ARRIS Announces Preliminary and Unaudited Fourth Quarter and Full Year 2017 Results
SUWANEE, Ga., Feb. 14, 2018 /PRNewswire/ -- ARRIS International plc (NASDAQ: ARRS) today announced preliminary and unaudited financial results for the fourth quarter and full year 2017.
Fourth Quarter 2017 Financial Highlights
-- Revenues were $1.739 billion
-- GAAP net income was $0.07 per diluted share
-- Adjusted net income (a non-GAAP measure) was $0.88 per diluted share
-- End-of-quarter cash resources were $511 million
-- $50 million of share repurchases
-- $822 million of cash resources used to complete Ruckus Networks
acquisition
-- Order backlog was $1.1 billion
-- Book-to-bill ratio was 1.02
"Our strong fourth quarter results capped a year in which we made important strategic and financial strides in positioning ARRIS for long-term profitable growth," said Bruce McClelland, ARRIS CEO. "A favorable product mix helped drive record quarterly non-GAAP earnings, and we achieved sequential profitability improvement throughout the year, while returning nearly $200 million in capital to shareholders via share repurchases. The recently closed Ruckus acquisition is already contributing to results and creates a more compelling, diversified platform for growth as we deliver innovative connectivity solutions across the enterprise and service provider markets."
"With respect to the first quarter 2018, we are estimating revenues in the range of $1.575 billion to $1.625 billion. We expect GAAP net loss per diluted share in the range of $(0.43) to $(0.38) and adjusted net income per diluted share in the range of $0.50 to $0.55. For full year 2018, we expect revenues to be in the range of $7.100 billion to $7.350 billion, GAAP net income per diluted share in the range of $0.48 to $0.73, and adjusted net income per diluted share to be in the range of $2.80 to $3.05. We expect our 2018 performance to be driven by our new Enterprise segment, expanded Network and Cloud share, growing international sales, and continued shift to broadband in our CPE business."
ARRIS will host its 2018 Investor Day on Wednesday, March 28, 2018 at The Westin New York at Times Square. Registration for the event can be found at the Company's website in the Investor Relations section.
Revenues in the fourth quarter 2017 of $1.739 billion were down $20 million, or 1%, as compared to fourth quarter 2016 revenues of $1.759 billion. Fourth quarter 2017 revenues were up $10 million, or 1%, as compared to third quarter 2017 revenues of $1.729 billion. Full year 2017 revenues were $6.614 billion, down $215 million, or 3%, as compared to the full year 2016 revenues of $6.829 billion.
GAAP net income in the fourth quarter 2017 was $0.07 per diluted share, as compared to GAAP net income of $0.46 per diluted share in the fourth quarter 2016 and a GAAP net income of $0.47 per diluted share in the third quarter 2017.
Full year 2017 GAAP net income was $0.49 per diluted share, as compared to 2016 GAAP net income of $0.09 per diluted share.
Adjusted net income (a non-GAAP measure) in the fourth quarter 2017 was $0.88 per diluted share, as compared to $0.79 per diluted share for the fourth quarter 2016, and third quarter 2017 adjusted net income of $0.80 per diluted share.
Adjusted net income was $2.72 per diluted share for 2017 as compared to 2016 adjusted net income of $2.86 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 ended the fourth quarter 2017 with $511 million of cash resources, as compared to $1.413 billion at the end of the third quarter 2017.
The Company used $822 million of cash resources to acquire the Ruckus Networks business and cash-out unvested equity awards held by transferring employees during the fourth quarter 2017, as required by the purchase agreement.
The Company repurchased 1.9 million ordinary shares for $50 million during the fourth quarter of 2017. For full year 2017, the Company repurchased 7.5 million ordinary shares for $197 million. As of December 31, 2017, the Company had $225 million remaining in available repurchase authorization.
The Company consumed $77.8 million of cash in operating activities during the fourth quarter 2017, including $61.5 million of employee equity payouts as part of the Ruckus Networks acquisition. This compares to $35.3 million generated during the fourth quarter 2016. For full year 2017, the Company generated $534 million of cash from operating activities as compared to $362 million generated during the full year 2016.
