
Amount
Per
Amount
Per
Amount
Per
Amount
Per
Amount
Per
Diluted
Diluted
Diluted
Diluted
Diluted
Share
Share
Share
Share
Share
Sales
$1,101,681
$1,725,145
$1,759,223
$4,798,332
$6,829,118
Highlighted items:
-
9,611
16,264
-
30,158
Reduction in revenue related to warrants
Adjusted sales
$1,101,681
$1,734,756
$1,775,487
$4,798,332
$6,859,276
Net income attributable to ARRIS International plc
30,041
0.20
48,162
0.25
86,748
0.45
92,181
0.62
16,565
0.09
Highlighted Items:
Impacting gross margin:
Stock compensation expense
2,219
0.01
2,773
0.01
2,837
0.01
8,508
0.06
9,846
0.05
Reduction in revenue related to warrants
-
-
9,611
0.05
16,264
0.08
-
-
30,158
0.16
Acquisition accounting impacts of fair valuing inventory
-
-
493
-
580
-
-
-
51,404
0.27
Impacting operating expenses:
Integration, acquisition, restructuring and other costs
8,281
0.06
10,831
0.06
7,922
0.04
29,277
0.20
152,810
0.80
Amortization of intangible assets
56,377
0.38
89,042
0.46
100,046
0.52
227,440
1.52
397,463
2.07
Stock compensation expense
15,443
0.10
15,102
0.08
15,646
0.08
55,710
0.37
52,690
0.27
Noncontrolling interest share of Non-GAAP adjustments
(1,357)
(0.01)
(786)
(0.00)
(807)
(0.00)
(2,947)
(0.02)
(3,145)
(0.02)
Impacting other (income)/expense:
Impairment of Investments
(159)
-
2,851
0.01
4,446
0.02
(9)
-
12,297
0.06
Debt amendment fees
291
-
(237)
-
-
-
15,342
0.10
(237)
-
Credit facility - ticking fees
1,022
-
-
-
-
-
1,700
0.01
(9)
-
Foreign exchange contract losses related to cash
13,699
0.09
-
-
-
-
22,283
0.15
1,610
0.01
consideration of Pace acquisition
Remeasurement of certain deferred tax liabilities
-
-
-
(16,356)
-
-
-
(16,356)
(0.09)
Adjustment to liability related to foreign tax credit benefits -
-
-
-
-
-
(3,669)
(0.02)
-
-
France R&D tax credit reclassification
-
-
4,992
0.03
(4,992)
(0.03)
-
-
-
-
Loss on sale of building
-
-
-
-
-
-
5,142
0.03
-
-
Impacting income tax expense:
France R&D tax credit reclassification
-
-
(4,992)
(0.03)
4,992
0.03
-
-
-
-
Foreign withholding tax
-
-
-
-
-
-
-
-
54,741
0.28
Net tax items
(32,363)
(0.22)
(31,145)
(0.16)
(64,417)
(0.33)
(128,864)
(0.86)
(209,437)
(1.09)
Total highlighted items
63,453
0.42
98,535
0.51
66,161
0.34
229,913
1.54
533,835
2.78
Adjusted net income
93,494
0.62
146,697
0.77
152,909
0.79
322,094
2.16
550,400
2.86
Weighted average common shares - basic
147,109
190,515
190,145
146,388
190,701
Weighted average common shares - diluted
149,842
191,508
192,400
149,359
192,185
ARRIS INTERNATIONAL PLC
PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED SALES & GROSS MARGIN RECONCILATION
(in thousands)
(unaudited)
Q4 2015
Q3 2016
Q4 2016
Sales - GAAP
1,101,681
1,725,145
1,759,223
Fair Value of Warrants Adjustment
-
9,611
16,264
Adjusted Sales - Non- GAAP
1,101,681
1,734,757
1,775,487
GAAP Gross Margin
358,673
442,850
435,603
Fair Value of Inventory Adjustment
-
494
580
Equity Compensation
2,219
2,773
2,837
Fair Value of Warrants Adjustment
-
9,611
16,264
Adjusted Gross Margin - Non-GAAP
360,892
455,728
455,284
GAAP Gross Margin - %
32.6%
25.7%
24.8%
Adjusted Gross Margin - Non-GAAP -
% 32.8%
26.3%
25.6%
ARRIS INTERNATIONAL PLC
PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED SALES & DIRECT CONTRIBUTION RECONCILATION
(in thousands)
(unaudited)
Q4 2016
Network &
CPE
Corp/ Other
Total
Cloud
Net Sales
519,871
1,255,552
(16,200)
1,759,223
Non GAAP Adjustments (1)
-
-
16,264
16,264
Adjusted Net Sales
519,871
1,255,552
64
1,775,487
Direct Contribution(2)
179,128
182,679
(176,240)
185,567
Non GAAP Adjustments (3)
-
-
35,327
35,327
Adjusted Direct Contribution
179,128
182,679
(140,913)
220,894
Direct Contribution % of sales 34.5%
14.5%
12.4%
(1)
Impact of warrant adjustment.
(2) Defined as gross margin less direct operating expenses, excluding amortization of intangible assets, restructuring
charges, acquisition, integration and other costs.
(3) Equity compensation expense, adjustments related to the acquisition accounting impacts and warrants adjustment.
ARRIS INTERNATIONAL PLC
PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED EPS GUIDANCE RECONCILATION
(in thousands)
Q1 2017 Guidance
Estimated GAAP Sales - $M
1,435 - 1,485
Warrants - $M
5
Estimated Adjusted (Non-GAAP) Sales - $M
1,440 - 1,490
Estimated GAAP EPS
$ (0.13) - $ (0.09)
Reconciling Items:
Amortization of Intangibles
0.48
Stock Compensation Expense
0.10
Integration and Other Costs
0.01
Warrants
0.02
Net tax items
(0.12)
Subtotal
0.49
Estimated Adjusted (Non-GAAP) EPS
$ 0.36 - $ 0.40
Note:
GAAP sales and EPS will be impacted by the fair value of warrants issued which can vary
depending upon the ultimate volumes, product mix and fair value calculation.

Notes to GAAP to Adjusted Non-GAAP Financial Measures

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

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).

Remeasurement of Deferred Tax Liability Related to Acquired Intangible Assets: In the fourth quarter of 2016, the Company recorded a foreign currency remeasurement gain 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 effects of this item on our total 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, a subsidiary of Pace, had a history of losses and did not expect to utilize their R&D Tax Credits against a future France income tax liability but rather expected to use the credits to offset non-income taxes. In the third quarter of 2016, 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. However, during the fourth quarter of 2016, the Company determined that the original classification within income taxes was more appropriate and therefore the reclassification from the third quarter of 2016 reversed. 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.

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SOURCE ARRIS

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