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.

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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.

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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