Order backlog at the end of the fourth quarter 2017 was $1.121 billion as compared to $1.106 billion and $1.083 billion at the end of the fourth quarter 2016 and the third quarter 2017, respectively. The Company's book-to-bill ratio in the fourth quarter 2017 was 1.02 as compared to the fourth quarter 2016 of 1.04 and the third quarter 2017 of 0.86.
ARRIS management will conduct a conference call at 5:00 pm EDT, today, Wednesday, February 14, 2018, to discuss fourth quarter 2017 results and first quarter and full year 2018 guidance. You may participate in this conference call by dialing 888-655-5028 or 503-343-6025 for international calls prior to the start of the call. Please note that ARRIS will not accept any calls related to this earnings release until after the conclusion of the conference call. A replay of the conference call can be accessed approximately two hours after the call through February 21, 2018, by dialing 855-859-2056 or 404-537-3406 for international calls and using the pass code 9197819. 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 and full year 2018, growth expectations, cost initiatives, the general market outlook and industry trends are forward-looking statements. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. Among other things:
-- projected results for the first quarter and full year 2018 are based on
preliminary estimates, assumptions and projections that management
believes to be reasonable at this time, but are beyond management's
control;
-- the anticipated benefits from the Ruckus Networks acquisition may not be
realized;
-- the Company may encounter significant integration costs and unknown
liabilities in connection with the Ruckus Networks acquisition;
-- volatility in component pricing and supply could impact revenues and
gross margins more than currently anticipated;
-- failure to receive clearance from U.S. Customs and Border Protection to
allow the import and sale of certain products currently subject to an
ITC exclusion order could significantly impact financial results;
-- volatility in currency fluctuation may adversely impact our
international customers' ability or willingness to purchase products and
the pricing of products;
-- impacts of the U.K. invoking Article 50 of the Lisbon Treaty to leave
the European Union, could have an adverse impact on results of
operations;
-- regulatory changes, including those related to recently completed
changes to the U.S. income tax code, could have an adverse impact on
operations and results of operations;
-- the impact of litigation and similar regulatory proceedings that we are
involved in or may become involved in, including the costs of such
litigation; and
-- the Company's customers operate in a capital intensive consumer-based
industry, and volatility in the capital markets or changes in customer
spending may adversely impact their ability or willingness to purchase
the products that the Company offers.
These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the Company's business and results from operations. Additional information regarding these and other factors can be found in the Company's reports filed with the Securities and Exchange Commission, including its Form 10-Q for the quarter ended September 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 powering a smart, connected world. The company's leading hardware, software and services transform the way that people and businesses stay informed, entertained and connected. For more information, visit www.arris.com.
For the latest ARRIS news:
-- Check out our blog: ARRIS EVERYWHERE
-- Follow us on Twitter: @ARRIS
ARRIS and the ARRIS Logo are trademarks or registered trademarks of ARRIS Enterprises, Inc. All other trademarks are the property of their respective owners. © 2018 ARRIS Enterprises, Inc. All rights reserved.
ARRIS INTERNATIONAL PLC
PRELIMINARY CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
December 31, September 30, June 30, March 31, December 31,
2017 2017 2017 2017 2016
---- ---- ---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents $487,573 $1,379,827 $1,346,028 $1,126,248 $980,123
