Press Release

ARRIS Announces Preliminary and Unaudited Third Quarter 2018 Results
Conference call details have changed

SUWANEE, Ga., Nov. 8, 2018 /PRNewswire/ -- ARRIS (NASDAQ: ARRS) today announced preliminary and unaudited financial results for the third quarter 2018. In a separate release issued today, ARRIS and CommScope (NASDAQ: COMM) announced an agreement under which CommScope will acquire ARRIS in an all-cash transaction for $31.75 per share, or a total purchase price of approximately $7.4 billion, including the repayment of debt.

As a result of this announcement, ARRIS has cancelled the third quarter 2018 earnings conference call scheduled for 5:00 PM EST today. ARRIS has also suspended any previously issued guidance.

ARRIS and CommScope will host a joint conference call today at 8:30 a.m. EST to discuss the transaction. The conference call can be accessed by dialing +1 884 397-6169 (U.S. / Canada) or +1 478-219-0508 (International) and giving the passcode 1458698.  

A live webcast of the conference call will be available on the investor relations section of ARRIS's website at www.ARRIS.com.  A replay will also be made available for a limited period of time following the conference call on the ARRIS website at www.ARRIS.com.

Third Quarter 2018 Financial Highlights

  • Revenues were $1.651 billion
  • GAAP net income was $0.26 per diluted share
  • Adjusted net income (a non-GAAP measure) was $0.68 per diluted share
  • End-of-quarter cash resources were $520 million

Revenues were $1.651 billion in the quarter and $4.955 billion through the first nine months of 2018. 

GAAP net income in the quarter was $0.26 per diluted share.  Through the first nine months of 2018, GAAP net income was $0.38 per diluted share.       

Adjusted net income (a non-GAAP measure) in the quarter was $0.68 per diluted share.  Through the first nine months of 2018, adjusted net income was $2.14 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 can be found on the Company's website (www.ARRIS.com).

Cash & Cash Equivalents - The Company generated $221 million of cash from operating activities during third quarter 2018 and ended the quarter with $520 million of cash resources.

The Company repurchased approximately 13.9 million ordinary shares for $353 million YTD through November 7, 2018.

Full results will be filed in our 10Q following market close.

Forward-Looking Statements

Statements made in this press release, including those related to revenues and net income for the fourth quarter 2018, the proposed ARRIS and CommScope transaction and 2019 growth expectations, share repurchases, 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 fourth quarter 2018, as well as the general outlook for 2019, 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;
  • fluctuations in share price or reductions in free cash flow may impact the volume of share repurchases;
  • recently enacted tariffs on imports from China could have a material adverse impact on our financial results;
  • the anticipated benefits from the Ruckus Networks acquisition may not be realized;
  • 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.

Statements regarding the proposed ARRIS and CommScope transaction are subject to various risks and uncertainties, many of which are outside of the control of CommScope and the Company, including, without limitation: failure to obtain applicable regulatory approvals in a timely manner, on acceptable terms or at all, or to satisfy the other closing conditions to the proposed transactions; the risk that the Company will be required to pay a termination fee under the acquisition agreement; the potential impact of announcement or consummation of the proposed acquisition on relationships with third parties, including customers, employees and competitors; uncertainties as to the timing of the proposed acquisition; the possibility that competing offers will be made; any statements of belief and any statements of assumptions underlying any of the foregoing; and other factors beyond the control of CommScope and/or the Company.

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, 2018. 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.

Important Additional Information Regarding the Transaction Will Be Filed With The SEC

In connection with the proposed ARRIS and CommScope transaction, ARRIS will prepare a proxy statement to be filed with the Securities and Exchange Commission (the "SEC"). When completed, a definitive proxy statement and a form of proxy will be mailed to the stockholders of ARRIS. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE PROXY STATEMENT AND OTHER DOCUMENTS FILED WITH THE SEC IN CONNECTION WITH THE TRANSACTION CAREFULLY AND IN THEIR ENTIRETY, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE TRANSACTION, THE PARTIES TO THE TRANSACTION AND THE RISKS ASSOCIATED WITH THE TRANSACTION. Those documents, if and when filed, as well as the Company's other public filings with the SEC may be obtained without charge at the SEC's website at www.sec.gov or at ARRIS' website at http://ir.arris.com. Security holders and other interested parties will also be able to obtain, without charge, a copy of the Proxy Statement and other relevant documents (when available) by directing a request by mail to ARRIS Investor Relations, 3871 Lakefield Drive, Suwanee, GA 30024 or at http://ir.arris.com. Security holders may also read and copy any reports, statements and other information filed with the SEC at the SEC public reference room at 100 F Street N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at (800) 732-0330 or visit the SEC's website for further information on its public reference room.

