ARRIS Announces Preliminary and Unaudited Third Quarter 2017 Results
SUWANEE, Ga., Nov. 1, 2017 /PRNewswire/ -- ARRIS International plc (NASDAQ:ARRS) today announced preliminary and unaudited financial results for the third quarter 2017.
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 (NASDAQ: ARRS) is a world leader in entertainment and communications technology. Our innovations combine hardware, software, and services across the cloud, network, and home to power TV and Internet for millions of people around the globe. The people of ARRIS collaborate with the world's top service providers, content providers, and retailers to advance the state of our industry and pioneer tomorrow's connected world. For more information, visit www.arris.com.
For the latest ARRIS news:
-- Check out our blog: ARRIS EVERYWHERE
-- Follow us on Twitter: @ARRIS
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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SOURCE ARRIS