Short-term investments, at fair value 23,874 33,309 38,759 90,673 115,553
------ ------ ------ ------ -------
Total cash, cash equivalents and short term investments 511,447 1,413,136 1,384,787 1,216,921 1,095,676
Accounts receivable, net 1,218,088 1,056,225 991,539 1,069,771 1,359,430
Other receivables 158,970 145,658 132,742 57,454 73,193
Inventories, net 819,373 775,142 657,881 556,264 551,541
Prepaid income taxes 28,351 41,780 16,354 21,845 51,476
Prepaids 26,644 27,954 32,149 27,898 21,163
Other current assets 145,953 109,567 119,405 132,338 127,593
------- ------- ------- ------- -------
Total current assets 2,908,826 3,569,462 3,334,857 3,082,491 3,280,072
Property, plant and equipment, net 372,467 347,506 355,033 354,050 353,377
Goodwill 2,278,512 2,016,580 2,014,550 2,018,012 2,016,169
Intangible assets, net 1,771,363 1,406,591 1,491,103 1,586,187 1,677,178
Investments 71,082 73,199 61,047 65,035 72,932
Deferred income taxes 115,435 193,703 199,102 190,037 298,757
Other assets 101,858 57,246 54,843 58,919 59,877
------- ------ ------ ------ ------
$7,619,543 $7,664,287 $7,510,535 $7,354,731 $7,758,362
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,201,094 $1,266,214 $1,201,883 $1,020,234 $1,048,904
Accrued compensation, benefits and related taxes 155,966 102,222 81,355 73,220 139,794
Accrued warranty 44,507 45,036 44,812 46,330 49,618
Deferred revenue 115,223 118,598 130,454 145,197 132,128
Current portion of LT debt & financing lease obligations 83,559 89,156 89,336 82,767 82,734
Income taxes payable 6,897 4,420 9,487 20,278 23,133
Other accrued liabilities 320,211 327,099 303,013 300,861 357,823
------- ------- ------- ------- -------
Total current liabilities 1,927,458 1,952,745 1,860,340 1,688,887 1,834,134
Long-term debt & financing lease obligations, net of current portion 2,116,244 2,112,494 2,134,506 2,159,300 2,180,009
Accrued pension 42,637 54,867 55,532 54,809 52,652
Noncurrent income taxes 144,665 115,434 114,187 120,493 123,344
Deferred income taxes 68,888 83,058 83,516 89,260 223,529
Other noncurrent liabilities 134,519 118,420 120,381 112,977 117,957
------- ------- ------- ------- -------
Total liabilities 4,434,412 4,437,018 4,368,462 4,225,726 4,531,625
Stockholders' equity:
Ordinary shares 2,768 2,788 2,786 2,802 2,831
Capital in excess of par value 3,387,128 3,367,940 3,356,183 3,322,803 3,314,707
Accumulated other comprehensive loss 4,552 8,838 2,211 10,628 3,291
Accumulated deficit (224,784) (188,375) (256,705) (243,207) (132,013)
-------- -------- -------- -------- --------
Total ARRIS International plc stockholders' equity 3,169,664 3,191,191 3,104,475 3,093,026 3,188,816
Stockholders' equity attributable to noncontrolling interest 15,467 36,078 37,598 35,979 37,921
------ ------ ------ ------ ------
Total stockholders' equity 3,185,131 3,227,269 3,142,073 3,129,005 3,226,737
--------- --------- --------- --------- ---------
$7,619,543 $7,664,287 $7,510,535 $7,354,731 $7,758,362
========== ========== ========== ========== ==========
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,
------------------ ------------------
2017 2016 2017 2016
---- ---- ---- ----
Net sales $1,738,593 $1,759,223 $6,614,392 $6,829,118
Cost of sales 1,244,124 1,323,222 4,948,153 5,121,501
--------- --------- --------- ---------
Gross margin 494,469 436,001 1,666,239 1,707,617
Operating expenses:
Selling, general, and
administrative expenses 140,653 115,597 473,619 454,190
Research and development
expenses 141,441 132,401 539,094 584,909
Amortization of intangible
assets 100,588 100,046 375,407 397,464
Integration, acquisition,
restructuring and other
costs 67,734 15,450 98,356 160,337
Impairment of goodwill and
intangible assets 55,000 - 55,000 -
505,417 363,494 1,541,477 1,596,900
------- ------- --------- ---------
Operating (loss) income (10,948) 72,507 124,762 110,717
Other expense (income):
Interest expense 23,850 20,985 87,088 79,817
Loss on investments 2,088 7,788 11,066 21,194
Loss (gain) on foreign
currency 4,188 (22,151) 9,757 (13,982)
Interest income (1,978) (1,623) (7,976) (4,395)