Participants in the Solicitation

ARRIS, its directors and certain of its executive officers may be considered participants in the solicitation of proxies in connection with the transactions contemplated by the Proxy Statement. Information about the directors and executive officers of ARRIS is set forth in its Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on March 1, 2018, and its proxy statement for its 2018 annual meeting of shareholders, which was filed with the SEC on March 23, 2018. Other information regarding potential participants in the proxy solicitations and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the Proxy Statement when it is filed.

The Company is organized under the laws of England and Wales. Some of the officers and directors of ARRIS are residents of countries other than the United States. As a result, it may not be possible to sue ARRIS or such persons in a non-US court for violations of US securities laws. It may be difficult to ARRIS and its affiliates to subject themselves to the jurisdiction and judgment of a US court or for investors to enforce against them the judgments of US courts.

About ARRIS

ARRIS (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:

ARRIS, the ARRIS logo and E6000 are trademarks of ARRIS International plc and/or its affiliates. All other marks are the property of their respective owners. © 2018 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,



2018


2018


2018


2017


2017












ASSETS






















Current assets:











Cash and cash equivalents


$480,756


$501,410


$506,240


$487,573


$1,379,827

Short-term investments, at fair value


39,640


46,698


36,804


23,874


33,309

Total cash, cash equivalents and short term investments

520,397


548,109


543,044


511,447


1,413,136












Accounts receivable, net


1,117,641


1,183,360


1,034,608


1,218,089


1,056,225

Other receivables 


235,122


192,067


169,681


157,845


145,658

Inventories, net


717,271


803,217


849,069


825,211


775,142

Prepaid income taxes


17,717


10,406


26,409


28,351


41,780

Prepaids


34,125


40,290


36,308


26,644


27,954

Other current assets


201,111


196,014


172,993


145,953


109,567

Total current assets


2,843,385


2,973,463


2,832,112


2,913,540


3,569,462












Property, plant and equipment, net 


289,820


299,991


309,457


372,467


347,506

Goodwill


2,261,002


2,259,177


2,336,820


2,278,512


2,016,580

Intangible assets, net


1,488,580


1,580,393


1,583,299


1,771,362


1,406,591

Investments


71,747


69,902


69,858


71,082


73,199

Deferred income taxes


155,193


146,443


131,417


115,436


193,703

Other assets


76,878


72,155


103,525


101,858


57,246



$7,186,605


$7,401,524


$7,366,488


$7,624,257


$7,664,287























LIABILITIES AND STOCKHOLDERS' EQUITY





















Current liabilities:











Accounts payable


$1,100,901


$1,125,619


$1,010,812


$1,206,656


$1,266,214

Accrued compensation, benefits and related taxes

146,964


140,387


113,029


155,966


102,222

Accrued warranty


40,772


38,651


42,434


44,507


45,036

Deferred revenue


115,989


123,590


143,740


115,224


118,598

Current portion of LT debt & financing lease obligations

83,785


83,709


83,633


83,559


89,156

Income taxes payable


4,182


2,093


4,937


6,244


4,420

Other accrued liabilities


356,002


361,315


316,206


321,113


327,099

Total current liabilities


1,848,594


1,875,365


1,714,791


1,933,269


1,952,745

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

2,053,373


2,074,352


2,095,320


2,116,244


2,112,494

Accrued pension


32,371


31,889


43,443


42,637


54,867

Noncurrent deferred revenue


58,553


58,233


56,041


54,090


34,569

Noncurrent income taxes


112,259


120,987


159,148


144,665


115,434

Deferred income taxes


60,410


62,886


68,825


68,888


83,058

Other noncurrent liabilities


67,534


68,507


71,546


80,430


83,852

Total liabilities


4,233,095


4,292,219


4,209,114


4,440,223


4,437,018












Stockholders' equity:











