ARRIS Announces Preliminary and Unaudited Third Quarter 2018 Results
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:
-- Check out our blog: ARRIS EVERYWHERE
-- Follow us on Twitter: @ARRIS
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: 3,064 8,145
-
Reduction in revenue related to warrants
---
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