Other (income) expense, net (402) (7,601) 1,873 3,991
---- ------ ----- -----
Income (loss) before income
taxes (38,693) 75,109 22,952 24,092
Income tax (benefit)
expense (31,656) (10,937) (44,268) 15,131
------- ------- ------- ------
Consolidated net (loss)
income (7,038) 86,046 67,221 8,961
Net loss attributable to
noncontrolling interests (20,604) (2,237) (25,903) (9,139)
------- ------ ------- ------
Net income attributable to
ARRIS International plc $13,566 $88,283 $93,124 $18,100
======= ======= ======= =======
Net income per ordinary share (1):
Basic $0.07 $0.46 $0.50 $0.09
===== ===== ===== =====
Diluted $0.07 $0.46 $0.49 $0.09
===== ===== ===== =====
Weighted average ordinary shares:
Basic 186,548 190,145 187,133 190,701
======= ======= ======= =======
Diluted 188,829 192,400 189,616 192,185
======= ======= ======= =======
(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 Twelve Months
Ended December 31, Ended December 31,
------------------ ------------------
2017 2016 2017 2016
---- ---- ---- ----
Operating Activities:
Consolidated net (loss) income $(7,038) $86,046 $67,221 $8,961
Depreciation 22,855 21,764 88,195 90,577
Amortization of acquired intangible assets 102,455 102,647 382,416 404,475
Amortization of deferred finance fees and debt
discount 2,339 1,915 7,960 7,705
Impairment of goodwill and intangible assets 55,000 - 55,000 2,200
Deferred income taxes (29,449) (53,600) (65,989) (148,418)
Foreign currency remeasurement of deferred income
taxes 320 (16,356) 10,490 (16,356)
Stock compensation expense 18,706 15,997 81,557 60,049
Provision for non-cash warrants (8,145) 16,265 - 30,159
Provision for doubtful accounts (7) 246 (566) 1,386
Loss on disposal of plant, property and equipment
and other 1,187 3,828 7,063 8,706
Loss on investments and others 2,088 7,788 11,065 21,194
Excess tax benefits from stock-based
compensation plans - (16,525) - (20,085)
Changes in operating assets & liabilities, net of
effects of acquisitions and disposals:
Accounts receivable (129,282) (256,788) 175,930 (258,677)
Other receivables (13,312) (27,737) (85,777) (31,517)
Inventories 3,989 51,515 (218,744) 282,644
Accounts payable and accrued liabilities (88,913) 69,859 43,524 (178,086)
Prepaids and other, net (10,568) 28,435 (25,508) 97,578
------- ------ ------- ------
Net cash (used in) provided by operating activities (77,775) 35,299 533,837 362,495
Investing Activities:
Purchases of investments (243) (71,688) (68,493) (141,543)
Sales of investments 10,000 22,605 165,301 25,931
Purchases of property, plant & equipment, net (15,683) (26,114) (78,072) (66,760)
Acquisitions, net of cash acquired (760,802) - (760,802) (340,118)
Purchases of intangible assets - (2,216) (6,422) (5,526)
Other, net - - 826 3,507
Net cash used in investing activities (766,728) (77,413) (747,662) (524,509)
Financing Activities:
Proceeds from issuance of debt 145,533 - 175,847 800,000
Payment of accounts receivable financing facility - - - (23,546)
Payment of financing lease obligation (187) (201) (777) (758)
Payment of debt obligations (145,033) (22,375) (244,009) (319,750)
Payment for deferred financing costs and debt
discount (4,499) - (5,961) (2,304)
Repurchase of shares (50,000) - (196,965) (178,035)
Excess income tax benefits from stock-based
compensation plans - 16,525 - 20,085
Repurchase of shares to satisfy employee minimum tax
withholdings (214) (163) (26,573) (17,925)
Proceeds from issuance of shares, net 8,846 8,570 17,469 12,885
Contribution from noncontrolling interest - - 3,500 -
Net cash (used in) provided by financing activities (45,554) 2,356 (277,469) 290,652
Effect of exchange rate changes on cash and cash equivalents (2,197) (12,097) (1,256) (12,097)
Net (decrease) increase in cash and cash equivalents (892,254) (51,855) (492,550) 116,541
Cash and cash equivalents at beginning of period 1,379,827 1,031,978 980,123 863,582
--------- --------- ------- -------
Cash and cash equivalents at end of period $487,573 $980,123 $487,573 $980,123
======== ======== ======== ========
ARRIS INTERNATIONAL PLC
PRELIMINARY ADJUSTED SALES & NET INCOME RECONCILIATION