Ordinary shares


2,621


2,722


2,769


2,768


2,788

Capital in excess of par value


3,439,476


3,424,906


3,392,415


3,387,128


3,367,940

Accumulated other comprehensive (loss) income

(8,655)


(4,649)


12,545


4,552


8,838

Accumulated deficit


(494,706)


(329,731)


(266,264)


(225,881)


(188,375)

     Total ARRIS International plc stockholders' equity

2,938,737


3,093,248


3,141,465


3,168,567


3,191,191

Stockholders' equity attributable to noncontrolling interest

14,774


16,056


15,909


15,467


36,078

Total stockholders' equity


2,953,511


3,109,304


3,157,374


3,184,034


3,227,269



$7,186,605


$7,401,524


$7,366,488


$7,624,257


$7,664,287

 

 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,


2018


2017


2018


2017









Net sales

$1,651,248


$1,728,524


$4,955,498


$4,875,799

Cost of sales

1,186,059


1,297,369


3,515,871


3,704,029

Gross margin

465,189


431,155


1,439,627


1,171,770

Operating expenses:








Selling, general, and administrative expenses

162,707


114,407


497,263


332,966

Research and development expenses

156,109


131,593


493,106


397,653

Amortization of intangible assets

88,306


90,162


293,499


274,819

Impairment of goodwill 

-


-


3,400


-

Integration, acquisition, restructuring and other costs

5,046


10,836


41,546


30,622


412,168


346,998


1,328,814


1,036,060

Operating income 

53,021


84,157


110,813


135,710

Other expense (income):








Interest expense

23,969


20,211


70,141


63,238

(Gain) loss on investments

(1,400)


839


(1,718)


8,978

Loss (gain) on foreign currency

2,025


(8,543)


6,034


5,570

Interest income

(1,764)


(2,288)


(5,088)


(5,997)

Other (income) expense, net

35


1,434


(25)


2,275

Income (loss) before income taxes

30,156


72,504


41,468


61,646

Income tax benefit

(15,652)


(14,311)


(22,106)


(12,613)

Consolidated net income 

45,808


86,816


63,574


74,259

Net loss attributable to noncontrolling interests

(1,271)


(1,505)


(5,659)


(5,299)

Net income attributable to ARRIS International plc

$47,079


$88,321


$69,233


$79,558









Net income per ordinary share (1):








Basic

$          0.26


$              0.47


$           0.38


$         0.42

Diluted

$          0.26


$              0.47


$           0.38


$         0.42









Weighted average ordinary shares:








Basic

178,106


187,064


182,132


187,878

Diluted

179,337


188,941


183,817


190,264









(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 Nine Months





Ended September 30,


Ended September 30,





2018


2017


2018


2017












Operating Activities:









Consolidated net income

$         45,808


$         86,815


$       63,574


$       74,259



Depreciation

21,430


22,337


65,539


65,340



Amortization of acquired intangible assets

90,181


91,983


299,136


279,961



Amortization of deferred finance fees and debt discount

1,198


1,730


3,620


5,621



Impairment of goodwill 

-


-


3,400


-



Deferred income taxes

(12,288)


983


(58,365)


(36,540)



Foreign currency remeasurement of deferred income taxes

509


2,979


530


10,170



Stock compensation expense

20,328


21,111


63,087


62,851



Provision for non-cash warrants

-


3,064


-


8,145



Recovery for doubtful accounts

(145)


(311)


(437)


(559)



Loss on disposal of plant, property and equipment and other

1,539


4,286


1,761


5,876



(Gain) loss on investments and others

(1,400)


838


(1,582)


8,977


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










Accounts receivable

64,774


(62,808)


85,636


305,212



Other receivables

(43,055)


(12,916)


(77,277)


(72,465)



Inventories

85,150


(115,892)


104,570


(222,733)



Accounts payable and accrued liabilities

(45,327)


95,556


(149,797)


132,437



Prepaids and other, net

(7,712)


(24,021)


16,845


(14,898)




Net cash provided by operating activities

220,990


115,734


420,240


611,654












Investing Activities:









Purchases of investments

(27,145)


(6,000)


(64,454)


(68,250)