(in thousands, except per share data) (unaudited)
Q4 2016 Q3 2017 Q4 2017 DEC YTD 2016 DEC YTD 2017
------- ------- ------- ------------ ------------
Amount Per Diluted Share Amount Per Diluted Share Amount Per Diluted Share Amount Per Diluted Share Amount Per Diluted Share
------ ----------------- ------ ----------------- ------ ----------------- ------ ----------------- ------ -----------------
Sales $1,759,223 $1,728,524 $1,738,593 $6,829,118 $6,614,392
Highlighted items: 16,265 3,064 (8,145) 30,159 -
Reduction in revenue related to warrants
Acquisition accounting impacts
of deferred revenue - 1,120 - 1,120
Adjusted sales $1,775,488 $1,731,588 $1,731,568 $6,859,277 $6,615,512
-------------- ---------- ---------- ---------- ---------- ----------
Net income attributable to
ARRIS International plc $88,283 $0.46 $88,320 $0.47 $13,566 $0.07 $18,100 $0.09 $93,124 $0.49
Highlighted Items:
Impacting gross margin:
Stock compensation expense 2,388 0.01 3,897 0.02 3,303 0.02 9,397 0.05 13,947 0.07
Reduction in revenue related
to warrants 16,265 0.08 3,064 0.02 (8,145) (0.04) 30,159 0.16 - -
Acquisition accounting impacts
of deferred revenue - - - - 1,120 0.01 - - 1,120 0.01
Acquisition accounting impacts
of fair valuing inventory 581 0.00 - - 7,560 0.04 51,405 0.27 8,468 0.04
Impacting operating expenses:
Integration, acquisition,
restructuring and other costs 7,922 0.04 10,836 0.06 67,734 0.36 152,810 0.80 98,356 0.52
Amortization of intangible
assets 100,046 0.52 90,162 0.48 100,588 0.53 397,464 2.07 375,407 1.98
Impairment on goodwill and
intangible assets - - - - 55,000 0.29 - - 55,000 0.29
Stock compensation expense 13,608 0.07 16,316 0.09 15,403 0.08 50,652 0.26 66,711 0.35
Noncontrolling interest share
of non-GAAP adj (807) - (711) - (20,026) (0.11) (3,145) (0.02) (22,352) (0.12)
Impacting other (income)/expense:
Impairment (gain) on
investments 4,446 0.02 (1,821) (0.01) - - 12,297 0.06 929 0.00
Debt amendment fees - - - - 3,069 0.02 (237) - 5,851 0.03
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 (16,356) (0.09) 3,569 0.02 851 - (16,356) (0.09) 9,359 0.05
France R&D tax credit (4,992) (0.03) - - - - - - - -
Impacting income tax expense:
Foreign withholding tax - - - - - - 54,741 0.28 - -
Net tax items (58,513) (0.30) (62,698) (0.33) (73,038) (0.39) (208,524) (1.09) (189,884) (1.00)
------- ------- ------- -------- --------
Total highlighted items 64,588 0.34 62,614 0.33 153,419 0.81 532,264 2.77 422,912 2.23
----------------------- ------ ---- ------ ---- ------- ---- ------- ---- ------- ----
Adjusted net income $152,871 $0.79 $150,934 $0.80 $166,985 $0.88 $550,364 $2.86 $516,036 $2.72
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Weighted average ordinary shares - basic 190,145 187,064 186,548 190,701 187,133
---------------------------------------- ------- ------- ------- ------- -------
Weighted average ordinary shares - diluted 192,400 188,941 188,829 192,185 189,616
------------------------------------------ ------- ------- ------- ------- -------
ARRIS INTERNATIONAL PLC
PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED SALES & GROSS MARGIN RECONCILIATION
(in thousands)
(unaudited)
Q4 2016 Q3 2017 Q4 2017 FY 2016 FY 2017
------- ------- ------- ------- -------
Sales - GAAP 1,759,220 1,728,524 1,738,593 6,829,110 6,614,392
Fair Value of
Warrants Adjustment 16,264 3,064 (8,145) 30,159 -
Fair Value of
Deferred Revenue
Adjustment - - 1,120 1,120
Adjusted Sales -
Non- GAAP 1,775,485 1,731,588 1,731,569 6,859,270 6,615,513
========= ========= ========= ========= =========
GAAP Gross Margin 435,997 431,155 494,469 1,707,609 1,666,239
Fair Value of
Inventory Adjustment 580 - 7,560 51,405 8,468
Fair Value of
Deferred Revenue
Adjustment - - 1,120 - 1,120
Equity Compensation 2,388 3,897 3,303 9,397 13,947
Fair Value of
Warrants Adjustment 16,264 3,064 (8,145) 30,159 -
Adjusted Gross Margin
- Non-GAAP 455,229 438,116 498,307 1,798,569 1,689,774
======= ======= ======= ========= =========
GAAP Gross Margin - % 24.8% 24.9% 28.4% 25.0% 25.2%
Adjusted Gross Margin
- Non-GAAP - % 25.6% 25.3% 28.8% 26.2% 25.5%
ARRIS INTERNATIONAL PLC
PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED SALES & DIRECT CONTRIBUTION RECONCILIATION
(in thousands)
(unaudited)
Q4 2017
-------
Network & CPE Enterprise Corp/ Other Total
Cloud
-----
Net Sales 595,842 1,089,981 45,749 7,021 1,738,593
Non GAAP Adjustments (1) - - - (7,021) (7,021)
--- --- ---
Adjusted Net Sales 595,842 1,089,981 45,749 0 1,731,572
======= ========= ====== === =========
Direct Contribution(2) 262,868 123,678 6,094 (180,265) 212,375
Non GAAP Adjustments (3) - - - 19,241 19,241
--- --- --- ------
Adjusted Direct Contribution 262,868 123,678 6,094 (161,024) 231,616
======= ======= ===== ======== =======
Direct Contribution % of sales 44.1% 11.3% 13.3% 13.4%
(1) Impact of warrants adjustment and adjustment related to acquisition accounting impacts
(2) Defined as gross margin less direct operating expenses, excluding amortization of intangible assets, restructuring charges, acquisition, integration and other costs.
(3) Equity compensation expense, adjustments related to the acquisition accounting impacts and warrants adjustment
ARRIS INTERNATIONAL PLC
PRELIMINARY SUPPLEMENTAL GAAP TO ADJUSTED EPS GUIDANCE RECONCILIATION
(in millions, except per share data)
Q1 2018 Guidance FY 2018 Guidance
---------------- ----------------
Estimated GAAP EPS $ (0.43) - $ (0.38) $ 0.48 - $ 0.73
Reconciling Items:
Amortization of Intangibles 0.63 2.12
Stock Compensation Expense 0.11 0.50
Integration and Other Costs 0.12 0.15
Purchase Accounting Items 0.15 0.20
Impairment of Goodwill and Intangible assets 0.04 0.04
Net Tax items (0.12) (0.69)
----- -----
Subtotal 0.93 2.32
---- ----
Estimated Adjusted (Non-GAAP) EPS $ 0.50 - $ 0.55 $ 2.80 - $ 3.05
=============== ===============
Notes to GAAP to Adjusted Non-GAAP Financial Measures
The Company reports its financial results in accordance with accounting principles generally accepted in the United States ("GAAP" or referred to herein as "reported"). However, management believes that certain non-GAAP financial measures provide management and other users with additional meaningful financial information that should be considered when assessing our ongoing performance. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the factors management uses in planning for and forecasting future periods. Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, the Company's reported results prepared in accordance with GAAP. Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:
Reduction in Revenue Related to Warrants: We entered into agreements with two customers for the issuance of warrants to purchase up to 14.0 million of ARRIS's ordinary shares. Vesting of the warrants is subject to certain purchase volume commitments, and therefore the accounting guidance requires that we record any change in the fair value of warrants as a reduction in revenue. Until final vesting, changes in the fair value of the warrants will be marked to market and any adjustment recorded in revenue. We have excluded the effect of the implied fair value in calculating our non-GAAP financial measures. We believe it is useful to understand the effects of these items on our total revenues and gross margin.
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 Deferred Revenue: In connection with our acquisition of Ruckus Networks, business combination rules require us to account for the fair values of arrangements for which acceptance has not been obtained, and 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. We believe the adjustment to these revenues is useful as a measure of the ongoing performance of our business. We have historically 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 our contracts
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.
Impairment of Goodwill and Intangibles: 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 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.
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).
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.
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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