Sales of investments

34,089


5,000


45,638


155,301


Purchases of property, plant & equipment, net

(16,975)


(19,489)


(45,621)


(62,389)


Deposit proceeds for sale of property, plant and equipment

20,000


-


50,000


-


Purchases of intangible assets

-


(6,000)


(423)


(6,422)


Other, net

-


-


171


826




Net cash provided by (used in) investing activities

9,969


(26,489)


(14,689)


19,066












Financing Activities:









Proceeds from issuance of debt

-


-


-


30,314


Payment of financing lease obligation

(226)


(185)


(640)


(590)


Payment of debt obligations

(21,875)


(23,737)


(65,625)


(98,976)


Payment for deferred financing costs and debt discount

-


-


-


(1,462)


Repurchase of shares 

(220,378)


(20,000)


(331,622)


(146,965)


Repurchase of shares to satisfy employee minimum tax withholdings

(5,938)


(12,477)


(19,917)


(26,359)


Proceeds from issuance of shares, net

188


70


9,206


8,623


Contribution from noncontrolling interest

-


-


2,257


3,500




Net cash used in financing activities

(248,229)


(56,329)


(406,341)


(231,915)












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

(1,368)


794


(4,017)


941

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

(18,638)


33,710


(4,807)


399,746

Cash, cash equivalents and restricted cash at beginning of period

502,947


1,347,728


489,116


981,692

Cash, cash equivalents and restricted cash at end of period

$       484,309


$    1,381,438


$      484,309


$   1,381,438























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













Cash and cash equivalent

480,757


1,379,827






Restricted cash included in other current assets

760


23






Restricted cash included in other assets

2,792


1,588






Total


484,309


1,381,438





 

ARRIS INTERNATIONAL PLC

PRELIMINARY ADJUSTED SALES & NET INCOME RECONCILIATION

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





























Q3 2017


Q2 2018


Q3 2018


SEP YTD 2017


SEP YTD 2018



Amount

Per Diluted Share


Amount

Per Diluted Share


Amount

Per Diluted Share


Amount

Per Diluted Share


Amount

Per Diluted Share


Sales

$1,728,524



$1,726,540



$1,651,248



$4,875,799



$4,955,498



Highlighted items:
    Reduction in revenue related to warrants

3,064



-



-



8,145





Acquisition accounting impacts of deferred revenue

-



3,307



2,400



-



11,401



Adjusted sales 

$1,731,588



$1,729,847



$1,653,648



$4,883,944



$4,966,899



















Net income (loss) attributable to ARRIS International plc

$         88,320

$    0.47


$         35,754

$    0.19


$         47,079

$    0.26


$         79,558

$    0.42


$         69,233

$           0.38


Highlighted Items:
Impacting gross margin:
















Stock compensation expense

3,897

0.02


3,809

0.02


3,660

0.02


10,644

0.06


10,722

0.06


Reduction in revenue related to warrants

3,064

0.01




8,145

0.04



Acquisition accounting impacts of deferred revenue


3,307

0.02


2,400

0.02



11,401

0.06


Acquisition accounting impacts of fair valuing inventory




908


16,971

0.09


Impacting operating expenses:
















Integration, acquisition, restructuring and other costs

10,836

0.06


22,844

0.12


5,046

0.03


30,622

0.16


41,545

0.23


Amortization of intangible assets

90,162

0.48


90,485

0.49


88,305

0.49


274,819

1.44


293,498

1.60


Impairment on goodwill and intangible assets





3,400

0.02


Stock compensation expense

16,316

0.08


19,694

0.11


16,668

0.09


51,308

0.27


52,365

0.28


Noncontrolling interest share of non-GAAP adj

(711)


(867)

(0.00)


(885)


(2,326)

(0.01)


(4,073)

(0.02)


Impacting other (income)/expense:
















Impairment (gain) on investments

(1,821)

(0.01)




929



Debt amendment fees




2,782

0.02



Remeasurement of certain deferred tax liabilities

3,569

0.02


(3,676)

(0.02)


519


8,508

0.04


540

0.00


Impacting income tax expense:
















Net tax items

(62,698)

(0.33)


(37,387)

(0.20)


(40,666)

(0.23)


(116,884)

(0.61)


(102,594)

(0.56)


Total highlighted items

62,614

0.33


98,209

0.53


75,047

0.42


269,455

1.41


323,775

1.76


Adjusted net income 

$      150,934

$    0.80


$      133,963

$    0.72


$      122,126

$    0.68


$      349,013

$    1.83


$      393,008

$           2.14


Weighted average ordinary shares - basic


187,064



184,216



178,106



187,878



182,132


Weighted average ordinary shares - diluted


188,941



185,669



179,337



190,264



183,817


 

ARRIS INTERNATIONAL PLC

PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED SALES & GROSS MARGIN RECONCILIATION

(in thousands)

(unaudited)












Q3 2017


Q2 2018


Q3 2018


Sep YTD 2017


Sep YTD 2018

Sales - GAAP

1,728,524


1,726,540


1,651,248


4,875,799


4,955,498

Adjustment to revenue related to warrants

3,064


-


-


8,145


-

Acquisition accounting impacts of deferred revenue

-


3,307


2,400


-


11,401

Adjusted Sales - Non-GAAP

1,731,588


1,729,847


1,653,648


4,883,944


4,966,899











GAAP Gross Margin

431,155


498,755


465,189


1,171,770


1,439,627

Acquisition accounting impacts of fair valuing inventory

-


-


-


908


16,971

Acquisition accounting impacts of deferred revenue

-


3,307


2,400


-


11,401

Stock compensation expense

3,897


3,809


3,660


10,644


10,722

Adjustment to revenue related to warrants

3,064


-


-


8,145


-

Adjusted Gross Margin - Non-GAAP

438,116


505,871


471,249


1,191,467


1,478,721











GAAP Gross Margin - %

24.9%


28.9%


28.2%


24.0%


29.1%

Adjusted Gross Margin - Non-GAAP -  %

25.3%


29.2%


28.5%


24.4%


29.8%

 

ARRIS INTERNATIONAL PLC

PRELIMINARY SUPPLEMENTAL OPERATING INCOME TO ADJUSTED DIRECT CONTRIBUTION RECONCILIATION

(in thousands)

(unaudited)








Q3 2018


Network & Cloud

CPE

Enterprise

Corp/ Other

Total

Operating income (loss)

173,577

12,233

103

(132,892)

53,021







Add:






Amortization of intangible assets

24,724

47,096

15,669

817

88,306

Integration, acquisition, restructuring & other costs

836

2,823

623

764

5,046







Direct contribution(1)

199,137

62,152

16,395

(131,311)

146,373







Adjustments:






Allocated costs (2)

(28,662)

(19,344)

(5,533)

53,539

-

Stock compensation expense

7,917

5,298

3,343

3,770

20,328

Depreciation expense

7,000

7,107

3,149

4,174

21,431

Adjusted direct contribution 

185,393

55,213

17,354

(69,828)

188,131













(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 ADJUSTED EBITDA RECONCILIATION


(in millions)


(unaudited)









Q4 2017

Q1 2018

Q2 2018

Q3 2018

Last Twelve Months

Net income (loss) as reported

$            (8)

$          (17)

$           35

$           46

$             55

Income tax expense (benefit)

(32)

3

(10)

(16)

(54)

Interest income

(2)

(2)

(2)

(2)

(7)

Interest expense

24

23

24

24

94

Depreciation expense

23

23

21

22

89

Amortization of intangible assets

101

115

90

88

394

EBITDA

105

145

158

162

571







Adjustments






Stock-based compensation expense

19

19

24

20

82

Integration, acquisition, restructuring and other costs

68

14

23

5

109

Impairment on goodwill and intangible assets

55

3

-

-

58

Acquisition accounting impacts of deferred revenue

(7)

6

3

2

4

Acquisition accounting impacts of fair valuing inventory

8

17

-

-

25

Remeasurement of deferred taxes

1

4

(4)

1

1

Adjusted EBITDA - Non-GAAP

$             248

$             208

$             204

$             191

$                850

 

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 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 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, the Company amended its credit agreement. This debt modification allowed us to improve the terms and conditions of the credit agreement and extend the maturities of certain loan facilities. 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.

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SOURCE ARRIS

Bob Puccini, Investor Relations, +1.720.895.7787, bob.puccini@arris.com